oversight

Defense Inventory Management: Problems, Progress, and Additional Actions Needed

Published by the Government Accountability Office on 1997-03-20.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on National Security,
                          International Affairs, and Criminal Justice, Committee on
                          Government Reform and Oversight, House of
                          Representatives

For Release on Delivery
Expected at
9:30 a.m., EST
                          DEFENSE INVENTORY
Thursday,
March 20, 1997            MANAGEMENT

                          Problems, Progress, and
                          Additional Actions Needed
                          Statement by Henry L. Hinton, Jr., Assistant Comptroller
                          General, National Security and International Affairs
                          Division




GAO/T-NSIAD-97-109
             Mr. Chairman and Members of the Subcommittee:

             We are pleased to be here today to discuss defense inventory management
             issues. We have identified defense inventory management as 1 of our 25
             high-risk areas in the federal government because of vulnerabilities to
             waste, fraud, and abuse.1 As requested, our testimony will focus on (1) a
             historical overview of defense inventory management problems;
             (2) measures taken by the Department of Defense (DOD) to improve
             inventory management; and (3) the actions DOD needs to aggressively take,
             both near and long term, to solve long-standing inventory management
             problems.


             DOD’s secondary inventories include consumable supplies, such as
Background   medical, hardware, food, and clothing items, that are discarded after use
             rather than repaired. Secondary items also include reparable items that, if
             damaged or worn, can be fixed or overhauled for less than the cost of new
             items. Examples of these items are landing gear, hydraulic pumps, and
             avionics, which are essential to a weapon system’s operation. In the past 5
             years, we have issued a number of reports that address DOD inventory
             management problems related to these inventories.2

             The private sector, driven by today’s globally competitive business
             environment, is faced with the challenge of improving its service while
             lowering costs. As a result, many companies have adopted innovative
             business practices to meet customer needs and retain profitability. Since
             DOD is facing a similar challenge of providing better service at a lower cost,
             it has also begun to reexamine its business practices. With the end of the
             Cold War, the DOD logistics system must support a smaller, highly mobile,
             high technology force with fewer resources. Also, due to the pressures of
             budgetary limits and base closures, DOD must seek new and innovative
             ways to make logistics processes as efficient and effective as possible. To
             address fundamental management problems in the federal government,




             1
              In 1990, we began a special effort to review and report on the federal program areas we identified as
             high risk because of vulnerabilities to waste, fraud, abuse, and mismanagement. This effort, which was
             supported by the Senate Committee on Government Affairs and the House Committee on Government
             Reform and Oversight, brought a much needed focus on problems that were costing the government
             billions of dollars. We identified DOD’s secondary inventory management as a high-risk area at that
             time because levels of unneeded inventory were too high and systems for determining inventory
             requirements were inadequate.
             2
              See Related GAO Products.



             Page 1                                                                        GAO/T-NSIAD-97-109
                   the Congress enacted landmark legislation3 in the 1990s to establish broad
                   management reforms within the federal government. These reforms, if
                   implemented successfully, will help resolve high-risk problems, such as
                   inventory management, and provide greater accountability in many
                   government programs and operations. Through these reforms, the
                   Congress has laid the groundwork for the federal government to use
                   proven best management practices that have been successfully applied in
                   the private sector. The administration has embraced these management
                   reforms and made their implementation a priority.


                   Inventory management problems have plagued DOD for decades. Despite
Results in Brief   numerous efforts on DOD’s part to correct these problems, we continue to
                   consider inventory management a high-risk area because it is vulnerable to
                   fraud, waste, and abuse. We recently reported that, as of September 30,
                   1995, about $34 billion, or about half of DOD’s $69.6 billion secondary
                   inventory, was not needed to support war reserve or current operating
                   requirements. Most of the problems that contributed to the accumulation
                   of this unneeded inventory still exist, such as outdated and inefficient
                   inventory management practices that frequently do not meet customer
                   demands, inadequate inventory oversight, weak financial accountability,
                   and overstated requirements. Because of these problems, we believe DOD’s
                   annual expenditure of approximately $15 billion for additional inventory is
                   at risk.

                   DOD recognizes that it needs to make substantial improvements to its
                   logistics system. While we continue to see pockets of improvement, as
                   evidenced by each service’s and the Defense Logistics Agency’s (DLA)
                   reengineering efforts, DOD has made little overall progress in correcting
                   systemic problems that have traditionally resulted in large unneeded
                   inventories. DOD top management needs to continue its commitment to
                   changing its inventory management culture so that it provides its forces
                   with necessary supplies in a timely manner while avoiding the
                   accumulation of unnecessary materials.

                   To effectively address its inventory management problems, DOD must
                   adopt a strategy that includes both short- and long-term actions.



                   3
                    These laws include (1) the expanded Chief Financial Officers Act of 1990 to prepare financial
                   statements that can pass the test of an independent audit and provide decisionmakers reliable
                   information, (2) the 1993 Government Performance and Results Act to measure performance and
                   focus on results, and (3) the 1995 Paperwork Reduction Act and the 1996 Clinger-Cohen Act to make
                   wiser investments in information technology.



