oversight

Inventory Management: The Army Could Reduce Logistics Costs for Aviation Parts by Adopting Best Practices

Published by the Government Accountability Office on 1997-04-15.

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

                  United States General Accounting Office

GAO               Report to the Ranking Minority Member,
                  Committee on Armed Services, U.S.
                  Senate


April 1997
                  INVENTORY
                  MANAGEMENT
                  The Army Could
                  Reduce Logistics Costs
                  for Aviation Parts by
                  Adopting Best
                  Practices




GAO/NSIAD-97-82
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-272662

             April 15, 1997

             The Honorable Carl Levin
             Ranking Minority Member
             Committee on Armed Services
             United States Senate

             Dear Senator Levin:

             This report is the 10th in a series of reports comparing the Department of
             Defense’s (DOD) logistics practices with those of the private sector.1 As you
             requested, we are continuously examining DOD’s inventory management
             practices to identify areas where costs can be reduced and problems can
             be avoided if DOD adopts leading-edge practices that have been applied
             successfully by the private sector.

             This report focuses on the Army’s logistics system for aviation parts. It
             discusses the potential application of best practices to the Army’s
             operations. The objectives of this review were to (1) examine the current
             performance of the Army’s logistics system, (2) review the Army’s efforts
             to improve the logistics system and reduce costs, and (3) identify
             opportunities where best practices could be incorporated into the Army’s
             logistics operations.


             The private sector, driven by a global competitive environment, faces the
Background   challenge of improving services while lowering costs. As a result, many
             companies have adopted innovative business practices to meet customer
             needs and retain profitability. DOD faces a similar challenge of providing
             better service at a lower cost. With the end of the Cold War, DOD’s logistics
             systems must support a smaller, highly mobile, high-technology force. Due
             to the pressures of budgetary constraints, DOD also must seek ways to
             make logistics processes as efficient as possible.

             To provide reparable parts for its approximately 7,300 aircraft (primarily
             helicopters),2 the Army uses an extensive logistics system that is based on
             a management process, procedures, and concepts that have evolved over
             time but are largely outdated. Reparable parts are expensive items that can
             be fixed and used again, such as hydraulic pumps, navigational computers,
             and landing gear. The Army’s logistics system, often referred to as a

             1
              See Related GAO Products.
             2
              The Army also provides helicopter and component repair services to the Air Force and the Navy.



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                   logistics pipeline, consists of a number of activities that play a role in
                   providing aircraft parts where and when they are needed. These activities
                   include the purchase, storage, distribution, and repair of parts, which
                   together require billions of dollars of investments in personnel, equipment,
                   facilities, and inventory. The Army’s depot repair location for helicopters
                   and aviation parts is the Corpus Christi Army Depot (CCAD), Texas.

                   The Army also relies on this pipeline for consumable parts (e.g., nuts,
                   bearings, and fuses) that are used extensively to fix reparable parts and
                   aircraft. The Defense Logistics Agency (DLA) provides most of the
                   consumable parts that Army repair activities need and handles a large part
                   of the warehousing and distribution of reparable parts.

                   Although not as large as the Army, commercial airlines have similar
                   operating characteristics to the Army. They maintain fleets of aircraft that
                   use reparable parts and operate logistics pipelines having similar activities.
                   For both the Army and commercial airlines, time plays a crucial role in the
                   responsiveness of logistics operations and the amount of inventory
                   needed. Pipeline complexity also adds to logistics costs by increasing
                   overhead and adding to pipeline times. Condensing and simplifying
                   pipeline operations, therefore, will simultaneously improve
                   responsiveness and decrease costs by reducing inventory requirements
                   and eliminating the infrastructure (warehouses, people, etc.) that is
                   needed to manage unnecessary material.

                   Over the last 10 years, we have issued more than 30 reports addressing the
                   Army’s logistics problems. These reports have highlighted issues related to
                   large inventory levels, inefficient repair practices, and information system
                   problems. While the Army has taken actions to correct its logistics
                   problems, these problems have not been completely resolved.


                   The Army’s efforts to improve its logistics pipeline for aviation parts and
Results in Brief   reduce logistics costs could be enhanced by incorporating best practices
                   we have identified in the private sector. The Army’s current repair
                   pipeline, characterized by a $2.6 billion investment in aviation parts, is
                   slow and inefficient. For example, in one case we examined, it took the
                   Army 4 times longer than a commercial airline to ship a broken part to the
                   depot and complete repairs. Also, for 24 different types of items examined,
                   we calculated it took the Army an average of 525 days to repair and ship
                   the parts to field units. The Army estimates only 18 days (3 percent)
                   should have been needed to repair the items. The remaining 507 days



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    (97 percent) were used to transport or store the parts or were the result of
    unplanned repair delays. Because of this lengthy pipeline time, the Army
    buys, stores, and repairs more parts than would be necessary with a more
    efficient system.

    Several factors contribute to the long pipeline time. These factors are
    (1) broken reparable parts move slowly between field units and a repair
    depot, (2) reparable parts are stored in warehouses for several months
    before and after they are repaired, (3) repair depots are inefficiently
    organized, and (4) consumable parts are not available to mechanics when
    needed.

    The Army has recognized that it must improve its logistics systems. Under
    a recently established program called “Velocity Management,” the Army
    plans to focus on and improve four key areas: repair of components, order
    and shipment of parts, inventory levels, and financial management. The
    program is in the initial stages of development and has had limited success
    in actual Army-wide process improvements to date. At CCAD, depot
    officials are not actively pursuing this program’s initiatives. Instead, depot
    officials are initiating process improvements under a local program
    designed to identify the actual cost of operations and improve the
    efficiency of CCAD operations.

