oversight

Defense Inventory: The Department Needs a Focused Effort to Overcome Critical Spare Parts Shortages

Published by the Government Accountability Office on 2003-06-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office
             Report to the Chairman, Subcommittee
GAO          on Defense, Committee on
             Appropriations, House of
             Representatives

June 2003
             DEFENSE
             INVENTORY
             The Department
             Needs a Focused
             Effort to Overcome
             Critical Spare Parts
             Shortages




GAO-03-707
                                                 June 2003


                                                 DEFENSE INVENTORY

                                                 The Department Needs a Focused Effort
Highlights of GAO-03-707, a report to the        to Overcome Critical Spare Parts
Subcommittee on Defense, Committee on
Appropriations, House of Representatives         Shortages



The Department of Defense’s                      The Office of the Secretary of Defense’s (OSD) logistics strategic plan focuses
(DOD) annual appropriation totals                on transforming the department’s logistics operations by emphasizing weapon
billions of dollars for spare parts.             system support, customer service, and enterprise integration, but does not
In addition, it has received                     specifically address mitigating spare parts shortages. In addition, while it
supplemental funding totaling $1.5
                                                 contains some key attributes of a strategic plan, such as broad goals and
billion since fiscal year 1999 to
increase the availability of spare               implementation strategies, it lacks other key attributes. In June 2002, the
parts. However, DOD continues to                 department published the Future Logistics Enterprise, which serves as the
experience critical spare parts                  strategic plan behind efforts to transform logistics operations within the
shortages that impact military                   department to ensure consistent, reliable support that meets the warfighters’
readiness. GAO examined whether                  requirements. This plan presents its vision for accelerating logistics
(1) DOD’s logistics strategic plan               improvement, enhancing support to the warfighter and aligning logistics
addresses the mitigation of critical             processes with the operational demands of the 21st Century.
spare parts shortages that
adversely affect readiness, (2)                  While the Future Logistics Enterprise plan identifies six departmentwide
DOD’s logistics initiatives are likely           initiatives under three broad topical areas to improve weapon system
to mitigate spare parts shortages                availability, none of the initiatives specifically address mitigating critical spare
that affect readiness, and (3) DOD               parts shortages. However, DOD has directed a separate Defense Logistics
has the ability to identify the effect           Agency effort to improve the availability of critical aviation spare parts. Under
of increased investments for spare               the three topics of weapon system support, customer service, and enterprise
parts on readiness.                              integration, OSD’s six agencywide initiatives aim to improve supply operations
                                                 and readiness. In fact, two—Condition Based Maintenance Plus and Total Life
                                                 Cycle System Management—specifically identify improving readiness as an
GAO recommends that the                          objective. For example, the Condition Based Maintenance Plus initiative is
Secretary of Defense:                            designed to improve maintenance capabilities and business processes that could
• Incorporate clear goals,                       increase operational availability and readiness throughout the life cycle of the
  objectives, and performance                    department’s weapon systems. If successfully implemented, this initiative would
  measures pertaining to mitigating              improve maintenance operations and might affect spare parts shortages, but it
  spare parts shortages in the                   does not have goals and performance measures related to mitigating spare parts
  Future Logistics Enterprise or                 shortages. As a result, DOD may not know whether it is investing its resources
  appropriate agencywide                         in the most efficient and effective manner.
  initiatives to include efforts
  recommended by the Under                       Recent OSD efforts to link funding to readiness could enhance its ability to
  Secretary of Defense Comptroller               identify the affect of funding for critical spare parts on readiness. In an August
  in his August 2002 study report.
                                                 2002 study report, the DOD Comptroller identified the value of investing in
• Establish milestones and define
  how it will measure progress in                critical parts that adversely affect readiness and recommended the Defense
  implementing the August 2002                   Logistics Agency and the services link budget requests to weapon system
  Inventory Management Study                     readiness rates. The Comptroller’s recommendations stemmed from concern
  recommendations.                               that the Defense Logistics Agency and the services’ inventory systems tend to
In written comments, DOD                         purchase low-cost/high-demand items and not those that would most improve
generally concurred with the intent              readiness rates. While citing some improvement, the Comptroller made eight
of our recommendations, but not                  recommendations, four of which were specifically aimed at improving efforts to
with the approach recommended.                   increase investment in critical spare parts and link funding requests to readiness
www.gao.gov/cgi-bin/getrpt?GAO-03-707.
                                                 rates. In addition, the Comptroller changed the budget justification document
                                                 (budget exhibit) to provide such information to Congress.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact William M. Solis
at (202) 512-8365 or solisw@gao.gov.
Contents


Letter                                                                                                    1
               Results in Brief                                                                           3
               Background                                                                                 5
               DOD’s Strategic Plan Is Aimed at Logistics Transformation, Not
                  Specifically Spare Parts Shortages                                                     8
               Initiatives Focus on Weapons System Availability, Not Critical
                  Spare Parts Shortages                                                                  9
               Recent Efforts Could Strengthen Link Between Funding and
                  Readiness                                                                              11
               Conclusions                                                                               13
               Recommendations for Executive Action                                                      13
               Agency Comments and Our Evaluation                                                        14
               Scope and Methodology                                                                     16

Appendix I     Initiatives Included in the Future Logistics
               Enterprise                                                                                18



Appendix II    Inventory Investment Budget Submission Material                                           20



Appendix III   Comments from the Department of Defense                                                   24



Appendix IV    GAO Contacts and Staff Acknowledgements                                                   27




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               Page i                                                     GAO-03-707 Defense Inventory
United States General Accounting Office
Washington, DC 20548




                                   June 27, 2003

                                   The Honorable Jerry Lewis
                                   Chairman, Subcommittee on Defense
                                   Committee on Appropriations
                                   House of Representatives

                                   Dear Mr. Chairman:

