DOCUMENT RESUME 03583 - [A2513643) The Department of Defense Should Increase Efforts to Implement Vertical Controls over Military Stock Funds. LCD-77-437; B-159797. September 7, 1977. Released September 14, 1977. 42 pp. * enclosure (6 FFp-)- Report to Sen. John L. McClellan, Chairman, Senate Committee on Appropriations; by Elmer B. Staats, Comptroller General. Issue Area: Facilities and Material Management: Supply and daintenance Operations Reporting Systems (703). Conitact: logistics and Communications Div. Budget Function: National Defense: Department of Defense - Military (except procurement S contracts) (051), organization Concerned: Department of the Navy; Department of Defense; Department of the Army; Department of the Air Force. C.ongressional Relevance: Senate Committee on Appropriationz. The Senate Committee on Appropriations requested a followup revie f on actions taken by the Department of Defense (DOD) to implement centralized controls over Defense stcck funds. DOD has five stock funds which are all under the policy Guidance of the Secretary of Defense. Each military service operates a fund tc prov 4 de for its own needs. Findings/Ccnclusiuns: The Air Force and the Navy have implemented vertical controls over important segments of their stock funds. Vertical controls have not been extended to all Air Force and Navy stock fund items primarily because DOD has not adequately coordinated service implementation of vertical management. The Army has nct implemented vertical controls over any part of its stock fund which operates on a decentralized basis. Army inventory managers did not control their stocks as efficiently as their Air Force and Navy counterparts. The Air Force and Navy implementation demonstrated that the concept is feasible and effective, that it provides better supply responsiveness to stock fund customers, and teat it makes more efficient use of stock fund assets. The delay in implementing vertical stock funds resulted in larger stock fund capital needs. Reccmmendations: The Secretary of Defense should: develop an overall Flan for improving logistics management and stock funding; establish a system to assure that ongoing or contemplated efforts by the military services and the Defense Logistics Agency are assessed fcr conformance with the coordinated long range plan; and assure strong Monitoring of the Defense Logistics Agency's assignment to develop the standardized computer systems model and timely implementation of the Retail Inventory Management Stockage Policy in order to facilitate interservice vertical management. (Author/SW) ")"` REPORT TO THE COMMITTEE" ON APPROPRIA TIONS co UNITED STATES SENATE Co -n - BY TIlE COMPTROLLER GENERAL OF THE UNITED STATES IE£TRICTED - Not to be released out.de the Gene'.al Aeccounting Offlet oxcept on the basJ of specific approval by the POffice of C.ongreonal Relatln.o* - The Department Of Defense Should Increase Efforts To Implement Vertical Controls Over Military Stock Funds While the Department of Defense has made some progress in implementing centralized or vertical contro!s over military stock funds, the Department's efforts to coordinate implemen- tation of vertical controls within and among the services have not been adequate. Therefore, improvements in stock fund opera- tions which would result from the implemen- tation of vertical management are being de- layed. LCD-77-437 SEPTEMBER 7, 1977 COMPTROLLER GENERAL OF THE UNITED STATES ! '.:,/r1/ WASHINGTON, D.C. 20o41 B-159797 The Honorable John McClellan Chairman, Committee on Appropriations United States Senate Dear Mr. Chairman: Our followup review of Department of Defense efforts to implement vertical controls over military stock funds was made in response to your June 17, 1976, request. You also asked that we determine: 1. The exact status of the Department of Defense efforts to implement vertical stock fund organization. (See pp. 10 to 19.) 2. The reasons why the military services have not pro- ceeded more quickly in implementing vertical stock funds. (See pp. 32 to 40.) 3. The 4mpact that the failure to implement vertical controls has had on stock fund capital. (See pp. 22 to 27.) At the direction of the Committee, we dif not solicit written comments from the Department of Defense. However, we have considered its informal comments, where appropriate, in preparing the report. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribu- tion of this report until 7 days from the date of the report. At that time we will send copies to the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Direc- tor of the Defense Logistics Agency; and the Director, Office of Management and Budget. We will also provide copies to the House Committee on Government Operations, the Senate Committee on Governmental Affairs, the House Committee on Appropriations, and to the House and Senate Committees on Armed Services and make copies available to otiers upon request. Sincerely yours, Comptroller General of the United States TROLLER GENERAL'S THE DEPARTMENT OF DEFENSE RT TO THE SENATE SHOULD INCREASE EFFORTS TO ITTEE ON APPROPRIATIONS IMPLEMENT VERTICAL CONTFOLS OVER MILITARY STOCK FUNDS DIGEST The Chairman, Senate Committee on Appropria- tions, asked GAO to perform a followup review on actions taken by the Department of Defense to implement centralized controls over Defense stock funds. In his request, the Chairman referred to a 1974 report in which GAO recom- mended that the Secretary of Defense require all military services to use vertical stock funds. Under the vertical stock fund organization, inventory managers control and are respon- sible for the efficient management of all stock fund material without regard to its location. This includes stock fund material stored at depots in the United States, over- seas, and on board ships. Two elements im- portant to the vertical stock fund concept are (1) inventory managers must have visi- bility over all stock fund material under their control--that is, know how much is on hand and where it is located and (2) inven- tory managers must own stock fund material and have the authority to order t'.e move- ment from one storage location to another. GAO found that uvome progress has been made in implementing vertical stock funds. Both the Air Force and the Navy have implemented vertical controls over important segments of their stock funds. (See p. 10.) However, vertical controls have not been extended to all Air Force and Navy stock fund items. This is primarily because Defense has not adequately coordinated service implementation of vertical manage- ment. For example, Defense has not re- plied to the military proposals for extend- ing vertical management controls submitted in February and March 1975. (See p. 40.) Tear d'eit- Upon removal, the reporti LCD-77-437 cover a should be noted hereon. LCD-77-437 Army opposition to giving inventory managers ownership of installation-level stocks has further delayed the extension of vertical stock fund controls. The Army has not imple- mented vertical controls over any part of its stock fund operation. Its stock fund operates on a decentralized basis, and GAO found that Army inventory managers did not control their stocks as efficiently as their Air Force and Navy counterparts. (See p. 20.) GAO believes that the Air Force and Navy applications of vertical stock fund manage- ment have demonstrated that the concept is feasible and effective, that it provides better supply responsiveness to stock fund customers, and that it makes more efficient use of stock fund assets. GAO concluded that the management of the Army stock fund would likewise benefit if the Army applied vertical controls. (See p. 36.) The delay in implementing vertical stock funds results in larger stock fund capital needs. GAO found, for example, that the slower requisition processing times for the Army in Europe adds approximately $9 million to the theater's inventory requirements. (See p. 24.) Finally, GAO found that before vertical controls can be implemented over Defense Logistics Agency stock fund material, Defense must coordinate the efforts of the military services so that any new changes in stock fund organization or automated equipment are compatible with Defense's vertical management concepts. (See p. 41.) The Secretary of Defense should: -- Develop an overall plan for improving logistics management and stock funding. -- Establish a system to assure that any on- going or contemplated efforts by the mili- tary services and the Defense Logistics Agency are assessed for conformance with the coordinated long-range plan. ii -- Assure strong monitoring of the Defense Logistics Agency's assignment to develop the standardized computer systems model and timely implementation of the Retail Inventory Management Stockage Policy in order to facilitate interservice vertical management. At the direction of the Committee staff, GAO did not solicit formal Defense comments. However, the Department's informal comments have been considered, where appropriate, in preparing this report. Uar ,heet iii Con tents Page DIGEST i CHAPTER 1 INTRODUCTION What is a stock fund? 1 Scope of this review I 2 2 WHY VERTICAL STOCK FUNDS? 4 Prerequisites to implementing vertical management 8 3 VERTICAL MAN1GEMENT IN THE AIR FORCE, NAVY, AND DEFENSE LOGISTICS AGENCY STOCK FUNDS 10 The Air Force stock fund 10 The Navy stock fund 15 DLA stock fund 17 Conclusions 19 4 ARMY'S STOCK FUND MANAGEMENT COULD BE IMPROVED 20 Army organization for supply and finan- cial management 21 Army's horizontal system requires larger inventories 22 Less excess stock accumulates for ver- tically managed Air Force items 25 Vertical management increases inventory control and flexibility 26 Army does not have asset visibility and control over stock fund inventory 30 Why hasn't the Army implemented vertical stock funds? 32 Conclusions 36 5 DOD SHOULD INCREASE ITS EFFORTS TO IMPLEMENT VERTICAL MANAGEMENT ue STOCK FUNDS 37 DOD Logistics Systems Policy Committee 37 Other DOD positions on vertical manage- ment of stock funds 38 Current DOD efforts in guiding vertical management 41 Conclusions 41 Recommendations 41 APPENDIX I Air Force stock fund--number of line items and wholesale source of supply 43 II Comparison of supply functions performed at various levels in Europe v 44 III Army stock funds--levels and purposes of material stockage 45 IV Other GAO reports related to the matters discussed in this report 46 V Principal officials responsible for activi- ties discussed in this report 47 ABBREVIATIONS ADP Automatic Data Processing ASO Aviation Supply Office DLA Defense Logistics Agency DOD Department of Defense DSU Direct Supply Unit GAO General Accounting Office GSA General Services Administration ICP Inventory Control Point LOGPLAN Logistics Systems Plan O & M Operations and Maintenance OSD Office of the Secretary of Defense SIMS Selected Item Management System SPCC Ships Parts Control Center TIR Transaction Item Reporting USAREUR U.S. Army, Europe CHAPTER 1 INTRODUCTION In June 1976 the Senate Committee on Appropriations asked the General Accounting Office to make a followup review on actions taken by the Department of Defense (DOD) to imple- ment vertical controls over military stock fund material. Ii making this request, the Chairman referred to a recommendation. made in ; 19'4 GAO report "Department of Defense Stock Funds-- Accomplishmn-its, Problems, and Ways to Improve" (B-159'97, April 2, 19'4). In this report, GAO recommended that the Secretary cr Defense require all military services -v use vertical ,tock funds. We were asked to follow up on this recommendation and to determine: 1. The exact status of DOD's efforts to implement vertical stock fund organization. 