Defense Inventory Management: Problems, Progress, and Additional Actions
Needed (Testimony, 03/20/97, GAO/T-NSIAD-97-109).

Inventory management problems have plagued the Defense Department for
decades. Despite efforts by the Pentagon to correct these shortcomings,
GAO has included inventory management as part of its list of government
areas most prone to fraud, waste, and abuse. (See GAO/HR-97-5, Feb.
1997.) GAO recently reported that half of DOD's $69.6 billion inventory
of spare parts, medical supplies, hardware, food, and clothing is either
obsolete or rarely used. (See GAO/NSIAD-97-71, Feb. 1997.) The
underlying causes of this unneeded inventory include outdated and
inefficient inventory management practices that often fail to meet
customer demands, inadequate inventory oversight, weak financial
accountability, and overstated requirements. Because of these problems,
GAO's annual outlay of $15 billion for additional inventory is
vulnerable to waste and trouble. In the short term, DOD must continue to
stress the efficient operations of its existing logistics systems. This
includes disposing of unneeded inventory, implementing efficient and
effective inventory management practices, training personnel and
rewarding the right behavior, improving data accuracy, and enforcing
existing policies to minimize the acquisition of unneeded inventory. In
the longer term, DOD must establish goals, objectives, and milestones
for changing its culture and adopting new management tools and
practices. Key to changing DOD's management culture will be an
aggressive approach using best practices from the private sector.

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

 REPORTNUM:  T-NSIAD-97-109
     TITLE:  Defense Inventory Management: Problems, Progress, and 
             Additional Actions Needed
      DATE:  03/20/97
   SUBJECT:  Military inventories
             Inventory control
             Property and supply management
             Surplus federal property
             Strategic planning
             Military procurement
             Logistics
             Spare parts
             Equipment repairs
IDENTIFIER:  B-1B Aircraft
             DOD Prime Vendor Program
             Air Force Lean Logistics Program
             Army Velocity Management Program
             
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Cover
================================================================ COVER


Before the Subcommittee on National Security, International Affairs,
and Criminal Justice, Committee on Government Reform and Oversight,
House of Representatives

For Release on Delivery
Expected at
9:30 a.m., EST
Thursday,
March 20, 1997

DEFENSE INVENTORY MANAGEMENT -
PROBLEMS, PROGRESS, AND ADDITIONAL
ACTIONS NEEDED

Statement by Henry L.  Hinton, Jr., Assistant Comptroller General,
National Security and International Affairs Division

GAO/T-NSIAD-97-109

GAO/NSIAD-97-109T


(709247)


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

  DLA - Defense Logistics Agency
  DOD - Department of Defense

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss defense inventory
management issues.  We have identified defense inventory management
as 1 of our 25 high-risk areas in the federal government because of
vulnerabilities to waste, fraud, and abuse.\1

As requested, our testimony will focus on (1) a historical overview
of defense inventory management problems; (2) measures taken by the
Department of Defense (DOD) to improve inventory management; and (3)
the actions DOD needs to aggressively take, both near and long term,
to solve long-standing inventory management problems. 


--------------------
\1 In 1990, we began a special effort to review and report on the
federal program areas we identified as high risk because of
vulnerabilities to waste, fraud, abuse, and mismanagement.  This
effort, which was supported by the Senate Committee on Government
Affairs and the House Committee on Government Reform and Oversight,
brought a much needed focus on problems that were costing the
government billions of dollars.  We identified DOD's secondary
inventory management as a high-risk area at that time because levels
of unneeded inventory were too high and systems for determining
inventory requirements were inadequate. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

DOD's secondary inventories include consumable supplies, such as
medical, hardware, food, and clothing items, that are discarded after
use rather than repaired.  Secondary items also include reparable
items that, if damaged or worn, can be fixed or overhauled for less
than the cost of new items.  Examples of these items are landing
gear, hydraulic pumps, and avionics, which are essential to a weapon
system's operation.  In the past 5 years, we have issued a number of
reports that address DOD inventory management problems related to
these inventories.\2