                                   The Department of Defense’s (DOD) fiscal year 2002 parts related annual
                                   operations and maintenance funding totaled approximately $11.2 billion
                                   and working capital fund obligation authority totaled approximately
                                   $22.9 billion. Since fiscal year 1999, it has also received supplemental
                                   funding totaling $1.5 billion to increase the availability of spare parts.
                                   While the Army and Defense Logistics Agency are reporting that they are
                                   meeting the overall supply performance goal of having parts available to
                                   meet customer demands 85 percent of the time, the department still
                                   reports shortages of critical spare parts1 that affect readiness. Recognizing
                                   that spare parts shortages will never be eliminated, it is reasonable to
                                   expect the department to place a priority on efforts to mitigate (reduce)
                                   those shortages that adversely affect readiness. This priority should be
                                   inherent in the overall planning and stewardship of funds requested from
                                   Congress and the accountability for making spare parts investment
                                   decisions that provide a good readiness return. In our January 2003 High
                                   Risk Series Report, we again identified DOD’s management of inventory as
                                   high-risk because of long standing management weaknesses that could
                                   result in unnecessary expenditures and that DOD was experiencing
                                   equipment readiness problems because of the lack of spare parts.2




                                   1
                                    Critical spare parts shortages refer to supply items that cause a degradation of the
                                   readiness status of the associated weapon system or equipment.
                                   2
                                    U.S. General Accounting Office, Major Management Challenges and Program Risks:
                                   Department of Defense, GAO-03-98 (Washington, D.C.: January 2003).



                                   Page 1                                                      GAO-03-707 Defense Inventory
This is one in a series of reports responding to your request that we
identify ways to improve the availability of spare parts.3 As agreed, this
report addresses the strategic planning efforts of the Office of the
Secretary of Defense (OSD) to transform the way DOD conducts its
logistics business operations in order to mitigate critical spare parts
shortages. More specifically, we are reporting on the following:

1. Does OSD’s logistics strategic plan address the mitigation of critical
   spare parts shortages—those that adversely affect readiness?

2. Will OSD logistics initiatives likely mitigate spare parts shortages that
   affect readiness?

3. Does OSD have the ability to identify the effect on readiness of
   increased investments for spare parts?

We reviewed the OSD’s current logistics strategic planning document to
determine whether it contained a focus on mitigating spare parts
shortages. We also assessed the extent to which the strategy and initiatives
provided a basis for guiding the defense agencies’ and military services’
efforts and were consistent with Government Performance and Results
Act of 1993 (GPRA) guidelines for preparing a strategic plan.4 We
interviewed OSD and Joint Staff officials about the strategic planning
document to identify their views on mitigating spare part shortages and
readiness. We also compared OSD’s current initiatives to issues identified
in GAO’s High Risk Series to determine if they contained specific goals and
objectives linked to mitigating spare parts and measures relating to
readiness. To assess DOD’s ability to link funding for spare parts to
improved readiness, we reviewed DOD documents and reports relevant to
linking additional funding for spare parts to readiness.




3
 U.S. General Accounting Office, Defense Inventory: Air Force Item Manager View of
Repair Parts Issues Consistent With Issues Reported in the Past, GAO-03-684R
(Washington, D.C.: May 21, 2003); Defense Inventory: The Army Needs a Plan to Overcome
Critical Spare Parts Shortages, GAO-03-705 (Washington, D.C.: June 27, 2003); Defense
Inventory: Air Force Plans and Initiatives to Mitigate Spare Parts Shortages Need Better
Implementation, GAO-03-706 (Washington, D.C.: June 27, 2003); Defense Inventory: Navy
Logistics Strategy and Initiatives Need to Address Spare Parts Shortages, GAO-03-708
(Washington, D.C.: June 27, 2003); and Defense Inventory: Several Actions Are Needed to
Further DLA’s Efforts to Mitigate Shortages of Critical Parts, GAO-03-709 (forthcoming).
4
Pub.L. 103-62, Aug. 3, 1993.




Page 2                                                   GAO-03-707 Defense Inventory
                   The Office of the Secretary of Defense’s logistics strategic plan is focused
Results in Brief   on transforming the department’s logistics operations through an
                   emphasis on improving weapon system support, customer service, and
                   enterprise integration. While this could improve weapon system readiness
                   over time, it does not specifically focus on mitigating spare parts
                   shortages. In addition, although it contains some key attributes of a
                   strategic plan, such as broad goals and implementation strategies, it lacks
                   other key attributes. In June 2002, the department published the Future
                   Logistics Enterprise, which serves as the strategic plan behind efforts to
                   transform logistics operations within the department to ensure consistent,
                   reliable support that meets the warfighters’ requirements. This plan
                   presents its vision for accelerating logistics improvement, enhancing
                   support to the warfighter and aligning logistics processes with the
                   operational demands of the 21st Century. However, according to OSD
                   officials, because the plan is focused on the high-level goal of transforming
                   operations, it does not focus on specific issues such as the need to
                   mitigate spare parts shortages. Even though DOD considers the Future
                   Logistics Enterprise plan to be in its infancy, the plan includes some key
                   elements of a good plan. For example, it cites general goals such as
                   meeting warfighter requirements and implementation strategies such as
                   adopting Total Life Cycle Systems Management, and recognizes the need
                   to develop broad performance measures such as weapons system
                   availability. However, the plan lacks other key elements, which are
                   considered important. It does not contain specific goals, objectives, or
                   performance measures; does not require subordinate organizations such
                   as the Defense Logistics Agency and the services to develop supporting
                   plans or submit annual progress reports; and does not provide the
                   comprehensive overarching guidance needed to integrate the multitude of
                   ongoing initiatives. By not focusing on mitigating spare parts shortages as
                   part of a well developed overall strategy to improve logistics operations,
                   DOD increases the likelihood there will be ineffective or duplicate efforts
                   within the Defense Logistics Agency and the services to address this
                   important problem that affects readiness. As a result, OSD will lack
                   assurance that it is investing in those highest priority items, which would
                   yield the greatest return on investment and effect on readiness.