2. The reasons why the military services have not proceeded more quickly in implementing our recommendations. 3. The impact on stock fund capital of the failures to implement our recommendation. WHAT IS A STOCK FUND? A stock fund s a system of financing the purchase of material and holding it for sale to users. Stock fund material generally consists of low-value, expense-type items, and the stock fund's customers are for the most part military units. Proceeds from. sales to customers are used to purchase addi- tional inventory for future sales. DOD has five stock funds which are all under the policy guidance of the Secretary of Defense. Each military service operates a fund to provide for its own needs. The Defense Logistics Agency (DLA) stock fund buys common-type items to sell to the services. Each stock fund is responsible for its own supply and financial management, although overall control is retained by the Secretary of Defense. The following chart shows the relative sizes of the serv- ice sLock funds in fiscal year 1976. 1 FY 76 ($ MILLIONS) DOD STOCK FUNDS ($12,056.9) MARINE $242.2 t?%) LOGISTICS \ $2,559.1 AGENCY tSecret21%ary C4,287.0 (36%) / REVIEW ~ OF NSCOPE d A VaMnd i FORCE (16%) $3.034427 SCOPE OF REVIEW Our fieldwork was conducted between September 1976 and May 1977. It included an analysis of pertinent records and discussions with officials at the respective stock fund head- quarters. Department of Defense: Office of the Assistant Secretary of Defense (Manpower, Reserve Affairs and Logistics) Office of the Assistant Secretary of Defense (Comptroller) Defense Logistics Agency, Washington, D.C. Defense Fuel Supply Center, Washington, D.C. Defense General Supply Center, Richmond, Virginia Army: Headquarters, U.S. Army, Washington, D.C. U.S. Army Materiel Development and Readiness Command, Alexandria, Virginia 2 U.S. Army Aviation Systems Command, St. Louis, Missouri U.S. Army Tank-Automotive Materiel Readiness Command, Warren, Michigan U.S. Army Headquarters, Europe U.S. Army 8th Infantry Division, Germai.n Navy: Naval. Supply Systemc Command, Washington, D.C. Ships Parts Control Center, Mechanicsburg, Pennsylvania Air Force: Headquarters, U.S. Air Force, Washington, D.C. Headquarters, Air Force Logistics Command, Wright-Patterson Air Force Base, Ohio Warner-Robins Air Logistics Center, Warner-Robins Air Force Base, Georgia U.S. Air Force Headquarters, Europe Zweibruccen Air Base, Germany 3 CHAPTER 2 WHY VERTICAL STOCK FUNDS? In a report dated August 2, 1974, we recommended that the Secretary of Defense require the military services to use the vertical stock fund concept. We told the Secretary of Defense that the vertical organization of stock funds of- fered certain advantages, including more efficient use of inventory investment dollars and better service for stock fund customers. Under the vertical organization, the stock fund inven- tory managers control, and are responsible for the efficient management of, all stock fund material. This includes not only material stored at the national depots but also material at base supply offices overseas, at installatio- depots, and on board ships. Key elements of vertical supply management are: 1. The inventory managers have visibility over all material under their control; i.e., they know how much is on hand and where it is located. For large accounts, such as major depots, this visibility is provided by high-speed computers which interface with computers at the inventory control point. For smaller accounts, periodic reports to the inven- tory manager provide asset visibility. 2. The inventory managers "own" the material under their control and have the authority to order stocks moved from one storage location to another. One aspect of ownership is called "vertical stock funding" because material is paid for and "funded" by the wholesale stock fund until it is delivered to the customer. Another aspect is called "vertical stock management," in which the wholesale inventory manager has the authority to control stocks at the intermediate level as well as at the wholesale level. An example of a vertically controlled stock fund is the Navy's Ship's Parts Control Center fund under which the in- ventory managers have visibility over stocks stored at 64 shore-based activities in the United States and overseas and on 34 ships. 4 Vertical funds are not confined to service lines. The Defense Logistics Agency will have a major role in managing DLA procured and managed stocks in military service ware- houses. Under the vertical model envisioned by the Secretary of Defense, the service retail-level stock funds will req- uisition DLA-managed material directly from the inventory managers. The inventory managers will (1) ship DLA-managed material directly to the service retail stock funds and (2) will continue to own and have visibility over this stock until it is sold to stock fund customers. As noted later in this chapter, a prerequisite for the inventory manager's visibility is a standardized computer system for DOD-wide logistics management. For example, at present, the Defense Fuel Supply Center buys, owns, and manages bulk petroleum for all military *.ervices in overseas areas and in the future will expand this responsibility to include visibility and ownership of bulk petroleum in U.S. military storage tanks all over the world. Because vertical inventory managers own the stocks they are responsible for and because they have visibility over these stocks, the vertical system offers major advantages. Among these are: 1. Administrative costs of operating the stock are less. Under the vertical system the stock fund buys material from commercial sources and sells to military users--one buy transaction, one sell trans- action. By contrast, the horizontal system requires two or more buy and sell transactions before stock is delivered to users. 2. Investment in stock fund material can be reduced. Reducing administrative requirements also reduces the time required to process requisitions. Because users can obtain material faster, they do not have to stock as much. 3. Material readiness is higher. The inventory manager's better visibility enables him to resolve "not opera- tional due to lack of spare parts" conditions faster by ordering lateral transfers between commands. La- teral transfers can frequently be made faster than shipments from wholesale depots. A second type of organization used by DOD stock funds is called a horizontal system. By contrast, it is a decen- tralized system under which separate installation-level stock funds, or retail stock funds, operate independent of 5 C~~~~~~~~~~~~~~UC z le ~~~~~0 I-I -Jc~~~~~ ~J LU - ', " I\clrr f-~~~~! 1'" r t~~~~~~ '" vo. Lu I-'~ ~ l; ', V- 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 LU, -, ' -i uj~~~~~~n l~ L 31: ~~~~~~~i4 ~ ~ ~ ~ ~ ~ ~ ~ I-L u w~~~~~~~~~~~~ I CZa:( I~ ~~~~~~~~~~~u I ac 6 yP zw~~~w kA O WI C~C~W LU 0 LJ de W. :L I-l No~~~~ U.. J A the central inventory manager. Unlike the vertical stock fund, inventory managers under the horizontal system have visibility over and own only these stocks located at the national level. This is shown on page 6. Since the retail stock fund under the horizontal system is a separate entity, it must "buy" material from the whole- sale stock fund and then resell the material to its primary customers, the using units. Vertical stock funds on the other hand sell material directly to the using units as shown on page 7. PREREQUISITES TO IMPLEMENTING VERTICAL MANAGEMENT Two major prerequisites must be met before vertical sup- ply management and stock funding can be implemented, especially on an interservice basis. Each service must have compatible automated systems at the wholesale and intermediate levels to provide wholesale-level inventory managers with visibility over retail-level stocks. A model for such a system is now being developed under DLA's phase II bulk fuels program. Secondly, the Retail Inventory Management Stockage Policy study must be completed to provide a standard stockage policy (range and depth), which takes into account the services' operational environment and applies to inventory stockage points throughout DOD. The study will also establish policies to insure that item managers could not arbitrarily redistribute assets from the retail level. The objective of this policy is to avDid the Army's concern that wholesale inventory man- agers do not adequately consider the local commanders' require- ments before redistributing material. This problem is dis- cussed further on page 32. The cost of introducing a compatible computer system DOD- wide solely to implement a vertical management system would probably not be cost effective. An acceptable alternative, however, is to replace existing systems as they become ob- solete. Any such endeavor would require diligence on DOD's part in designing an acceptable system and soliciting accept- ance from the services. DOD would also have to police the implementation of such a system to insure that it is applied as intended. Applying the vertical concept to the Army stock fund From our examination of the problems in the operation of the Army stock fund, we have concluded that vertical 8 controls would improve the management of the Army s' ~ck fund. We also found support for this conclusion bi comparing the Armv's horizontal system with the Air Force and Navy vertical stock fund operations. Almost every indicator we examined showed that the Air Force and Navy vertical systems were superior. We recognize, however, that the implementation of a ver- tical system will not provide a cure for all Army stock fund problems. Army officials are attempting to improve the train- ing of supply personnel ard to implement a standardized com- puter system of the type both the Air Force and Navy use to manage stock fund assets. 