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)

                         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
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
                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-

                LCD-77-437                                 SEPTEMBER 7, 1977
!   '.:,/r1/                        WASHINGTON, D.C.   20o41


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
                                        OVER MILITARY STOCK FUNDS

              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

              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
     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.

            -- 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
            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
DIGEST                                                        i

              What is a stock fund?                       1
              Scope of this review                        I
  2       WHY VERTICAL STOCK FUNDS?                       4
              Prerequisites to implementing vertical
                management                                8
              The Air Force stock fund                   10
              The Navy stock fund                        15
              DLA stock fund                             17
              Conclusions                                19
            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
              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
           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

      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


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

      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

     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.

     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.

                        FY 76 ($ MILLIONS)
                    DOD STOCK FUNDS ($12,056.9)
                                             MARINE $242.2 t?%)

                         LOGISTICS       \    $2,559.1
                         AGENCY              tSecret21%ary
                           (36%)     /

        REVIEW    ~ OF        NSCOPE
                               d A VaMnd i FORCE


     Our fieldwork was conducted between September 1976 and
May 1977. It included an analysis of pertinent records
discussions with officials at the respective stock fund

     Department of Defense:

        Office of the Assistant Secretary
        of Defense (Manpower, Reserve Affairs and Logistics)

        Office of the Assistant Secretary of Defense

        Defense Logistics Agency, Washington, D.C.

        Defense Fuel Supply Center, Washington, D.C.

        Defense General Supply Center, Richmond, Virginia


        Headquarters, U.S. Army, Washington, D.C.

        U.S. Army Materiel Development and Readiness
        Command, Alexandria, Virginia

    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

    Naval. Supply Systemc Command, Washington, D.C.
    Ships Parts Control Center, Mechanicsburg,
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

                          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.

     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


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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.

     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

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.

                           CHAPTER 3
     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 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.

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
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-

     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

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

     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
     -- 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
    -- 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.

     -- 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
     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

                           FISCAL YEAR i9;6
                                     S IN MILLIONS
           SALES TO OTHER        -                              OTHER SALES
           SERVICES              550 I'-                             $

                   COTO L\ T                     TRANSFERS TO
                        SALES                     RETAIL ASES
                    PROGRAMS               \$             250
                    S11S (17%)

                        a,,     SERVICE

                                      TOTAL $681

                 OTHER SALES               RETAIL
        SALES TO AND Maintenance.
   (AIR NATIONAL GUARD)       $14

                      ALES T           \
                      SERVICE                        SALES TO O AND M



                                     TOTAL $228

Note:     "O and M" means operation and maintenance.

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 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
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

Ships Parts Control Center            $ 517.9
Aviation Supply Office                  876.7

    Retail stock fund
Fleet Material Supp-,rt Office          423.0
Naval Publications and Forms
  Office                                 13.9
Navy Resale Systems Office               60.1

     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-
     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

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

     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 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.

     These items are managed through six Defense Logistics
Centers which act as ICPs. The value of inventories controlled
by each Center is shown below.


           Construction material       $     465.3
           Electronics                       561.1
           Industrial supplies               451.9
           Fuels                             970.4
           Personnel                       1,427.4
           General material                  410.9
     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,
    -- have item or dollar value visibility over these stocks
       through the DOD-wide standard computer systems; and

     --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.


     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
     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.

                         CHAPTER 4


                     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

     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:

    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.

     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.

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
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

     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.


     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

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:

       ---    -----.-       TO 15 DAYS   --------

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

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.

     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.


                                   Stock on    Excess     Percent
  System           As of             hand      amount     elcess
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

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

               Per unit       tion       On       Number    Value of
     Item        cost       objective   hand    in excess    excess
  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
  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 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

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

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
                    as of-November 1976

                Air Force           a/85 percent
                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.

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.


                               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

     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 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.

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

     Another factor which influenced Air Force order and
shipping times was the method of shipment. The Air Force

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.


     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

     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.

     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

     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

      -- "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

      -- 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
tical controls can be worked out without detracting from
DSU's objectives for mobility.

     Both the Air Force and the Navy have successfully imple-
mented vertical management and stock funding with those
managed within their respective services, as discussed
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
flexibility are an integral part of the Navy's supply
Nevertheless, the Navy achieved better order and shipping
times than did the Army.

                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

     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

 new automated systems being implemented to manage the
 expanded program be extended to provide visibility over
 stocks in Europe.  In making this recommendation, he stated

     "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   * * *."


     The Army's supply management system gives inventory
managers visibility over secondary items, including
stock funded and non-stock-funded items, but the asset
reported to inventory managers is untimely and inaccurate.

      The nonstandard and inadequate automated supply systems
 lack compatibility between the wholesale and retail
Because the retail-level e-counting does not compare
 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
items cannot be attained until the computer systems
operational. We believe that the horizontal stock fund
organization, where the wholesale inventory manager
visibility and control over items sold to the retail
adversely affects supply management.   Reduced visibility
affects redistribution of assets, contributes to the
for higher inventory levels and excess stocks, and in
decreases supply performance.

      We believe that implementing the vertical concept would
give Army field commanders efficient, responsive supply
port.   Both the Air Force and the Navy have successful ver-
tical management and stock funding and maintain high
of performance.

                         CHAPTER 5


     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.


     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

      "Expense type items assigned to the Military
      Services and the Defense Supply Agency (DSA)[1]
      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
      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.

      In May 1972, the Assistant Secretary
tions and Logistics) issued a concept paperof for
                                               Defense (Installa-
vertical management operations in 1975-80.         implementing
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
items. This concept paper was jointly developed   stock fund
of both the Assistant Secretary of Defense          by the staffs
Logistics) and the Assistant Secretary of Defense            and
     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

     -- 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
     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

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
     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.

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.
     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.
     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.

     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

systematic and evolutionary actions is necessary.
                                                   In the
absence of a coordinated comprehensive implementation
however, the military services and DLA will continue plan,
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
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
       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.

APPENDIX I                                              APPENDIX I

                        AIR'FORCE STOCK FUND

                            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.

APPENDIX II                                           APPENDIX II

                          COMPARISON OF

                    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
Equipment management      Air Force Base       Division Corps
                          Air Force, Europe    USAREUR - MMC
                                               Army Headquarters
a/USAREUR Materiel Management Center.

APPENDIX III                                                                                                         APPENDIX III

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APPENDIX IV                                         APPENDIX IV


                        THIS REPORT

Department of Defense Stock         B-159797 - April 12, 1974
  Problems, and Ways to
Department of Defense Stock         B-159797 - June 16, 1976
  Funds' Declining Financial
Letter Report to the Secretary      B-146828 - July 3, 1974
  of Defense on "GAO Survey of
  the Army's Selected Item Man-
  agement System"

APPENDIX V                                         APPENDIX V



                                        Tenure of-office--
                                        From          To

                    DEPARTMENT 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

    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
    Fred P. Wacker                   Sept. 1976    Present
    Terence E. McClary               June 1973     Sept. 1976
    Don R. Brazier (acting)          Jan.  1973    June 1973
    Lt. Gen. Woodrow E. Vaughn
       (USA)                         Dec.   1975   Present
    Lt. Gen. Wallace H.
      Robinson, Jr. (USMC)           July   1973   Dec.   1975
    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

APPENDIX V                                           APPENDIX V

                                      -   Tenure of office
                    DEPARTMENT OF DEFENSE (cont'd)
    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

    William G. Claytor, Jr.          Feb.   1977     Present
    J. William Middendorf            Apr.   1974     Jan. 1977
    John W. Warner                   May    1972     Apr.  1974