                   The Future Logistics Enterprise plan identifies six departmentwide
                   initiatives under three broad topical areas to improve weapon system
                   availability, but none of the initiatives specifically address mitigating
                   critical spare parts shortages. However, in a separate initiative, DOD
                   directed the Defense Logistics Agency to improve the availability of
                   critical aviation spare parts. Under the three topics of weapon system
                   support, customer service, and enterprise integration, OSD’s six


                   Page 3                                            GAO-03-707 Defense Inventory
agencywide initiatives focus on improving supply operations and
readiness. In fact, two—Condition Based Maintenance Plus and Total Life
Cycle System Management—specifically identify improving readiness as
an objective. For example, the Condition Based Maintenance Plus
initiative focuses on improving maintenance capabilities and business
processes that could increase operational availability and readiness
throughout the life cycle of the department’s weapon systems. If
successfully implemented, this initiative would improve maintenance
operations and might affect spare parts shortages, but it does not have
goals and performance measures related to mitigating spare parts
shortages. As a result, DOD may not know if it is investing in those items
that would give the greatest return on investment or effect on readiness, or
may achieve readiness at a higher than necessary cost by simply buying
more parts rather than addressing the cause of shortages. While not an
agencywide initiative, DOD has directed the Defense Logistics Agency to
implement a focused effort called the Aviation Investment Strategy to
reduce specific critical spare parts shortages. Under this initiative, the
Defense Logistics Agency has spent $500 million to buy more of these
parts, thereby increasing their availability.

Recent OSD efforts to link funding to readiness could enhance its ability to
identify the effect of funding for critical spare parts on readiness. In an
August 2002 study report, the DOD Comptroller identified the value of
investing in critical parts that adversely affect readiness and
recommended the Defense Logistics Agency and the services link budget
requests to weapon system readiness rates. The Comptroller’s
recommendations stemmed from concern that the Defense Logistics
Agency and the services’ inventory systems tend to purchase low-
cost/high-demand items and not those that would most improve readiness
rates. Although he cited some improvement efforts, the Comptroller made
eight recommendations, four of which specifically focused on improving
efforts to increase investment in critical spare parts and link funding
requests to individual weapon system readiness rates. In addition, the
Comptroller changed the budget justification document (budget exhibit)
to provide such information to Congress. However, his recommendations
did not cite reporting deadlines or how OSD would measure Defense
Logistics Agency and service progress in implementing the four
recommendations.

Given the adverse effect of critical spare parts shortages on readiness, we
are recommending that the Secretary of Defense incorporate clear goals,
objectives, and performance measures pertaining to mitigating spare parts
shortages in either the Future Logistics Enterprise or appropriate


Page 4                                           GAO-03-707 Defense Inventory
             agencywide initiatives to include efforts recommended by the Under
             Secretary of Defense Comptroller in his August 2002 study report. In
             addition, we are recommending that OSD identify milestones and define
             how it will measure progress in implementing the August 2002 Inventory
             Management Study recommendations. DOD concurred with the intent of
             our first recommendation, but not all of the suggested actions. DOD stated
             that spare parts shortages are a symptom of imperfect supply chain
             processes and that components of the Future Logistics Enterprise would
             transform these processes. Furthermore, the August 2002
             recommendation has been incorporated in the Financial Management
             Regulation and their implementation would be reviewed in annual budget
             conferences. Therefore, DOD does not need to incorporate additional
             goals, objectives and performance measures into the strategy or
             agencywide initiatives to address this issue. We recognize OSD’s focus on
             transforming logistics processes and endorse the actions taken to monitor
             implementation of the August 2002 study report recommendations.
             However, we believe that process improvements alone do not meet the
             intent of our recommendation. Further, we continue to believe that
             including a focus on mitigating spare parts with clear goals, objectives and
             performance measures included in its logistics strategy or agencywide
             initiatives is needed to provide the framework for ensuring this issue is
             addressed as part of DOD’s overall logistics effort. DOD partially
             concurred with the second recommendation in that it believes separate
             reporting milestones to measure the progress in implementing the Under
             Secretary of Defense, Comptroller’s August 2002 recommendations are not
             needed because progress would be measured as an integral part of the
             resource allocation process in its annual budget conferences. When
             implemented, these actions meet the intent of our recommendation
             provided goals, objectives, and performance measures pertaining to
             mitigating spare parts shortages are included in the scorecard. The
             department’s comments and our evaluation are on page 14 of this report.


             To support the warfighter, DOD maintains an extensive supply system to
Background   provide the spare parts necessary to keep weapons systems operational.
             The department currently maintains an inventory in excess of $60 billion,
             with annual sales to operating forces of approximately $30 billion. The
             operating forces rely on operations and maintenance appropriations to
             procure spare parts from this supply infrastructure. In recent years,
             Congress has fully funded the operation and maintenance budget request
             of the department and has provided supplemental funding targeted for
             spare parts. Traditionally, the department has measured the effectiveness
             of supply operations in terms of supply availability rate—the frequency


             Page 5                                           GAO-03-707 Defense Inventory
with which a part is available for delivery upon a customer’s first request.
The current supply availability goal is 85 percent and the Army and
Defense Logistics Agency report they are achieving this goal. Nevertheless,
the Defense Logistics Agency and the services continue to experience
critical spare parts shortages that affect the operational readiness of the
warfighter.

The department, Congress, and GAO have long recognized the importance
of a supply system that operates efficiently and effectively. The
department has taken a number of actions to improve the logistics system.
First, beginning in fiscal year 1994, the Under Secretary of Defense for
Acquisition and Technology developed the department’s initial strategic
plan for guiding improvements to the logistics support systems. This
planning effort continued with the development of the fiscal year 2000
Logistics Strategic Plan to direct the transformation of the logistics
system. This plan required the services and defense commands to develop
implementation plans that reflected the vision, objectives, and metrics of
the departmentwide plan. Although GAO identified shortcomings in the
departmentwide and subordinate plans, we acknowledge that this
planning effort was a positive step toward improving the economy and
efficiency of logistics support systems.5 In fiscal year 2002, this strategic
plan was replaced with the current Future Logistics Enterprise, which
focused on three key areas with the overall goal of operating DOD logistics
as a single end-to-end enterprise. In achieving this end, the Future
Logistics Enterprise is designed to support the national defense strategy,
meet the requirements of the warfighter, support the ongoing initiatives
within the services, and focus the objectives of corrective actions.