    Best practices used in the airline industry provide opportunities to build
    on the Army’s efforts to improve its logistics pipeline. We identified key
    best practices to address each of the four factors contributing to the
    Army’s long pipeline time:

•   Third-party logistics services can assume warehousing and distribution
    functions and provide rapid delivery of parts and state-of-the-art
    information systems that would speed the shipment of parts between
    depots and field locations.
•   Eliminating excess inventory and quickly initiating repair actions can
    reduce the amount of time parts are stored, improve the visibility of
    production backlogs, and reduce the need for large inventory to cover
    operations while parts are out of service.
•   Cellular manufacturing techniques can improve repair shop efficiency by
    bringing all the resources (tooling, support equipment, etc.) needed to
    complete repairs to one location, thereby minimizing the current
    time-consuming exercise of routing parts to different workshops located
    hundreds of yards apart.




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

                             Although we cannot say that these practices can be successfully integrated
                             into the Army’s system, we believe they are compatible with many aspects
                             of the Army’s operations and the Velocity Management program. Because
                             of the significant benefits realized by private firms that have adopted these
                             practices, we further believe that the potential benefits in adopting these
                             practices are enough to justify a demonstration project involving the Army
                             and DLA. This demonstration project could determine with certainty the
                             feasibility and cost-effectiveness of these practices.


                             The Army’s current depot repair pipeline, characterized by a $2.6 billion
The Army Operates a          inventory investment, is slow, unreliable, and inefficient. For 24 different
Slow, Inefficient, and       types of aviation parts examined, we calculated the Army’s logistics
Costly Logistics             system took an average of 525 days to ship broken parts from field units to
                             the depot, repair them, and return the repaired parts to using units. We
System                       estimated 507 days (97 percent) of this time was the result of unplanned
                             repair delays, depot storage, or transportation time. In another measure of
                             efficiency, we calculated the Army uses its inventory 6 times slower than
                             an airline in our comparison.

                             The amount of time required by the system is important because the Army
                             must invest in enough inventory to resupply units with serviceable parts
                             and cover the amount of time it takes to move and repair parts through
                             this process. If this repair time were reduced, inventory requirements
                             would also be reduced. For example, in an Army-sponsored RAND study,
                             it was noted that reducing the repair time for one helicopter component
                             from 90 days to 15 days would reduce inventory requirements for that
                             component from $60 million to $10 million.3

                             Also, in a 1996 preliminary report to the Army, RAND concluded that “if
                             non-value-added steps [in the repair process] were reduced or eliminated,
                             repair cycle times could become much shorter and far less variable. The
                             benefits for the Army would be greater weapon system availability, more
                             regular and predictable supply of serviceable components, savings from




                             3
                             RAND Arroyo Center Documented Briefing, Weapon System Sustainment Management: A Concept for
                             Revolutionizing the Army Logistics System (1994).



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                                    reduced pipeline inventory requirements, and a repair system more
                                    flexible and responsive in serving the needs of the combat commander.”4

                                    To calculate the amount of time the Army’s system takes to repair and
                                    distribute parts using the current depot repair process, we judgmentally
                                    selected 24 types of Army aviation parts and computed the time the parts
                                    spent in four key segments of the repair process. The key segments were
                                    (1) preparing and shipping the parts from the bases to the depot,
                                    (2) storing the parts at the depot before induction into the repair shop,
                                    (3) repairing the parts, and (4) storing the parts at the depot before they
                                    were shipped to a field unit. For the parts we selected, it took the Army an
                                    average of 525 days to complete this process. Table 1 shows the fastest,
                                    slowest, and average time the Army took to complete each of the four
                                    pipeline segments.

Table 1: Average Days Used by the
Army Depot Repair System for 24                                               Fastest time        Slowest time           Average time
Types of Aviation Parts             Pipeline segment                          (days)              (days)                       (days)
                                    Part preparation and shipment to          Less than 1         899                                   75
                                    the depot
                                    Depot storage prior to repair             Less than 1         887                               158
                                    Depot repair time                         1                   1,067                             147
                                    Depot storage prior to issue              Less than 1         1,196                             145
                                                                         a
                                    Total depot repair pipeline time          Not applicable      Not applicable                    525
                                    a
                                     It is inappropriate to sum the pipeline segments for the fastest and slowest times because these
                                    values represent the Army’s pipeline performance on one component in each segment. The
                                    average time for each segment, however, is appropriate to sum because it represents the
                                    average time for all components that passed through that pipeline segment.



                                    As shown in table 1, the repair pipeline time was both long and highly
                                    variable. The fastest time the Army took to complete any of the four
                                    pipeline segments was less than 1 day, but the slowest times ranged from
                                    887 days to more than 1,000 days.

                                    In contrast, one airline we found to be using leading-edge practices, British
                                    Airways, took a much shorter period of time to move a part through its
                                    logistics system. As shown in figure 1, the average time to move a gearbox
                                    assembly through the first three segments was 116 days for British
                                    Airways while the Army’s average time was 429 days, or about 4 times
                                    longer. While the Army’s repair time was twice as long as British Airways,
                                    most of the Army’s time occurred in the shipping and storage segments.

                                    4
                                    RAND Annotated Briefing, Improving the Army’s Repair Process: Baseline Repair Cycle Time
                                    Measures (DRR-1271-1-A, May 1996).



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Figure 1: Comparison of the Army’s and British Airways’ Pipeline Times for a Gearbox Assembly

      Army


66 days                                        111 days                                             252 days                    Total = 429 Days




Part readied for      In-transit    Part received at           Storage time           Shop flow      Awaiting          Repaired part
transport from base                 repair center and                                                parts/            turned into
                                    sent to storage or                                               queue time        warehouse
                                    maintenance shops

British Airways

 2 days                                          1 day                                               113 days                   Total = 116 Days




                                          In part, because of this slow process, the Army has invested billions of
                                          dollars in inventory to support peacetime operations that is not used as
                                          effectively as it could be. DOD reported that as of September 1995, the
                                          value of the Army’s reparable aviation parts inventory was $2.6 billion,5
                                          with 74 percent ($1.9 billion) allocated to support daily operations,
                                          11 percent for war reserves, and 15 percent allocated as long supply— a
                                          term identifying stock that is excess to current Army requirements.

