oversight

Defense Inventory: Several Actions Are Needed to Further DLA's Efforts to Mitigate Shortages of Critical Parts

Published by the Government Accountability Office on 2003-08-01.

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

              United States General Accounting Office

GAO           Report to the Chairman,
              Subcommittee on Defense,
              Committee on Appropriations,
              House of Representatives

August 2003
              DEFENSE
              INVENTORY
              Several Actions Are
              Needed to Further
              DLA’s Efforts to
              Mitigate Shortages of
              Critical Parts




GAO-03-709
              a
                                                 August 2003


                                                 DEFENSE INVENTORY

                                                 Several Actions Are Needed to Further
Highlights of GAO-03-709, a report to the        DLA’s Efforts to Mitigate Shortages of
Chairman, Subcommittee on Defense,
Committee on Appropriations, House of            Critical Parts
Representatives




DOD’s management, funding, and                   DLA’s Strategic Management System, meant to transform its 2002-2007
reporting of spending for spare                  logistics operations, addresses the mitigation of readiness-affecting
parts programs have been a focus                 shortages of critical spare parts. The system includes a strategic plan with
of GAO high risk reports for over a              goals, strategies, and objectives; a balanced scorecard to monitor progress;
decade. They noted that spare parts              and a business plan that contains 97 initiatives. Of these initiatives, DLA
shortages adversely affect military
operations and readiness. Despite
                                                 identified 24 as linked to spare parts shortages. The DLA strategic system
funding of about $1.9 billion over               incorporates attributes of strategic planning outlined in the Government
fiscal years 1999-2002 to increase               Performance and Results Act of 1993.
availability of spare parts,
managing to mitigate shortages still             The 24 initiatives, if fully implemented, could help mitigate critical spare
challenges the Defense Logistics                 parts shortages and improve supply readiness because, in part, they address
Agency (DLA).                                    causes for the shortages. Of the 24 DLA-identified initiatives, 18 should
                                                 improve availability of parts identified by the services as critical to
GAO examined if (1) DLA’s                        readiness; and 6 should indirectly improve parts availability through
strategic planning addresses                     modernized logistics systems and business processes.
mitigating critical spare parts
shortages that affect readiness,
(2) strategic initiatives will likely
                                                 A $500-million DOD-directed aviation investment initiative, not part of DLA’s
mitigate these shortages, (3) a                  strategic system, increased critical parts availability and likely supply
DOD-directed initiative has                      readiness. It improved the aggregate, or total average, availability of three
improved availability of critical                critical groups of DLA-managed parts in the first 3 fiscal years—2000-2002—
aviation parts, and (4) DLA can                  of the 4-year initiative. However, DLA’s aggregate 85-percent goal does not
identify the impact of added                     clearly reveal that many parts are still far below 85 percent. For example, at
investment on parts availability.                the end of fiscal year 2002, of the 10,291 critical aviation parts selected for
                                                 investment, about 4,900 met or exceeded the aggregate measure, but over
                                                 5,400 did not. Of these, about 2,900 parts were available under 35 percent of
GAO recommends DOD direct DLA                    the time. A DOD regulation, since revised to allow waivers, caused 3,342
to (1) submit requests for waivers               parts to be below the 85-percent availability goal.
to a DOD regulation to allow the
investment necessary to attain a                 Aviation Initiative’s Effect on Parts Availability over 3 Years
minimum 85-percent availability                  Parts availability (percent)        No. of parts before investment   No. of parts after investment
goal for each critical part that                 85 and above                                                1,397                           4,877
affects readiness, (2) change its
                                                 84 to 75                                                      881                             641
aggregate supply availability goal to
an 85-percent minimum goal and                   74 to 65                                                      905                             524
establish annual performance                     64 to 55                                                      860                             455
targets for measuring progress, and              54 to 45                                                      803                             516
(3) prioritize funding to achieve the            44 to 35                                                      791                             374
minimum 85-percent goal.
                                                 Below 35                                                     4654                           2,904
In written comments, DOD
generally concurred with the intent              Total                                                      10,291                          10,291
of our recommendations, but not                  Source: GAO analysis of DLA data.

with all of the specific actions.
                                                 DLA can estimate the impact of increased funding on supply availability.
www.gao.gov/cgi-bin/getrpt?GAO-03-709.
                                                 Investment costs, however, will be significant—DLA estimated $748 million
To view the full product, including the scope    to obtain an 85-percent minimum availability of the 219,071 most critical
and methodology, click on the link above.        parts. Also, necessary inventory levels may take years to build, and increases
For more information, contact William M. Solis
at (202) 512-8365 or solisw@gao.gov.             in unit readiness are not assured because supply is only one readiness factor.
Contents



Letter                                                                                                 1
                             Results in Brief                                                          3
                             Background                                                                6
                             DLA’s Strategic Management System Addresses Mitigating Critical
                               Spare Parts Shortages That Adversely Affect Readiness                   8
                             Some Strategic Initiatives Could Help Mitigate Spare Parts
                               Shortages and Improve Supply Readiness                                 12
                             A Separate DOD-Directed Aviation Investment Initiative Has
                               Significantly Increased Availability of Some Critical Aviation
                               Parts, but Others Remain in Short Supply                               16
                             DLA Can Estimate the Impact of Additional Investment on Supply
                               Availability, Which Contributes to Supply Readiness                    22
                             Conclusions                                                              24
                             Recommendations for Executive Action                                     25
                             Agency Comments and Our Evaluation                                       25


Appendixes
              Appendix I:    Scope and Methodology                                                    29
             Appendix II:    Comments from the Department of Defense                                  31
             Appendix III:   Schematic of Defense Logistics Agency Strategic
                             Management System                                                        34
             Appendix IV:    Description of DLA Initiatives Aimed at Mitigating
                             Spare Parts Shortages                                                    35
                             Strategic Materiel Sourcing Initiative                                   35
                             Manufacturing on Demand                                                  38
                             Organic Manufacturing Initiative                                         40
                             Improved Supply Availability Initiative                                  40
                             Backorder Reduction Initiative                                           41
                             Customer Relationship Management and Service Level Agreements
                                Initiatives                                                           41
                             National Inventory Management Strategy Initiative                        43
                             Inventory Accuracy Improvement Initiative                                44
                             Product Conformance, Aviation                                            45
              Appendix V:    Description of DLA Initiatives Aimed at Improving Logistics
                             Systems and Processes                                                    46
                             Business Systems Modernization Initiative                                46
                             Distribution Planning and Management System Initiative                   47
                             Strategic Distribution Initiative                                        47



                             Page i                                          GAO-03-709 Defense Inventory
                        Contents




                        Logistics Response Time Reduction Initiative                                 48
                        Direct Vendor Delivery Processing Time Initiative                            48
                        Overall Purchase Request Processing Time Improvement
                          Initiative                                                                 49
         Appendix VI:   GAO Contacts and Staff Acknowledgments                                       50
                        GAO Contacts                                                                 50
                        Acknowledgments                                                              50


Tables                  Table 1: DLA’s 2002-2007 Strategic Goals and the Number of
                                  Strategies, Objectives, and Initiatives                             9
                        Table 2: Representative Strategies, Objectives, and Action Plan
                                  Initiatives of DLA's 2002-2007 Strategic Plan Customer
                                  Goal (strategic goal 1)                                            10
                        Table 3: DLA Initiatives Specifically Aimed at Improving Spare
                                  Parts Shortages                                                    14
                        Table 4: DLA System and Process Initiatives                                  16
                        Table 5: Impact of Investment Results on All Tier Groups of Critical
                                  Aviation Parts, as of the End of Fiscal Year 2002                  18
                        Table 6: Impact of Investment Results on Tier 1 Most Critical
                                  Aviation Parts, as of the End of Fiscal Year 2002                  19
                        Table 7: Impact of Investment Results on Tier 2 Critical Aviation
                                  Parts, as of the End of Fiscal Year 2002                           19
                        Table 8: Impact of Investment Results on Tier 3 Least Critical
                                  Aviation Parts, as of the End of Fiscal Year 2002                  20
                        Table 9: Estimated Investment to Achieve Various Minimum Supply
                                  Availability Rates for the Most Critical Aviation, Land, and
                                  Maritime Military Service Parts                                    23
                        Table 10: Expected Benefits of the National Inventory Management
                                  Strategy to the Services and DLA                                   43
                        Table 11: Response Time Improvement by Item Category                         48


Figure                  Figure 1: DLA’s Supply-Chain Management Process                               7




                        Abbreviations

                        DLA        Defense Logistics Agency
                        DOD        Department of Defense
                        GPRA       Government Performance and Results Act


                        Page ii                                             GAO-03-709 Defense Inventory
Contents




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Page iii                                                    GAO-03-709 Defense Inventory
A
United States General Accounting Office
Washington, D.C. 20548



                                    August 1, 2003                                                                     Leter




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

                                    Dear Mr. Chairman:

                                    The Defense Logistics Agency (DLA) manages about 4.6 million
                                    consumable items, including weapon systems spare parts, with sales of
                                    over $20 billion in fiscal year 2002. In the Department of Defense’s (DOD)
                                    February 2003 budget submission to the Congress, DLA reported achieving
                                    an aggregate weapon system supply availability rate of 85 percent. DLA
                                    began to strategically address ways to mitigate spare parts shortages
                                    and improve its logistics infrastructure and operations as early as 1988.
                                    However, managing to mitigate critical spare parts shortages is a
                                    continuing challenge for DLA and defense managers, even though over
                                    $1.9 billion was devoted to increasing the availability of spare parts in the
                                    fiscal years 1999-2002 period. Concerns remain about DOD’s continuing
                                    shortages of critical spare parts for aircraft, ships, vehicles, and weapons
                                    systems and their resulting detrimental effect on military readiness.
                                    Also, since 1990, we have repeatedly reported that DOD’s inventory
                                    management systems and procedures were ineffective and wasteful,
                                    putting DOD at high risk for unnecessary spending that, through good
                                    stewardship, could be directed to higher priorities such as modernization
                                    or readiness. In our January 2003 High Risk Series report,1 we wrote that
                                    DOD was experiencing equipment readiness problems because of a lack
                                    of key spare parts; and we recommended that DOD act to address these
                                    shortages. While recognizing that spare parts shortages will never be
                                    eliminated, it is reasonable to expect DOD and DLA to place a high priority
                                    on mitigating, or reducing, the shortages that adversely impact readiness.
                                    Such priority would be inherent in the overall stewardship of funds and
                                    accountability for making spare parts investment decisions that provide a




                                    1
                                      U.S. General Accounting Office, Major Management Challenges and Program Risks:
                                    Department of Defense, GAO-03-98 (Washington, D.C., Jan. 2003).




                                    Page 1                                                  GAO-03-709 Defense Inventory
good readiness return. As recently as August 2002, DOD recognized the
need to overcome critical spare parts shortages and recommended changes
to improve the readiness of weapon systems.2

This report is one in a series of reports3 that responds to your request that
we identify ways to improve the availability of spare parts. As agreed, this
report focuses on DLA’s strategic efforts to transform the way it conducts
its logistics business operations, including spare parts. More specifically,
this report focuses on whether (1) DLA’s strategic planning addresses
mitigating critical spare parts shortages that adversely affect readiness,4
(2) DLA’s strategic logistics initiatives will likely help mitigate spare
parts shortages that affect readiness, (3) a separate DOD-directed aviation
initiative has improved the availability of critical aviation parts, and
(4) DLA can identify the impact of increased investments on the availability
of critical spare parts.

To accomplish these objectives, we analyzed DLA plans, initiatives, and
performance metrics applicable to the management and oversight of
DLA’s Strategic Management System. We interviewed officials, as well as
obtained and analyzed information on inventory management practices and
critical spare part shortages, at DLA headquarters, Fort Belvoir, Virginia,
and the inventory control point for aviation in Richmond, Virginia. Our
criteria for evaluating DLA’s strategy and initiatives included the
Government Performance and Results Act (GPRA) of 1993,5 previous GAO
reports, and appropriate DOD reports and guidance. Our scope and
methodology are discussed in further detail in appendix I.