9 CHAPTER 3 VERTICAL MANAGEMENT IN THE AIR FORCE, NAVY, AND DEFENSE LOGISTICS AGENCY STOCK FUNDS Both the Navy and the Air Force successfully operate vertically managed and vertically funded supply systems. Although these services have applied variations to the system, both have as part of their supply systems the follow- ing key elements: -- Air Force and Navy inventory managers have visibility over material under their control. -- Inventory managers own and have the authority to redistribute stocks. As described later in this chapter, both Air Force and Navy vertical systems are limited to those items for which those services have cataloging and procurement responsibility. They manage other items, such as DLA and General Services A]min- istration (GSA) items, under a horizontal system. The DLA stock fund, the largest of the military stock funds, sells most of its commodities under a horizontal sys- tem. However, two classes of material, bulk fuels and sub- sistence, are being converted to vertical controls. An au- tomated management system is currently being prepared by DLA which, when completed, will extend the control and visibility of DLA inventory managers from procurement to service base warehouses all over the world. THE AIR FORCE STOCK FUND The Systems Support Division of the Air Force has been vertically integrated since its inception in July 1968. This Division is the largest of seven Air Force stock fund divi- sions and its inventory consists primarily of wholesale-level, Air Force-managed stocks. The remaining six Air Force stock fund divisions are horizontally managed, and the inventories consist mainly of stocks requisitioned from the DLA stock fund or purchased directly from commercial suppliers. 10 Organization for supply and financial management As of June 30, 1976, the Air Force stock fund managed inventories valued at $2,559.1 million as shown below. Air Force Stock Fund as of June 30, 1976 Number of Divisions line items Inventory Sales (millions) Systems support 477,805 $1,873.5 $ 659.1 General support 915,887 288.3 1,011.9 Fuels 141 244.8 1,589.9 Medical/dental 15,000 26.5 80.2 Clothing 1,530 14.5 39.9 Commissary 4,200 108.6 1,317.1 Academy 14,000 2.9 6.2 Total $2,559.1 $4,704.3 The six horizontally managed divisions process requisi- tions directly to the inventory manager, which may be DLA, GSA, or another service, or may buy locally to replenish stocks. The wholesale-level source of supply for all the line items in the Air Force stock fund is shown in appendix I. Systems Support Division In the Systems Support Division, the wholesale-level inventory manager has knowledge and control over total system assets from the time of acquisition to the time of sale to a user. This capability enables the inventory manager to make worldwide requirements computations; to procure supplies; to position, redistribute, and dispose of assets; and to control excess. The Division provides responsive supply support through an automated, standardized, and centralized system combined with extensive use of communications and transpor- tation. The Systems Support Division, which manages weapon sys- tems related items, is a two-echelon system with direct re- quisitioning by bases from centralized inventory managers. Wholesale inventories are stored and managed by the Air Force Logistics Command through its five air logistics centers. The inventory managers, supply depots, and the 11 major overhaul facilities for the principal Air Force weapon systems are located at these centers. The Air Force has no overseas depots and supports Air Force units worldwide from these five continental U.S. depots. The units normally operate from stationary bases although mobility would be required during wartime when alternate base locations may be used. The Air Force uses a standard base supply system at all bases worldwide. Each base requisitions directly from the inventory manager, and material is shipped directly to base supply points where it is stored or sold to users. The standard base supply system, using UNIVAC 1050-II computers exclusively for supply operations, can update supply information on a near real time basis. This facili- tates movement of personnel between locations and minimizes orientation and training, permits centralized standard pro- graming, and enhances review of worldwide supply operations. The standardized computer systems are compatible with both wholesale and retail inventories and offer significant advantages: -- Excess reporting capability. Any assets which are excess to the bases' needs are reported quarterly by computer to the wholesaler. The Air Logistics Center may direct (1) redistribution to another Air Force base to satisfy a backorder, (2) return of the item to the wholesale level, (3) local disposition, or (4) retention of the material. During fiscal year 1976, assets totaling $22 million were returned to the wholesale level; $31 million were redistributed to other bases; and $13 million were disposed of at the bases. -- Automatic requisitioning capability. Daily, the com- puters at the bases recompute the balance of assets on hand and, if more items are required, requisition the items from the Air Logistics Center. -- Retail stratification data capability. The retail level provides the Air Logistics Center a report quarterly showing the dollar values of all assets, the requirements for war reserves and operating needs, and all stocks on hand in excess of war reserves and operating needs. 12 -- Special item reporting capability. After Septem- ber 30, 1977, the retail level will report weekly to the wholesale level on individual items that are in critical supply or have annual issue value exceeding $50,000. Systems Support Division has inventory visibility and control More than 92 percent of the financial value of the Division's inventory is located within the wholesale Air Logistics Center complex; the remaining inventory is posi- tioned at retail-level bases. Air Force officials believe that vertical management has enhanced both item and financial inventory controls by improving visibility at the wholesale level. Also, we found that improved item and dollar visibility enabled the inventory managers to consider all available assets in computing worldwide requirements. Systems Support Division sales and transfers The Air Force positions 92.5 percent of the inventory value ($1,732.2 million) at the wholesale level because the air logistics centers not only transfer items to the retail level but also make 65 percent of the total sales. The re- maining 35 percent of sales are made by the intermediate level at the bases, as illustrated in the chart on page 14. Cost savings associated with vertical management The Air Force considers the Systems Support Division a successful vertically managed stock fund. However, because the Division has been vertically organized from the beginning, Air Force officials could not provide us comparative cost savings associated with a vertically managed versus a hori- zontally managed stock fund. Chapter 4 provides illustrations of how vertical management enhanced supply performance by the Air Force in Europe. Problems in the financial management of the Systems SuppoLt Division The Office of Management and Budget has expressed con- cern over the Air Force financial management of the Systems 13 MAGNITUDE OF SALES AND TRANSFERS AIR FORCE STOCK FUND FISCAL YEAR i9;6 S IN MILLIONS WHOLESALE SALES TO OTHER - OTHER SALES SERVICES 550 I'- $ 512 COTO L\ T TRANSFERS TO OTHSECURITY SALES RETAIL ASES ASSISTANCE PROGRAMS \$ 250 S11S (17%) SALEATO 0 AD SALES TO DEPOT (AIRNAMAINTENANCE a,, SERVICE TOTAL $681 OTHER SALES RETAIL SALES TO AND Maintenance. (AIR NATIONAL GUARD) $14 ALES T \ SERVICE SALES TO O AND M $164 (72%) TOTAL $228 Note: "O and M" means operation and maintenance. 14 Support Division and thus far has aenied this Division relief from certain financial restrictions tame required of the other Air Force stock fund divisions. We did not review the accounting system of the Systems Support Division during this assignment. We plan, however, to perform such a review in the near future. THE NAVY STOCK FUND The Navy employs both vertical and horizontal material management systems in its secondary, or consumable, item management. Wholesale stocks are managed vertically by the Inventory Control Points (ICPs) and retail stocks are managed horizontally. Navy stock fund organization The Navy stock fund operation responsibility is exercised by the Naval Supply Systems Command. The two ICPs--the Avia- tion Supply Office (ASO) in Philadelphia, Pennsylvania, and Ships Parts Control Center (SPCC), in Mechanicsburg, Pennsylvania--manage all of their secondary items through vertical stock funds. Thus, they maintain visibility of these items at all stock points. ICP visibility over this material continues until it is issued to consumer activities. On the other hand, thp Navy stock fund's retail system is maraged on a horizontal basis. The retail system stocks .tems purchased from DLA, GSA, and other Pervic- stock funds. At the end of fiscal year 1976, Navy stock fund inventories totaled nearly $1.9 billion. Wholesale stock fund Inventory (millions) Ships Parts Control Center $ 517.9 Aviation Supply Office 876.7 1,394.6 Retail stock fund Fleet Material Supp-,rt Office 423.0 Naval Publications and Forms Office 13.9 Navy Resale Systems Office 60.1 497.0 $1,891.6 15 Most Navy stock fund material is located at the Naval Air Stations, Naval Supply CenterP, Naval Shipyards, and the ammunition depots and weapons stations. Navy stock fund operation ICPs maintain item visibility and inventory control of the wholesale assets through either daily transaction item reporting (TIR) from the stock points or through cyclic (monthly or quarterly) asset reports submitted by the stock points. The primary factors that determine which of these two reporting systems is used are: automatic data processing (ADP) hardware and software capacities, inventory value, value or frequency of demands, and adequacy of staffing. Generally as unit prices increase or the value of demand for a specific period increases so does the likelihood that the material will be managed in a vertical mode. For example, the Naval Air Station, Bermuda, ASO-managed inventory ($0.7 million) is managed by cyclic reporting while the Naval Air Station in Norfolk, Virginia, ASO-managed inventory ($145.5 million) is managed by TIR. TIRs reflect receipts, issues, and other transactions which affect stock balance. An ADP software constraint cur- rently prevents either ICP from receiving daily TIRs from more than 45 stock point "reporters." However, the Navy is expanding ADP storage capacity to accommodate up to 150 addi- tional activitles' repokting to each ICP. Currently 41 activities submit TIRs to ASO for aviation material, and 45 activities submit TIRs to SPCC for ship- related items. The ICPs compute wholesale system requirements for each item and then "push" replenishment material to these stock points based on forecast demand. Assets at all stock points are available to the ICPs to satisfy worldwide require- ments. Currently, 95 percent of the total value of Navy ICP- managed inventory is visible to the ICP on an item-by-item basis; TIR visibility is available on about 70 percent of the total Navy stock-funded inventory. Cyclic asset report- ing, which covers approximately 3 percent of the ICP-managed inventory, is performed by stock points holding stock fund material. As is the case with TIR material, the items re- ported to the ICPs are available for worldwide use but on a much more restricted basis and usually for only high- priority requirements or in unique operational or contingency situations. 