In section 362 of the National Defense Authorization Act for fiscal year
2000,6 Congress directed an independent study of DOD’s secondary
inventory and parts shortages to focus on any items that adversely affect
readiness. This study, performed by the Logistics Management Institute
and the Center for Naval Analysis, found that while overall supply
availability met department goals, declining inventory levels had resulted
in reduced aircraft readiness. DOD also recognized the need to improve
supply performance in its August 2001 Defense Planning Guidance which


5
 U.S. General Accounting Office, Defense Logistics: Strategic Planning Weaknesses Leave
Economy, Efficiency and Effectiveness of Future Support Systems at Risk, GAO-02-106
(Washington, D.C.: October 11, 2001).
6
    Pub.L. 106-65, Oct. 5, 1999.




Page 6                                                  GAO-03-707 Defense Inventory
directed a review of inventory management practices and stockage levels
during the fiscal year 2003 program/budget review. The initial results of
this study were included in the fiscal year 2002 Program Budget Decision
422, which recommended the department further study inventory
management including developing a plan to streamline inventory
management practices and improve supply chain management. More
specifically, it suggested the department address the effect of inventory
levels on weapons systems readiness. In August 2002, the DOD
Comptroller published the results of these further efforts in the Inventory
Management Study report, which outlined eight recommendations for
improving inventory and supply readiness, four of which are directly
aimed at improving efforts to increase investments in readiness related
spares and link funding requests to readiness rates. In addition to these
departmentwide plans and policies, according to Deputy Under Secretary
of Defense for Logistics and Material Readiness, there are about 500
logistics improvement initiatives underway at various DOD activities.

Beginning in 1990, GAO identified the department’s management of
secondary inventories as a high-risk area because inventory levels were
too high and management systems and procedures were ineffective and
wasteful. In the most recent high-risk report,7 GAO identified the need to
address seven key weaknesses, one of which is overcoming key spare
parts shortages. More importantly, the report focused on the need for an
overarching strategic plan to guide the department’s logistics
transformation efforts. GPRA provides guidance to executive agencies for
establishing and monitoring strategic plans. GPRA specifies that virtually
every agency is required to prepare multiyear strategic plans, annual
performance plans, and annual performance reports. These strategic plans
are to include an agency’s mission statement, long-term general goals, and
the strategies that the agency will use to achieve these goals. GPRA also
requires executive agencies to prepare an annual performance plan
including among other things, (1) the performance goals for agencies’
major programs and activities; (2) the performance indicators or measures
that will be used to gauge performance; (3) the processes, skills,
technology and resources required to achieve the performance goals; and
(4) the procedures that will be used to verify and validate performance
information. Finally, GPRA requires each agency to prepare annual reports
on program performance for the previous fiscal year.




7
    GAO-03-98.




Page 7                                           GAO-03-707 Defense Inventory
                        The Office of the Secretary of Defense’s strategic logistics plan is focused
DOD’s Strategic Plan    on transforming the department’s logistics operations through an
Is Aimed at Logistics   emphasis on improving weapon system support, customer service, and
                        enterprise integration. While this could improve weapon system readiness
Transformation, Not     over time, it does not specifically focus on mitigating spare parts
Specifically Spare      shortages. According to OSD officials, the plan’s focus on the higher-level
                        goal of improving weapon systems availability subsumes the issue of
Parts Shortages         critical spare parts shortages. In addition, while that planning document—
                        the Future Logistics Enterprise—includes some key elements of an
                        effective strategic plan, others are not included.

                        The department’s Future Logistics Enterprise published in June 2002
                        replaced the 2000 strategic plan and is intended to accelerate the
                        department’s implementation of its integrated logistics systems and its
                        commercial information system to meet warfighter needs. The ultimate
                        objective of this plan is to ensure that the logistics system provides
                        consistent, reliable support that meets the warfighters requirements. To
                        accomplish this, the Future Logistics Enterprise concentrated on changing
                        policy, processes, and systems within the logistics environment that could
                        improve weapon system support, customer service, and enterprise
                        integration.

                        The Future Logistics Enterprise contains some key elements necessary for
                        a good strategic plan, but other key elements are missing. Because DOD
                        considers this plan to be in its infancy, it has focused on initiating these
                        efforts, setting policy for the new initiatives, and exploring potential
                        approaches for evaluating progress toward achieving the objectives. The
                        plan contains general goals such as meeting warfighter requirements and
                        strategies to be employed such as implementing the agencywide
                        initiatives. In addition, DOD is currently developing the performance
                        measures to measure the effect of the plan. However, other essential
                        elements are missing. For example, although, specific initiatives may
                        require the Defense Logistics Agency and the services to develop an
                        implementation plan for that initiative, there is no requirement for the
                        development of Defense Logistics Agency and service plans or annual
                        progress reports in support of the Future Logistics Enterprise. In addition,
                        the plan is not all-inclusive and does not provide the overarching guidance
                        necessary to integrate some 500 ongoing initiatives at the service and
                        defense agencies or recommendations from DOD studies such as those
                        cited in the August 2002 Inventory Management Study. For example, the
                        2002 study identified weaknesses in the models used by the Defense
                        Logistics Agency and the services to determine which items they should
                        buy to meet the 85 percent supply availability goal. Specifically the study


                        Page 8                                           GAO-03-707 Defense Inventory
                       concluded that the models do not routinely account for factors such as
                       intended use, cost, or criticality in terms of readiness when establishing
                       inventory requirements. Consequently, the models favor procurement of
                       low-cost/high-demand items and do not provide sufficient weight to high-
                       cost/low-demand items that were found to be a problem for aviation
                       platforms. In addition to recommending that the Defense Logistics Agency
                       and the services apply higher supply targets for these items in the short-
                       term, the study recommended that all new supply systems be capable of
                       supporting readiness based sparing models. However, there is no apparent
                       linkage of the study results and recommended actions to the Future
                       Logistics Enterprise. Other key elements missing from the strategic plan
                       include (1) how the department should be organized in the future to fulfill
                       evolving logistics requirements and (2) the facilities and personnel needed
                       to fulfill its future logistics requirements. GAO identified these same
                       weaknesses in the department’s fiscal year 2000 Logistics Strategic Plan.8
                       Without these elements of a good plan, the department can not ensure that
                       efforts undertaken by the Defense Logistics Agency and the services will
                       support and achieve the department’s logistics transformation goals.