2
  Office of the Secretary of Defense, Inventory Management Study (Washington, D.C.:
Aug. 2002).
3
  U.S. General Accounting Office, 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: The Department Needs a Focused Effort to Overcome Critical Spare Parts
Shortages, GAO-03-707 (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).
4
  For this report, we used “critical spare parts” to mean those parts that directly affect the
readiness of weapon systems. For example, DLA periodically identifies parts, such as
complete engines and engine components for various aircraft, as “top degraders” of weapon
system readiness.
5
    Pub. L. No. 103-62, Aug. 3, 1993.




Page 2                                                        GAO-03-709 Defense Inventory
Results in Brief   DLA’s strategic logistics planning specifically addresses mitigating critical
                   spare parts shortages that adversely affect readiness through a major
                   component of its Strategic Management System—the business plan. The
                   business plan does so by focusing initiatives on some of the primary causes
                   of critical shortages and increasing investment in the safety level of parts—
                   the number of parts in the inventory that triggers reordering. The Strategic
                   Management System incorporates four components: (1) a strategic plan
                   that contains DLA’s corporate goals, objectives, and strategies; (2) a
                   balanced scorecard that provides a basis for assessing how well the
                   strategic plan is working; (3) a business plan containing 97 initiatives in
                   varying stages of implementation that specify the actions needed to achieve
                   the strategic plan’s goals, strategies, and objectives; and (4) a review and
                   analysis process that assesses performance. The 2002-2007 strategic
                   management system is an improvement over previous efforts because it
                   contains performance metrics and management feedback mechanisms for
                   measuring performance progress consistent with key attributes of strategic
                   planning included in GPRA. The system is also designed to incorporate
                   future changes as necessary to reflect and improve business operations.

                   If fully implemented as planned by 2009, 24 of the 97 initiatives contained
                   in DLA’s business plan could either directly or indirectly contribute to
                   mitigating spare parts shortages and improve supply support readiness.
                   A group of 18 initiatives is aimed at mitigating critical spare parts shortages
                   by improving the availability of specific parts that the services have
                   identified as critical to readiness. For example, a few initiatives in this
                   group are designed to obtain sources of supply for critical, hard-to-find
                   parts or to identify and contract with key material suppliers for low-
                   demand, long-lead-time parts. Others in the group focus on addressing
                   some of the recurring causes of spare parts shortages. A second group of
                   six initiatives seeks to modernize DLA’s entire logistics management
                   system to improve business processes and systems and better support its
                   customers. While these initiatives show potential, until they are fully
                   implemented the extent to which they will contribute to mitigating spare
                   parts shortages is not certain.




                   Page 3                                              GAO-03-709 Defense Inventory
A separate initiative not included in DLA’s business plan—a $500-million
aviation investment initiative—has steadily improved the supply
availability of DLA-managed critical aviation spare parts. Nonetheless,
shortages exist, in part because the aggregate supply availability measure
DLA used to assess its effectiveness does not reveal the lower supply
availability rates of many critical spare parts. Furthermore, DLA’s progress
in buying these critical spare parts was impeded by a DOD regulation
that has since been revised (May 23, 2003) to allow a waiver for such
purchases. The availability of critical aviation parts increased over the first
3 fiscal years (2000-2002) of the 4-year initiative that is aimed at achieving
DLA’s aggregate, or total average, supply availability goal of 85 percent.
This means that the parts, on average, will be available to meet customer
demand 85 percent of the time. Using this aggregate goal, however, does
not reveal the actual availability of many critical aviation spare parts
because many parts are at or over 85 percent, while others continue to
be far less available. For example, by fiscal year 2002, of the about
10,300 critical parts that were selected for aviation investment, almost
4,900, or 48 percent, met or exceeded the DLA goal of 85 percent.6 The
remaining 5,400 parts were available less than 85 percent of the time. Of
these, over 2,900—such as engine mount fittings for the B-52 bomber,
shoulder bolts for the F-14 Tomcat, and landing gear axles for the UH-60A
helicopter—were available less than 35 percent of the time. Furthermore,
the availability of 3,342 of these critical parts was below the 85-percent
aggregate goal because a DOD regulation, recently revised, constrained
how many DLA could buy based on the lead time required to acquire the
part. A subsequent investment initiative, planned for fiscal year 2004, is
designed to increase availability of aviation, as well as land and maritime,
critical spare parts and may improve supply readiness. This initiative
has an 80-percent minimum availability goal for each of the critical
DLA-managed parts but is dependent on funding as well as a waiver of
the lead-time requirement as allowed in the revised DOD regulation.




6
  It may take up to 2 years before an increase in supply availability of a specific spare part is
evident because current demands and backorders are filled first before safety levels are
increased.




Page 4                                                          GAO-03-709 Defense Inventory
DLA can estimate how additional investments in critical spare parts can
improve supply availability to the military services. For example, based
on a DLA November 2002 estimate, a one-time cost of $748 million would
achieve a minimum 85-percent availability for each of DLA’s 219,071
aviation, land, and maritime most critical items. The cost to achieve a
90-percent minimum availability for each of these items would be about
$1.3 billion and the cost to achieve a 95-percent minimum would be about
$2.2 billion. However, while selectively buying more critical spare parts will
likely increase supply availability, doing so will not necessarily increase the
overall readiness posture of the forces because supply is only one of
several factors7 that contribute to the overall readiness posture of
operating units. Therefore, an operating unit having sufficient spare parts
could still have readiness deficiencies due to factors such as maintenance
or training needs.

We are making several recommendations to help ensure that DLA’s service
customers have an adequate supply of critical spare parts that affect the
readiness of weapon systems. These involve (1) DLA’s submission of
needed waivers as allowed in the recently revised DOD regulation that
limits the safety level investment in critical spare parts, (2) a change in
DLA’s current aggregate supply availability goal to a minimum 85-percent
goal, and (3) prioritizing funding to achieve the 85-percent goal. DOD
concurred with the report and the intent of our recommendations but did
not agree with all actions we prescribed. The department’s comments and
our evaluation of them are on page 25 of this report.




7
  Factors impacting readiness posture include supply, maintenance, equipment, training, and
personnel.




Page 5                                                      GAO-03-709 Defense Inventory
Background   DLA is a DOD Combat Support Agency under the supervision, direction,
             authority, and control of the Under Secretary of Defense for Acquisition,
             Technology, and Logistics. DLA’s mission is “To provide best value
             logistics support to America’s Armed Forces, in peace and war…around
             the clock, around the world.” In carrying out its mission, DLA manages an
             $80.5 billion inventory comprised of about 4.6 million consumable items
             including commodities such as energy, food, clothing, and medical
             supplies. DLA also buys and distributes hardware and electronics items
             used in the maintenance and repair of equipment and weapons systems.
             DLA sales and services amounted to over $20 billion in fiscal year 2002.

             Customers, mainly the military services, determine their requirements for
             material and supplies and submit requisitions to any of four DLA supply
             centers.8 The centers then consolidate the requirements and procure the
             supplies for their customers. DLA provides its customers with requested
             supplies in one of two ways. Some items are delivered directly to
             customers from commercial vendors while other items are stored and
             distributed through worldwide distribution depots owned and managed
             by both DLA and the military services. DLA refers to this ordering and
             delivery process as materiel management or supply-chain management.9
             Figure 1 depicts this process.




             8
               DLA’s four supply centers are (1) Defense Supply Center, Columbus, Ohio, which is
             responsible for land, maritime, and missile support; (2) Defense Energy Support Center,
             Fort Belvoir, Va., the lead center for comprehensive energy solutions, such as contract
             support and the management of petroleum-based fuels; (3) Defense Supply Center,
             Richmond, Va., which is responsible for air, aviation, and space support; and (4) Defense
             Supply Center, Philadelphia, Pa., the lead center for troop support items, such as food,
             clothing, and medical supplies.
             9
               The materiel management or supply chain management process incorporates five major
             DLA business functions. These functions include distributing materiel ordered from its
             inventory; purchasing fuels for DOD and the U.S. government; storing strategic materiel;
             marketing surplus DOD materiel for reuse, reutilization, or disposal; and providing
             numerous information services, such as item cataloging, for DOD and the United States
             and selected foreign governments.




             Page 6                                                       GAO-03-709 Defense Inventory
Figure 1: DLA’s Supply-Chain Management Process




                                           Requisitions                           Orders



                                                          Agency supply centers             Agency distribution depots            Materiel delivered
              Customers
                                                                                  Or
                                                                                    de
                                                                                       rs




                                                                                            Manufacturers/vendors
                                                          Ord
                                                             ers




                                                                                                    Vendors

Source: GAO's analysis of DLA's process.




                                                                GPRA requires establishment of a strategic plan for program activities
                                                                by each agency that includes, among other things, a mission statement
                                                                covering major functions and operations, outcome-related goals and
                                                                objectives, and a description of how those goals and objectives are to
                                                                be achieved.

                                                                DLA has been guided by formal strategic plans since 1988. The 1988 plan
                                                                did not identify strategic measures or performance targets for achieving
                                                                strategic goals and objectives. Subsequent strategic plans incorporated
                                                                GPRA attributes but still lacked strategic measures.




                                                                Page 7                                                   GAO-03-709 Defense Inventory
                       DLA approved the current 6-year 2002-2007 Strategic Plan—on
                       February 19, 2002, updating DLA’s 2000 Strategic Plan. The DLA
                       Strategic Management System formalizes, aligns, and integrates
                       planning and performance measurement processes. The system
                       incorporates four components: a strategic plan with goals and objectives;
                       a balanced scorecard,10 with strategies and performance measures; a
                       business plan containing initiatives; and a review and analysis process
                       that assesses performance. The balanced scorecard and business plan
                       reflect decisions on the initiatives in which DLA will invest, and these
                       investments and performance target levels form the basis for DLA’s budget
                       request. The strategies, performance measures, and objectives address
                       mitigating critical spare parts shortages. Performance measures provide
                       DLA management a means of assessing progress and making adjustments
                       as necessary to achieve its goals and strategies. The system’s review and
                       analysis process involves examining progress against objectives and
                       targets to make necessary adjustments to plans and objectives to meet
                       customer requirements. In developing and revising the Strategic
                       Management System, DLA’s procedures require it to incorporate
                       higher-level plans such as, the National Military Strategy, the Quadrennial
                       Defense Review, and Defense Planning Guidance. According to a DLA
                       planning official, DLA’s first corporate assessment of the 2002-2007
                       Strategic Plan is scheduled for 2003. Appendix III graphically displays the
                       DLA Strategic Management System.



DLA’s Strategic        DLA’s Strategic Management System’s business plan specifically addresses
                       mitigating critical spare parts shortages that adversely affect readiness.
Management System      The strategic logistics planning process, currently being implemented, is
Addresses Mitigating   DLA’s framework for logistics transformation, strategic measurement, and
                       performance management. Three of its components—a strategic plan, a
Critical Spare Parts   balanced scorecard, and a business plan—incorporate GPRA attributes,
Shortages That         address spare parts shortages, and act to improve overall logistics systems
Adversely Affect       and business processes, all of which could improve overall supply support
                       to DOD customers.
Readiness


                       10
                         The balanced scorecard, introduced by Professor Robert Kaplan and Dr. David Norton
                       in 1992, is a component of the Strategic Management System that links strategic goals,
                       strategies, objectives, and measures to an organization’s strategic plan.




                       Page 8                                                     GAO-03-709 Defense Inventory
DLA’s 2002-2007 Strategic                    The DLA strategic plan covers a 6-year period that includes the year
Plan                                         of publication—2002—and 5 additional years consistent with GPRA
                                             guidelines. It focuses on long-term outcomes and contains DLA’s corporate
                                             mission, vision, and values statements and the agency’s 4 strategic goals,
                                             13 strategic strategies, and 39 strategic objectives. The goals that address
                                             customer service, customer outcomes, or management of DLA resources
                                             for customer value address spare parts shortages directly or indirectly
                                             through improved service to the military service customers. Table 1
                                             identifies DLA’s four strategic goals and the respective number of
                                             strategies, objectives, and initiatives to be measured for achieving the
                                             plan’s strategic goals and strategies. Table 2 illustrates the relationships
                                             between the Customer Goal (strategic goal 1) and representative strategic
                                             strategies, objectives, and action plan initiatives, relative to spare parts and
                                             customer service.