16 Financial management As part of a separate effort, we have been assisting the Navy for about 2 years in documenting an acceptable accounting system. The Navy has not provided us with an acceptable system to date in either the wholesale or retail divisions. While in this assignment we found that the logistics aspects of the Navy's wholesale system functioned success- fully, we did not review the Navy's accounting system for stock funds. Major benefits of the Navy's vertical management systems The Navy stock fund's vertical management offers two major benefits. -- Excess stock reporting capability. Like the Air Force, the Navy system automatically identifies stock excess to a stock point's needs. As a gen- eral rule, the inventory manager will not redis- tribute excesses until a requirement occurs at another activity. During fiscal year 1976, inven- tory managers redistributed stocks valued at more .--- - thaw $56 million. -- Requisitioning capability. For most TIR units, ICPs push material to the stock points. Replenishment quantities are computed from demand histories avail-, able at the ICPs. Most non-TIR stock points pull1 material from the ICPs, but replenishment quantities are computed using the same criteria as the ICPs use to push material to TIR stock points. This requisi- tioning capability contributes to the Navy stock fund's low ordering and shipping times of 18 days in the continental United States and 38 days to overseas locations for routine requisitions. DLA STOCK FUND DLA operates the largest military stock fund. During fiscal year 1976 inventories amounted to $4.3 billion and sales amounted to $5.4 billion. DLA manages about 1.9 million line items, primarily low-dollar-value items. About 85 percent of DLA's items have a unit price of less than $25. 17 These items are managed through six Defense Logistics Centers which act as ICPs. The value of inventories controlled by each Center is shown below. Value (millions) Construction material $ 465.3 Electronics 561.1 Industrial supplies 451.9 Fuels 970.4 Personnel 1,427.4 General material 410.9 $4,287.0 DLA items are controlled by the Defense Logistics Centers. The Centers compute systemwide requirements, procure material, designate storage locations, process requisitions, designate the warehouse that ships items, bill customers, and declare excess material no longer needed. The Centers, therefore, perform the whole range of financial and quantitative func- tions needed to manage the items assigned to them. DLA has two automatvEd computer systems which integrate inventory management and depot distribution management. The Standatd Automated Materiel Management System controls such inventory management functions as determining requirements, procurement, distribution, financing, and cataloging. A second system, the Mechanization of Warehousing and Shipping Procedures, controls depot functions--receiving, shipping, and warehousing. Even though DLA has centralized financial and stock con- trol, most items are supplied to the military services through a horizontal system. DLA inventory managers own and have visibility over material from procurement to shipment to DLA warehouses. After material is shipped from DLA warehouses, however, inventory managers lose ownership and visibility. When DOD is successful in implementing interservice vertical controls, DLA inventory managers will --own DLA-managed items in military base warehouses, worldwide; -- have item or dollar value visibility over these stocks through the DOD-wide standard computer systems; and 18 --have the authority to redistribute within a service or between services. The military services' intermediate-level supply activities will, in turn, requisition DLA material directly from the inventory managers. We believe this will (1) reduce the number of accounting transactions involved in the current system under which DLA inventory managers sell to service inventory managers who, in turn, resell material to inter- mediate-level stock fund activities and (2) permit interser- vice redistribution of DLA excesses. Although vertical controls have been implemented over two DLA-managed classes of material--bulk petroleum and sub- sistence--many problems need to be resolved before vertical management can be extended to other items. The most impor- tant of these problems involve (1) establishing a stockage policy common to all services and (2) establishing a computer system with compatibility and the capacity to manage DLA items carried in service inventories. This responsibility belongs to the Department of Defense. Our observations on DOD's progress in resolving these problems are given in chapter 5. CONCLUSIONS We believe the Air Force and the Navy have successfully implemented vertical management over important segments of their stock funds. In both services we found that: 1. The inventory manager can perform the full range of inventory functions on a worldwide basis. 2. Responsive supply support is provided through an automated, standardized, and centralized system combined with extensive use of communications and transportation. 3. Computer systems at the wholesale and retail levels are standardized with associated compatibility. In order to maximize the benefits of vertical management, systems standardization is a prerequisite. Also, standardiza- tion can yield other benefits such as significant savings in the cost of training personnel to operate the system. 19 CHAPTER 4 ARMY STOCK FUND MANAGEMENT COULD BE IMPROVED The Army makes a strong distinction between vertical stock funds and vertical stock management, and it has not adopted vertical stock funding. Although the Army has made some efforts to apply elements of vertical stock management in its Selected Item Management Program, these generally have not been successful. We believe that using both ver- tical stock funding and vertical stock management would im- prove management of the Army stock fund. The Army's system for managing its stock fund assets is decentralized. Retail stock is excluded from the wholesale inventory manager's control; and assets at the direct sup- port units are not part of the stock fund and, thus, are also excluded from the wholesale inventory manager's con- trol. Because of their resulting limited visibility over retail stocks and because information provided to them is usually incomplete and outdated, wholesale inventory managers cannot effectively redistribute excess stocks nor order re- distribution of assets to meet high-priority requirements. The horizontal system of stock management also results in a longer time for requisition processing and, conse- quently, a large requisitioning objective and inventory in Europe. All of these factors combine to place Army wholesale inventory managers at a disadvantage in comparison to Navy and Air Force wholesale inventory managers who, in most cases, have either dollar or item visibility. The Army is taking steps to make certain improvements in the vertical management of intermediate-level stocks. For example, computer compatability is planned for selected items in the continental United States by 1978 and overseas by 1980. This system will provide item managers with im- proved visibility over the selected items at the retail level. The Army does not plan, however, to transfer ownership to the wholesale inventory manager. The primary reasons for opposing this aspect of vertical control are: 20 1. The Army prefers that the field commanders retain control over all intermediate-level assets, contend- ing that loss of this control would compromise field commanders' control over those supplies needed to perform their missions. 2. The Army wants DOD to provide evidence that vertical controls are cost beneficial. 3. The Army wants assurance that logistics responsive- ness will not be compromised. It is our opinion that inventory managers need owner- ship of all stock fund assets before they can effectively control them. Our evaluation of the Army's position is presented later in this chapter. ARMY-ORGANIZATION FOR-SUPPLY AND-FINANCIAL-iANAGEMENT The Army stock fund is divided into a who.esale and a retail level. At the wholesale level, six inventory control points manage assets by specific commodity groupings: mis- siles, weapons and fire control, tank and automotive, air- craft, electronics, and ground support equipment. The Army Materiel Development and Readiness Command is responsible for policy direction for the wholesale-level Army stock fund, and the six major subordinate commands are responsible for managing the material, including procuring new items. The wholesale fund sells material to the retail stock fund, which in turn is reimbursed by customers from funds allocated by the major Army commands. This results in multiple buying and selling transactions from the time of the original pro- curement until delivery to the user. The retail divisions of the eight major Army commands, five within the continental United States and three overseas, manage the retail stock fund. Each command with supply re- sponsibilities operates branches of the retail stock fund at installations in the continental United States and support elements overb,ias. The retail (intermediate) level maintains communication with the wholesale level and the general and direct support unit levels; it requisitions material, obli- gates funds, supports contingency and war plans, and provides limited services such as stock records support for subordinate or Eupported supply activities. The Army is phasing down overseas depot level stocks with the objective of stocking only wholesale and direct support unit peacetime inventories. 