                                          One measure of the repair process efficiency is a calculation of how often
                                          an organization uses its inventory. This calculation is called the turnover
                                          rate. The higher the turnover rate, the more often a company is using its
                                          inventory. At one airline we visited—British Airways—the turnover rate
                                          for reparable parts was 2.3 times each year. In comparison, we calculated
                                          that, based on fiscal year 1995 repairs, the Army’s turnover rate was
                                          0.4 times, or about 6 times slower (see fig. 2). This calculation neither
                                          includes inventory the Army has allocated for war reserves nor inventory
                                          the Army has stored at field level organizations, which is classified as
                                          retail inventory.

                                          5
                                           These inventory values were calculated by DOD using its standard valuation methodology—the value
                                          of reparable parts requiring repair was reduced by the estimated cost of repair, and excess inventory
                                          was valued at the estimated salvage price (2.5 percent of the fiscal year 1995 acquisition costs).



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Figure 2: Comparison of British
Airways and Army Inventory Turnover   3.0   Number of inventory turns per year
Rates

                                      2.5



                                      2.0



                                      1.5



                                      1.0



                                      0.5



                                       0

                                               Army    British
                                                       Airways




                                      Comparing the Army’s engineering estimate of the repair time that should
                                      be needed to complete repairs with the actual amount of time taken is
                                      another measure of the repair process’ efficiency. Of the 525-day average
                                      pipeline time from our sample, the Army estimates an average of 18 days
                                      should be needed to repair the item(s). The remaining 507 days, or
                                      97 percent of the total time, were spent to transport or store the part(s) or
                                      for unplanned repair delays.


                                      Several factors contribute to the Army’s slow logistics pipeline. Four of the
Several Factors                       factors are (1) slow processing and shipping of parts from the field to the
Contribute to This                    repair depot, (2) delays in inducting parts into the repair shops,
Slow System                           (3) inefficient organization of the depot repair process, and (4) lack of
                                      consumable parts needed to complete repairs. Because of these factors,
                                      parts sit idle or are delayed in the repair process, which lengthens the total
                                      repair time.


Slow Processing and                   Preparing and shipping a broken part from the operating unit to the depot
Shipping of Parts to the              for repair—a process called “retrograde”—took an average of 75 days for
Depot                                 the items we examined. In contrast, British Airways estimated that only




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                                     2 days were needed to prepare and ship components from operating
                                     locations to its repair centers. In May 1996, RAND also found the Army’s
                                     retrograde process to be slow; the median retrograde time for a sample of
                                     items it measured from the point when maintenance personnel determined
                                     a part was not reparable at the operating unit until it arrived at a DLA depot
                                     storage facility was 22 days and the longest time was more than 100 days.


Delayed Induction of Parts           Our sample data show that broken parts may sit in storage at the depot
                                     facility for a long period of time until a certain quantity of parts are moved
                                     to or are “inducted” into the repair shop. Because different operating units
                                     ship parts to the depot in various quantities, each part that is inducted for
                                     repair may be stored for different amounts of time. For example, the Army
                                     inducted helicopter gearboxes into the repair shop 5 times over a 2-year
                                     period. The average storage time for the parts inducted in each group
                                     ranged from 15 to 366 days. Table 2 shows the quantity of parts inducted
                                     and the average amount of days the parts were stored before being
                                     inducted.

Table 2: Gearbox Repair Inductions
                                                                            Average storage         Number of parts
                                     Group      Induction date                   time (days)             inducted
                                     1          Sept. 8, 1994                            27                      11
                                     2          Sept. 20, 1994                           15                       7
                                     3          Dec. 9, 1994                             32                       8
                                     4          Jan. 17, 1996                           310                      10
                                     5          Apr. 24, 1996                           366                       1

                                     According to Army officials, parts sit in storage before induction because
                                     of the method that is used to plan repair programs. Item managers
                                     periodically review and compare inventory levels and the projected
                                     requirements for parts. Based upon this analysis, an item manager
                                     determines how many parts should be either repaired or purchased to
                                     meet the Army’s anticipated needs. For items that need to be repaired, the
                                     Army develops a repair program, which includes a funding estimate for the
                                     repairs. The depot can induct parts into the repair process only after this
                                     program and its related funding have been approved. Also, parts may sit in
                                     storage because an excessive amount of inventory is available to meet
                                     current and projected Army requirements. As previously discussed,
                                     15 percent of the Army inventory is classified as long supply, or excess to
                                     current requirements.




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Inefficient Organization of   The Army moves parts from one location to another several times during
Repair Activities             the repair process, which increases the time required to complete a repair.
                              Functions such as testing, cleaning, and machining are sometimes done at
                              separate shops that are hundreds of yards apart. Routing components
                              through different shops reduces the efficiency of the process because each
                              time a part is moved, it must be prepared for transportation, physically
                              moved, and processed through the shop. For example, at CCAD, the repair
                              of hydraulic components involves routing parts through six different
                              shops, each located 100 to 400 yards from the main repair shop (see fig. 3),
                              which adds time and reduces the efficiency of the process. For one
                              hydraulic part we examined, the Army estimated the repair time of
                              31 days—only 3 days were estimated for direct labor to repair the item and
                              28 days (90 percent) were estimated to cover handling and moving the part
                              to different shops, or anticipated repair delays.