Table 1: DLA’s 2002-2007 Strategic Goals and the Number of Strategies, Objectives, and Initiatives

                                                                         Number of            Number of               Number of
DLA strategic goal                                                       strategies           objectives               initiatives
Goal 1—Provide responsive, best value supplies and services
consistently to our customers.                                                   3                       8                      8
Goal 2—Structure internal processes to deliver customer
outcomes effectively and efficiently.                                            4                      18                     37
Goal 3—Ensure our workforce is enabled and empowered to
deliver and sustain logistics excellence.                                        3                       5                     36
Goal 4—Manage DLA resources for best customer value.                             3                       8                     16
Total                                                                           13                      39                     97
Source: GAO analysis of DLA data.




                                             Page 9                                                  GAO-03-709 Defense Inventory
Table 2: Representative Strategies, Objectives, and Action Plan Initiatives of DLA's 2002-2007 Strategic Plan Customer Goal
(strategic goal 1)

DLA strategic goal                 Strategic strategies         Strategic objectives                         Strategic action plan initiatives
Goal 1—Provide                     Focus, manage, and measure Improve customer satisfaction to 90% by        Refine customer satisfaction
responsive, best value             logistics support by customer the end of fiscal year 2007.                survey.
supplies and services              segment based on customer                                                 Implement customer Relationship
consistently to                    requirements.                                                             Management.
customers.                                                                                                   Service Level Agreements with
                                                                                                             major customer segments.
                                                                Supply availability, for weapons systems    Improved supply availability.
                                                                and overall, shall be equal to or greater
                                                                than 85% for each military service for each
                                                                fiscal year.
                                                                Implement measurement of Customer         Customer Wait Time as the DOD
                                                                Wait Time as the DOD logistics timeliness Logistics Timeliness Measure.
                                                                metric by the end of fiscal year 2007.
                                                                Reduce hardware backorders to 250,000        Backorder Reduction.
                                                                by the end of fiscal year 2007.
                                   Negotiate and honor          Improve responsiveness by all modes of       Establishment of practical
                                   performance agreements       customer contact so that 85% of customer     responsiveness standards for
                                   with customer segments.      contacts meet standards by fiscal year       each mode of customer contact
                                                                2007.                                        with DLA and actions to improve
                                                                                                             responsiveness for each mode.
                                                                Cost-effectively increase hardware combat
                                                                support capability through utilizing
                                                                Strategic Materiel Sourcing techniques
                                                                and partnering with industry by forging 17
                                                                long-term strategic supplier alliances by
                                                                fiscal year 2004.
Source: GAO summary of DLA data.




The Balanced Scorecard                                The balanced scorecard component of DLA’s strategic system identifies
                                                      and links DLA’s strategic goals and strategies to transform DLA operations,
                                                      including customer service, over the next 2 to 5 years. It also provides
                                                      metrics to measure strategic plan progress including “lead” and “lag”
                                                      indicators. For example, a lead performance indicator for a Goal 1
                                                      strategy—“Negotiate and honor performance agreements with customer
                                                      segments”—measures the percent of customer agreements negotiated. A
                                                      lag performance indicator for that same strategy measures the percent of
                                                      negotiated agreements fulfilled.

                                                      DLA’s balanced scorecard component “cascades” to each of its Defense
                                                      Supply Centers located in Richmond, Virginia; Columbus, Ohio; and



                                                      Page 10                                                     GAO-03-709 Defense Inventory
                    Philadelphia, Pennsylvania. The centers’ balanced scorecards identify
                    the “how and to what extent” their strategies support DLA’s corporate
                    balanced scorecard. The centers’ scorecards are expected to reflect DLA’s
                    overall vision of “Right Item, Right Time, Right Place, Right Price, Every
                    Time…Best Value Solutions for America’s Warfighters” and, in this way,
                    provide a consistent vision to DLA customers, stakeholders, and
                    employees.



The Business Plan   DLA’s business plan is a 2-year, agency-wide operating plan that (1) tracks
                    DLA’s 97 initiatives in varying stages of implementation and (2) highlights
                    the investments and actions necessary to achieve strategies and business
                    objectives in the near-term. DLA considers 43 of these initiatives as
                    strategic because they are required to achieve DLA’s vision and strategy.
                    Another 45 initiatives DLA considers critical to maintain or improve DLA
                    operations and guarantee both effectiveness and efficiency. Also, DLA
                    considers nine initiatives mandatory because they are directed by higher
                    authority and may also be strategic or critical. The 97 initiatives, at the time
                    of our review, were in varying stages of implementation.

                    DLA’s business plan, issued in May 2002, is the newest component of the
                    Strategic Management System. Its initiatives are described in action plans,
                    which cite who is responsible for the action; the amount of investment
                    required; how the action supports strategic plan goals, strategies, and
                    objectives; and the major events and time frames to achieve the action.
                    Of the 97 DLA initiatives contained in DLA’s Strategic Management System,
                    DLA identified 18 that are aimed specifically at mitigating spare parts
                    shortages and 6 that are aimed at improving DLA’s internal logistics
                    operating systems and processes that may improve logistics support to
                    customers and thus help reduce critical readiness-degrading spare part
                    shortages affecting the military forces. The remaining 73 initiatives relate
                    to DLA’s financial, human capital, and information technology areas that
                    could improve DLA’s ability to better serve its customers but do not
                    specifically relate to acquiring spare parts to fill shortages. Thus, they are
                    not addressed in this report.




                    Page 11                                              GAO-03-709 Defense Inventory
Some Strategic               DLA has a number of initiatives that, if fully implemented, could either
                             directly or indirectly contribute to mitigating critical spare parts
Initiatives Could            shortages and may improve supply support readiness. Twenty-four of
Help Mitigate Spare          the 97 initiatives contained in its Strategic Management System, and
                             1 separate ongoing DOD-directed initiative, according to DLA, are aimed at
Parts Shortages              achieving these results. Such improvements are likely, in part, because
and Improve                  some of the 24 initiatives address recurring causes for the shortages.
Supply Readiness

If Fully Implemented, DLA    If fully implemented as planned by the end of 2009, 18 initiatives in DLA’s
Initiatives Could Directly   Strategic Management System could directly help mitigate spare parts
                             shortages and may improve supply support readiness. These initiatives
Reduce Critical Shortages
                             focus heavily on (1) obtaining strategic sourcing, which involves alliances
and Improve Supply           and long-term agreements with suppliers of critical parts; (2) partnerships
Support Readiness            and agreements with customers; (3) an improved supply availability to
                             customers; (4) a reduction of backorders; and (5) the development of a
                             national inventory system. Several of these initiatives also address some
                             recurring causes of shortages. For example, one initiative is aimed at
                             reducing spare parts shortages by identifying manufacturers that produce
                             parts, such as cast and forged parts and microcircuits, that are no longer
                             produced by the original equipment manufacturers, yet are still critical
                             components of weapon systems. Another initiative will likely mitigate
                             spare parts shortages because it is designed to guarantee DLA sources
                             of low-demand, high-dollar items by forming long-term contracts with their
                             manufacturers. Another initiative is designed to develop agreements
                             between suppliers and DLA to arrange long-term contracts for sole-source
                             items.




                             Page 12                                           GAO-03-709 Defense Inventory
Some of the initiatives more specifically address recurring causes for
critical spare parts shortages. For example, a Defense Supply Center
Richmond official identified two predominant causes for a number of
critical spare parts shortages—unexpected service demand and sole
source manufacturers not producing quantities DLA needed to fill
customer orders. The customer relationship management initiative is
designed to address unexpected service demands by using collaborative
demand planning between DLA and the services to determine how much
of a particular part is needed during wartime as opposed to peacetime.

According to DOD, this initiative addresses the readiness-based sparing
concept11 by using service level agreements to provide tailored support
levels for weapon systems parts. Several supplier relationship initiatives
are aimed at addressing problems with sole source manufacturers not
producing quantities DLA needs to fill customer orders.

Table 3 briefly describes the 18 initiatives DLA Logistics Operations
officials identified in the Strategic Management System’s business plan
component that are currently aimed at mitigating spare parts shortages.
It also provides an estimated completion date for the ongoing initiatives.
Appendix IV describes the initiatives in more detail.




11
   The readiness-based sparing concept tailors different support level goals by item with a
link between the item’s availability and desired readiness levels, according to DOD.




Page 13                                                       GAO-03-709 Defense Inventory
Table 3: DLA Initiatives Specifically Aimed at Improving Spare Parts Shortages

Initiative                          Description                                                          Estimated completion date
Strategic Materiel Sourcing         Procure items needed for readiness by applying commercial best Fiscal year 2005
                                    practices to several initiatives that fall under the initiative’s
                                    “umbrella” including Strategic Supplier Alliances, Strategic
                                    Materiel Sourcing/Rapid Manufacturing initiative, Supplier
                                    Relationship Management, Corporate Contracts, and Prime
                                    Vendor Contracts.
Strategic Supplier Alliances        Develops agreements between suppliers and DLA to arrange             Fiscal year 2005
                                    long-term contracts for sole-source items using best commercial
                                    practices.
Strategic Materiel Sourcing/Rapid   Guarantee DLA sources of low-demand, high-dollar items by            Ongoing business practicea
Manufacturing Initiative            forming long-term contracts with their manufacturers stipulating
                                    that DLA will also purchase other low-priced, higher-demand
                                    items from those same manufacturers.
Supplier Relationship Management    Facilitates communication between DLA and its suppliers with        Fiscal year 2005
                                    the end goal of receiving the desired quantity of a particular item
                                    when it is needed.
Corporate Contracts                 Long-term contracts with a single source that provides multiple      Ongoing business practicea
                                    items, which reduces spot buying activity and business
                                    transaction costs.
Prime Vendor Contracts              Long-term contracting that allows military customers to              Ongoing business practicea
                                    requisition market ready or commercial products directly from a
                                    commercial distributor as the items are needed.
Manufacturing on Demand             Identifies manufacturers for parts that are no longer produced by Ongoing business practicea
                                    the original source, yet are still critical components of weapon
                                    systems. Includes Casting and Forging, the Generalized
                                    Emulation of Microcircuits, Warstoppers, and the Strategic
                                    Material Sourcing/Rapid Manufacturing initiative.
Casting and Forging                 Obtains cast and forged spare parts that are difficult to find and   Ongoing business practicea
                                    often are no longer produced by the original manufacturer.
Generalized Emulation of            Identifies sources of replacement microcircuits that are critical Ongoing business practicea
Microcircuits                       components of older weapons systems still used by the services.
Warstoppers                         Identifies (1) critical, mission-essential items with long production Ongoing business practicea
                                    lead-times that are low-demand items during peacetime but
                                    experience high demand during periods of war and (2) vendors
                                    that will be able to meet the wartime surge and sustain wartime
                                    requirements for those items.
Organic Manufacturing               Production process of items that must be produced by                 Ongoing business practicea
                                    government owned and operated facilities because the private
                                    sector no longer produces the parts.
Improved Supply Availability        Increases supply availability in accordance with DLA’s goal of     Assessed and reported in
                                    improving supply availability, specifically, maintaining aggregate monthly reviews
                                    85 percent, or greater, supply availability for weapon systems for
                                    each of the military services for each fiscal year.




                                           Page 14                                                        GAO-03-709 Defense Inventory
(Continued From Previous Page)
Initiative                                Description                                                              Estimated completion date
Backorder Reduction                       Reduce backorders to increase supply availability and customer           Assessed and reported in
                                          support.                                                                 monthly reviews
Customer Relationship Management          Incorporates customer input into DLA’s business practices to             Initial Operational Capability
                                          improve customer service and anticipate customer needs.                  fiscal year 2005; Full
                                                                                                                   Operational Capability fiscal
                                                                                                                   year 2009
Service Level Agreements                  Establishes a set of common expectations between DLA and                 Fiscal year 2004
                                          customers and encourages collaboration between them to
                                          improve customer satisfaction.
National Inventory Management             Combines the consumable inventories of the services, with DLA’s Fiscal year 2009
Strategy                                  inventory, resulting in a single national inventory that will improve
                                          supply performance by eliminating redundancy and improving
                                          asset visibility.
Inventory Accuracy Improvement            Improve inventory record accuracy by using independent                   Fiscal year 2007
                                          contractors to perform sample inventories of DLA items.
DLA Product Conformance, Aviation         Conducts monthly quality assurance testing to baseline aviation          Assessed and reported in
                                          products to identify necessary improvements to meet                      monthly reviews
                                          performance goals for critical items.
Source: DLA (data), GAO (presentation).
                                                 a
                                                  A business practice that DLA has implemented to fulfill specific goals and to better meet customers’
                                                 needs. Such practices have performance targets and measures that are assessed periodically.