The private sector, driven by today's globally competitive business
environment, is faced with the challenge of improving its service
while lowering costs.  As a result, many companies have adopted
innovative business practices to meet customer needs and retain
profitability.  Since DOD is facing a similar challenge of providing
better service at a lower cost, it has also begun to reexamine its
business practices.  With the end of the Cold War, the DOD logistics
system must support a smaller, highly mobile, high technology force
with fewer resources.  Also, due to the pressures of budgetary limits
and base closures, DOD must seek new and innovative ways to make
logistics processes as efficient and effective as possible.  To
address fundamental management problems in the federal government,
the Congress enacted landmark legislation\3 in the 1990s to establish
broad management reforms within the federal government.  These
reforms, if implemented successfully, will help resolve high-risk
problems, such as inventory management, and provide greater
accountability in many government programs and operations.  Through
these reforms, the Congress has laid the groundwork for the federal
government to use proven best management practices that have been
successfully applied in the private sector.  The administration has
embraced these management reforms and made their implementation a
priority. 


--------------------
\2 See Related GAO Products. 

\3 These laws include (1) the expanded Chief Financial Officers Act
of 1990 to prepare financial statements that can pass the test of an
independent audit and provide decisionmakers reliable information,
(2) the 1993 Government Performance and Results Act to measure
performance and focus on results, and (3) the 1995 Paperwork
Reduction Act and the 1996 Clinger-Cohen Act to make wiser
investments in information technology. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:2

Inventory management problems have plagued DOD for decades.  Despite
numerous efforts on DOD's part to correct these problems, we continue
to consider inventory management a high-risk area because it is
vulnerable to fraud, waste, and abuse.  We recently reported that, as
of September 30, 1995, about $34 billion, or about half of DOD's
$69.6 billion secondary inventory, was not needed to support war
reserve or current operating requirements.  Most of the problems that
contributed to the accumulation of this unneeded inventory still
exist, such as outdated and inefficient inventory management
practices that frequently do not meet customer demands, inadequate
inventory oversight, weak financial accountability, and overstated
requirements.  Because of these problems, we believe DOD's annual
expenditure of approximately $15 billion for additional inventory is
at risk. 

DOD recognizes that it needs to make substantial improvements to its
logistics system.  While we continue to see pockets of improvement,
as evidenced by each service's and the Defense Logistics Agency's
(DLA) reengineering efforts, DOD has made little overall progress in
correcting systemic problems that have traditionally resulted in
large unneeded inventories.  DOD top management needs to continue its
commitment to changing its inventory management culture so that it
provides its forces with necessary supplies in a timely manner while
avoiding the accumulation of unnecessary materials. 

To effectively address its inventory management problems, DOD must
adopt a strategy that includes both short- and long-term actions. 

  In the short term, DOD must continue to emphasize the efficient
     operation of its existing logistics systems.  This includes
     reducing and disposing of unneeded inventory, implementing
     efficient and effective inventory management practices, training
     personnel in these practices and rewarding the right behavior,
     improving requirements data accuracy, and enforcing existing
     policies and procedures to minimize the acquisition and
     accumulation of unnecessary inventory. 

  In the long term, DOD must establish goals, objectives, and
     milestones for changing its culture and adopting new management
     tools and practices.  A key part to changing DOD's management
     culture will be an aggressive approach to using best practices
     from the private sector.  From our discussions with more than 50
     private sector companies, we identified best practices which, if
     applied in an integrated manner, could help streamline DOD's
     logistics operations, potentially save billions of dollars, and
     improve support to the military customer.  In our opinion, DOD
     has not been aggressive enough in pursing these practices. 
     Recent DOD reengineering efforts have not incorporated some of
     the most advanced practices found in the private sector for
     reparable parts, and they have been slow to adopt best practices
     for hardware items. 


   OVERVIEW OF DOD'S INVENTORY
   MANAGEMENT PROBLEMS
---------------------------------------------------------- Chapter 0:3

We have reported over the last 20 years on numerous problems dealing
with DOD's secondary inventory management.  We reported that much of
DOD's unneeded inventory was acquired because of outdated and
inefficient inventory management practices.  For consumable items,
DOD holds inventory in as many as four different layers to ensure
items are available to end users when needed--a philosophy some
private sector companies have moved away from in recent years.  For
reparable aviation parts, DOD's depot repair process is slow and
inefficient.  As a result, each of the services can spend several
months or even years to repair the parts and then distribute them to
the end user. 