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Figure 3: The Army’s Repair Process for a Hydraulic Component


                   Cleaning           200 Yards     Nondestructive                                        Plate
                     Shop                             Test Shop                                           Shop


                                                                            400 Yards               400 Yards
                                                          100 Yards
                                  150 Yards


                    (Start) 300 Yards
        DLA                                       Main Hydraulic Shop
                            Broken part
      Storage                                     (located in two floors)               100 Yards        Machine
       Depot        (End) 300 Yards                    -Disassemble                                       Shop
                          Repaired part                -Inspect
                                                       -Evaluate                        100 Yards
                                                       -Reassemble
                                                       -Test

                                                                                             400 Yards            400 Yards


                                                                 400 Yards
                150 Yards         150 Yards       400 Yards


                     Depot
                   Automated                                                                             Chrome
                                                         Paint
                   Distribution                                                                          Shop
                                                         Shop
                   Warehouse




Inadequate Piece Part                             Another cause of delays is mechanics often do not have the necessary
Support                                           consumable parts that are used in large quantities to repair aircraft
                                                  components. According to CCAD officials, the lack of piece parts is the
                                                  primary cause for repair delays at the depot. The traditional DOD supply
                                                  system used at CCAD to provide piece parts to mechanics involves several
                                                  inventory storage locations at the depot and a wholesale inventory system
                                                  managed by DLA (see fig. 4).




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Figure 4: Multilayered Inventory System for Consumable Parts


DOD Wholesale Supply System                       Corpus Christi Army Depot Supply System


                                                                                                                          Maintenance
                                                                                  Depot
                                                                                Automated                                Shop Storage
                                                                                Distribution                             (72 Locations)
                                                                                Warehouse
                              DLA
                            Wholesale                  Depot Bulk
  Manufacturers
                            Inventory a                 Storage


                                                                                                                          End users
                          $5.7 Billion              $23 Million                  $23 Million
                          on hand                   on hand                      on hand

                                                                                                                      Unknown amount
                                                                                                                      on hand



                                          a
                                              DLA inventory is stored at multiple locations nationwide to support all DOD customers.


                                          This process has created as many as four layers of inventory in the CCAD
                                          supply system. As of August 1996, the first two layers (depot bulk storage
                                          and the automated distribution warehouse) stored inventory valued at
                                          $46 million. For the next two layers (maintenance shop storage and
                                          end-user storage), the Army does not centrally track inventory levels or
                                          supply effectiveness. Therefore, CCAD officials could not provide us with
                                          consolidated information on the amount or value of the inventory stored in
                                          these locations or if the inventory was the right type of material or in the
                                          appropriate quantity to meet the mechanics’ needs. Figure 5 shows the
                                          CCAD automated storage and distribution warehouse where $23 million of
                                          inventory is stored. Figure 6 shows 1 of the 72 maintenance shop storage
                                          locations and is an example of the size of some of these facilities.




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Figure 5: CCAD Automated
Distribution Warehouse




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Figure 6: CCAD Maintenance Shop
Inventory Storage Location




                                  Despite this investment in inventory, the supply system frequently fails to
                                  completely fill orders when they are placed by mechanics or other CCAD
                                  customers. According to Army records, the CCAD bulk storage warehouse
                                  did not have an adequate supply of inventory to meet customer demands
                                  75 percent of the time during the first 11 months of fiscal year 1996.6 When
                                  parts are not available at the bulk storage facility, the maintenance shops
                                  can request (backorder) them from the DLA wholesale system, which may
                                  take several days or even months for delivery. As of August 1996, CCAD
                                  mechanics had more than $40 million worth of parts on backorder, of
                                  which 34 percent was still unfilled after 3 months.

                                  Depot officials identified several options available to minimize repair
                                  delays that are caused by part shortages. For example, depot personnel
                                  can buy the part from local vendors or fabricate the part in its machine

                                  6
                                   The Army calculated this fill rate by comparing total demands with the total number of times a
                                  demand was completely filled by the inventory on hand at depot storage locations. At times, a demand
                                  is partially filled by inventory on hand, with the remaining unfilled demands placed on backorder, and
                                  filled at a later time. These “partial fills” are not included in the 75-percent calculation.



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                        shops. In other cases, mechanics remove parts from one component that
                        has just entered the repair shop and install the part on one that is nearing
                        completion. This is called a “rob-back” of parts. Depot officials did not
                        have any records that specifically quantify the number of rob-back actions
                        in the depot, but they indicated that it was a common practice among
                        maintenance personnel.


Effects of the Army’s   The following examples of parts we examined illustrate the effects of the
Process                 Army’s slow and inefficient logistics pipeline. First, in fiscal year 1995, the
                        Army repaired 25 helicopter rotor heads. The average time to ship these
                        units from field locations and complete the repair of each item was 723
                        days. Of the 723-day average, 577 days involved shipping and storage time
                        and 146 days involved repair time. The Army’s engineering estimate
                        indicates the optimum repair shop time should be 35 days. At the end of
                        fiscal year 1995, the Army had 134 units on hand, valued at $20.9 million.
                        Using historical demand data, this inventory could satisfy Army
                        requirements for the next 3.5 years.

                        Also, in fiscal year 1995, the Army repaired 79 helicopter transmissions. It
                        took the Army an average of 414 days to ship and repair each of these
                        items. This 414-day average was comprised of 67 days for shipping, 229
                        days for storage, and 118 days for repair. The Army’s engineering estimate
                        indicates 37 days should be needed for repair shop time. At the end of
                        fiscal year 1995, the Army had 204 transmissions on hand, which should
                        satisfy routine requirements for 4.7 years.