Several DLA Initiatives                          DLA also identified six Strategic Management System initiatives that
Focus on Improving                               could decrease shortages and increase supply availability by developing
                                                 or adjusting systems and business processes to improve its logistics
Logistics Systems
                                                 operations and better serve its customers. However, some of these
and Processes That                               initiatives are not expected to be fully implemented until 2007. These
Indirectly Reduce Spare                          initiatives include Business Systems Modernization, Distribution
Parts Shortages                                  Planning and Management System, Strategic Distribution, Logistics
                                                 Response Time Reduction, Direct Vendor Delivery Processing Time,
                                                 and Improving Overall Purchase Request Processing Time. Business
                                                 System Modernization faces a number of challenges before being fully
                                                 implemented. In June 2001, we reported some information technology
                                                 concerns with the initiative, which increased program risk that DOD
                                                 agreed to address.12 Table 4 identifies the system and process initiatives
                                                 and provides a brief description of intended results. It also provides an



                                                 12
                                                   U.S. General Accounting Office, Information Technology: DLA Should Strengthen
                                                 Business Systems Modernization Architecture and Investment Activities, GAO-01-631
                                                 (Washington, D.C.: June 29, 2001).




                                                 Page 15                                                             GAO-03-709 Defense Inventory
                                                  estimated completion date for the ongoing initiatives. Appendix V
                                                  describes each initiative in greater detail.



Table 4: DLA System and Process Initiatives

Initiative                                Description                                                        Estimated completion date
Business Systems Modernization            Transformation of how DLA conducts its logistics operations     Fiscal year 2006
                                          including the replacement of legacy systems with new software,
                                          reengineering by fielding best practices, improving customer
                                          service through collaboration with customers and suppliers, and
                                          providing best value solutions.
Distribution Planning and                 Improves DLA business processes by enhancing existing                Fiscal year 2007
Management System                         systems with new commercial best practices that include
                                          reengineered logistics processes and industry-based integrated
                                          supply chain solutions. Electronic logistics data will provide real-
                                          time information about orders, including asset visibility of
                                          requisitioned spare parts, as they are in transit to the customer.
Strategic Distribution                    Identifies international locations that can be used as strategic   Fiscal year 2007
                                          distribution points.
Logistics Response Time Reduction         Improves supply chain performance by reducing the number of        Assessed and reported in
                                          days that its customers must wait for medical, pharmaceutical,     monthly reviews
                                          clothing, and textile items, as well as repair parts.
Direct Vendor Delivery Processing         Improves the average processing time to 13 days for planned        Assessed and reported in
Time                                      direct vendor delivery from the inventory control point/vendor.    monthly reviews
Improve Overall Purchase Request          Improve purchase request processing time by reducing inventory Assessed and reported in
Processing Time                           control point processing time.                                 monthly reviews
Source: DLA (data), GAO (presentation).




A Separate                                        A separate DOD-directed, $500 million aviation investment initiative—
                                                  although not included in DLA’s business plan—has significantly improved
DOD-Directed Aviation                             the availability of many critical aviation spare parts and most likely supply
Investment Initiative                             readiness. During its first 3 fiscal years, 2000-2002, the initiative, called the
                                                  Aviation Investment Strategy, significantly improved critical aviation parts.
Has Significantly                                 Shortages, however, will continue, in part, because the 85-percent
Increased Availability                            aggregate goal does not reveal that while 47 percent of the critical aviation
of Some Critical                                  spare parts were raised to this level, many—5,414 (53 percent) as of the
                                                  end of fiscal year 2002—are below the goal. Of that number, 2,904 parts,
Aviation Parts, but                               or over half, were available less than 35 percent of the time. In addition,
Others Remain in Short                            DLA officials informed us that DLA’s progress in buying these critical
Supply                                            spare parts was impeded by a DOD regulation that has since been revised
                                                  on May 23, 2003, to allow a waiver for such purchases.




                                                  Page 16                                                       GAO-03-709 Defense Inventory
DOD transferred $500 million from the services’ operations and
maintenance funds to support the initiative. The low availability of critical
aviation parts had occurred because of (1) steady declines in inventory
levels during the 1990s and (2) inventory models that optimized total
stock availability, while constrained by total cost, and did not favor
investing in low-demand, high-cost parts regardless of readiness impact.
These conditions prompted the Office of the Secretary of Defense in 1999
to direct DLA’s investment of $500 million, through the initiative, in safety
level inventories of selected aviation critical parts to achieve the aggregate
85-percent goal. Our analysis of over 10,000, out of a total of over 15,000,
critical aviation parts before and after investment indicates that their
availability significantly improved over the fiscal years 2000-2002 period.
Also, additional improvement could result as DLA invests the initiative’s
remaining $119 million in fiscal year 2004—the fourth and last year of
investment allocation—in the initiative’s remaining parts.13 However,
5,414 of these critical aviation parts were below DLA’s 85-percent goal as of
the end of fiscal year 2002.

DLA measures its supply support effectiveness by its ability to provide
customers the parts they need based on meeting an aggregate 85-percent
availability rate. This means that the first time a customer requisitions a
part, it will be available for delivery, on average, 85 percent of the time.
Using an aggregate measure means that the actual supply availability for
individual parts will vary—some items will be above 85 percent and some
well below 85 percent. But DLA targets the average availability of the group
at 85 percent.

Our analysis shows significant improvement in the availability of critical
aviation spare parts resulting from investments made during fiscal years
2000 to 2002. It also shows that many critical aviation parts will continue to
be available well below 85 percent of the time. This occurred, in part,
because of DLA’s 85-percent aggregate measure of supply support
effectiveness that was applied to each of three critical part groups,14 and


13
  As of December 2002, there were 15,708 parts in the Aviation Investment Strategy
initiative. We excluded 5,412 parts that remained for targeted investment in the initiative’s
fourth year, fiscal year 2003, because the investment results of those parts were not
available. Additionally, we excluded five parts for which the Marine Corps was the
predominant user, leaving a balance for our analysis of 10,291.
14
  As identified by the military services, Tier 1 parts are the most critical, Tier 2 parts are
critical, and Tier 3 parts are the least critical.




Page 17                                                          GAO-03-709 Defense Inventory
                                            not individual parts, and a DOD regulation that until recently limited the
                                            safety level inventory investment. Thus, many parts in the initiative will
                                            have availability rates at 85 percent or higher after they receive investment
                                            allocation, but other parts will continue to experience low availability until
                                            further investment is made. For example, of the 10,291 parts that received
                                            investment through fiscal year 2002, 1,397 had supply rates greater than or
                                            equal to 85 percent before the initiative’s investment. After investment
                                            through the initiative for 3 years, that number increased to 4,877—about a
                                            250-percent increase. However, 5,414 parts still had availability rates less
                                            than the DLA 85-percent aggregate goal; and 2,904, or 54 percent, of
                                            these parts—such as engine mount fittings for the B-52 bomber,
                                            shoulder bolts for the F-14 Tomcat, and landing gear axles for the UH-60A
                                            helicopter—were available below 35 percent of the time. Nearly 2,400 of
                                            these were tier 1, or the most critical, spare parts.

                                            Tables 5 through 8 illustrate that this trend holds true, not only for all parts
                                            in the Aviation Investment Strategy initiative as a whole, but also for each
                                            of the three critical part groups. Table 5 shows the aggregate improvement
                                            for 10,291 DLA-managed critical aviation parts through investment year
                                            2002 by various availability percent stratifications. Table 6 shows the same
                                            information for the 8,300 Tier 1 parts, the most critical group; table 7
                                            reflects the results of the 1,415 parts in the Tier 2 critical part group, and
                                            table 8 shows the results of the 576 parts in the Tier 3 least critical part
                                            group. Furthermore, similar improvement occurred in each of the military
                                            services over the same period.



Table 5: Impact of Investment Results on All Tier Groups of Critical Aviation Parts, as of the End of Fiscal Year 2002

                                         Status before investment
Supply availability percent          (number of items in base year      Status after investment                          Percent
stratification                             preceding investment)             (number of items)        Difference         change
85 and above                                                  1,397                        4,877           3,480             249
84 to 75                                                        881                         641             -240             -27
74 to 65                                                        905                         524             -381             -42
64 to 55                                                        860                         455             -405             -47
54 to 45                                                        803                         516             -287             -36
44 to 35                                                        791                         374             -417             -53
Below 35                                                      4,654                        2,904          -1,750             -38
Total                                                        10,291                      10,291
Source: GAO analysis of DLA data.




                                            Page 18                                                  GAO-03-709 Defense Inventory
Table 6: Impact of Investment Results on Tier 1 Most Critical Aviation Parts, as of the End of Fiscal Year 2002

                                         Status before investment
Supply availability percent          (number of items in base year         Status after investment                             Percent
stratification                             preceding investment)                (number of items)          Difference          change
85 and above                                                  1,101                         3,886               2,785              253
84 to 75                                                        694                           495                -199              -29
74 to 65                                                        730                           436                -294              -40
64 to 55                                                        690                           373                -317              -46
54 to 45                                                        657                           422                -235              -36
44 to 35                                                        636                           293                -343              -54
Below 35                                                      3,792                         2,395               -1,397             -37
Total                                                         8,300                         8,300
Source: GAO analysis of DLA data.




Table 7: Impact of Investment Results on Tier 2 Critical Aviation Parts, as of the End of Fiscal Year 2002

                                            Status before investment
Supply availability percent             (number of items in base year          Status after investment                         Percent
stratification                                preceding investment)                 (number of items)        Difference        change
85 and above                                                       222                               706            484            218
84 to 75                                                           125                               106             -19           -15
74 to 65                                                           123                                64             -59           -48
64 to 55                                                           126                                59             -67           -53
54 to 45                                                           112                                61             -51           -46
44 to 35                                                              98                              57             -41           -42
Below 35                                                           609                               362           -247            -41
Total                                                             1,415                          1,415
Source: GAO analysis of DLA data.




                                            Page 19                                                        GAO-03-709 Defense Inventory
Table 8: Impact of Investment Results on Tier 3 Least Critical Aviation Parts, as of the End of Fiscal Year 2002

                                                   Status before investment
Supply availability percent         (number of items in base year preceding        Status after investment                         Percent
stratification                                                  investment)             (number of items)       Difference         change
85 and above                                                              74                            285            211             285
84 to 75                                                                  62                             40             -22             -35
74 to 65                                                                  52                             24             -28             -54
64 to 55                                                                  44                             23             -21             -48
54 to 45                                                                  34                             33              -1              -3
44 to 35                                                                  57                             24             -33             -58
Below 35                                                                 253                            147           -106              -42
Total                                                                    576                            576
Source: GAO analysis of DLA data.


                                                 Furthermore, our analysis of information provided by DLA revealed
                                                 that 3,342 of the 15,708 critical aviation parts in the Aviation Investment
                                                 Strategy initiative as of December 2002 could remain below DLA’s
                                                 85 percent aggregate availability rate, regardless of funds available for
                                                 investment. According to DOD officials, this is because DOD Supply Chain
                                                 Materiel Management Regulation 4140.1-R limits safety level investments
                                                 by requiring they meet a specific demand limit unless that limit is waived in
                                                 cases where application of the limit significantly impairs weapon system
                                                 support.15 Without such a waiver, these spare parts could continually be
                                                 below DLA’s availability goal, adversely affect readiness, and increase
                                                 DLA backorders. Furthermore, DLA’s supply support effectiveness and
                                                 critical aviation spare parts availability to customers could continue to
                                                 be limited.

                                                 DLA is planning another investment strategy, scheduled to begin in fiscal
                                                 year 2004 called Weapon System Readiness Improvement, subsequent to

                                                 15
                                                   Section C2.6.3.2.6.1 of DOD’s Supply Chain Materiel Management Regulation 4140.1-R
                                                 states that to dampen any overstatement of safety level requirements due to imprecise
                                                 safety level models and thereby avoid unnecessary procurement or repair actions, an item’s
                                                 safety level shall be constrained to a maximum of three standard deviations of lead-time
                                                 demand or the lead-time demand, whichever is less. Lead-time demand for a particular
                                                 supply item is the number of the item needed in a specified time period multiplied by the
                                                 projected lead time for the item. The regulation was amended on May 23, 2003, to allow
                                                 waivers. Under the amended regulation, the lead-time demand limit may be waived for
                                                 weapon system items where credible evidence exists that its application significantly
                                                 impairs weapon system support.