      MUCH OF DOD'S INVENTORY IS
      UNNEEDED
-------------------------------------------------------- Chapter 0:3.1

As of September 30, 1995, DOD held inventories valued at a total of
$69.6 billion, of which about $34 billion was not needed for war
reserve or current operating requirements (see fig.  1).  After a
detailed analysis of DOD's inventory records, we reported in February
1997 that some of DOD's inventory could last for decades or may never
be used.  For example, we identified about $14.6 billion of inventory
that did not have projected demands and therefore is likely never to
be used.  We calculated that another $11.8 billion of inventory could
last 2 to 10 years and $1.1 billion of inventory could last at least
100 years. 

   Figure 1:  DOD Inventory (Sept. 
   30, 1995)

   (See figure in printed
   edition.)

For example, as of September 1995, the Air Force had invested about
$472,000 for 4,177 wiring harnesses used on the airborne radio
communication system.  Of these, 4,152 were not needed to satisfy war
reserve and current operating requirements.  On the basis of
projected demand data, we determined that the unneeded harnesses
represented 277 years of supply.  According to the item manager,
demand for the harnesses decreased as modifications to the radio
system were made.  However, some of the harnesses are being retained
to support the military services, the Coast Guard, and foreign
military sales and to reconfigure other radios.  The item manager
informed us that 3,822 harnesses have been recommended for disposal. 

In another example, DLA had 127 motor blower brakes on hand as of
August 1996.  The brakes are used on the B-1B aircraft.  Inventory
records showed that 101 brakes, valued at $4,110 each, were unneeded
and represented 101 years of supply.  According to the item manager,
100 brakes were expected to be needed for fiscal year 1996.  However,
September 1996 records showed that only one had been used in the past
year.  The item manager believed that the demands for the brakes are
cyclic because the contractor repairing the B-1B periodically orders
the parts in bulk. 

To store and distribute this large inventory, DOD operates a
worldwide logistics system.  In the United States alone, DOD operates
about 25 distribution depots and other storage locations.  Much of
this storage space is occupied with unneeded inventory.  We reported
in May 1995 that DOD uses about 130 million cubic feet of storage
space to store inventory that is not needed to support current
operations or war reserve requirements.  DOD estimated it took
approximately 205 warehouses, each the size of over 2 football
fields, to provide this space, at an estimated cost of $94 million
per year. 

Downsizing of the military forces has contributed to some of DOD's
excess inventory.  However, we have also reported that DOD has wasted
billions of dollars on excess supplies.  This problem resulted
because inherent in DOD's culture was the belief that it was better
to overbuy items than to manage with just the amount of stock needed. 
The problems that have contributed to billions of dollars of unneeded
inventory still exist, such as inadequate inventory oversight, weak
financial accountability, and overstated requirements.  If DOD had
used effective inventory management and control techniques and modern
commercial inventory management practices, it would have lowered its
inventory levels and it would have avoided the burden and expense of
storing excess inventory.  Because these problems still exist, we
believe DOD's annual expenditure of approximately $15 billion for
additional inventory is at risk. 


      OUTDATED LOGISTICS SYSTEM
      FOR CONSUMABLE ITEMS
-------------------------------------------------------- Chapter 0:3.2

Of DOD's $69.6 billion inventory, about $19.2 billion is consumable
inventory stored at wholesale and retail facilities (see fig.  2). 
DOD's large inventory of consumable items reflects its philosophy of
relying on large stock levels to readily meet customer needs.  As a
result, DOD stores inventory in as many as four different layers to
provide items to end users when needed.  The first layer of inventory
is the wholesale supply system.  The $14.5 billion inventory stored
by DOD at this level can, in some cases, satisfy the needs of the
services for years.  For example, we estimated that DLA wholesale
inventory for hardware items could last an average of about 2 years,
based on fiscal year 1995 demands.  At the retail level, the services
hold additional inventory valued at about $4.7 billion.  This
inventory is stored in three different layers close to where the
items are used--base warehouses, central storerooms, and end-user
locations.  As reported in August 1995, service facilities we visited
had retail stock on hand sufficient to last from 1 month to over 5
years. 