21 Overseas depot stocks are limited to war reserves, opera- tional project items, and a safety supply of stock items having no reserve or project stocks. (See app. III.) The direct support level is mission oriented and main- tains stocks required for field operations. Direct support units must be mobile in order to support and move with combat operations. Direct support units buy stock with operations and maintenance funds and, except for selected items, do not report stock levels to either retail or wholesale inventory managers. Stock funds overseas For overseas commands, materials are requisitioned and delivered in various ways. depending primarily on the type of commodity, its priority, and the type of unit. For example, in Europe, materials shipped from the United States are generally sent to the division supply support unit, which distributes the material to direct support units for storage or release to users. Value of inventories and transactions As of June 30, 1976, the Army stock fund inventory wa;- valued at about $3.05 billion. The national inventory con- trol points managed about- $2.23-billion in inventory con- sisting of about 240,000 stock-funded line items. About $1.98 billion, or 89 percent, of the inventory is held at the wholesale level, and about $250 million is located at the retail level. The remaining $830 million of inventory consists of items provided and managed by the retail divi- sions or military assistance programs and mobilization material. Army retail divisions purchased approximately $2.87 bil- lion of stock-funded assets in fiscal year 1976. About $414 million, or 14 percent, was purchased from wholesale inventory control points. Most retail items were purchased from the Defense Logistics Agency, the General Services Administration, local sources, and other military services. ARMY'S HORIZONTAL SYSTEM REQUIRES LARGER INVENTORIES We compared supply operations at Army and Air Force headquarters in Europe and at Zweibruecken Air Base and 9th Infantry Division of the Army's VII Corps. We found that the Air Force's vertically managed system provided 22 faster response than the Army's horizontal system. The order and shipping time was much less. Since Air Force units were able to obtain material faster, they did not need to stock as much. Order-and Shipping Times Forthe European Theater in Days Total order and shipping time by Requisitioning -priority-group System and service process III III Vertical Air Force (note a) 1 11.8 17.3 51.3 Horizontal Army 5 to 15 36.11 55.1 65.3 a/Systems Support Division. The main reasons for these differences include: -- Multiple requisition reviews in the Army took 5 to 15 days versus an Air Force average of 1 day. -- The Air Force vertical management system provided better item availability in U.S. depots, -- The Air Force used air transportation for priority categories I and II, whereas the Army generally used surface transportation. -- The Air Force required less time to record items arriving in Europe and to distribute them. Multiple Army-review-levels increase requisitioning- ime Army requisition processing in Europe is 4 to 14 days longer than Air Force processing. Though there are a number of variations in processing steps, requisitions often take the following path: ARMY REQUISITION PROCESSING --- -----.- TO 15 DAYS -------- 23 Generally, overseas support units submit requisitions to theater inventory management centers for editing and funding. Except for high-priority requirements, requisitions are screened against theater excess stocks or long supplies before being passed to ICPs in the United States. Under the Army's horizontal stock fund concept, budget- ary authority is passed from one level of command to the next. Consequently, obligations must be accounted for by the USAREUR Materiel Management Center, the corps, the division, and the user for each requisition. A buying and selling transaction occurs at each level, and each applies funding data. Requisitions are usually carried by courier from the forward support company, or direct support unit, to the divi- sion's supply support activity. The supply support activi- ties forward requisitions either by courier or by transceiver to successive processing levels. As much as 1 day can elapse while transferring requisitions between each level. By contrast, Air Force transaction takes only 1 day. The wholesale inventory manager owns all base-level stocks and no comparable buying and selling transaction occurs. The Air Force requisition is, in effect, merely a request for a change in warehouse locations. Air Base U.S. [--------1 day ------- Further the Army review is primarily intended to deter- mine whether the needed stocks are available--not to deter- mine whether the item should be requisitioned. The Air Force inventory manager carries out this same function much faster by simply interrogating his computer records to determine whether the needed items are on hand within the theater. The time difference amounts to about 4 to 14 days, not including delays in recording arriving inventory. Because order and shipping time is an element of requisitioning objec- tives, the Army has a requisition objective which averages 13.2 days longer than the Air Force. We estimate that this slower Army processing adds approximately $9 million to USAREUR inventory requirements. While we did not perform detailed work in other Army commands, we noted that similar problems are being reported. For example, Army units in Japan require more than 14 days to process requisitions, and those in Hawaii require 6.4 days. In fact, the Army standard for oversees commands ranges from 24 5 to 7 days. All of these Army activities must, therefore, stock additional material to compensate for the protracted pipeline time. We believe that the implementation of vertical manage- ment of the Army stock fund would result in faster requisi- tion processing. The major DSUs, if part of a vertical stock fund, could transmit requisitions directly to whole- sale inventory managers and thereby eliminate the multiple review and financial accounting levels now required. LESS'EXCESS STOCK ACCUMULATES FOR VERTICALLY MANAGED AIRFORCEITMS Air Force vertically managed items have had lower ac- cumulations of stocks. For example, at June 30, 1976, for vertically managed stocks, excesses in Europe were 10.9 per- cent of the inventory on hand. The Army's horizontally managed stocks had accumulated excesses of 18.9 percent of the inventory on hand. Excess-Inventory-Accumulations Stock on Excess Percent System As of hand amount elcess (millions) Vertical June 30, 1975 $ 12.6 $ 1.0 8.1 Air Force June 30, 1976 18.2 2.0 10.9 Horizontal June 30, 1975 21.5 2.7 12.5 Air Force June 30, 1976 24.0 3.3 13.8 Horizontal June 30, 1975 116.2 28.9 24.8 Army June 30, 1976 121.0 22.9 18.9 Through November 1976, Zweibruecken Air Base had excess stocks amounting to 6.7 percent of their vertically managed items. For horizontally managed stocks, excesses were 12.4 percent of inventory received. Other factors related to but separate from vertical management also affected the Army's excess position. At the 8th Infantry Division, duplicate inventories are maintained at Headquarters and Headquarters Company (a supply support activity) and three corresponding forward support companies (direct support units) which are located near the 25 units they serve. Along with these duplicate inventories, generous criteria for :omputing requirements and infrequent reporting have resulteC in accumulations of excess material. Following are several examples of the excess situations we encountered at the 8th Infantry Division. Examples of Items in-Excess October 29;-1976 Requisi- Per unit tion On Number Value of Item cost objective hand in excess excess Incandes- cent lamp $ 3.62 238 8,954 8,478 $30,690 Turbocharger 612.00 24 89 41 25,092 Control 308.00 6 21 9 2,772 Valve assembly 158.00 6 19 7 1,106 A radiator was excess at both main and forward support companies. The radiator, valued at $181, had a total re- quisitioning objective of 9 while 36 were on hand. Ten of these valued at $1,810 were excess at October 29, 1976. According to Army officials, as much as 50 Percentt of Army excess in Europe is due to accumulations of major items of equipment which have gone out of service. As shown below, the visibility which Air Force inventory managers have over material stored at equivalent locations permits them to identify such accumulations of excesses. Army inventory managers do not have this visibility. VERTICAL MANAGEMENT INCREASES INVENTORY CONTROL AND FLEXIBILITY Vertical management of supplies promotes flexibility and inventory control. For example, the Air Force closely monitors inventory demands from base level. The ability to anticipate demands and transfer inventory from location to location, as required, results in lower inventory levels and reduced stock excesses. Lack of visibility and control decreases Army supply responsiveness In the Army's horizontal supply system, the wholesale inventory managers have little actual inventory visibility and control below the wholesale level. Possibilities for 26 lateral supply actions are difficult to identify, and even if they had asset visibility, wholesale managers could not direct redistribution. One official said that instruction from the inventory manager to redistribute excess assets from one location to another can be ignored because the inventory manager does not own the assets and, therefore, cannot require the holding activities to ship the material. (In some in- stances, the data reported to the inventory manager was in- accurate; in other instances, the data was untimely and the installation reports were outdated by the time they were received.) Vertical management in Europe provides increased responsiveness-to users Air Force readiness rates are increased by laterally transferring urgently needed parts from one unit to another. This contributes to the highest degree of demand satisfac- tion among the supply systems in Europe. Percent of-Parts Provided Upon Request FromEuropean-Inventory as of-November 1976 Vertical: Air Force a/85 percent Horizontal: Air Force a/X5 prtenF't .. Army E/71 percent a/Vertically managed items have a higher satisfaction record than Air Force horizontally managed items, according to Air Force officials, but data is not accumulated separately for vertical and horizontal operations. b/Represents data from 98 of the 319 Army units authorized to requisition supplies. Air Force-lateral-supply actions For the Air Force, lateral supply actions take place be- tween two field stations when one has equipment not operation- ally ready due to lack of repair parts. Two methods are pos- sible. First, because t: ICP in the United States has visi- bility or knowledge of the worldwide inventory levels, includ- ing the 32 European supply accounts, and owns the base-level stocks, it can order the transfer of parts. Secondly, each airbase can identify from inventory listings whether another European base stocks an inventory item; transfers between bases are not inhibited by accounting or funding technicalities. 