                        The Army has recognized that it must develop a faster and more flexible
The Army Has            logistics pipeline. In early 1995, the Army’s Deputy Chief of Staff for
Targeted Logistics      Logistics directed the Army logistics community to implement a program
System Improvements     called “Velocity Management” to speed up key aspects of the logistics
                        system and reduce the Army’s need for large inventory levels. Under this
                        program, the Army has established Army-wide process improvement
                        teams for the following four areas: (1) ordering and shipping of parts,
                        (2) the repair cycle, (3) inventory levels and locations, and (4) financial
                        management. Also, under this program, the Army is establishing local-level
                        site improvement teams to examine and improve the logistics operations
                        of individual Army units. As of September 1996, however, Velocity
                        Management has had no impact on CCAD operations and has had only
                        limited success in improving overall logistics operations.




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                   The Army established the Velocity Management program with the goals,
                   concepts, and top-management support that parallel the improvement
                   efforts found in private sector companies. The overall goal of the program
                   is to eliminate unnecessary steps in the logistics pipeline that delay the
                   flow of parts through the system. Like the private sector, the Army plans
                   to achieve these improvements by changing its processes, not by refining
                   the existing system that tends to gain only incremental improvements. The
                   Army also recognizes the importance of top-management support to the
                   ultimate success of these initiatives. The Army’s current leadership has
                   strongly endorsed the program as a vehicle for making dramatic
                   improvements to its current logistics system.

                   As of September 1996, CCAD was not actively involved in the Velocity
                   Management program. Instead, depot officials established a program to
                   improve CCAD operations. Under this program, depot officials have focused
                   on changing the management culture, measuring the actual cost of
                   operations, and redesigning some of the local repair processes. The first
                   major initiative pursued by depot officials was to measure the actual cost
                   of completing repairs using an activity-based cost analysis of certain depot
                   processes. Depot officials have also redesigned the repair process for
                   helicopter blades, moving all of the resources needed to complete repairs
                   into one facility, which is intended to reduce the repair cycle time. Unless
                   CCAD’s local program is expanded to include other DOD organizations, such
                   as DLA, substantial reductions in the total pipeline time may not be
                   possible.


                   The airline industry has developed leading-edge practices that focus on
Industry Best      reducing the time and complexity of the logistics pipeline. As discussed in
Practices Can Be   our reports on Air Force and Navy reparable parts logistics operations, we
Used to Build on   identified four best practices in the airline industry that have the potential
                   for use in military systems and have resulted in significant improvements
Army Initiatives   and reduced logistics costs for several airlines, especially British Airways.
                   These practices are the prompt repair of items, the reorganization of the
                   repair process, the establishment of partnerships with key suppliers, and
                   the use of third-party logistics services. When used together, they can help
                   maximize a company’s inventory investment, decrease inventory levels,
                   and provide a more flexible repair capability. In our opinion, they address
                   many of the same problems the Army is facing and represent practices that
                   could be applied to Army operations.




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Repairing Items Promptly   Certain airlines streamlined their repair process by eliminating excess
                           inventories and initiating repair actions as quickly as possible, which
                           prevented the broken items from sitting in storage for extended periods.
                           Minimizing idle time helps reduce inventories because it lessens the need
                           for extra “cushions” of inventory to cover operations while parts are out of
                           service. In addition, repairing items promptly promotes flexible scheduling
                           and production practices, enabling maintenance operations to respond
                           more quickly as repair needs arise.

                           Prompt repair involves inducting parts into maintenance shops soon after
                           broken items arrive at repair facilities. In contrast, as discussed earlier in
                           this report, the Army sometimes holds parts for more than a year before
                           they are inducted for repair. Prompt repair does not mean that all parts are
                           fixed, however. The goal is to quickly fix only those parts that are needed.
                           One airline that uses this approach routes broken parts directly to holding
                           areas next to repair shops, rather than to stand-alone warehouses, so that
                           mechanics can quickly access broken parts when it comes time to repair
                           them. These holding areas also give the production managers and the
                           mechanics better visibility of any backlogs.


Reorganizing the Repair    One approach to simplify the repair process is the “cellular” concept,
Process                    which brings all the resources, such as tooling and support equipment,
                           personnel, and inventory that are needed to repair a broken part into one
                           location, or one “cell.” This approach simplifies the flow of parts through
                           the process by eliminating the time-consuming exercise of routing parts to
                           workshops in different locations. It also ensures that mechanics have the
                           technical support so that operations run smoothly. In addition, because
                           inventory is placed near the workshops, mechanics have quick access to
                           the parts they need to complete the repairs more quickly. British Airways
                           adopted the cellular approach after determining that parts could be
                           repaired as much as 10 times faster using this concept. Another airline that
                           adopted this approach in its engine blade shop reduced its repair time by
                           as much as 50 percent to 60 percent and decreased work-in-process
                           inventory by 60 percent.

                           One airline we visited has also adapted the cellular concept to its aircraft
                           overhaul process. The airline established work cells adjacent to the
                           aircraft bays that contain a variety of tooling and support equipment that
                           enable mechanics to overhaul a variety of aircraft parts alongside the
                           aircraft. At this location, the airline completes a majority of aircraft repairs
                           planeside, using this cellular approach.



                           Page 16                                     GAO/NSIAD-97-82 Inventory Management
                            B-272662




Establishing Partnerships   Several airlines and manufacturers that we visited have worked with
With Key Suppliers          suppliers to improve parts support while reducing overall inventory. The
                            use of local distribution centers and integrated supplier programs are two
                            approaches that specifically seek to improve the management and
                            distribution of consumable items. These approaches help ensure that the
                            consumable parts for repair and manufacturing operations are readily
                            available, which prevents items from stalling in the repair process and is
                            crucial in speeding up repair time. In addition, by improving management
                            and distribution methods, such as using streamlined ordering and fast
                            deliveries, firms can delay the purchase of inventory until it is needed.
                            Firms, therefore, can reduce their stocks of “just-in-case” inventory.