                                                 Page 20                                                      GAO-03-709 Defense Inventory
the conclusion of the Aviation Investment Strategy initiative that could
also improve supply readiness. It is expected to target critical aviation,
land, and maritime weapon systems spare parts for investment to achieve
a minimum availability of 80 percent for each part. However, the same
lead-time constraints contained in DOD’s Supply Chain Materiel
Management Regulation 4140.1-R could also prevent some of these critical
spare parts from reaching the 80-percent availability goal, meaning they
will not be available to customers when needed.

An Office of the Secretary of Defense Inventory Management Study
conducted in August 2002 addressed a need for a focused investment in
critical spare parts that affect supply readiness. The study concluded
that low stockage levels for high-cost, low-demand consumable parts
were the predominate cause of supply-related Not Mission Capable rates
in the Air Force and Navy. Furthermore, it stated that DLA’s optimization
requirements models favor the procurement of the higher-demand,
lower-cost parts, continuing the low availability trend for critical spare
parts. The Comptroller, Office of the Under Secretary of Defense,
recommended in the August 2002 DOD management study that DLA and
the services should continue efforts to ensure that high-cost, low-demand
items that would improve weapon system readiness are available when
needed—an effort that might require DLA to prioritize its funding to
increase appropriate weapon system inventories to meet higher availability
of critical parts.

The August 2002 Office of the Secretary of Defense Inventory Management
Study stated that additional efforts are required to improve the supply
managers ability to make purchase decisions based on readiness impacts
instead of aggregate availability goals. It recommended long and short-term
actions intended to more closely align supply management accountability
with readiness. The long-term recommendation was to ensure that the
department’s logistics systems provide the data needed to link readiness
and supply management decisions supporting readiness based sparing
models. It noted that the Army, Navy and DLA are in the process of
changing their supply management functions from legacy systems to new
commercial systems, but this change to new commercial systems
introduces an interoperability risk because the department does not have
an overarching enterprise architecture defining the interoperability
requirements. Therefore, the study also recommended that in the interim
time remaining before the new systems are implemented the military
departments should continue to apply higher supply targets to the
inventory items associated with weapons systems that report readiness



Page 21                                           GAO-03-709 Defense Inventory
                          rates below established goals. It specified that these supply targets should
                          be measured by several factors including supply availability.



DLA Can Estimate          DLA can estimate that added investment in safety level inventories of
                          critical readiness-related spare parts will increase parts availability and
the Impact of             will likely improve supply readiness of the military services. However,
Additional Investment     there is no assurance that increased investments would affect overall
                          unit readiness.
on Supply Availability,
Which Contributes to      At our request, the DLA Office of Operations Research and Resource
Supply Readiness          Analysis provided investment estimates16 as of November 2002 to indicate
                          what it would cost to achieve supply availability rates of 85, 90, and
                          95 percent for over 219,000 of the spare parts most critical to readiness.
                          Part criticality was determined by the military services. Estimates
                          disregard DOD’s limiting regulatory requirement and are based on a
                          minimum availability rate for each part instead of an aggregate. Because
                          DLA maintains some parts at rates higher than 85 percent, the overall rate
                          for the group will generally be higher than the minimum. Table 9 shows the
                          investment cost estimates at the various supply availability rates and the
                          effective overall availability rate for 219,071 of the military services’ most
                          critical aviation, land, and maritime parts. For example, an investment of
                          $748 million was estimated to achieve a minimum supply availability rate of
                          85 percent for the most critical parts. When all parts that exceed the
                          minimum rate are considered, the overall supply availability rate is
                          estimated at 92 percent. As indicated in table 9, investment costs increase
                          considerably to achieve the 5 percent increments at the higher minimum
                          availability rates with little effect on the overall rate.




                          16
                               We did not validate the accuracy of these estimates.




                          Page 22                                                     GAO-03-709 Defense Inventory
Table 9: Estimated Investment to Achieve Various Minimum Supply Availability
Rates for the Most Critical Aviation, Land, and Maritime Military Service Parts

Dollars in millions
Supply availability minimum rate            85 percent          90 percent         95 percent
Estimated investment                               $748             $1,256              $2,215
Overall supply availability rate             92 percent         93 percent          96 percent
Number of critical items                        219,071            219,071            219,071
Source: GAO analysis of DLA data.


Inventory quantities needed to achieve these supply levels could take
years to acquire and affect a part’s availability rate. It takes up to 3 years
in some cases to procure certain critical parts; and when delivered, the
purchased quantities do not necessarily have an immediate impact on
supply availability rates. Some parts, particularly aviation parts, have
several years of acquisition lead time.17 For example, 351 critical aviation
parts contained in the Aviation Investment Strategy initiative have
acquisition lead times of 2 years or greater. Several parts even exceeded
3 years. In addition to this acquisition lead time, an initiative official told us
that it generally takes about 2 years before parts received from vendors
actually affect or increase supply availability rates because initial
investment dollars are used to fill an item’s backorders before increasing
the part’s safety level quantities. Thus, it could take as long as 5 years in
total to improve the supply availability of long acquisition lead-time parts.

Increasing safety levels of critical spare parts inventories will likely
increase supply availability and therefore supply support readiness.
However, because of the multiple factors that affect a unit’s readiness—
including supply, equipment, training, and personnel—investment in
critical parts does not necessarily mean that a unit’s overall readiness
posture will improve. For example, an operating unit having sufficient
spare parts could still have impaired readiness due to maintenance,
training, and personnel problems.




17
   Acquisition lead time is the administrative and production time required between
identification of a need to buy and the letting of a contract or the placing of an order and
receipt into the supply system of materiel purchased.




Page 23                                                        GAO-03-709 Defense Inventory
Conclusions   It is important for DLA, the procurer and manager of most spare parts
              for the military services, to have effective supply acquisition, inventory
              management, and distribution systems to ensure DOD’s readiness. The
              agency’s strategy for its logistics planning system and its initiatives have
              the attributes that, if fully implemented, could help resolve causes for
              shortages and improve supply support. The strategy and initiatives also
              provide a baseline for measuring progress. However, three things—DOD’s
              Supply Chain Materiel Management Regulation 4140.1-R, DLA’s aggregate
              measurement goal for assessing supply effectiveness, DLA’s requirements
              models that do not prioritize high-cost, low-demand critical spare parts—
              could significantly lessen DLA’s potential to mitigate critical spare parts
              shortages and increase military readiness. Unless waivers to the lead-time
              demand limits are requested and approved as appropriate under the
              current regulation, the availability of certain critical spare parts for
              customers could continue to be less than 85 percent—many even below
              35 percent. Thus, DLA’s follow-on investment initiative scheduled to begin
              in fiscal year 2004 will not be as effective as it could be in increasing the
              availability of critical parts that, in turn, may increase military readiness.
              Continuing to manage critical spare parts based on an 85-percent aggregate
              availability goal also contributes to the disparity in the availability of these
              parts. Absent a minimum availability goal for buying and stocking critical
              spare parts and annual performance targets for assessing progress toward
              that goal, many critical spare parts shortages that impede readiness could
              continue. Furthermore, prioritizing investments in spare parts is important.
              Had DOD not directed DLA to focus $500 million on critical aviation parts
              in the Aviation Investment Strategy, DLA would likely have continued using
              quantitative models that prioritized buying and stocking low-cost, high-
              demand parts and not those high-cost, low-demand parts that most impact
              readiness. The success of the DOD-directed initiative has shown that
              prioritizing funding for critical spare parts can improve their availability
              over several years and likely enhance supply readiness. Such a focused
              investment is also consistent with the recommendation of the Comptroller,
              Office of the Under Secretary of Defense, to invest in those high-cost,
              low-demand items that are critical to supply readiness. Linking funding to
              the annual performance targets could be an effective management tool for
              decision makers.




              Page 24                                              GAO-03-709 Defense Inventory
Recommendations for   To improve the supply availability of critical readiness degrading spare
                      parts that may improve the overall readiness posture of the military
Executive Action      services, we recommend that the Secretary of Defense direct the Director
                      of the Defense Logistics Agency to

                      • submit, as appropriate, requests for waiver(s) of the provisions of the
                        DOD Supply Chain Materiel Management Regulation 4140.1-R that limit
                        the safety level of supply parts to specific demand levels. Such waivers
                        would allow DLA to buy sufficient critical spare parts that affect
                        readiness of service weapon systems to attain an 85-percent minimum
                        availability goal;

                      • change the agency’s current aggregate 85-percent supply availability
                        goal for critical spare parts that affect readiness, to a minimum 85-
                        percent supply availability goal for each critical spare part, and because
                        of the long lead times in acquiring certain critical parts, establish annual
                        performance targets for achieving the 85-percent minimum goal; and

                      • prioritize funding as necessary to achieve the annual performance
                        targets and ultimately the 85-percent minimum supply availability goal.



Agency Comments and   In written comments on this report, DOD generally concurred with the
                      draft report and the intent of the recommendations, but not all of the
Our Evaluation        specified actions we recommended. Furthermore, DOD concluded its
                      proposed actions regarding each of our recommendations are sufficient
                      and no further directions or actions are required. DOD’s written comments
                      are reprinted in their entirety in appendix II.

                      In concurring with the first recommendation, DOD acknowledged that the
                      amended DOD 4140.1-R, dated May 2003, gives the military services and
                      DLA authority to waive the lead-time demand maximum in cases where
                      creditable evidence exists. We agree with that action.

                      Although DOD concurred with the intent of our second and third
                      recommendations, DOD did not agree with the need to replace the
                      aggregate 85-percent supply availability goal with a minimum 85-percent
                      supply availability goal for critical spare parts, establish annual
                      performance targets for achieving the minimum goal, or prioritize funding
                      to achieve it. Instead, DOD said DLA is working toward a readiness-based
                      sparing concept of tailoring different support level goals by item with a link



                      Page 25                                             GAO-03-709 Defense Inventory
between an item’s availability and desired inventory levels rather than one
standard level of support for all critical items. Additionally, DOD stated that
setting an 85-percent minimum goal across the universe of critical items
would undermine the efficiencies of optimization that may be achieved by
working toward different supply availability goals for different parts based
on readiness impact. It cited that its Customer Relationship Management
initiative, which is scheduled to start in fiscal year 2005 and be fully
operational in fiscal year 2009, will use service level agreements to provide
this type of tailored support. It stated that funding would then be
prioritized accordingly in concert with the implementation of the new
tailored approach.

We disagree that the actions DOD prescribes will be sufficient, particularly
in the near term, to address the need for DLA to increase critical spare
parts availability. As our report notes, DLA is responsible for managing
hundreds of thousands of critical parts that the services have identified
as crucial to weapons systems readiness. However, many of these parts are
not available to meet service needs. DLA has been using the same 85-
percent aggregate goal for stocking these critical parts as it has for
non-critical parts. Based on our work, DLA was not managing its inventory
by developing individual item supply availability targets tailored to desired
readiness levels. Although DLA has started using service level agreements,
which are a component of DLA’s Customer Relationship Management
initiative, as our report notes, these agreements have a limited scope and
are considered a work in progress. DLA plans to execute 11 agreements by
the end of fiscal year 2003 and as noted, full implementation for the
Customer Relationship Management initiative is scheduled for fiscal year
2009. Furthermore, managing to an 85-percent aggregate goal does not
reveal the significant shortages in availability of many individual critical
parts. For example, after 3 years of focused investment to increase the
availability of over 10,000 critical aviation parts, 53 percent were not
available at the 85-percent aggregate goal and over half of these parts were
available below 35 percent of the time.

DOD’s response proposes, what we agree is, an optimum approach that is
consistent with the desire expressed in the August 2002 Office of Secretary
of Defense Inventory Management Study for supply managers to make
purchase decisions based on readiness impacts instead of aggregate
availability goals. However, according to the August report, implementing
this approach is a long-term effort dependent on DLA and the services’
logistics systems providing the data needed to link readiness and supply
management decisions that has interoperability risks because the



Page 26                                             GAO-03-709 Defense Inventory
department does not have an overarching architecture for integrating such
systems. The August report, therefore, recommended that until these new
systems are implemented to provide more visibility into the relationship
between inventory levels and weapon system readiness, DLA and the
military departments should continue to apply higher supply availability
targets to the inventory items associated with weapon systems where
readiness is below established goals.