27 Further, the Air Force in Europe has its own fleet of aircraft to transport the items. The time required for such lateral supply actions is as little as 1 day compared to about 11 days to receive inventory from the United States. Volume of lateral actions About 1,200 lateral actions take place amon.g European airbases each month. For example, from September through November 1976, 84 percent of the items required to meet the- F-4 aircraft's emergency parts supply in Europe were provided from in-theater stocks including lateral supply actions among European airbases. At Zweibruecken Air Base about 120 in- coming lateral supply actions are arranged each month and as many as 175 occurred during September 1976. 1/ As a result, Zweibruecken obtained most of its urgently required repair items from theater stocks. Lateral actions less prevalent-in Army Stock fund inventory is purchased by the Army major subordinate commands in Europe, each acting independently. Little actual inventory visibility is provided within or among the three European Corps or to the wholesale-level ICPs. When lateral supply actions are attempted, they are usually made intra-Corps. Because inventory transferred between Corps requires accounting transactions to record the purchase or sale of inventory, inter-Corps lateral supply actions seldom take place. Assets visibility within each Corps is restricted to weekly reporting of items each unit is authorized to stock. Because of rapid stock level changes, these lists are fre- quently outdated by the time they are received. Conse- quently, lateral supply actions are often unsuccessful. At the 8th Infantry Division, an estimated 80 percent of the lateral supply attempts were unsuccessful each month. A comparison of Air Force and Army distribution channels for high-priority requisitions is shown in the illustration on page 29. 1/In addition, about 100 lateral transfers are effected from Zweibruecken stocks to other bases each month. 28 ILLUSTRATION COMPARING AIR FORCE AND ARMY METHODS OF DISTRIBUTION - EUROPEAN THEATER AIR FORCE STOC:. FUND WHOLESALE STOCK FUND INVENTORY MANAGER AVERAGE 51 DA BASE SUPPLY to 2 DAn BASE SUPPLY toBASE SUPPLY BASE A d U BASE B BASE C ARMY STOCK FUND WHOLESALE STOCK FUND INVENTORY MANAGER AVERAGE 65 DAYS Army has DIRECT SUPPORT no functioning DIRECT SUPPORT DIRECT SUPPORT UNIT A redistribution UNIT B UNIT C system in European Theater 29 Inventory balancing also achieved Lateral supply actions can also be used to balance inventory levels among supply points in anticipation of demand changes. Zweibruecken transferred an average of about 20 percent of the Systems Support Division inventories they had received to other locations. 1/ Only 4 percent of Air Force horizontally managed inventory and little Army in- ventory was transferred as a balancing action. ARMY DOES NOT HAVE ASSET-VISIBILITY AND CONTROL OVER STOCK FUND- ILVENTORY Army item managers have asset visibility and control over the Army-managed items at the wholesale level. The Commodity Command Standard System, which is linked with Army depots by an automatic digital network, provides asset visibility on a daily basis. Currently, the Selected Item Management System (SIMS) provides the item manager with visibility on secondary items at the retail level. This system includes both stock fund and non-stock-fund items. SIMS items selections are based upon a high dollar value of annual demands and upon critical- ity. As of June 30, 1976, this system included 1,253 stock funded items and 1,421 non-stock-funded items with annual dollar values of demands of $298.2 million and $40.9 million, respectively. These (st.ock funded) items represent only 37 percent of the annual dollar value of total demands for stock fund items. SIMS data is late and in a nonstandard format SIMS has been only maL.inally effective because asset information provided to inventory managers is not timely. The data is reported monthly from the intermediate level and quarterly from overseas direct support units. Also, the data is in nonstandard form and must be converted into for- mats usable at the national ICPs. Frequently, the elapsed time for transmitting, editing, converting, and mailing to the ICPs is 45 to 75 days. l/Disposition of inventory: other air bases, 67 percent; depots, 30 percent; repair, 3 percent. 30 Further improvements are-planned DOD believes a prerequisite for vertical supply manage- ment is centrally designed, standard automated systems for the wholesale and intermediate levels. The Army is giving priority to developing a standard automated logistics system at all support levels. The Standard Army Intermediate Level Supply System will replace the nonstandard supply system at the retail level and will be compatible with the Commodity Command Standard System used by the national ICPs. Standardization will improve the entire supply system, including daily asset reporting for intensive management of selected secondary items. Planned- improvements-have been delayed We pointed out to the Secretary of Defense in a July 1974 letter (B-146828) Lhat the Army's SIMS was not achieving its objectives. Among other problems, data was not timely or accurate. At that time, the Army's scheduled completion dates for installing the two standard computer systems were January 1975 for the Commodity Command Standard System and July 1975 for a Standard Army Intermediate Level Supply System. Delays and system changes occurred. As of March 1977, the Army planned to extend the intermediate-level system to over- seas commands by May 1978 and to continental U.S. locations by June 1980. It is anticipated that the Commodity Command Standard System will have interface capacity with the Stand- ard Army Intermediate Level System about July 1978. Other-factors influence supply responsiveness Although vertical supply management and stock funding enhance supply performance, another factor which improved Air Force supply performance was that it has a standardized computer system dedicated to supply management. In addi- tion, the Air Force has established a supply career whereby personnel develop expertise and staffing continuity is main- tained. By contrast, the Army often assigns personnel tem- porarily to supply units and has no supply career field. Army officials at all levels told us that lack of training and experience contributed to inefficiencies in the Army system. Another factor which influenced Air Force order and shipping times was the method of shipment. The Air Force 31 made greater use of air transportation than the Army. In January 1977, however, the Army began increasing its use of air delivery to Europe and this should improve Army delivery times. New Army procedures may also eliminate delays in dis- tributing receipts within Europe. WHY HASN'T THE ARMY IMPLEMENTED VERTIr.L STOCK FUNDS? The Army has opposed vertical stock funding because of reluctanc- to put system stocks at the retail level under control of the wholesale inventory manager. One of the Army's management principles is decentralized command and control over resources. Under this philosophy, the Army attempts to provide the field commander control, including financial control, over the assets necessary to fulfill his mission. We evaluated these objections and pertinent aspects of the Army's supply management and stock fund system to deter- mine what impact the present horizontal system has on the Army's supply operations. Centralized resource control does not precludemssison readiness The Army believes that field commanders cannot effec- tively accomplish assigned missions without control of all theater assets, including those at the using units, at the direct and general support units, and at the intermediate level (continental U.S. installations and overseas depots). In an effort to decrease intermediate-level stockage, the Army has implemented the Direct Support System which supplies DSUs from wholesale-level stocks. DSUs are not part of the stock fund but instead are funded by operation and maintenance (O&M) appropriation. The DSU is the last level which maintains stock record accounts. Therefore, it is the lowest level to which ver- tical management techniques could be extended. At present, however, many DSUs have no automated capability while other units have inadequate and nonstandard systems. The Army told DOD that, as standardized systems are developed and reporting is cost effective, assets and requirements information will be reported but that respositioning of these inventories will be limited. Further, the Army has no plans to change to ver- tical stock funding for items positioned at DSUs. 32 We believe that, with an efficient and responsive supply system, commanders could maintain readiness without owning stocks. We found this true in the Air Force, and we believe this concept would also benefit the Army. Supplies would continue to be stored at DSUs as they are at Air Force base supply offices but be owned by the stock fund until sold to the ultimate user. Commanders would be able to maintain fi- nancial control over their operating and maintenance budgets which are used to purchase supplies. In fact, the system should increase the commander's financial flexibility since his operating and maintenance funds would not be committed to an item until it was required by a user. While the Army has not officially objected to vertical management at the DSU level on the basis that the DSU's mobility would be inhibiting, this question is a major con- cern to Army officials. DSUs in Europe, for example, are not now mobile because they have insufficient equipment to move stocks and personnel and equipment in one move. The Army's objective, however, is to establish a 90-percent mobility capability for DSUs; consequently, any plan for extending vertical controls to DSUs must consider this objective. Among the questions that should be addressed are: 1. Are computers needed to manage DSU stocks small enough to be transported and can they be trans- ported without damaging the equipment? 2. Does the system provide redundancy or a back-up system for supply management in the event the DSU computers are lost in battle? 