   Figure 2:  DOD Inventory
   Composition (Sept.  30, 1995)

   (See figure in printed
   edition.)

Despite this large investment in inventory, DOD's supply system
frequently fails to meet the needs of its "customer." For example, at
one Army repair depot we visited, the base warehouse failed to fully
satisfy customer orders 75 percent of the time during the first 11
months of fiscal year 1996.  Also, as of February 1996, the Navy had
almost 12,000 broken aircraft parts, valued at $486 million, that it
stopped repairing because parts were not available to complete
repairs.  These items, which had been packaged and moved to a
warehouse next to the repair facility, had been storage for an
average of 9 months. 


      INEFFICIENT LOGISTICS SYSTEM
      FOR REPARABLE ITEMS
-------------------------------------------------------- Chapter 0:3.3

DOD's depot repair pipeline for reparable parts is slow and
inefficient.  Several factors contribute to these conditions.  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, each of the services can spend several months
or even years to repair and distribute a repaired part to the end
user. 

The amount of time required by the logistics system 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.  As of September 30, 1995, DOD's reparable parts inventory was
valued at about $50 billion, of which about $41 billion was for
aircraft component parts.  If DOD's repair time were reduced,
inventory requirements could also be reduced.  For example, an
Army-sponsored RAND study noted that reducing the repair time for one
helicopter component from 90 to 15 days would also reduce inventory
requirements for that component from $60 million to $10 million. 


      ADDITIONAL PROBLEMS
      CONTRIBUTING TO UNNEEDED
      INVENTORY
-------------------------------------------------------- Chapter 0:3.4

Along with the outdated and inefficient practices discussed above, we
found instances where DOD still lacks adequate oversight of its
inventory, financial accountability remains weak, and requirements
continue to be overstated.  These additional problems have
contributed to DOD's unneeded inventory.  For example: 

  In August 1996, we reported that Navy managers did not have
     adequate visibility over $5.7 billion in operating materials and
     supplies on board ships and at 17 redistribution sites.  We
     estimated that, because of the lack of oversight, in the first
     half of 1995 item managers ordered or purchased items in excess
     of operating level needs.  As a result, the Navy will incur
     unnecessary costs of about $27 million. 

  We reported in March 1996 that the Air Force and the Navy budgeted
     $132 million more than was needed for aviation spare parts
     because of questionable policies concerning the determination of
     requirements and the accountability for depot maintenance
     assets.  The Air Force did not consider $72 million of on-hand
     assets, and the Navy counted $60 million in depot maintenance
     requirements twice. 

  Regarding DOD's financial accounting process and systems, the
     Secretary of Defense, in his February 1996 annual statement of
     assurance required by the Federal Managers' Financial Integrity
     Act, identified inadequate internal controls and other
     significant deficiencies, such as the use of a variety of
     nonintegrated systems; inability of current systems to respond
     rapidly to change; lack of automated indicators that measure, or
     link costs, performance measurements, or other output
     measurements; difficulties with consistently valuing and
     reconciling physical inventories to financial account balances;
     and inaccuracies in the valuation of property, plant, and
     equipment. 


   DOD HAS MADE SOME PROGRESS IN
   REDUCING INVENTORY
---------------------------------------------------------- Chapter 0:4

DOD recognizes that it needs to make substantial improvements to its
logistics system.  In fact, DOD's goals, concepts, and top management
commitment to reengineer its business practices closely parallel
those we have seen in the private sector.  Since fiscal year 1989,
DOD has reduced secondary inventory levels by $22.9 billion.  While
this is a significant reduction, we believe much of it was the result
of reduced force levels, which reduced overall demands on the
logistics system.  DOD has made little progress in developing the
management tools to help solve its long-term inventory management
problems. 

DOD recognizes that it can no longer continue its current logistics
practices if it is to effectively carry out its mission in today's
environment.  For example, Air Force officials stated that budgetary
constraints in recent years have led to substantial reductions in
personnel, leaving the remaining work force to deal with a logistics
operation that has traditionally relied on large numbers of
personnel.  DOD has also recognized that, with the end of the Cold
War, dramatic changes need to be made and goals, objectives, and
processes similar to those being used in the private sector need to
be established.  Aggressively pursuing these goals would fit into
DOD's plans to reduce infrastructure and operations and support costs
so that funds could be freed up to support its current weapons
modernization efforts. 