                       The department’s Future Logistics Enterprise concentrates on three key
Initiatives Focus on   areas—weapon systems support, customer service and enterprise
Weapons System         integration—to focus the six agencywide initiatives that have the potential
                       to affect readiness, but none specifically address mitigating critical spare
Availability, Not      parts shortages. Under a separate initiative, however, DOD has directed
Critical Spare Parts   the Defense Logistics Agency to increase inventories of critical aviation
                       spare parts. The six initiatives aligned with these areas include (1) Depot
Shortages              Maintenance Partnerships, (2) Conditioned Based Maintenance Plus,
                       (3) Total Life Cycle Systems Management, (4) End-to-End Distribution,
                       (5) Executive Agents, and (6) Enterprise Integration (see app. I). Of these,
                       the Conditioned Based Maintenance Plus and the Total Life Cycle Systems
                       Management initiatives specifically address improving readiness. While
                       not specifically focused on, each of the departmentwide initiative has the
                       potential to help reduce spare parts shortages. Although not agencywide,
                       DOD has directed specific efforts such as the Aviation Investment Strategy
                       to address specific critical spare parts problems.

                       The Conditioned Based Maintenance Plus initiative is designed to increase
                       operational availability and readiness throughout the weapon system life


                       8
                           GAO-02-106.




                       Page 9                                           GAO-03-707 Defense Inventory
cycle using real time diagnostic and prognostic techniques to determine
the current operating status and predict the future condition of equipment.
Data from these techniques will be utilized to better anticipate the
maintenance requirements of the weapon system and its components.
Currently, four Condition Based Maintenance Plus programs are being
piloted within the military services: (1) the Army Diagnostic Improvement
Program, (2) the Integrated Condition Assessment System, (3) the Joint
Strike Fighter Prognostic Health Management, and (4) the Integrated
Mechanical Diagnostics-Health Usage Monitoring System. These pilots
demonstrate the use of diagnostic and prognostic tools on both existing
weapon systems and systems in the acquisition pipeline. For example, the
Integrated Mechanical Diagnostics-Health Usage Monitoring System
provides in-flight monitoring and collects engine and mechanical drive
systems information on the H-53 and H-60 helicopters, as well as accurate
flight hour recording. Among the cited benefits of this program is a 10
percent reduction in total aviation depot level reparable/consumable costs
due to vibration related maintenance actions. If successfully implemented,
this initiative would improve maintenance operations and might affect
spare parts shortages, but it does not have goals and performance
measures related to mitigating spare parts shortages.

The Total Life Cycle Systems Management initiative makes the program
manager responsible for all activities associated with the acquisition,
development, production, fielding, sustainment, and disposal of a weapon
system across its life cycle. The goal is to create a procurement action
where the sustainability and maintainability, as well as the operational
needs of the warfighter, are incorporated into the acquisition decision.
Performance Based Logistics is the preferred strategy to support Total Life
Cycle System Management activities and enhance weapon system product
support within the department. Under this concept, the program manager
enters into contractual relationships for support of the weapon system or
components that are based on the vendor meeting specific performance
requirements for weapon system availability. In essence, the management
risk for the spare parts support of the weapon system or component is
transferred to the vendor through the performance requirements included
in the contracts. By focusing on weapon system or component availability,
OSD claims the effect of spare parts shortages on readiness could be
mitigated to a level deemed acceptable to the warfighter.

Although not an agencywide initiative, in 1999 DOD directed the Defense
Logistics Agency to focus on particular shortages of aircraft parts. The
Aviation Investment Strategy specifically targeted critical aviation spare
parts. In 1999-2000 the Office of the Secretary of Defense, Program


Page 10                                          GAO-03-707 Defense Inventory
                       Analysis and Evaluation, with support from the Logistics Management
                       Institute, completed a study that concluded low stockage levels of high-
                       cost/low-demand items were the predominant cause of supply related Not
                       Mission Capable rates. As a result, the Office of the Secretary of Defense
                       added $500 million in the 1999 Program Review to increase inventory
                       levels for high-cost/low-demand aviation parts managed by the Defense
                       Logistics Agency. Since then, the Defense Logistics Agency has been
                       buying more of these parts and increasing the amount of inventory on
                       hand, but as discussed in our report on Defense Logistics Agency
                       initiatives,9 over half of these parts still remain below the 85 percent
                       supply availability goal.


                       Although DOD has long been monitoring readiness, it has recently
Recent Efforts Could   undertaken efforts to link funding to readiness by weapons system. The
Strengthen Link        department’s ability to link funding for critical spare parts to readiness
                       should improve when the Defense Logistics Agency and the services
between Funding and    implement four recent recommendations by the DOD comptroller. The
Readiness              Comptroller’s recommendations stemmed from concern that the Defense
                       Logistics Agency and the services’ inventory systems tend to purchase low
                       cost/high demand items and not those that would most improve readiness
                       rates. Although the Comptroller cited some improvement efforts, he made
                       four recommendations specifically aimed at improving their efforts to
                       increase investment in critical spare parts and link funding requests to
                       readiness rates. In addition, the Comptroller changed the budget
                       justification material (budget exhibit) to provide such information to
                       Congress. However, the report conveying these recommendations did not
                       cite deadlines or how DOD would measure the Defense Logistics Agency
                       and the services’ progress in implementing the four recommendations.