                   Page 2                                                                      GAO/T-NSIAD-97-109
                          •   In the short term, DOD must continue to emphasize the efficient operation
                              of its existing logistics systems. This includes reducing and disposing of
                              unneeded inventory, implementing efficient and effective inventory
                              management practices, training personnel in these practices and
                              rewarding the right behavior, improving requirements data accuracy, and
                              enforcing existing policies and procedures to minimize the acquisition and
                              accumulation of unnecessary inventory.
                          •   In the long term, DOD must establish goals, objectives, and milestones for
                              changing its culture and adopting new management tools and practices. A
                              key part to changing DOD’s management culture will be an aggressive
                              approach to using best practices from the private sector. From our
                              discussions with more than 50 private sector companies, we identified
                              best practices which, if applied in an integrated manner, could help
                              streamline DOD’s logistics operations, potentially save billions of dollars,
                              and improve support to the military customer. In our opinion, DOD has not
                              been aggressive enough in pursing these practices. Recent DOD
                              reengineering efforts have not incorporated some of the most advanced
                              practices found in the private sector for reparable parts, and they have
                              been slow to adopt best practices for hardware items.


                              We have reported over the last 20 years on numerous problems dealing
Overview of DOD’s             with DOD’s secondary inventory management. We reported that much of
Inventory                     DOD’s unneeded inventory was acquired because of outdated and

Management                    inefficient inventory management practices. For consumable items, DOD
                              holds inventory in as many as four different layers to ensure items are
Problems                      available to end users when needed—a philosophy some private sector
                              companies have moved away from in recent years. For reparable aviation
                              parts, DOD’s depot repair process is slow and inefficient. As a result, each
                              of the services can spend several months or even years to repair the parts
                              and then distribute them to the end user.


Much of DOD’s Inventory       As of September 30, 1995, DOD held inventories valued at a total of
Is Unneeded                   $69.6 billion, of which about $34 billion was not needed for war reserve or
                              current operating requirements (see fig. 1). After a detailed analysis of
                              DOD’s inventory records, we reported in February 1997 that some of DOD’s
                              inventory could last for decades or may never be used. For example, we
                              identified about $14.6 billion of inventory that did not have projected
                              demands and therefore is likely never to be used. We calculated that
                              another $11.8 billion of inventory could last 2 to 10 years and $1.1 billion
                              of inventory could last at least 100 years.



                              Page 3                                                     GAO/T-NSIAD-97-109
Figure 1: DOD Inventory (Sept. 30,
1995)                                                                        0.4%
                                                                             Designated for Reuse or Disposal
                                                                             $0.3 Billion




                                              48.4%
                                                             51.2%           War Reserves and Current Operations
                                                                             $35.7 Billion




                                                                             Beyond War Reserves and
                                                                             Current Operations
                                                                             $33.7 Billion




                                     For example, as of September 1995, the Air Force had invested about
                                     $472,000 for 4,177 wiring harnesses used on the airborne radio
                                     communication system. Of these, 4,152 were not needed to satisfy war
                                     reserve and current operating requirements. On the basis of projected
                                     demand data, we determined that the unneeded harnesses represented 277
                                     years of supply. According to the item manager, demand for the harnesses
                                     decreased as modifications to the radio system were made. However,
                                     some of the harnesses are being retained to support the military services,
                                     the Coast Guard, and foreign military sales and to reconfigure other
                                     radios. The item manager informed us that 3,822 harnesses have been
                                     recommended for disposal.

                                     In another example, DLA had 127 motor blower brakes on hand as of
                                     August 1996. The brakes are used on the B-1B aircraft. Inventory records
                                     showed that 101 brakes, valued at $4,110 each, were unneeded and
                                     represented 101 years of supply. According to the item manager, 100
                                     brakes were expected to be needed for fiscal year 1996. However,




                                     Page 4                                                     GAO/T-NSIAD-97-109
                            September 1996 records showed that only one had been used in the past
                            year. The item manager believed that the demands for the brakes are
                            cyclic because the contractor repairing the B-1B periodically orders the
                            parts in bulk.

                            To store and distribute this large inventory, DOD operates a worldwide
                            logistics system. In the United States alone, DOD operates about 25
                            distribution depots and other storage locations. Much of this storage space
                            is occupied with unneeded inventory. We reported in May 1995 that DOD
                            uses about 130 million cubic feet of storage space to store inventory that is
                            not needed to support current operations or war reserve requirements.
                            DOD estimated it took approximately 205 warehouses, each the size of over
                            2 football fields, to provide this space, at an estimated cost of $94 million
                            per year.

                            Downsizing of the military forces has contributed to some of DOD’s excess
                            inventory. However, we have also reported that DOD has wasted billions of
                            dollars on excess supplies. This problem resulted because inherent in
                            DOD’s culture was the belief that it was better to overbuy items than to
                            manage with just the amount of stock needed. The problems that have
                            contributed to billions of dollars of unneeded inventory still exist, such as
                            inadequate inventory oversight, weak financial accountability, and
                            overstated requirements. If DOD had used effective inventory management
                            and control techniques and modern commercial inventory management
                            practices, it would have lowered its inventory levels and it would have
                            avoided the burden and expense of storing excess inventory. Because
                            these problems still exist, we believe DOD’s annual expenditure of
                            approximately $15 billion for additional inventory is at risk.