      PRIME VENDOR PROGRAMS FOR
      PERSONNEL SUPPLIES
-------------------------------------------------------- Chapter 0:4.1

In response to our recommendations, DOD has adopted best practices to
improve the management of personnel items, but these initiatives
impact less than 3 percent of DOD's secondary items.  Between 1991
and 1995, we issued a series of reports that identified and
recommended ways DOD could apply best management practices to
personnel items.  These reports focused on improved partnerships
between suppliers and DOD facilities, principally through the use of
prime vendors.  A prime vendor provides timely and direct delivery
between customers and suppliers, and orders additional stock from
manufacturers on short notice, with quick turnaround, to minimize
inventory holding costs.  This approach reduces the need for DOD to
stock and distribute inventory from multiple locations. 

Since 1993, DLA has taken steps to use prime vendors for personnel
items.  One of DLA's most successful initiatives has been the
implementation of a prime vendor program for medical supplies and
pharmaceutical products.  We reported in 1995 that approximately 150
DOD hospitals and medical treatment facilities were using prime
vendors in 21 different geographic regions across the United States. 
The use of this program has allowed DOD to reduce stock levels at
both wholesale and retail locations.  Reducing inventory levels has
also enabled DOD to reduce the warehouse space needed to store these
items.  At one storage depot alone, DLA reduced the storage space
used for medical and pharmaceutical items by about 40 percent over a
3-year period (see fig.  3). 

   Figure 3:  Vacated DLA
   Warehouse - 1991 vs 1994

   (See figure in printed
   edition.)

We estimate that between September 1991 and September 1996, DOD
reduced its pharmaceutical, medical, and surgical inventories and
associated management costs by about $714 million through the use of
best practices, such as prime vendors.  The majority of savings has
resulted from the issuance of medical supplies to military customers
without having to replace inventories through the purchase of
additional stocks.  Similar prime vendor programs are being
implemented for food and clothing items. 

The prime vendor program also enables DOD hospitals to reduce
inventory costs.  For example, we reported in August 1995 that the
Walter Reed Army Medical Center, in addition to a $3.8 million
reduction in pharmaceutical inventories, saves over $6 million a year
in related inventory management expenses by using a prime vendor.  In
addition, as a result of the elimination of inventories after the
prime vendor program was established, Walter Reed was able to convert
a former warehouse holding medical supplies into a medical training
facility.  (see fig.  4). 

   Figure 4:  A Converted
   Warehouse at the Walter Reed
   Army Medical Center

   (See figure in printed
   edition.)


      SERVICES' INITIATIVES FOR
      IMPROVING REPARABLE PARTS
      MANAGEMENT
-------------------------------------------------------- Chapter 0:4.2

Each service is developing initiatives to improve the management of
its logistics pipeline for reparable aircraft parts to make their
logistics processes faster, better, and cheaper.  For example: 

  As we reported in 1996, the Air Force has described its "Lean
     Logistics" initiative as the cornerstone of all future logistics
     system improvements.  These efforts, spearheaded by the Air
     Force Materiel Command, are aimed at dramatically improving
     service to the end user while simultaneously reducing pipeline
     time, excess inventory, and other logistics costs.  In June
     1996, the Air Force began testing certain practices through
     demonstration projects at each of the five Air Logistics
     Centers.  In fiscal year 1997, the Air Force also plans to
     examine the application of an integrated supplier program and
     other logistics practices we have recommended. 

  Under its regional supply and maintenance initiatives, the Navy is
     identifying redundant capabilities and consolidating operations
     into regionally based activities.  In one region, the Navy is
     consolidating
     32 locations used to calibrate maintenance test equipment into 4
     locations.  The Navy believes that eliminating the fragmented
     management approach to supply management and maintenance will
     allow it to decrease infrastructure costs by reducing
     redundancies and eliminating excess capacity.  The Navy also
     believes that moving away from highly decentralized operations
     will better position it to improve and streamline operations
     Navy-wide.  The Navy has also established an initiative looking
     at ways to reduce the amount of time it takes a customer to
     receive a part after placing an order to the logistics system. 
     We reported in July 1996 that these initiatives were in the
     early phases, so broad-based improvements had not yet occurred. 