                       In the August 2002 report, the DOD Comptroller issued the Inventory
                       Management Study report in response to Program Budget Decision 422, in
                       which the Comptroller cited problems with the supply models currently
                       being used by the Defense Logistics Agency and the services. Foremost,
                       the models tended to purchase low-cost/high demand items—not
                       necessarily those that would most improve readiness rates. This occurred
                       because the model forecasted inventory purchases based on historical
                       demand for an item and aimed, as a goal, to have that part available for the
                       customer 85 percent of the time. Although the report noted numerous


                       9
                           GAO-03-709.




                       Page 11                                          GAO-03-707 Defense Inventory
    commercial practices and supply management initiatives under way that
    need to be continued, it also stated that additional efforts are required to
    make better parts investment decisions based on readiness. For example,
    the report cited OSD’s continuing efforts to help supply managers identify
    where to focus their resources for optimal readiness gains. He also
    modified the budget justification material (budget exhibit) to show the
    rates at which each major weapon system is not available due to supply
    problems so that funding requests submitted to the Congress could be
    evaluated based on their ability to improve readiness. More specifically,
    the Comptroller made eight recommendations for improving inventory and
    supply readiness, four of which are directly aimed at improving efforts to
    increase investments in readiness related spares and link funding requests
    to readiness rates. The four recommendations are as follows:

•   The Under Secretary of Defense, Acquisition, Technology, and Logistics
    should ensure that the logistics systems are capable of supporting
    readiness based sparing models and readiness drivers. The systems should
    also support life-cycle cost and trade-off analyses. All requests for systems
    initiatives or Enterprise Resource Planning must have Office of the Under
    Secretary of Defense, Comptroller approval through the Financial
    Management Modernization Plan before investment of milestone
    decisions.

•   The Defense Logistics Agency and the military services should continue
    efforts to ensure that high-cost/low-demand weapon system items are
    available when needed.

•   Requests for funds to increase inventory investments should be justified
    by corresponding increases in weapon system readiness rates.

•   OSD for Program Analysis and Evaluation should continue to investigate
    links between inventory funding levels and readiness to establish a
    readiness outcome metric for use in resource allocation and performance
    measurement processes.

    Although these recommendations are aimed at significantly improving
    inventory management and the spare parts investment decision process,
    the Comptroller did not establish milestones for their implementation or
    their performance measures. Without deadlines and performance
    measures, it is uncertain when these recommendations will be
    implemented and what results should be expected. For example, while the
    DOD Comptroller specified how the Defense Logistics Agency and the
    services should report data linking funding to readiness in the Financial



    Page 12                                           GAO-03-707 Defense Inventory
                      Management Regulation, the services ability to report this information is
                      linked to the status of their efforts to develop logistics data systems
                      capable of collecting and performing the necessary trade off analyses. As a
                      result, in the February 2003 budget submission, the Air Force was able to
                      fully implement this reporting recommendation while the Army and Navy
                      did not provide all of the desired information (see app. II).


                      Due to the significant funding DOD receives annually to provide spare
Conclusions           parts, the long-standing problems concerning critical spare parts, and
                      accountability issues pertaining to the effective tracking of investment of
                      these funds, it is important that the department’s strategic goals and
                      objectives guide its effort to transform the logistics system and mitigate
                      spare parts shortages that reduce readiness. Although the department has
                      taken several significant steps to improve the economy and efficiency of
                      the logistics support system and possibly provide valuable information for
                      making future investment decisions that may result in better logistics
                      support to the warfighter, its Future Logistics Enterprise lacks a specific
                      focus on spare parts shortages and some of the elements needed for a
                      strategic plan. Without a comprehensive strategic plan linked to
                      subordinate plans, the results will likely be less effective or potentially
                      duplicative efforts within the Defense Logistics Agency and the services.
                      In addition, the lack of a departmentwide goal to address the issue of
                      critical spare parts shortages could result in continued spare parts
                      shortages that negatively affect readiness. Furthermore, without specific
                      initiatives to address critical spare parts shortages that links to the
                      strategic plan’s goals, objectives, and performance measures, the
                      department may be unable to significantly reduce the effect of spare parts
                      shortages on readiness and there is no assurance that investments in spare
                      parts will be based on the greatest return on investment or effect on
                      readiness. Finally, because OSD did not establish deadlines or how it
                      would measure progress in implementing its August 2002
                      recommendations to provide Congress with information linking increased
                      investments in spare parts inventories to include weapon system readiness
                      rates, there is no assurance when this information will be available to
                      Congress for use in making future funding decisions.


                      In order to improve the department’s logistics strategic plan to achieve
Recommendations for   results for overcoming spare parts shortages, improving readiness, and
Executive Action      address the long-standing weaknesses that are limiting the overall
                      economy and efficiency of logistics operations, we recommend that the



                      Page 13                                         GAO-03-707 Defense Inventory
                         Secretary of Defense direct the Under Secretary for Acquisition,
                         Technology and Logistics to

                     •   incorporate clear goals, objectives, and performance measures pertaining
                         to mitigating spare parts shortages in the Future Logistics Enterprise or
                         appropriate agencywide initiatives to include efforts recommended by the
                         Under Secretary of Defense, Comptroller in his August 2002 study report;


                         We also recommend that the Secretary of Defense direct the Under
                         Secretary of Defense, Comptroller to

                     •   establish reporting milestones and define how it will measure progress in
                         implementing the August 2002 Inventory Management Study
                         recommendations related to mitigating critical spare parts shortages.


                         In written comments on this report, DOD generally concurred with the
Agency Comments          intent of the recommendations, but not all of the specified actions we
and Our Evaluation       recommended. DOD’s written comments are reprinted in their entirety in
                         appendix III.