                            Local distribution centers are supplier-operated facilities that are
                            established near a customer’s operations and provide deliveries of parts
                            within 24 hours. One airline that used this approach worked with key
                            suppliers to establish more than 30 centers near its major repair
                            operations. These centers receive orders electronically and, in some cases,
                            handle up to eight deliveries per day. Airline officials said that the ability
                            to get parts quickly has contributed to repair time reductions. In addition,
                            the officials said that the centers have helped the airline cut its on hand
                            supply of consumable items nearly in half.

                            Integrated supplier programs involve the shifting of inventory management
                            functions to suppliers. Under this arrangement, a supplier monitors parts
                            usage and determines how much inventory is needed to maintain a
                            sufficient supply. The supplier’s services are tailored to the customer’s
                            requirements and can include placing a supplier’s representative in
                            customer facilities to monitor supply bins at end-user locations, place
                            orders, manage receipts, and restock bins. Other services can include
                            24-hour order-to-delivery times, quality inspections, parts kits,
                            establishment of electronic data interchange links and inventory bar
                            coding, and vendor selection management. Table 3 summarizes the types
                            of services, reductions, and improvements achieved by an integrated
                            supplier (TriStar Aerospace Corporation) for some of its customers
                            (designated as A through E) under the integrated supplier program.




                            Page 17                                    GAO/NSIAD-97-82 Inventory Management
                                         B-272662




Table 3: Integrated Supplier Program Results for Five Companies
Company                                        A                B                              C                        D                         E
Date established                      10/16/93                 1/17/92                    1/7/94                 7/29/92                   7/9/93
Length of contract (years)                      5                      5                        3                       3                         3
Number of line items                     8,858                    8,000                   4,500                    1,888                       1,900
Numbers of stocking                     29,505                    3,404                  13,153           Not available                        4,311
points/bins
Number of customer facilities                  45                      7                        3                       1                         1
Amount of inventory reduction       $7,350,000             $2,000,000               $1,800,000                 $300,000                $200,000
Percent reduction                              84                    50                       60                       30                        29
                      a
Fill rate (percent)                          98.0                  88.7                     96.7                     99.0                       94.3
Order ship timeb (hours)                       24                    48                       48                       24                        24
Frequency of deliveries                      Daily                Daily                    Daily                    Daily                      Daily
Number of orders filled daily                 300                   200                      150                       15                        75
                                         a
                                          Fill rate is the number of times the inventory requested is on hand and delivered to the customer,
                                         expressed as a percent of total orders.
                                         b
                                          Order ship time is the amount of time it takes Tri-Star to deliver inventory to the customer after
                                         receiving an order.

                                         Source: TriStar Aerospace Corporation.



                                         The use of an integrated supplier program would significantly alter the
                                         current DOD process of providing piece parts to mechanics at the repair
                                         depot or in the field. Figure 7 compares using the DOD system at CCAD with
                                         using the integrated supplier concept. As shown, the integrated supplier
                                         concept provides the opportunity to reduce or eliminate inventory in the
                                         DLA wholesale system, the depot bulk storage location, and the automated
                                         distribution warehouse.




                                         Page 18                                                    GAO/NSIAD-97-82 Inventory Management
                                        B-272662




Figure 7: DOD Supply System at CCAD Compared to an Integrated Supplier Concept




                                                            Depot
 CCAD Supply System                                                                                Maintenance
                                                             X
                                                          Automated
                                                          Distribution
                                                          Warehouse
                                                                                                   Shop Storage

                         DLA               Depot
 Manufacturers
                        X
                       Wholesale
                       Inventory
                                           X
                                           Bulk
                                          Storage
                                                                                                    End-users




 Integrated Supplier Concept                                                                       Maintenance
                                                                                                   Shop Storage
                                                                                                    Locations
                        Key
  Manufacturers
  a
                       Vendor


                                                                                                    End-users




Using Third-Party Logistics             The airlines we contacted provided examples of how third-party logistics
Providers                               providers can be used to reduce costs and improve performance.
                                        Third-party providers manage and carry out certain functions, such as
                                        inventory storage and distribution. They can also offer management
                                        expertise that companies often do not have the time or the resources to
                                        develop.

                                        For example, one airline contracts with a third-party provider to handle
                                        deliveries and pickups from suppliers and repair vendors, which has
                                        improved the reliability and speed of deliveries. The airline receives most
                                        items within 5 days, which includes time-consuming customs delays, and
                                        is able to deliver most items to repair vendors in 3 days. In the past,
                                        deliveries took as long as 3 weeks.




                                        Page 19                                   GAO/NSIAD-97-82 Inventory Management
                      B-272662




                      Third-party providers can also assume other functions. One provider that
                      we visited, for example, can assume warehousing and shipping
                      responsibilities and provide rapid transportation to speed parts to end
                      users. The provider can also pick up any broken parts from a customer
                      and deliver them to the source of repair within 48 hours. In addition, this
                      provider maintains the data associated with warehousing and in-transit
                      activities, offering real-time visibility of assets.


                      Some combination of the four best practices discussed in this report may,
Integrated Best       in our opinion, significantly reduce the Army’s repair pipeline time and
Practices May         inventory requirements. The current repair pipeline at CCAD, including the
Produce Significant   average number of days it took to move the parts we examined through
                      this pipeline and the flow of consumable parts into the repair depot, is
Savings               shown in figure 8. A modified Army system incorporating the use of an
                      integrated supplier for consumable items, third-party logistics services,
                      inducting parts soon after they arrive at the depot, and cellular repair
                      shops is shown in figure 9. A comparison of figures 8 and 9 shows the
                      potential reductions possible using these key best practices.