  The Army developed the "Velocity Management" program to speed up
     key aspects of the logistics system and reduce the Army's need
     for large inventory levels.  The Army established the program
     with goals, concepts, and top management support that parallel
     the improvement efforts found in private sector companies.  The
     overall goal of the program is to eliminate unnecessary steps in
     the logistics pipeline that delay the flow of parts through the
     system.  Under this program, the Army has established Army-wide
     process improvement teams for the following four areas: 
     ordering and shipping of parts, the repair cycle, inventory
     levels and locations, and financial management.  Also, the Army
     is establishing local-level site improvement teams under this
     program to examine and improve the logistics operations of
     individual Army units. 

Because these programs have only recently begun, they have had
limited impact in improving DOD's overall logistics operations. 


   AGGRESSIVE ACTIONS ARE NEEDED
   TO RESOLVE LONG-STANDING
   PROBLEMS
---------------------------------------------------------- Chapter 0:5

On the basis of the work we have done comparing DOD and private
sector logistics practices, we believe substantial opportunities
exist for DOD to build on its current improvement efforts.  Overall,
DOD has been slow in adopting new management practices for hardware
items and has not incorporated some of the most advanced practices
found in the private sector for reparable parts.  From our
discussions with more than 50 companies, we identified best practices
that, if applied in an integrated manner, could help streamline DOD's
logistics operations, save billions of dollars, and improve support
to the military customer.  In the short term, however, DOD must
continue to emphasize the efficient operation of its existing
logistics systems.  In the long term, DOD must establish goals,
objectives, and milestones for changing its culture. 


      SHORT-TERM SOLUTIONS
-------------------------------------------------------- Chapter 0:5.1

In the short term, DOD needs to continue emphasizing the efficient
operation of its existing inventory systems.  As previously reported,
this includes committing to improved inventory management by top
management's emphasis on (1) inventory indicators that highlight
reduction and disposal of unneeded inventory; (2) implementation of
efficient and effective inventory management practices; and (3)
training personnel in those practices and rewarding the right
behavior, improving the accuracy of data such as requirements and the
quantity, condition, and value of inventory items managed through
current logistics and financial systems, and aggressively enforcing
existing policies and procedures that will minimize the acquisition
and accumulation of unnecessary inventory. 


      LONG-TERM SOLUTIONS
-------------------------------------------------------- Chapter 0:5.2

In the long term, overall solutions include mapping a strategy for
completing its culture change initiatives; setting aggressive goals,
objectives, and milestones for identifying and implementing viable
and more cost-effective commercial practices for supplying its
forces; establishing goals, objectives, and milestones for
determining where outsourcing logistics functions represents a
cost-effective and efficient alternative to traditional methods; and
providing inventory managers with the automated, integrated
accounting and management systems necessary to manage its inventory
in a world-class manner.  These long-term solutions will address
systemic problems that have contributed to DOD's accumulation of
unneeded inventory. 


      ORGANIZATIONAL CULTURE
      CHALLENGES FACING DOD
-------------------------------------------------------- Chapter 0:5.3

To address and resolve the issues we have discussed today, DOD faces
major challenges as it pursues efforts to institutionalize a
reengineered logistics system.  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.  This kind of
resistance must be overcome if the services are to expand their
concept of operations.  DOD's top management needs to continue its
commitment to changing its inventory management culture so that it
provides its forces with necessary supplies in a timely manner while
avoiding the accumulation of unneeded materials.  We believe that the
adoption of best practices is key to changing DOD's inventory
management culture. 