                         In concurring with the intent of our first recommendation, DOD expressed
                         concern that because spare parts shortages are a symptom of imperfect
                         supply management processes, its plans must focus on improving those
                         processes, not the symptoms. According to DOD, the Future Logistics
                         Enterprise focuses on achieving improvement through three threads:
                         Weapon System Support, End-to-End Warfighter Support, and Enterprise
                         Integration. Specifically, End-to-End Warfighter Support implements
                         performance based agreements that include goals, objectives, and
                         performance measures between the source of supply and the customer to
                         eliminate potential gaps in support to ensure the readiness of weapons
                         systems. Weapon system support focuses on a fully integrated life-cycle
                         development process where weapon system managers procure
                         performance of the weapon system including sustainment. According to
                         DOD, this represents a major shift in the approach to weapon system
                         support by emphasizing purchasing a predetermined level of availability to
                         meet the warfighter’s objectives rather than buying set levels of spares,
                         repairs and data. In addition, DOD said that Enterprise Integration enables
                         these transformed supply processes by allowing collaboration across the
                         logistics domain and will enhance the ability to forecast supply and
                         demand to ensure weapon system readiness. Furthermore, efforts
                         recommended by the Under Secretary of Defense, Comptroller in his



                         Page 14                                         GAO-03-707 Defense Inventory
August 2002 study report have already been incorporated into the
Financial Management Regulation. The implementation of the efforts by
the Defense Logistic Agency and military services will be reviewed within
the annual budget conferences. Therefore, DOD does not agree that
additional goals, objectives, and performance measures or additional
initiatives are needed to mitigate spare parts shortages.

We disagree that the actions taken are sufficient to address our
recommendation. We believe that modification of the Financial
Management Regulation reporting requirements along with actions taken
in response to our second recommendation are sufficient to address the
recommendations made by the Under Secretary of Defense, Comptroller.
Furthermore, our report recognizes that the Future Logistics Enterprise
focuses on transforming DOD’s logistics operations and that improving
logistics processes is part of the solution to mitigating spare parts
shortages. However, we believe that process improvements alone do not
meet our recommendation. The intent of our recommendation was for
OSD to include a focus on mitigating spare parts shortages in either the
Future Logistics Enterprise or agencywide initiatives. Without a focus on
mitigating spare parts shortages that includes clear goals, objectives, and
milestones included in the strategic plan or departmentwide initiatives, we
believe DOD efforts will not establish the framework necessary to assess
the department’s progress in addressing this issue. In addition, without
this framework, DOD’s progress in mitigating spare parts shortages will be
limited because it efforts may be ineffective or duplicative in mitigating
spare parts shortages that are critical to equipment readiness. Therefore,
we continue to believe implementation of our recommended actions is
necessary for improving readiness of legacy and future weapon systems.

In partially concurring with our second recommendation, DOD stated that
progress in implementing the Under Secretary of Defense, Comptroller
recommendations would be measured as an integral component of its
resource allocation process and that separate reporting milestones are not
needed. DOD also stated that budget guidance for fiscal year 2005 will
include additional performance metrics that will be further refined as the
logistics balanced scorecard10 is implemented under the Future Logistics
Enterprise and Business Management and Modernization Program
initiatives. Successful implementation of these actions and DOD’s ongoing



10
 The balanced scorecard links strategic goals, strategies, objectives and performance
measures to an organization’s strategic plan..




Page 15                                                   GAO-03-707 Defense Inventory
              development of a balanced scorecard as a mechanism for measuring
              progress in implementing these recommendations will meet the intent of
              our recommendation provided goals, objectives, and performance
              measures pertaining to mitigating spare parts shortages are included in the
              scorecard.


              To determine the adequacy of DOD’s current strategic plans to address
Scope and     spare parts shortages, we obtained current DOD logistics and strategic
Methodology   planning documents that identified guidance on improving spare parts
              support for military readiness.

              To determine how adequately the strategic plan addressed spare parts
              shortages, we reviewed the Future Logistics Enterprise and supporting
              documents to ascertain whether the plan addressed mitigating spare parts
              shortages as one of its objectives or goals. We also reviewed the Future
              Logistics Enterprise to determine whether it contained the elements
              necessary for a strategic plan as outlined in the Government Performance
              and Results Act of 1993 (GPRA).11 In addition, we interviewed key officials
              responsible for logistics and strategic planning efforts in the Office of the
              Secretary of Defense and the Joint Chiefs of Staff.

              To determine how likely the initiatives in the Future Logistics Enterprise
              were to achieve the intended results and contribute to mitigating spare
              parts shortages to improve readiness, we reviewed the six initiatives to
              determine if any had goals and objectives related to readiness or
              mitigating spare parts shortages. We focused our analysis on whether the
              initiatives addressed spare parts shortages and the need for quantifiable
              and measurable performance targets as identified in GPRA. In addition, we
              interviewed officials responsible for each of the initiatives within the
              Office of the Secretary of Defense.

              To determine the extent to which the department can identify the effect of
              increased funding for spare parts on readiness, we reviewed the Inventory
              Management Study completed in August 2002. In addition, we interviewed
              officials at the Office of the Secretary of Defense to determine the status
              of efforts to establish a link between funding for spare parts and readiness.




              11
                   Pub.L. 103-62, Aug. 3, 1993.




              Page 16                                           GAO-03-707 Defense Inventory
Further, we compared the Future Logistics Enterprise initiatives to GAO’s
High Risk Series and GPRA to determine if the initiatives contained (1) a
clear mission and vision, (2) specific objectives and attributes linked to
spare parts and readiness, (3) milestones, and (4) performance metrics
and reporting requirements. We also coordinated our efforts with the four
other GAO engagements evaluating strategic planning documents and
initiatives for mitigating spare parts shortages within the Defense Logistics
Agency, Army, Navy, and Air Force.

We performed our review from July 2002 through May 2003 in accordance
with generally accepted government auditing standards.


We are sending copies of this report to the Secretary of Defense and other
interested congressional committees and parties. We will also make copies
available to others upon request. In addition, the report will be available at
no charge on the GAO Web site at http://www.gao.gov.

Please contact me on (202) 512-8365 if you or your staff have any
questions concerning this report. Major contributors to this report are
included in appendix III.