3. Is it cost effective to put computers in all DSUs? 4. What type of equipment is needed to provide communi- cations between DSUs and higher supply levels? We believe these problems can be successfully resolved. In fact, many were resolved during a 1975 study made at the direction of the USAREUR Deputy Chief of Staff for Logistics. In this effort, USARTUR examined the feasibility of estab- lishing vertical control over DSU stocks at the Corps level. The study proposed that these controls be implemented as an extension of the Standard Army Intermediate Level Supply System. (See p. 31.) Key features of the USAREUR proposals were: 33 -- "Data Stations" (mini-computers) with limited storage capability would be established at every DS; within USAREUR. The computer model proposed was small enough to be easily housed in a van and inexpensive enough to be installed at all DSUs. This equipme it is available commercially. -- Data station functions would be limited to computing receipts, issues, and ending balances (and certain other related functions). -- Records cf transactions (on storage discs) would be radio transmitted or sent by courier to more sophis- ticated computers at the Corps level. -- The Corps computers would provide all other supply management needs such as demand histories, substitut- ability data, and supply analyses and would compare the quantity of stocks on hand between DSUs. -- In the event a DSU deployed outside its Corps areas of responsibility, the computer would extract the DSU's demand history data. One copy would be sent to the DSU which could operate for up to 30 days independent of Corps support. One copy would also go to the receiving Corps. -- Redundancy would be provided by the duplication of data stored in the DSU and Corps computers--if the Corps computer was lost, the DSU computer could con- tinue to function within the capabilities of the data stations; if a DSU data station were lost, the Corps would have a record of its transactions and could reconstruct its records. This illustrates, in our opinion, that the mechanics of ver- tical controls can be worked out without detracting from the DSU's objectives for mobility. Both the Air Force and the Navy have successfully imple- mented vertical management and stock funding with those items managed within their respective services, as discussed in chapter 3. The Navy has maintained high rates of performance as measured by standard DOD indicators. Although the Navy's requirements for supplying ships cannot be compared directly to the Army's mobility requirements, elements of mobility and flexibility are an integral part of the Navy's supply system. Nevertheless, the Navy achieved better order and shipping times than did the Army. 34 Army Order and Shipping Times in Days Fiscal Year 1976 Total order and Average shipping time by all priority groups requisitions III III Continental United States 25.8 21.' 25.8 30.5 All overseas 59.3 42.3 63.2 72.5 Note: Statistics based on Direct Support System reports in- clude both stock fund and non-stock-fund requisitions. Stock fund data cannot be separated. In contrast, the Navy filled priority group III requisitions in the United States in 18 days and overseas requisitions in 38 days. Cost benefits The Army made two major cost studies, in August 1974 and April 1976, to determine the feasibility of applying vertical stock funding to Lhe continental U.S. portion of the Army stock fund. Both studies claimed disadvantages to such im- plementation, citing, for example, a need for additional staffing. In our opinion, however, these studies were inconclusive because both failed to identify major benefits associated with vertical stock funding, such as greater item manager flexibility in positioning material without financial con- straints. Also, neither study associated dollar amounts with major types of costs cited for changes in software, hard tare, and telecommunications equipment, nor did these studies ad- dress the question of supply responsiveness to the customer. As discussed in chapter 5, we believe that such studies should be made under the guidance and direction of DOD. Finally, the Army's official opposition to vertical con- trols is not shared by all Army logisticians. As noted earlier in this chapter, inventory managers described their difficulties in effectively redistributing stocks stored at the direct support units. Further, in July 1975, the Deputy Chief of Staff for Logistics, USAREUR, recommended that the 35 new automated systems being implemented to manage the SIMS expanded program be extended to provide visibility over DSU stocks in Europe. In making this recommendation, he stated that: "The majority of our logistics resources and most of the problems causing failures in our supply support are at the DSU level. The principal con- tributing factors to inefficient support are at- tributed to the complexity of supply management functions and the inefficient ADPE [automated data processing equipment] and ADP software available at the DSU level. Centralized supply management will provide the on-line visibility and control necessary to simplify DSU operations, increase supply satisfaction, reduce current stockage re- quirements and reduce unnecessary field return of items * * *." CONCLUSIONS The Army's supply management system gives inventory managers visibility over secondary items, including both stock funded and non-stock-funded items, but the asset data reported to inventory managers is untimely and inaccurate. The nonstandard and inadequate automated supply systems lack compatibility between the wholesale and retail levels. Because the retail-level e-counting does not compare with that at wholesale level, the information reported must converted before it is usable by the ICPs. be This delays the submission of the data to the inventory manager. Timely reporting of those intensively managed selected stock fund items cannot be attained until the computer systems are operational. We believe that the horizontal stock fund organization, where the wholesale inventory manager loses visibility and control over items sold to the retail level, adversely affects supply management. Reduced visibility affects redistribution of assets, contributes to the need for higher inventory levels and excess stocks, and in general decreases supply performance. We believe that implementing the vertical concept would give Army field commanders efficient, responsive supply sup- port. Both the Air Force and the Navy have successful ver- tical management and stock funding and maintain high rates of performance. 36 CHAPTER 5 DOD SHOULD INCREASE ITS EFFORTS TO IMPLEMENT VERTICAL MANAGEMENT OF STOCK FUNDS The Office of the Secretary of Defense's (OSD's) effort to assist the services in implementing a vertical management system was strong in the early 1970s. The Assistant Secretary of Defense for Installations and Logistics and the Logistics Systems Policy Committee actively fostered long-term planning and coordination for changing major logistical operations. General objectives for improving DOD operations through ver- tical management were established by joint agreement among the services, Defense Logistics Agency, and OSD. Since that time, however, OSD actions to implement these objectives have been limited. DOD LOGISTICS SYSTEMS POLICY COMMITTEE The Logistics Systems Policy Committee was established in March 1970 to develop a long-range plan for improving the DOD logistics system. The Committee was intended to be the major DOD mechanism for logistics planning, including coordinating the services' long-range concepts, objectives, and planning. Early in its tenure, the Committee authorized a task group to develop the Logistics Systems Plan (LOGPLAN). The LOGPLAN published in June 1971 endorsed the vertical manage- ment concept. While the issues were being deliberated by the Committee, the Army contracted with the Logistics Management Institute to study the impact of vertical management on its operations worldwide and to make appropriate recommendations. This study, completed in June 1973, supported both vertical supply and financial management as envisioned in the LOGPLAN profile. Although the Army never formally rejected the Institute's re- commendations, it launched an in-house study shortly there- after. This study was conducted at about the same time as the expansion of the Army's Direct Supply Support concept. Further development of the LOGPLAN, to formalize its con- cepts as new DOD policy, required a prolonged series of de- liberationn, particularly those objectives having to do with vertical financial management of stock fund items. The specific objectives and implementing actions were not adopted with the full concurrence of the Committee until May 28, 1974. The specific objective relating to vertical funding is shown below. 37 "Expense type items assigned to the Military Services and the Defense Supply Agency (DSA) will be financed in accordance with the ver- tical stock funding concepts established for each Military Service and DSA to the extent that cost benefits will accrue and logistic responsiveness to the operating forces is not lessened. Supporting systems will be made ztandard to the degree practicable, be tailored to the form of vertical and will supt'ly management employed." To implement the plan, OSD, DLA, and each service asked to develop a concept of vertical stock were management and to develop a time-phased plan for applying the fund concept. vertical stock The Committee's charter expired completed the task of developing the June 30, 1976, after it initial LOGPLAN. Most of the objectives in the plan have not been achieved. OTHER DOD POSITIONS ON VERTICAL MANAGEMENT OF STOCK FUNDS In May 1972, the Assistant Secretary tions and Logistics) issued a concept paperof for Defense (Installa- vertical management operations in 1975-80. implementing This stated that supply operations were becoming more document oriented. Although this orientation was more vertically pronounced for investment items because of the higher cost involved, also increasingly applied to the management it was of items. This concept paper was jointly developed stock fund of both the Assistant Secretary of Defense by the staffs (Installations Logistics) and the Assistant Secretary of Defense and (Comptroller). The following principal advantages for vertical ment of stock fund items were cited. manage- -- Item managers' worldwide knowledge and control of assets would increase management efficiency. -- Increased system-wide visibility would result effective use of DOD inventories. in more l/The Defense Supply Agency is now called the Defense Logistics Agency. 