As DLA plans another investment strategy, subsequent to the conclusion of
the Aviation Investment Strategy initiative, that will expand the number of
critical parts that are targeted for investment by including land and
maritime items, it needs a clear minimum goal for the availability of these
parts, annual performance targets for measuring progress, and focused
funding. Therefore, until the systems, initiatives, and agreements are in
place to support the department’s prescribed approach for optimizing
efficiencies of supply availability and investment, we continue to believe
our recommendations to set a minimum goal of 85 percent for each critical
spare part, establish annual performance targets for achieving the goal, and
prioritize funding accordingly are reasonable interim actions to meet the
services’ readiness goals for parts they have identified as critical
to readiness.


We are sending copies of this report to the Secretary of Defense; the
Director, Defense Logistics Agency; the Director, Office of Management
and Budget; 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.




Page 27                                           GAO-03-709 Defense Inventory
Please contact me on (202) 512-8365 or Richard Payne on (757) 552-8119 if
you or your staff have any questions concerning this report. Other contacts
and key contributors are listed in appendix VI.

Sincerely yours,




William M. Solis, Director
Defense Capabilities and Management




Page 28                                           GAO-03-709 Defense Inventory
Appendix I

Scope and Methodology                                                                       AA
                                                                                             ppp
                                                                                               ep
                                                                                                ned
                                                                                                  n
                                                                                                  x
                                                                                                  id
                                                                                                   e
                                                                                                   x
                                                                                                   Iis




             To determine the adequacy of DLA’s strategic plans to address critical spare
             parts shortages and their effect on readiness, we obtained and analyzed
             DLA planning documents that pertained to spare parts or logistics. We
             assessed the adequacy of DLA’s strategic planning by comparing DLA
             planning to the requirements outlined in the Government Performance and
             Results Act of 1993 to determine if DLA’s planning contained key
             management attributes that are necessary to reduce spare parts shortages.
             We interviewed DLA officials at DLA Headquarters, Fort Belvoir, Virginia,
             regarding DLA strategic planning efforts and to determine the extent to
             which DLA’s strategic planning had been coordinated with the Office of the
             Secretary of Defense and the services.

             To determine the likelihood that DLA’s strategic logistics initiatives will
             achieve their intended results and help mitigate spare parts shortages
             that affect readiness, we obtained and analyzed information and
             documentation related to (1) initiatives to overcome shortages, (2) chronic
             shortage items degrading the readiness of forces, and (3) chronic and
             recurring causes for shortages. We obtained a list of initiatives that DLA
             officials identified as either specifically improving spare parts shortages
             or improving systems and processes that could impact shortages. We
             analyzed the initiatives to see if they contained performance measures
             and milestones to track the progress of the initiatives.

             To determine the impact of a $500 million DOD-directed aviation
             investment to improve the availability of critical spare parts, we obtained
             and analyzed DOD-directed aviation investment data on supply availability.
             We sorted the data by critical part group, predominant user, funding year,
             fiscal year, and supply availability percentage increments/stratifications
             (85 percent and greater, 84 to 75 percent, 74 to 65 percent, 64 to 55 percent,
             54 to 45 percent, 44 to 35 percent, and less than 35 percent) to detail
             changes in parts availability before and after investment. We interviewed
             program and budget officials at DLA Headquarters concerning which
             initiatives contained in their strategic planning would impact spare parts
             shortages. We also interviewed officials at the Defense Supply Center in
             Richmond, Virginia, concerning the separate DOD-directed Aviation
             Investment Initiative and the spare parts shortages that the services
             identified as critical to weapon system readiness, as well as the key
             DLA-identified initiatives. We focused on the Richmond Supply center
             because it is the lead center for aviation and because aviation items have
             been predominant readiness degrading items for the Air Force and Navy.




             Page 29                                             GAO-03-709 Defense Inventory
Appendix I
Scope and Methodology




To determine the extent to which DLA can identify how increased
investment impacts critical spare parts inventories and readiness, we
requested DLA’s Office of Operations Research and Resource Analysis to
estimate the investment cost necessary to increase supply availability of
critical aviation spare parts to a minimum rate of 85 percent. However, we
did not independently validate or verify the accuracy of DLA’s estimates
that show the relationship between investment and supply availability or of
DLA’s optimization models that determine logistics requirements, given
funding constraints.

We performed our work from August 2002 to May 2003 in accordance with
generally accepted government auditing standards.




Page 30                                           GAO-03-709 Defense Inventory
Appendix II

Comments from the Department of Defense                    Appendx
                                                                 Ii




              Page 31           GAO-03-709 Defense Inventory
Appendix II
Comments from the Department of Defense




Page 32                                   GAO-03-709 Defense Inventory
Appendix II
Comments from the Department of Defense




Page 33                                   GAO-03-709 Defense Inventory
Appendix III

Schematic of Defense Logistics Agency
Strategic Management System                                  Appendx
                                                                   iI




               Page 34            GAO-03-709 Defense Inventory
Appendix IV

Description of DLA Initiatives Aimed at
Mitigating Spare Parts Shortages                                                                               Appendx
                                                                                                                     iIV




                              DLA identified 18 strategic initiatives in varying stages of implementation
                              in its Strategic Management System that are aimed at mitigating
                              shortages of spare parts, including critical ones. Of these, three—Strategic
                              Material Sourcing, Manufacturing on Demand, Customer Relationship
                              Management—are umbrella initiatives with five, three, and one additional
                              initiative, respectively, under them. What follows is DLA’s description of the
                              initiatives. We have not verified the details of these descriptions.



Strategic Materiel            The Strategic Materiel Sourcing initiative represents DLA’s attempt to
                              procure items needed for readiness by applying commercial best practices
Sourcing Initiative           to several initiatives that fall under that initiative’s “umbrella,” including
                              Strategic Supplier Alliances, Strategic Materiel Sourcing/Rapid
                              Manufacturing initiative, Supplier Relationship Management, Corporate
                              Contracts, and Prime Vendor Contracts.



Strategic Supplier Alliance   The Strategic Supplier Alliance develops agreements between suppliers
Initiative                    and DLA to arrange long-term contracts for sole-source items using best
                              commercial practices such as partner-driven, integrated supply chain
                              management whereby the buyer and seller cooperate to maximize their
                              mutual benefit. One of the initiative’s goals is to improve the readiness
                              of weapon systems, and this is accomplished in part by reducing the
                              customer wait time for spare parts. Other potential benefits include
                              improved capacity utilization, increased process reliability, reduced
                              inventories, reduced cycle times, leveraging of shareholder strength,
                              increased flexibility, increased customer service, shared innovations and
                              technologies, and reduced total system costs. The initiative is composed of
                              a charter, goals, improvements, and metrics.

                              According to a March 2002 report by the DOD Inspector General, a
                              Strategic Supplier Alliance with Honeywell International has had positive
                              results. The DOD Inspector General report stated that a DLA alliance with
                              Honeywell produced three primary sole-source contracts for spare parts
                              that resulted in improved wait time, reduced inventory for DLA to manage,
                              and lower prices for DLA customers. The report also noted that (1) the
                              contracts had resulted in a $9.8 million cost reduction of DLA managed
                              inventory for the first 221 catalog contract items and (2) the alliance
                              contracts will ultimately result in a price reduction of $59 million over
                              12 years for the first 594 items placed on the three contracts. Additionally,
                              administrative lead–time for one of the contract items was reduced from



                              Page 35                                             GAO-03-709 Defense Inventory
                           Appendix IV
                           Description of DLA Initiatives Aimed at
                           Mitigating Spare Parts Shortages




                           180 to 10 days. Other potential suppliers that DLA had identified as
                           Strategic Supplier Alliance candidates include Lockheed Martin, Northrop
                           Grumman, and Rolls Royce.



Strategic Material         The Strategic Material Sourcing/Rapid Manufacturing initiative is likely to
Sourcing/Rapid             improve spare parts shortages because it is intended to guarantee DLA
                           sources of low-demand, high-dollar items by forming long-term contracts
Manufacturing Initiative
                           with their manufacturers, stipulating that DLA will also purchase other
                           low-priced, higher-demand items from those same manufacturers. The
                           group of low-demand, high-priced items and the high-demand, low-priced
                           items to be purchased through one of the initiative’s contracts is referred to
                           as a “market basket.” Insurance or numeric stockage objective and
                           replenishment items with production lead-times of 60 days or greater that
                           are projected to be purchased within the next 5 years will be included in
                           the program, but critical weapon system parts will be excluded. At the time
                           of our review, this initiative was still in the demonstration phase; and items
                           were being identified to include in the market baskets. According to DLA
                           officials, the demonstration phase will involve 18 groups of items covering
                           approximately 11,000 individual items. The candidate population for the
                           initiative includes 39,000 items with an annual demand of $67 million. Also,
                           long-term sources for hard-to-find spare parts can be obtained by
                           agreements tailored to the Strategic Material Sourcing/Rapid
                           Manufacturing Initiative program. The initiative’s contracts to produce a
                           market basket’s items for DLA can last up to 11 years: 5 years under the
                           original contract and as many as three additional 2-year options if
                           performance targets are met.



Supplier Relationship      The Supplier Relationship Management program seeks to improve
Management Initiative      spare parts shortages by facilitating communication between DLA and its
                           suppliers with the end goal of receiving the desired quantity of a particular
                           item when it is needed. Supply Relationship Managers meet periodically
                           with the suppliers to ensure that the supplier will meet the performance
                           levels and targets, which are specified in the contract with DLA, to provide
                           spare parts.




                           Page 36                                             GAO-03-709 Defense Inventory
                          Appendix IV
                          Description of DLA Initiatives Aimed at
                          Mitigating Spare Parts Shortages




Corporate Contracts       Corporate contracts are a form of long-term contract that DLA uses to
                          negotiate an agreement with a manufacturer to supply a range of items.
                          With such a contract, DLA can use a single source to provide an assortment
                          of items that are managed by one or more inventory control points. The one
                          contract thus reduces spot buying activity and business transaction costs.
                          According to DLA, additional benefits potentially include lower production
                          costs, improved delivery, ease of use, and reduced customer support
                          infrastructure. Further, corporate contracts will likely improve spare parts
                          shortages by locating a long-term source of spare parts with improved
                          delivery, and this improved delivery will increase supply availability, which
                          contributes to readiness. As of the beginning of fiscal year 2002, there were
                          nearly 100 suppliers that had entered into corporate contracts with DLA.



Prime Vendor Initiative   The Prime Vendor initiative is another DLA supply support vehicle that
                          uses single commercial distributors to supply customers through long-term
                          contracting in a particular region. Prime Vendor’s long-term contracts allow
                          military customers to requisition market-ready or commercial products
                          directly from a commercial distributor as the items are needed. The DLA
                          supply centers negotiate the long-term contracts with the vendors, and the
                          customers can order the items directly from the supplier via an electronic
                          catalog. According to this initiative, with Prime Vendor, the customer
                          receives an order confirmation within minutes; and the delivery is to occur
                          within 24 to 48 hours.

                          According to DLA, because the military customers can direct-order items
                          when they need them directly from the vendor and receive them within
                          48 hours, spare parts shortages will improve, supply availability will
                          increase and readiness may be improved. Another benefit is the reduced
                          inventory management costs to DLA because there will be no need for DLA
                          to maintain items long-term in its warehouses if the customers are ordering
                          items directly from the manufacturer when they are needed. Virtual Prime
                          Vendor is the advancement of the Prime Vendor concept and is designed to
                          anticipate customer needs and provide items or services as they are
                          needed. Virtual Prime Vendor includes additional logistics support and
                          other services such as forecasting requirements, inventory management,
                          engineering support, technical services, and other services related to
                          customer satisfaction.