      DOD HAS BEEN SLOW IN TESTING
      BEST PRACTICES FOR HARDWARE
      ITEMS
-------------------------------------------------------- Chapter 0:5.4

While DLA has taken steps to improve its logistics practices and
reduce inventories, such as through long-term contracting, direct
vendor delivery, and electronic commerce, more aggressive steps could
provide better customer service while reducing logistics costs.  DLA
has not made enough progress with its $5.7 billion inventory of
hardware items because it still has large amounts of items, such as
bolts, valves, and fuses, that cost millions of dollars to manage and
store.  We estimate that this inventory could satisfy DOD's
requirements for the next 2 years, assuming demands remain constant. 
In contrast, some private sector companies we visited maintain
inventory levels that last only 90 days.  These companies have
achieved these lean inventory levels and saved millions in operating
costs by developing innovative supplier partnerships that give
established commercial distribution networks the responsibility to
manage, store, and distribute inventory on a frequent, regular basis. 

Although we recommended in 1993 that DOD pursue innovative
partnerships with its suppliers to reduce logistics costs, DOD is
only now in the initial stages of testing this type of partnership
through its "Virtual Prime Vendor" program for hardware supplies.  If
successfully implemented, this concept could enable DOD to improve
service to its customers and reduce overall logistics costs.  In our
opinion, this program is close to those efforts we have observed in
the private sector and provides DOD with an excellent opportunity to
achieve greater inventory reductions by minimizing the need to store
inventory at wholesale and retail locations (see fig.  5).  If DOD
were able to achieve similar performance from this effort as those in
the private sector, hardware inventories and related management costs
could be reduced by billions of dollars and parts needed to complete
repairs would be more readily available to the end user. 

   Figure 5:  Traditional DOD
   Logistics System Compared to
   Best Management Practices

   (See figure in printed
   edition.)


      DOD HAS NOT TESTED MOST
      ADVANCED INVENTORY PRACTICES
      FOR REPARABLE PARTS
-------------------------------------------------------- Chapter 0:5.5

In addition to the opportunities to improve the management of
hardware items, there are even greater opportunities to improve DOD's
management of reparable parts.  As of September 30, 1995, DOD held
more than $50 billion worth of these parts, but its efforts to
streamline its logistics system for them have not included key best
practices we have identified.  Over the past 13 months, we have
reported on the various problems with DOD's pipeline for reparable
parts and on the substantial improvement opportunities available to
DOD.  For example: 

  In 1996, we examined 24 different types of Army aviation parts, and
     calculated that the Army's logistics system took an average of
     525 days to ship broken parts from field units to the depot,
     repair them, and ship the repaired parts to using units.  We
     estimated that all but 18 days (97 percent) was the result of
     unplanned repair delays, depot storage, or transportation time. 
     We also calculated the Army uses its inventory six times slower
     than a major airline, British Airways.  That airline had
     developed a process to move parts through its repair pipeline
     much faster.  For example, one part we examined had an Army
     repair pipeline time of 429 days; in contrast, British Airways
     was able to complete this process in 116 days.  (see fig.  6). 

   Figure 6:  Comparison of
   British Airways' and Army's
   Repair Pipeline for a Gearbox
   Assembly

   (See figure in printed
   edition.)

  In July 1996, we reported that the Navy's repair process can create
     as many as 16 time-consuming steps as parts move through the
     depot repair pipeline.  Component parts can accumulate at each
     step in the process, which increases the total number of parts
     that are needed to meet customer demands and to ensure a
     continuous flow of parts.  By tracking parts through each of the
     16 steps and using the Navy's flow time data, we estimated that
     it could take, on average, about 4 months from the time a broken
     part is removed from an aircraft to the time it is ready for
     reissue.  Our analysis did not include the amount of time parts
     were stored in warehouses awaiting repair or issue to the
     customer. 

  In February 1996, we reported that using its current logistics
     pipeline process, the Air Force can spend several months to
     repair the parts and then distribute them to the end user.  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.  (see fig.  7).  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 7:  Comparison of
   British Airways' and the Air
   Force's Repair Pipeline for a
   Landing Gear Component

   (See figure in printed
   edition.)

In our reports, we stated that DOD's improvement efforts were not as
extensive as they could be because they have not incorporated the
best practices we have seen in the private sector.  These best
practices have successfully reduced costs and improved logistics
operations.  We have recommended that DOD test these concepts and
expand them to other locations, where feasible. 