38 -- More effective use of inventories would permit reduc- tions in total inventories or improved system-wide stock balances and increased supply response with the same inventories. -- Reduction in total inventories and/or improved DOD- wide stock balances would result in reduced operations and maintenance costs per unit of support (less labor costs in handling, inventorying, etc., and reduced requirement for warehouse space). -- Increased worldwide visibility for selected items and high-response ADP systems would increase combat read- iness; i.e., permit rapid screening of high-priority requisitions against total DOD assets. -- Reducing the number of stock fund sales transactions would significantly reduce accounting transactions without reducing combat effectiveness. -- Flexibility for any required positioning of material without financial constraints would be increased. Basic questions regarding implementation of vertical management The May 1972 concept paper recognized that the reactions to the proposed changes in management of stock fund items would vary by service component and that the suitability of vertical stock funding and vertical supply management for each service must consider the differences in mission assign- ment, management orientation, and current and planned system configurations. DOD officials informed us the procuct of a joint task group which has proposed a standard "Retail Inventory Man- agement and Stockage Policy" is now being considered. If implemented, this policy would protect the basic interests of all parties within the logistics pipeline, including the DOD item manager and the line commanders. It would remove a principal roadblock to installing vertical stock funding posed in the past because line commanders would be protected by standard distribution and redistribution criteria from indiscriminate redistribution of their on-order/on-site stock by the DOD item managers. Aside from Retail Inventory Management and Stock Policy and the publication of a further memorandum discussed below, DOD has made little progress in the last 18 months toward a vertically oriented management system. 39 DOD efforts to implement vertical management According to officials, there is a consensus in DOD that vertical stock funding is feasible only when vertical supply management concepts have been effectively employed. Vertical supply management, which provides control and visi- bility by item managers over inventory items at wholesale, intermediate, and retail levels, is necessary to insure that the inventory at various supply levels is properly managed. Further, DOD officials believe that vertical stock funding should be used to the extent that cost benefits will accrue and logistic responsiveness to operating forces is not lessened. In October 1974, the Deputy Secretary of Defense sent a memorandum entitled "Materiel Management in the Vertical Environment" to each of the military services and the De- fense Logistics Agency. The memorandum provided further guidance for phased implementation of vertical material man- agement. Each service was directed to develop specific proposals for implementing this concept. OSD intends to implement vertical supply management and stock funding on a time-phased, incremental approach. Implemen ation would first be on an intraservice basis, followed by an interserv- ice basis, with final extension to supply management sources outside DOD, such as GSA. The services were asked to submit proposals according to these three phases. Upon receipt of the service proposals, an OSD committee was to evaluate them and make appropriate recommendations for approval and imple- mentation. The memorandum recognized that such implementing actions would be long range in nature due to the magnitude of the task. The October OSD memorandum was supplemented in January 1975 by another memorandum which sought to clarify the con- cept of vertical management and to assist the services and DLA in completing their proposals. OSD again indicated that, due to the current state of development of most automated logistic systems, transitional planning for and application of vertical supply management would be evolutionary. OSD action on component plans and proposals The services and DLA responded to OSD in February and March 1975, but the degree of responsiveness varied. The Air Force referred to its success with vertical stock fund- ing and expressed a desire to retain vertical management but raised a series of cautions related to interservice employment. 40 At the other extreme, the Army disagreed philosophically with any change from its then-current approach of using horizontal funds to manage the logistics pipeline. We were informed by officials of the services and DLA that they were never formally notified of the results of any OSD evaluation of their responses. OSD officials on the other hand said that the input from the services raised more questions than it answered. The OSD committee, how- ever, did begin a formal evaluation of the Army's response, but it was never completed because of differences in opin- ion within OSD over the issues involved and how to proceed. No further formal evaluation has taken place. CURRENT DOD EFFORTS IN GUIDING VERTICAL MANAGEMENT The Office of the Assistant Secretary of Defense (Man- power, Reserve Affairs, and Logistics) and the Assistant Secretary of Defense (Comptroller) are responsible for provid- ing guidance to the services in implementing vertical manage- ment. This effort now appears to be limited or static. We were told that the ongoing OSD effort associated with vertical supply management and stock funding amounted to ap- proximately 2 staff-years. These efforts are currently limited to interservice application in the areas of bulk fuels, subsistence, and commissaries. In addition, the Re- tail Inventory Management Stockage Policy Study (see p. 39) is now being evaluated. A standard DOD-wide stockage policy is expected to be published about October 1977. The estimated date for completing development and implementation of the standardized computer system model being developed under DLA's phase II bulk fuels program is now December 1978. CONCLUSIONS OSD action to further develop a DOD-wide plan for imple- menting a vertical supply management and stock funding system for expense items ceased in March 1975 except for limited interservice application in the areas of bulk fuel, subsis- tence, and commissaries. RECOMMENDATIONS We recognize the magnitude of the effort required to implement vertical supply and stock fund management through- out DOD. Because of the size and complexity of the supply and financial management systems, long-range planning for 41 systematic and evolutionary actions is necessary. In the absence of a coordinated comprehensive implementation however, the military services and DLA will continue plan, pur- suing uncoordinated efforts. Consequently, we believe should take timely action to complete the development OSD overall implementation plan. of an We recommend that the Secretary of Defense develop an overall plan for improving logistics management based on vertical supply management and stock funding. We also recommend that the Secretary of Defense: -- Establish a system to assure that any ongoing or templated efforts by the military services and DLAcon- are assessed for conformance with the coordinated long-range plan. -- Assure strong OSD monitorship of DLA's assignment to develop the standardized computer systems model and timely implementation of the Retail Inventory Management Stockage Policy in order to facilitate interservice vertical management. 42 APPENDIX I APPENDIX I AIR'FORCE STOCK FUND NUMBER OF LINE ITEMS'AND'WHOLESALE-SOURCE OF SUPPLY JUNE-30-'1976 Number of Division line-items Source-of supply Systems support 477,805 Air Force - 100% General support 915,887 DFA - 86% Commercial - 4% Army - 4% Navy - 3% GSA - 2% Manufactured - 1% Fuels 141 Commercial - 45% Air Force - 39% DLA - 16% Medical/dental 15,000 a/DLA - 65% a/Commercial - 35% Clothing 1,530 DLA - 100% Commissary 4,200 DLA - 92% Commercial - 8% Academy 14,000 Commercial - 95% OLA - 5% a/Predicated on total dollar value of purchase; no specific detail maintainedi on line item by source. 43 APPENDIX II APPENDIX II COMPARISON OF SUPPLY FUNCTIONS PERFORMED AT VARIOUS LEVELS IN-EUROPE -- Performed at levels Functions Air Force Army Financial accounting %ir Force Base Division Corps a/USAREUR - MMC Inventory maintenance Air Force Base Division Corps and control USAREUR - MMC Excess management Air Force Base Division Corps USAREUR - MMC Requisition processing Air Force Base Division Corps USAREUR - MMC Management and Air Force Base Division Corps procedures Air Force, Europe USAREUR - MMC Army Headquarters Europe Equipment management Air Force Base Division Corps Air Force, Europe USAREUR - MMC Army Headquarters Europe a/USAREUR Materiel Management Center. 44 APPENDIX III APPENDIX III 4) to g124 w0 , L V~ -- hU ,O0'0 0 mO Q o0 W * U Co 4 Uro H Y o to t > H o 4 : .4 - .n ) 4la ,. I C40 4,0 C ., ) 0 4 - tEUo 3 0 a 0eno 0c4 u 0h0.4 o 4 Q) Woo P)0 @ Q C4 V4 O UC O C04 ra 04 I ( > U) >0 o4 0 O P Coa e -44 (U 1 t)4 @ 4 ffi @ @ - m 0= En ,-4 o H4 CX C- O- C h ffci rl a o U ba *< O Cc CC . *^- zC a0:k 4) -04 4 44 64 444) 45 FO -4 .rlOw-4 H -a v1 D '4 uq i 0 , o0 p. E 0 a C 1 CwL4 >.X U APPENDIX IV APPENDIX IV OTHER GAO REPORTS RELATED TO THE MATTERS DISCUSSED IN THIS REPORT Department of Defense Stock B-159797 - April 12, 1974 Funds-Accomplishments, Problems, and Ways to Improve Department of Defense Stock B-159797 - June 16, 1976 Funds' Declining Financial Position Letter Report to the Secretary B-146828 - July 3, 1974 of Defense on "GAO Survey of the Army's Selected Item Man- agement System" 46 APPENDIX V APPENDIX V PRINCIPAL OFFICIALS 'RESPONSIBLEFOR ACTIVITIES-DISCUSSED-IN THIS-REPORT Tenure of-office-- From To DEPARTMENT OF DEFENSE SECRETARY OF DEFENSE: Harold Brown Feb. 1977 Present Donald H. Rumsfeld Nov. 1975 Feb. 1977 James R. Schlesinger July 1973 Nov. 1975 William P. Clements, Jr. (acting) Apr. 1973 July 1973 Elliott L. Richardson Jan. 1973 Apr. 1973 ASSISTANT SECRETARY OF DEFENSE (MANPOWER, RESERVE AFFAIRS, AND LOGISTICS): Dr. John P. White May 1977 Present Dale R. Babione (acting) Jan. 1977 Apr. 1977 Frank A. Shrontz Feb. 1976 Jaa. 1977 John J. Bennett (acting) Mar. 1975 Feb. 1976 Arthur I. Mendolia June 1973 Mar. 1975 Hugh McCullough (acting) Jan. 1973 June 1973 ASSISTANT SECRETARY OF DEFENSE (COMPTROLLER): Fred P. Wacker Sept. 1976 Present Terence E. McClary June 1973 Sept. 1976 Don R. Brazier (acting) Jan. 1973 June 1973 DIRECTOR, DEFENSE LOGISTICS AGENCY: Lt. Gen. Woodrow E. Vaughn (USA) Dec. 1975 Present Lt. Gen. Wallace H. Robinson, Jr. (USMC) July 1973 Dec. 1975 SECRETARY OF THE AIR FORCE: John C. Stetson Apr. 1977 Present Thomas C. Reed Jan. 1976 Apr. 1977 James W. Plummer (acting) Nov. 1975 Jan. 1976 Dr. John L. McLucas June 1973 Nov. 1975 Dr. Robert C. Seamans, Jr. Jan. 1969 May 1973 47 APPENDIX V APPENDIX V - Tenure of office iromTo DEPARTMENT OF DEFENSE (cont'd) SECRETARY OF THE ARMY: Clifford L. Alexander Feb. 1977 Present Martin R. Hoffman Aug. 1975 Feb. 1977 Howard H. Callaway July 1973 Aug. 1975 Robert F. Froehlke Jan. 1971 Apr. 1973 SECRETARY OF THE NAVY: William G. Claytor, Jr. Feb. 1977 Present J. William Middendorf Apr. 1974 Jan. 1977 John W. Warner May 1972 Apr. 1974 947245 48
The Department of Defense Should Increase Efforts To Implement Vertical Controls Over Military Stock Funds
Published by the Government Accountability Office on 1977-09-07.
Below is a raw (and likely hideous) rendition of the original report. (PDF)