Sincerely yours,




William M. Solis, Director
Defense Capabilities and Management




Page 17                                           GAO-03-707 Defense Inventory
                                         Appendix I: Initiatives Included in the Future
Appendix I: Initiatives Included in the Future
                                         Logistics Enterprise



Logistics Enterprise

                                         The following six initiatives represent the department’s integrated
                                         approach to accelerate logistics improvement, enhance support to the
                                         warfighter, and align logistics processes with the operational demands of
                                         the 21st century.


Initiative                      Objective/goals                             Accomplishments/additional actions
Weapon System Support
Depot Maintenance Partnership   Increase the level of public-private        Accomplishments:
                                partnerships resulting in                   • Legislative changes included in the National
                                • greater private sector investment,          Defense Act for fiscal year 2002
                                • better facility utilization,              • Policy memorandum promulgated
                                • reduced ownership cost,                   • Three Legislative Proposals under consideration
                                • workforce integration,                    • Service implementation plans
                                • more efficient business processes,        Additional Actions:
                                • greater credibility, and                  • Develop reports and measures
                                • more collegial working relationship
                                   with Congress.
Condition Based Maintenance     Increase operational availability and       Additional Actions:
Plus                            readiness throughout the weapon             • Draft policy completed
                                system life cycle at a reduced cost.        • Incorporated in DOD 5000 series
                                                                            • Service implementation plans
Total Life Cycle System         Improve weapon system sustainment           Accomplishments:
Management                      through                                     • Improved Defense Acquisition University curriculum
                                • timely acquisition of weapon systems,     • Service Performance Based Logistics
                                • meeting warfighter performance              implementation schedules
                                   requirements,                            • Revised DOD publications 5000.1.5000.2
                                • integration of sustainment and            Additional Actions:
                                   maintainability during the acquisition   • Develop financial mechanisms with Under Secretary
                                   process, and                               of Defense
                                • weapon system sustainment to meet
                                   warfighter performance requirements
                                   at a best corporate value.
Customer Service
End-to-End Distribution         Streamlining warfighter support by        Accomplishments:
                                providing material from the source of     • Identify additional improvements in the management
                                supply or point of origin to the point of   of end-to-end distribution
                                use or disposal on a worldwide basis.     Additional Actions:
                                The intent is to influence acquisition,   • Synchronize policies and initiatives for end-to-end
                                sourcing, positioning, and transportation   distribution
                                to facilitate the flow of material and    • Advocate greater consideration of distribution in
                                ensure that deployment and sustainment      acquisition decisions
                                are synchronized.
Executive Agents                Assess and align Executive Agent          Additional Actions:
                                designations with warfighter              • Prepare a schedule for assessing potential EA
                                requirements arising from the National      assignments for construction and medical material
                                Defense Strategy.                         • Prepare Concept of Operations and draft DOD
                                                                            directives for bulk petroleum and subsistence
                                                                          • Complete initial analyses of emerging Executive
                                                                            Agents




                                         Page 18                                                   GAO-03-707 Defense Inventory
                                  Appendix I: Initiatives Included in the Future
                                  Logistics Enterprise




 Initiative               Objective/goals                            Accomplishments/additional actions
 Enterprise Integration
 Enterprise Integration   Create highly trained and skilled people Additional Actions:
                          within DOD logistics enterprise to have  • Incorporate Triangle Working Groups plans of action
                          access to near real time, actionable       and milestones
                          information from modern, commercially    • Implement phase two of fact finding review of
                          based software produces that will enable   Enterprise Initiatives
                          reengineered logistics processes and     • Draft Policy Recommendations
                          business rules.
Source: GAO.




                                  Page 19                                                 GAO-03-707 Defense Inventory
              Appendix II: Inventory Investment Budget
Appendix II: Inventory Investment Budget
              Submission Material



Submission Material

              February 2003 Working Capital Fund Budget submissions for the Air
              Force, Army, and Navy provide an example of the information reported by
              each service pertaining to inventory investment.




              1
               NMCSR – Not Mission Capable Supply Rate is the percentage of time a weapon system is down for
              parts. Assuming no other factors impact aircraft availability, then the aircraft availability is computed 1
              minus NMCSR. NMCSR is computed only for weapon systems. NMCSR is not computed for weapon
              system parts such as engines.

              Legend

              SOF – Special Operating Forces

              Common EW – Common Electronic Warfare1

              NIMSC5 – Nonconsumable Item Material Support Code 5




              Page 20                                                              GAO-03-707 Defense Inventory
Appendix II: Inventory Investment Budget
Submission Material




Legend

MSE – Mobile Subscriber Equipment

MLRS – Multiple Launch Rocket System

HMMWV – High Mobility Multipurpose Wheeled Vehicle




Page 21                                              GAO-03-707 Defense Inventory
Appendix II: Inventory Investment Budget
Submission Material




Legend

SNT – Serial Number Tracking

NIS PBL – Not In Stratification Performance Based Logistics

PBL Savings – Performance Based Logistics Savings

LECP – Logistics Engineering Change Proposal




Page 22                                                       GAO-03-707 Defense Inventory
Appendix II: Inventory Investment Budget
Submission Material




Page 23                                    GAO-03-707 Defense Inventory
              Appendix III: Comments from the Department
Appendix III: Comments from the
              of Defense



Department of Defense




              Page 24                                      GAO-03-707 Defense Inventory
Appendix III: Comments from the Department
of Defense




Page 25                                      GAO-03-707 Defense Inventory
Appendix III: Comments from the Department
of Defense




Page 26                                      GAO-03-707 Defense Inventory
                            Appendix IV: GAO Contacts and
Appendix IV: GAO Contacts and Staff
                            Staff Acknowledgments



Acknowledgments

                  Richard G. Payne (757) 552-8119
GAO Contacts      John Wren (757) 552-8235


                  In addition to those named above, Latrealle Lee, Margaret Giammarco,
Acknowledgments   Marjorie Jane Hunt, and Barry L. Shillito also made significant
                  contributions to this report.




(350252)
                  Page 27                                       GAO-03-707 Defense Inventory
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