The four specific practices described below are key to the overall
improvement of the reparable parts pipeline.  For the companies we
visited, they have resulted in substantial logistics system
improvements and reduced costs.  When used together in an integrated
fashion, they can help maximize a company's inventory investment,
decrease inventory levels, and provide a more flexible repair
capability.  (see figs.  8 and 9). 

   Figure 8:  Current Repair
   Pipeline at the Corpus Christi
   Army Depot, Texas

   (See figure in printed
   edition.)

   Figure 9:  Best Practices
   Applied to the Army Repair
   Pipeline

   (See figure in printed
   edition.)

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

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

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

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


   SUMMARY
---------------------------------------------------------- Chapter 0:6

Substantial opportunities exist for DOD to improve the management of
its $69.6 billion inventory as well as its $15 billion annual
procurement of new parts.  To do this, DOD needs to pursue both
short- and long-term goals.  In the short term, DOD needs to focus on
improving the effectiveness of its current inventory management
systems, such as those affecting requirements determination and
inventory accountability.  In the long term, DOD must focus on goals
and objectives that will dramatically change its inventory management
practices to provide a more cost-effective and efficient system while
maintaining readiness and sustainability goals.  The key to doing
this is aggressively focusing on changing its culture and adopting
new leading-edge business practices.  Recently enacted legislation
sets an overall framework within which DOD can establish objectives
and measures for achieving these short- and long-term solutions. 
Close congressional oversight will continue to be a critical element
as DOD establishes plans, goals, objectives, and milestones for
addressing its inventory management processes. 


-------------------------------------------------------- Chapter 0:6.1

Mr.  Chairman, this concludes our statement.  We would be happy to
answer any questions you or the Subcommittee may have. 


RELATED GAO PRODUCTS
=========================================================== Appendix 1

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

High-Risk Series:  Defense Inventory Management (GAO/HR-97-5, Feb. 
1997). 

Defense Logistics:  Much of the Inventory Exceeds Current Needs
(GAO/NSIAD-97-71, Feb.  28, 1997). 

Defense Inventory:  Spare and Repair Parts Inventory Costs Can Be
Reduced (GAO/NSIAD-97-47, Jan.  17, 1997). 

Logistics Planning:  Opportunities for Enhancing DOD's Logistics
Strategic Plan (GAO/NSIAD-97-28, Dec.  18, 1996). 

1997 DOD Budget:  Potential Reductions to Operation and Maintenance
Program (GAO/NSIAD-96-220, Sept.  18, 1996). 

Defense IRM:  Critical Risks Facing New Materiel Management Strategy
(GAO/AIMD-96-109, Sept.  6, 1996). 

Navy Financial Management:  Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, Aug.  16, 1996). 

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

Defense Logistics:  Requirement Determinations for Aviation Spare
Parts Need to Be Improved (GAO/NSIAD-96-70, Mar.  19, 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). 

Defense Inventory:  Opportunities to Reduce Warehouse Space
(GAO/NSIAD-95-64, May 24, 1995). 

Best Practices Methodology:  A New Approach for Improving Government
Operations (GAO/NSIAD-95-154, May 1995). 

Defense Business Operations Fund:  Management Issues Challenge Fund
Implementation (GAO/NSIAD-95-79, Mar.  1, 1995). 

Defense Supply:  Inventories Contain Nonessential and Excessive
Insurance Stocks (GAO/NSIAD-95-1, Jan.  20, 1995). 

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

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

Commercial Practices:  Opportunities Exist to Enhance DOD's Sales of
Surplus Aircraft Parts (GAO/NSIAD-94-189, Sept.  23, 1994). 

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

Partnerships:  Customer-Supplier Relationships Can Be Improved
Through Partnering (GAO/NSIAD-94-173, July 19, 1994). 

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). 

Defense Transportation:  Commercial Practices Offer Improvement
Opportunities (GAO/NSIAD-94-26, Nov.  26, 1993). 

Defense Inventory:  Applying Commercial Purchasing Practices Should
Help Reduce Supply Costs (GAO/NSIAD-93-112, Aug.  6, 1993). 

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). 

Organizational Culture:  Techniques Companies Use to Perpetuate or
Change Beliefs and Values (GAO/NSIAD-92-105, Feb.  27, 1992). 

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). 


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