                      Page 20                                   GAO/NSIAD-97-82 Inventory Management
                                            B-272662




Figure 8: Current Repair Pipeline at CCAD

                                                                                                             Reparable
                                                                                                             Parts Flow
                                                                                                                              75 Days

                                                                                                                  Operating
                                                                                                                  Base




                                                                                                                   DLA
                                                                                                                   Depot
                                                                                                                   Storage    158 Days




  Consumable                                           DLA                        Repair
                                                       Depot                      Depot
                                                                                                                    Depot
  Parts Flow          Manufacturers
                                                       Storage                    Storage                           Repair    147 Days



                                        DLA performance for all    - $23 million retail inventory
                                        DOD customers:             - $23 million automated
                                                                       distribution warehouse                      DLA
                                                                   - 72 other storage locations                    Depot      145 Days
                                        Hardware items:                                                            Storage
                                        - $5.7 billion inventory   - 25% fill rates
                                        - over 2 years on hand     - $40 million backorders
                                        - 5-week order/ship time      to mechanics




                                                                                                                  Operating
                                                                                                                  Base




                                            Page 21                                                 GAO/NSIAD-97-82 Inventory Management
                                           B-272662




Figure 9: Best Practices Applied to the Army Repair Pipeline

                                                                   Reparable
                                                                   Parts Flow
                                                                                         2 Days
                                                                           Operating
                                                                           Base




                                                                    Third-party
                                                                     provider




Consumable                                        Integrated                Cellular
Parts Flow          Manufacturers                                           Depot        30 Days
                                                  Supplier
                                                                            Repair


                                      - 24 hour delivery
                                      - minimum DOD inventory
                                      - 95% or better fill rates
                                      - in-plant representative          Third-party    Storage +
                                                                         provider      2 day delivery




                                                                          Operating
                                                                          Base




                                           The reparable parts pipeline time could be reduced by hundreds of days
                                           with the application of third-party logistics providers, the cellular concept,
                                           and quick induction of parts into repair. The consumable parts flow could
                                           be improved and inventories substantially reduced by using the integrated
                                           supplier concept. If the Army were able to adopt these practices and
                                           achieve savings similar to the private sector, inventory and related
                                           management costs could be substantially reduced.




                                           Page 22                                     GAO/NSIAD-97-82 Inventory Management
                      B-272662




                      As part of the Army’s current efforts to improve the logistics system’s
Recommendations       responsiveness and reduce its complexity, we recommend that the
                      Secretary of Defense direct the Secretary of the Army, working with DLA,
                      to develop a demonstration project to determine the extent to which the
                      Army can apply best practices to its logistics operations. We also
                      recommend that the Secretary of the Army appoint an accountable
                      “change agent” for this program who will periodically report back to the
                      Secretary on the progress of the demonstration project. In addition, we
                      recommend that the Secretary of the Army identify the Army facilities that
                      will participate in this project, establish specific test program milestones,
                      and identify the performance measures that will be used to quantify
                      process improvements and reductions in the overall pipeline time. The
                      practices should be tested in an integrated manner, where feasible, to
                      maximize the interrelationship many of these practices have with one
                      another. The specific practices that should be considered, where feasible,
                      are

                  •   eliminating excess inventory and inducting parts at repair depots soon
                      after they break, consistent with repair requirements, to prevent parts
                      from sitting idle;
                  •   using the cellular concept to reduce the time it takes to repair parts;
                  •   establishing innovative supplier partnerships to increase the availability of
                      parts needed to complete repairs at the depot, such as local distribution
                      centers and integrated supplier programs; and
                  •   using third-party logistics providers to store and distribute spare parts
                      between the depot and end users to improve delivery times.

                      We further recommend that this project be used to quantify the costs and
                      benefits of these practices and to serve as a means to identify and alleviate
                      barriers or obstacles that may inhibit the expansion of these practices.
                      After these practices have been tested, the Army should consider
                      expanding and tailoring the use of these practices, where feasible, so they
                      can be applied to other locations.


                      In its comments on a draft of this report, DOD agreed with the findings and
Agency Comments       recommendations. DOD indicated that the Army is participating in DLA’s
                      Virtual Prime Vendor pilot program, which is intended to improve supply
                      support to depot maintenance activities. DOD stated that contractors under
                      that program will determine, working with DLA, the best method of support
                      to meet the performance criteria of the program.




                      Page 23                                   GAO/NSIAD-97-82 Inventory Management
              B-272662




              DOD  estimates that the Army will initiate a Virtual Prime Vendor pilot at an
              Army depot by October 1998. DOD stated that, after the pilot is successfully
              implemented at an Army site, the Army plans to assess the applicability of
              this approach at other locations. However, an implementation date for
              future projects has not been set. In addition, the Army plans to identify
              and appoint an accountable change agent for these programs by
              June 1997. DOD’s comments are included in appendix I.


              We reviewed documents and interviewed officials on the Army’s inventory
Scope and     policies, practices, and efforts to improve its logistics operations. We
Methodology   contacted officials at the Office of the Deputy Under Secretary of Defense
              for Logistics, Washington D.C.; Army Headquarters, Washington, D.C.; the
              Army Materiel Command, Alexandria, Virginia; the Army’s Aviation and
              Troop Command, St. Louis, Missouri; and the Army Industrial Operations
              Command, Rock Island Arsenal, Rock Island, Illinois.

              To examine the Army’s logistics operations and improvement efforts, we
              visited the DLA Defense Distribution Depot, Corpus Christi, Texas; the DLA
              Premium Services System, Memphis, Tennessee; CCAD, Corpus Christi,
              Texas; and the (Army) 101st Airborne Division (Air Assault), Fort
              Campbell, Kentucky. At these locations, we discussed with supply and
              maintenance personnel the operations of the Army’s current logistics
              system, customer satisfaction, planned improvements to their logistics
              system, and the potential application of private sector logistics practices
              to their operations. We also reviewed and analyzed detailed information
              on inventory levels and usage, repair times, supply effectiveness and
              response times, and other related logistics performance measures. We did
              not test or otherwise validate the Army’s data.