                          Page 37                                            GAO-03-709 Defense Inventory
                           Appendix IV
                           Description of DLA Initiatives Aimed at
                           Mitigating Spare Parts Shortages




Manufacturing on           The Manufacturing on Demand initiative seeks to improve spare parts
                           shortages by identifying manufacturers for parts that are no longer
Demand                     produced by the original source, yet are still critical components of weapon
                           systems, such as cast and forged parts and microcircuits. Such spare parts
                           often cannot be purchased from the original source because the
                           original manufacturer does not produce the part anymore or the
                           original manufacturer is no longer in business. Manufacturing on Demand
                           is the umbrella initiative for the Casting and Forging, the Generalized
                           Emulation of Microcircuits, and the Warstoppers initiatives. In addition,
                           it includes, in part, the Strategic Material Sourcing/Rapid Manufacturing
                           initiative, which is also under the Strategic Materiel Sourcing initiative and
                           is discussed there.



Casting and Forging        DLA’s Casting and Forging initiative seeks to improve spare parts shortages
Initiative                 by obtaining cast and forged spare parts that were difficult to find and
                           often no longer produced by the original manufacturer. Typically, foundries
                           and forging operations are known as “third tier” suppliers that do not
                           manufacture spare parts for a weapon system once it is out of production.
                           DLA coordinates with the American Metalcasting Consortium and the
                           Forging Defense Manufacturing Consortium to locate manufacturers that
                           will produce critically needed spare parts with materials and processes
                           that DLA and the consortiums deemed suitable. The American Metalcasting
                           Consortium alone involves 230 companies, 37 contractors, and 94 shops
                           that account for the production of 455 parts for 59 weapon systems. In sum,
                           as of January 2003, the casting and forging program was producing over
                           560 parts from 65 different weapon systems, according to DLA officials.



Generalized Emulation of   The Generalized Emulation of Microcircuits initiative was designed
Microcircuits Initiative   to identify a source of replacement microcircuits that are critical
                           components of older weapon systems still used by the services. The
                           original microcircuits on older weapon systems are now obsolete because
                           technology has advanced since their introduction, and the original
                           manufacturers do not produce the microcircuits anymore because the
                           commercial demand is not high enough to encourage them to incur
                           production costs. However, these microcircuits are still critically needed
                           on several weapon systems; therefore, DLA currently has a contract with
                           the Sarnoff Corporation to provide replacements for the microcircuits
                           that are no longer in production by imitating their original designs. This
                           initiative seeks to improve the supply of these critically needed spare



                           Page 38                                             GAO-03-709 Defense Inventory
                         Appendix IV
                         Description of DLA Initiatives Aimed at
                         Mitigating Spare Parts Shortages




                         parts through the development of a steady supply source, and high supply
                         availability could contribute to supply readiness. Other potential benefits
                         of emulated microcircuits include the elimination of redesign costs,
                         audited reliability testing/screening, indefinite supply availability, and
                         direct orders placed with the supplier. Additionally, the replacement supply
                         of microcircuits could provide another option for maintaining mission-
                         ready status for weapons systems such as MLRS, Patriot, AV-8B, B-2, and
                         the B-52. As of May 2003, this initiative has emulated over 300 designs from
                         the government-owned library and has supplied over 45,000 microcircuit
                         devices to customers, which include DLA, Hanscom Air Force Base, Naval
                         Surface Warfare, Warner Robins Air Force Base, and the National
                         Aeronautics and Space Administration.



Warstoppers Initiative   The Warstoppers initiative seeks to impact the shortage of spare parts by
                         identifying (1) critical, mission-essential items with long production
                         lead-times that are low-demand items during peacetime but experience
                         high demand during periods of war and (2) vendors that will be able to
                         meet the wartime surge and sustain wartime requirements for those items.
                         An integral part of this initiative is DLA’s industrial base evaluation tool
                         known as the World Wide Web Industrial Capabilities Assessment Program.
                         The program is DLA’s effort to collect current data directly from private
                         industry, via the Internet, on thousands of parts and then analyze that data
                         to identify actual or potential part availability problems when there is a
                         surge in demand for those parts in wartime. The program also emphasizes
                         investment in technology resources and the pre-positioning of raw
                         materials so that items can be produced as needed during wartime with
                         reduced lead-times, rather than procuring items and storing them as war
                         reserves. According to this initiative, it is more cost effective to invest in
                         the industrial base that will produce critical items than to store quantities
                         of those same items as war reserve inventory until they are needed.

                         In July 2002, we reported1 that the World Wide Web Industrial Capabilities
                         Assessment Program “has several attributes reflecting sound management
                         practices that are required for reliable industrial base capability
                         assessments.” According to DLA, benefits of Warstoppers include reduced
                         lead-times, reduced prices, and reduced wartime inventory costs.


                         1
                           U.S. General Accounting Office, Defense Inventory: Improved Industrial Base
                         Assessments for Army War Reserve Spares Could Save Money, GAO-02-650
                         (Washington, D.C., July 12, 2002).




                         Page 39                                                   GAO-03-709 Defense Inventory
                          Appendix IV
                          Description of DLA Initiatives Aimed at
                          Mitigating Spare Parts Shortages




                          Examples of acquisitions for weapon system spare parts that benefited
                          from the Warstoppers program include DC motors for the H-2, H-60, AH-1,
                          and UH-1 helicopters; hydraulic tubes for the F-15 fighter; and the clip-on
                          nut used on several weapon system engines.



Organic Manufacturing     Organic Manufacturing refers to the production of items by government-
                          owned and -operated facilities because the private sector cannot meet the
Initiative                need for those parts. Government facilities that produce these parts
                          include arsenals, military repair depots, and other DOD–operated factories.
                          These facilities produce the hard to find items when no offer is received to
                          produce them, there is no source, the part is an Emergency Supply
                          Operations Center Requirement, the private sector price is unacceptable,
                          or the private sector delivery time frame is unacceptable. Organic
                          manufacturing improves spare part shortages by producing items for 34
                          Level–A (most critical) weapon systems including multiple weapon
                          systems at 35 organic manufacturing sources.



Improved Supply           DLA uses supply availability as a measure of supply effectiveness. DLA’s
                          goal is to maintain an aggregate 85 percent, or greater, supply availability
Availability Initiative   for weapon systems parts for each of the military services for each fiscal
                          year. By increasing supply availability, backorders for spare parts are
                          reduced, and the readiness of weapon systems could increase because the
                          critical spare parts essential to mission performance would be available at
                          a higher rate.

                          The 85-percent supply availability initiative supports DLA Strategic
                          Plan Goal 1—to provide responsive, best value supplies and services
                          consistently to its customers. According to DLA officials, the 85-percent
                          target availability rate is based on the statistical rule that 85 percent of the
                          population lies within one standard deviation of the mean. Further, DLA
                          officials maintain that 85 percent is an acceptable supply availability goal
                          because it is cost-effective, and supplying items at rates above 85 percent
                          would be cost prohibitive. However, as discussed earlier in this report, the
                          85-percent availability rate is an aggregate rate, meaning that DLA’s items
                          are to be available 85 percent of the time on average. The 85-percent
                          measure does not specifically relate to each individual item that DLA
                          manages. Rather, it is an average measure of the supply availability of each
                          item, which means that some items are available at rates greater than




                          Page 40                                              GAO-03-709 Defense Inventory
                         Appendix IV
                         Description of DLA Initiatives Aimed at
                         Mitigating Spare Parts Shortages




                         85 percent of the time, and other items are available at rates well below
                         85 percent.



Backorder Reduction      Backorder reductions support DLA’s Strategic Plan Goal 1; and the
                         backorder reduction initiative supports the DLA strategy to focus, manage,
Initiative               and measure logistics support by customer segment, based on customer
                         requirements. Through the initiative, DLA plans to reduce hardware
                         backorders to 250,000 by the end of fiscal year 2007. A benefit to
                         backorder reductions in addition to contributing to readiness, according
                         to a DLA official, is the reduction of cannibalization, where parts are taken
                         from one system and used on another. DLA officials also stated that
                         backorders are filled on average in 80 days and about one-third are filled
                         within 30 days. DLA reported in the spring of 2003 that backorders had
                         been reduced from a high of approximately 525,000 in May 2000 to a little
                         over 314,000 in September 2002. This means that more items are available
                         to DLA customers.



Customer Relationship    The Customer Relationship Management program is an initiative
                         designed to foster a better relationship between DLA and the services
Management and           by incorporating input from the services. The customer relationship
Service Level            management element of DLA’s business practices is designed to use
                         information obtained to provide customer service and anticipate the
Agreements Initiatives   individual needs of each customer. The focus of the initiative is on
                         collaborative demand planning between DLA and the customer to
                         determine how much of a particular part is needed for wartime activities
                         as opposed to peacetime activities. Through its processes and system that
                         emphasizes customer satisfaction, the Customer Relationship Management
                         initiative supports the DLA plan to (1) provide responsive, best value
                         supplies and services; (2) focus, manage, and measure logistics support;
                         and (3) improve customer support.

                         The Service Level Agreements initiative is an integral component of the
                         Customer Relationship Management initiative. Service level agreements
                         are formally negotiated between DLA and its customers and set priorities
                         to meet customer needs, performance measures, and targets. The initiative
                         seeks to establish a set of common expectations between DLA and its
                         customers and to encourage collaboration. This collaboration seeks to
                         improve customer satisfaction, which is an objective DLA is targeting at
                         90 percent by the end of fiscal year 2007. The application of service level



                         Page 41                                            GAO-03-709 Defense Inventory
Appendix IV
Description of DLA Initiatives Aimed at
Mitigating Spare Parts Shortages




agreements also seeks to support DLA’s plan to (1) provide responsive, best
value supplies and services consistently to its customers and (2) negotiate
and honor performance agreements with its customers. Each service level
agreement typically is composed of a scope/objective, detail of service to
be provided, and the performance measurement standards to be met.
According to DOD this initiative addresses the readiness based sparing
concept by using service level agreements to provide tailored support
levels for weapon systems parts.

Service Level Agreements have a limited scope and are considered a work
in progress. According to a DLA official, DLA is negotiating with the Air
Force Materiel Command to develop a service level agreement, and other
agreements are planned with NADEP and NAVAIR. In total, DLA plans to
execute 11 agreements by the end of fiscal year 2003. The Service Level
Agreement initiative is likely to improve spare parts shortages by its
existence as a contracting instrument of the CRM program that is a product
of encouraged communication between the customers and DLA to
anticipate customer demand.

Other Customer Relationship Management initiatives involve

• identifying the appropriate customers to receive service level agreement
  offers,

• establishing a process to approach and train customers,

• designing the future DLA organization focusing on customer
  interactions,

• establishing key performance indicators consistent with BSC,

• developing the right customer communication plan, and

• determining the customers to contact personally.




Page 42                                           GAO-03-709 Defense Inventory
                      Appendix IV
                      Description of DLA Initiatives Aimed at
                      Mitigating Spare Parts Shortages




National Inventory    According to DLA, the National Inventory Management Strategy initiative
                      seeks to achieve a DLA managed single National Inventory combining
Management Strategy   military service managed consumable inventories with DLA’s inventory.
Initiative            DLA anticipates that a national inventory will provide total asset visibility
                      to DOD-wide inventories and improve supply performance by eliminating
                      redundancy in all levels of inventory and information systems managed by
                      DLA and the services. DLA expects the National Inventory Management
                      Strategy to increase DLA efficiency in providing items to its customers
                      because it allows DLA to locate all of the parts that the services previously
                      managed. This total visibility will allow DLA to determine how many parts
                      are in the inventory, which parts have shortages, and where they are
                      needed. The faster DLA can locate a part, the faster it can supply that part
                      to the customer. Table 10 highlights some of the expected initiative benefits
                      to the services and to DLA.



                      Table 10: Expected Benefits of the National Inventory Management Strategy to the
                      Services and DLA

                      Benefits to the services                  Benefits to DLA
                      Higher levels of supply readiness         Supplier of choice
                      Tailored logistics support solutions      Core competencies
                      Optimized supply chain                    Better decisions
                      Focus on core competency                  Resource allocation
                      Better resource use
                      Source: DLA (data), GAO (presentation).


                      In addition, according to DLA, a uniform DLA-managed system will help
                      reduce wait time for items because supplies will be regionally located
                      according to regional usage and customer input. Reducing customer wait
                      time should increase the availability of many spare parts, and the increase
                      in parts availability will contribute to the supply readiness of the military
                      services. The National Inventory Management Strategy initiative also
                      incorporates milestones for completion, and performance metrics will be
                      jointly established by DLA and the services. According to a DLA official,
                      the initiative’s metrics include (1) supply chain availability, (2) item
                      transfer, (3) customer relations, and (4) resource management. The
                      initiative supports DLA’s Strategic Plan to structure internal processes to
                      deliver customer outcomes effectively and efficiently, reduce redundant




                      Page 43                                                 GAO-03-709 Defense Inventory
                         Appendix IV
                         Description of DLA Initiatives Aimed at
                         Mitigating Spare Parts Shortages




                         DOD inventory and improve responsiveness, and improve supply
                         chain effectiveness.

                         DLA has over a hundred potential sites to include in the National Inventory
                         Management Strategy initiative; and current pilot sites using the initiative,
                         according to a DLA official, include the Defense Depot Yokosuka, Japan,
                         where DLA has assumed control of managing 11,000 items previously
                         owned by the Navy; Naval Air Station Lemoore, California, where DLA has
                         improved supply support; and Naval Air Italy. Additional pilot program
                         sites, according to a DLA official, will include Fort Carson, Colorado; Camp
                         Lejeune, North Carolina; Tinker Air Force Base, Oklahoma; and Ingleside
                         Navy Base, Texas. The National Inventory Management Strategy is being
                         developed in four phases. As of April 2003, this initiative was in its testing
                         period (Phase III) with the DOD-wide implementation process scheduled
                         from fiscal years 2004 into 2009.



Inventory Accuracy       The Inventory Accuracy Improvement initiative is designed to improve
                         inventory record accuracy by using independent contractors to perform
Improvement Initiative   sample inventories for over 4 million DLA-managed items. This initiative
                         seeks to support DLA’s plan to structure internal processes to deliver
                         customer outcomes effectively and efficiently and improve processes. Also,
                         DLA plans to improve inventory accuracy for high-dollar, general supplies
                         to at least 99 percent by the end of fiscal year 2007, and it plans to achieve a
                         95-percent accuracy level for all other items by the end of fiscal year 2007
                         as well. Improved inventory accuracy will likely improve spare parts
                         shortages by giving inventory managers better supply information about
                         items that are critically needed for systems that affect readiness. This
                         information can factor into the decision to purchase more of those critical
                         spare parts to increase their supply availability, which in turn can
                         contribute to supply readiness of the services. DLA developed the
                         inventory improvement accuracy initiative based on a GAO report released
                         in June 1999.2




                         2
                           U.S. General Accounting Office, Financial Management: Better Controls Essential
                         to Improve the Reliability of DOD’s Depot Inventory Records, GAO/AIMD-99-132
                         (Washington, D.C., June 28, 1999).




                         Page 44                                                   GAO-03-709 Defense Inventory
                       Appendix IV
                       Description of DLA Initiatives Aimed at
                       Mitigating Spare Parts Shortages




Product Conformance,   DLA expects that the Product Conformance initiative is designed to
                       improve aviation spare parts shortages by conducting monthly quality
Aviation               assurance testing to baseline aviation products and identifying where
                       improvements are necessary to meet performance goals for items that the
                       services have identified as critical. According to a DLA official, the Product
                       Conformance initiative has four metrics: (1) identification of critical items
                       by the services, (2) the impact the critical items will have on readiness,
                       (3) identification by the services of procurement sources to procure those
                       items, and (4) the cost of the items. DLA’s aim is to achieve 97-percent
                       production conformance for critical aviation material on hand by the end of
                       fiscal year 2005 and 99 percent conformance by the end of fiscal year 2007.
                       Also, DLA explains that Product Conformance supports DLA’s plan to
                       (1) structure internal processes to deliver customer outcomes effectively
                       and efficiently, (2) improve processes, and (3) leverage industry.




                       Page 45                                             GAO-03-709 Defense Inventory
Appendix V

Description of DLA Initiatives Aimed at
Improving Logistics Systems and Processes                                                          Append
                                                                                                        x
                                                                                                        i
                                                                                                        V




                   DLA identified six strategic initiatives in varying stages of implementation
                   in its Strategic Management system that seek to modernize and improve
                   DLA’s logistics processes and systems and better serve its customers. DLA
                   believes that doing so will indirectly improve spare parts availability and
                   supply readiness. The six include the Business Systems Modernization,
                   Distribution Planning and Management System, Strategic Distribution,
                   Logistics Response Time Reduction, Direct Vendor Delivery Processing
                   time, and Overall Purchase Request Processing Time Improvement
                   initiatives.



Business Systems   Business Systems Modernization is an approximately $850-million
                   initiative that seeks to transform how DLA conducts its logistics
Modernization      operations. The transition initiative includes the eventual replacement
Initiative         of DLA’s older logistics materiel management systems, or legacy systems,
                   with commercial off-the-shelf software by January 2006. The Standard
                   Automated Materiel Management System and the DLA Integrated
                   Subsistence Management System are the legacy logistics systems
                   that DLA has used to manage its inventory for over 30 years. Other
                   initiative objectives that DLA seeks to achieve by the end of 2005 are
                   reengineering by fielding best practices, improved customer service
                   through collaboration with customers and suppliers, and providing
                   best value solutions.

                   DLA explains that according to this initiative, commercial off-the-shelf
                   software will replace the legacy systems as a single, integrated system.
                   All order fulfillment, planning, and financial management activities will
                   be supported by the new software that impacts DLA’s financial, material
                   management, and sales and distribution logistics operations. DOD
                   approved the initiative on December 21, 1999, and DLA began a concept
                   demonstration test phase, also referred to as “Release 1,” of the new
                   initiative software on July 31, 2002. DLA transferred about 170,000 items
                   for the initial test phase from its legacy systems among its three inventory
                   supply centers at Columbus, Ohio; Philadelphia, Pennsylvania; and
                   Richmond, Virginia. About 2.5 million customer orders have been made
                   using the new BSM technology involving around $500 million in sales. A
                   follow-on test phase, or “Release 2,” of the initiative is scheduled to begin in
                   July 2004, and it will include 50 percent of the remaining items that DLA
                   manages. As of April 2003, initiative implementation across DLA was
                   targeted for January 2006.




                   Page 46                                              GAO-03-709 Defense Inventory
                         Appendix V
                         Description of DLA Initiatives Aimed at
                         Improving Logistics Systems and Processes




Distribution Planning    The Distribution Planning and Management System initiative seeks to
                         improve DLA business processes by enhancing existing systems with new
and Management           commercial best practices that include re-engineered logistics processes
System Initiative        and industry-based integrated supply chain solutions. Electronic logistics
                         data will provide real-time information about orders, including asset
                         visibility of requisitioned spare parts, as they are in-transit to the customer.
                         The initiative supports DLA’s plan to structure internal processes to
                         (1) deliver customer outcomes effectively and efficiently, (2) design and
                         implement a best value enterprise information technology environment,
                         and (3) improve distribution responsiveness and reduce costs. By
                         improving the supply process by which spare parts are provided to
                         customers, as well as reducing wait time, the Distribution Planning and
                         Management System initiative could contribute to the improvement of
                         spare parts shortages and potentially the readiness of the military services.
                         The initiative seeks to meet assigned objectives for weapon systems
                         readiness support. According to DLA, additional benefits include cost
                         reductions for transportation and overall distribution; greater use of DOD
                         negotiated rates, more consolidated shipments, and increased productivity
                         of distribution and transportation operations. Additionally, DLA projects
                         that the completion of the initiative will result in net projected savings to
                         the agency of $63 million by the end of fiscal year 2007.



Strategic Distribution   The Strategic Distribution initiative is intended to reduce transportation
                         costs by identifying international locations that can be used as strategic
Initiative               distribution points. Because critically needed items at the distribution
                         points are located closer to the customer, customer wait time is reduced.
                         A reduction in customer wait time could improve spare parts shortages by
                         providing items to the customer faster than if the items had to be delivered
                         from more distant distribution points. An additional benefit could be
                         reduced shipping costs because strategic distribution emphasizes the use
                         of other shipping methods, such as dedicated trucks for deliveries within
                         the United States and surface transports for overseas shipping, to replace
                         air transport, which has a higher material shipping cost. According to DLA
                         officials, Strategic Distribution has been used for 2 years in three locations:
                         Germansheim, Yokosuka, and Pearl Harbor.




                         Page 47                                              GAO-03-709 Defense Inventory
                         Appendix V
                         Description of DLA Initiatives Aimed at
                         Improving Logistics Systems and Processes




Logistics Response       The Logistics Response Time Reduction initiative is a DLA effort to
                         improve supply chain performance by reducing the number of days that its
Time Reduction           customers must wait for subsistence, medical, pharmaceutical, clothing,
Initiative               and textile items, as well as repair parts. According to DLA officials, the
                         initiative complements the Business Systems Modernization initiative and
                         is an integral part of the DLA transition from older business practices and
                         logistics management. Also, the Logistics Response Time Reduction
                         initiative supports DLA’s strategic goal to improve average performance for
                         customer delivery by the end of fiscal year 2007. Table 11 demonstrates the
                         improvement in response time for categories of DLA-managed items.



                         Table 11: Response Time Improvement by Item Category

                         Item category                                     Response time improvement
                         Repair Parts                                                           15 days
                         Medical and Pharmaceutical                                             1.9 days
                         Subsistence                                                            2.5 days
                         Clothing and Textile                                                   21 days
                         Source: DLA.


                         The Logistics Response Time Reduction initiative also supports DLA’s
                         strategic plan to structure internal processes to deliver customer outcomes
                         effectively and efficiently and improve supply chain effectiveness.
                         According to DLA, by improving the response time of DLA’s system for
                         spare parts delivery, the availability of those parts will increase, which
                         could contribute to readiness.



Direct Vendor Delivery   Direct vendor delivery is the DLA arrangement with suppliers that allows
                         its customers to receive items from the suppliers directly, instead of DLA
Processing Time          receiving the items first and then distributing them to the customers.
Initiative               Although DLA does not take delivery of the items, it still monitors the
                         delivery performance of the suppliers, and it is also involved in the direct
                         vendor delivery planning and procurement processes. Customers may take
                         direct delivery from direct vendor delivery sales, but DLA obligates and
                         commits the funds to pay the supplier. The aim of the Direct Vendor
                         Delivery Processing Time initiative is to improve the average processing
                         time for the planned direct vendor delivery inventory control point/vendor
                         to 13 days by the end of fiscal year 2003, which matches the Uniform



                         Page 48                                            GAO-03-709 Defense Inventory
                     Appendix V
                     Description of DLA Initiatives Aimed at
                     Improving Logistics Systems and Processes




                     Materiel Movement Issue Priority System processing time. By improving
                     delivery time, customer wait time is reduced, and supply availability is
                     increased, which can positively affect readiness. The Direct Vendor
                     Delivery Processing Time initiative also supports DLA’s plan to structure
                     internal processes to deliver customer outcomes effectively and efficiently,
                     as well as leverage industry.



Overall Purchase     The Overall Purchase Request Processing Time Improvement initiative
                     is intended to improve purchase request processing time by reducing
Request Processing   inventory control point processing, as well as meeting lead-time processing
Time Improvement     requirements 75 percent of the time by the end of fiscal year 2007. Another
                     objective is to reduce the number of open purchase requests, according to
Initiative           a DLA official. This initiative seeks to improve spare parts shortages by
                     reducing customer wait time to receive critically needed items, thus
                     improving supply support. Also, this initiative could also improve unit
                     readiness by delivering critical parts as they are needed to operate systems
                     used by the military services. According to a DLA official, the metrics
                     developed for this process improvement include (1) monitoring the
                     number of open purchase requests and (2) monitoring the number of
                     purchase requests that exceeded the administrative lead-time processing
                     requirements. This initiative supports DLA’s plan to structure internal
                     processes to deliver customer outcomes effectively and efficiently as well
                     as improve processes.




                     Page 49                                           GAO-03-709 Defense Inventory
Appendix VI

GAO Contacts and Staff Acknowledgments                                                        Appendx
                                                                                                    iVI




GAO Contacts      Richard G. Payne (757) 552-8119
                  Dudley C. Roache, Jr. (757) 552-8117



Acknowledgments   In addition to those named above, M. Todd Dice, M. Jane Hunt, Latrealle
                  Lee, Charles W. Perdue, Barry L. Shillito, and John Wren also made
                  significant contributions to this report.




(350251)          Page 50                                          GAO-03-709 Defense Inventory
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