              To calculate the amount of time the Army’s system takes to repair and
              distribute parts using the current depot repair process, we judgmentally
              sampled 24 components—9 of the components, provided to us and
              currently stored by the Defense Distribution Depot, Corpus Christi, were
              ones with an active fiscal year 1996 repair program, and 15 components
              were selected from the top 20 repair programs managed by the Army’s
              Aviation and Troop Command based on dollar value, impact on readiness,
              and numbers of backorders.

              To identify leading commercial practices, we used information from our
              February 1996 report that compared Air Force logistics practices to those
              of commercial airlines. This information, which was collected by making



              Page 24                                   GAO/NSIAD-97-82 Inventory Management
B-272662




an extensive literature search, identified leading inventory management
concepts and detailed examinations and discussions of logistics practices
used by British Airways, United Airlines, Southwest Airlines, American
Airlines, Federal Express, Boeing, the Northrop-Grumman Corporation,
and TriStar Aerospace. We also participated in roundtables and
symposiums with recognized leaders in the logistics field to obtain
information on how companies are applying integrated approaches to their
logistics operations and establishing supplier partnerships to eliminate
unnecessary functions and reduce costs. Finally, to gain a better
understanding on how companies are making breakthroughs in logistics
operations, we attended and participated in the Council of Logistics
Management’s Annual Conferences in San Diego, California, and Orlando,
Florida. We did not independently verify the accuracy of logistics costs
and performance measures provided by private sector organizations.

We conducted our review from January 1996 to December 1996 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to the appropriate congressional
committees; the Secretaries of Defense and the Army; the Directors of DLA
and the Office of Management and Budget; and other interested parties.
We will also make copies available to others upon request.

Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report. The major contributors to this report are
listed in appendix II.

Sincerely yours,




David R. Warren, Director
Defense Management Issues




Page 25                                  GAO/NSIAD-97-82 Inventory Management
Contents



Letter                                                                                            1


Appendix I                                                                                       28

Comments From the
Department of
Defense
Appendix II                                                                                      31

Major Contributors to
This Report
Related GAO Products                                                                             32


Tables                  Table 1: Average Days Used by the Army Depot Repair System for            5
                          24 Types of Aviation Parts
                        Table 2: Gearbox Repair Inductions                                        8
                        Table 3: Integrated Supplier Program Results for Five Companies          18

Figures                 Figure 1: Comparison of the Army’s and British Airways’ Pipeline          6
                          Times for a Gearbox Assembly
                        Figure 2: Comparison of British Airways and Army Inventory                7
                          Turnover Rates
                        Figure 3: The Army’s Repair Process for a Hydraulic Component            10
                        Figure 4: Multilayered Inventory System for Consumable Parts             11
                        Figure 5: CCAD Automated Distribution Warehouse                          12
                        Figure 6: CCAD Maintenance Shop Inventory Storage Location               13
                        Figure 7: DOD Supply System at CCAD Compared to an                       19
                          Integrated Supplier Concept
                        Figure 8: Current Repair Pipeline at CCAD                                21
                        Figure 9: Best Practices Applied to the Army Repair Pipeline             22




                        Abbreviations

                        CCAD       Corpus Christi Army Depot
                        DLA        Defense Logistics Agency
                        DOD        Department of Defense


                        Page 26                                 GAO/NSIAD-97-82 Inventory Management
Page 27   GAO/NSIAD-97-82 Inventory Management
Appendix I

Comments From the Department of Defense




             Page 28        GAO/NSIAD-97-82 Inventory Management
                Appendix I
                Comments From the Department of Defense




Now on p. 23.




Now on p. 23.




                Page 29                                   GAO/NSIAD-97-82 Inventory Management
                Appendix I
                Comments From the Department of Defense




Now on p. 23.




Now on p. 23.




                Page 30                                   GAO/NSIAD-97-82 Inventory Management
Appendix II

Major Contributors to This Report


                        Charles I. (Bud) Patton, Jr.
National Security and   Kenneth R. Knouse, Jr.
International Affairs
Division, Washington,
D.C.
                        Robert L. Repasky
Dayton Field Office     Matthew B. Lea
                        Frederick J. Naas


                        Robert C. Gorman
Dallas Field Office     Robert D. Malpass




                        Page 31                        GAO/NSIAD-97-82 Inventory Management
Related GAO Products


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

              Best Management Practices: Reengineering the Air Force’s Logistics
              System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 21, 1996).

              Inventory Management: DOD Can Build on Progress in Using Best Practices
              to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug. 4, 1995).

              Commercial Practices: DOD Could Reduce Electronics Inventories by Using
              Private Sector Techniques (GAO/NSIAD-94-110, June 29, 1994).

              Commercial Practices: Leading-Edge Practices Can Help DOD Better
              Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, Apr. 13, 1994).

              Commercial Practices: DOD Could Save Millions by Reducing Maintenance
              and Repair Inventories (GAO/NSIAD-93-155, June 7, 1993).

              DOD Food Inventory: Using Private Sector Practices Can Reduce Costs and
              Eliminate Problems (GAO/NSIAD-93-110, June 4, 1993).

              DODMedical Inventory: Reductions Can Be Made Through the Use of
              Commercial Practices (GAO/NSIAD-92-58, Dec. 5, 1991).

              Commercial Practices: Opportunities Exist to Reduce Aircraft Engine
              Support Costs (GAO/NSIAD-91-240, June 28, 1991).




(709176)      Page 32                                    GAO/NSIAD-97-82 Inventory Management
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