Outdated Logistics System   Of DOD’s $69.6 billion inventory, about $19.2 billion is consumable
for Consumable Items        inventory stored at wholesale and retail facilities (see fig. 2). DOD’s large
                            inventory of consumable items reflects its philosophy of relying on large
                            stock levels to readily meet customer needs. As a result, DOD stores
                            inventory in as many as four different layers to provide items to end users
                            when needed. The first layer of inventory is the wholesale supply system.
                            The $14.5 billion inventory stored by DOD at this level can, in some cases,
                            satisfy the needs of the services for years. For example, we estimated that
                            DLA wholesale inventory for hardware items could last an average of about
                            2 years, based on fiscal year 1995 demands. At the retail level, the services
                            hold additional inventory valued at about $4.7 billion. This inventory is
                            stored in three different layers close to where the items are used—base



                            Page 5                                                     GAO/T-NSIAD-97-109
                                      warehouses, central storerooms, and end-user locations. As reported in
                                      August 1995, service facilities we visited had retail stock on hand sufficient
                                      to last from 1 month to over 5 years.


Figure 2: DOD Inventory Composition
(Sept. 30, 1995)                                                                   Reparable Aircraft Parts
                                                                                   $40.8 Billion


                                                                                   Other Reparable Parts
                                                                                   $9.6 Billion


                                                                                   Personnel Items (Consumables)
                                                                                   $3.5 Billion




                                                                                   Other Consumable Items
                                                                                   $15.7 Billion




                                                Total Inventory $69.6 Billion




                                      Despite this large investment in inventory, DOD’s supply system frequently
                                      fails to meet the needs of its “customer.” For example, at one Army repair
                                      depot we visited, the base warehouse failed to fully satisfy customer
                                      orders 75 percent of the time during the first 11 months of fiscal year 1996.
                                      Also, as of February 1996, the Navy had almost 12,000 broken aircraft
                                      parts, valued at $486 million, that it stopped repairing because parts were
                                      not available to complete repairs. These items, which had been packaged
                                      and moved to a warehouse next to the repair facility, had been storage for
                                      an average of 9 months.


Inefficient Logistics                 DOD’s depot repair pipeline for reparable parts is slow and inefficient.
System for Reparable                  Several factors contribute to these conditions. These factors are
Items                                 (1) broken reparable parts move slowly between field units and a repair



                                      Page 6                                                        GAO/T-NSIAD-97-109
                               depot, (2) reparable parts are stored in warehouses for several months
                               before and after they are repaired, (3) work processes at repair depots are
                               inefficiently organized, and (4) consumable parts are not frequently
                               available to mechanics when needed. As a result, each of the services can
                               spend several months or even years to repair and distribute a repaired part
                               to the end user.

                               The amount of time required by the logistics system is important because
                               DOD must invest in enough inventory to resupply units with serviceable
                               parts during the time it takes to move and repair broken parts. As of
                               September 30, 1995, DOD’s reparable parts inventory was valued at about
                               $50 billion, of which about $41 billion was for aircraft component parts. If
                               DOD’s repair time were reduced, inventory requirements could also be
                               reduced. For example, an Army-sponsored RAND study noted that
                               reducing the repair time for one helicopter component from 90 to 15 days
                               would also reduce inventory requirements for that component from
                               $60 million to $10 million.


Additional Problems            Along with the outdated and inefficient practices discussed above, we
Contributing to Unneeded       found instances where DOD still lacks adequate oversight of its inventory,
Inventory                      financial accountability remains weak, and requirements continue to be
                               overstated. These additional problems have contributed to DOD’s unneeded
                               inventory. For example:

                           •   In August 1996, we reported that Navy managers did not have adequate
                               visibility over $5.7 billion in operating materials and supplies on board
                               ships and at 17 redistribution sites. We estimated that, because of the lack
                               of oversight, in the first half of 1995 item managers ordered or purchased
                               items in excess of operating level needs. As a result, the Navy will incur
                               unnecessary costs of about $27 million.
                           •   We reported in March 1996 that the Air Force and the Navy budgeted
                               $132 million more than was needed for aviation spare parts because of
                               questionable policies concerning the determination of requirements and
                               the accountability for depot maintenance assets. The Air Force did not
                               consider $72 million of on-hand assets, and the Navy counted $60 million
                               in depot maintenance requirements twice.
                           •   Regarding DOD’s financial accounting process and systems, the Secretary
                               of Defense, in his February 1996 annual statement of assurance required
                               by the Federal Managers’ Financial Integrity Act, identified inadequate
                               internal controls and other significant deficiencies, such as the use of a
                               variety of nonintegrated systems; inability of current systems to respond



                               Page 7                                                     GAO/T-NSIAD-97-109
                            rapidly to change; lack of automated indicators that measure, or link costs,
                            performance measurements, or other output measurements; difficulties
                            with consistently valuing and reconciling physical inventories to financial
                            account balances; and inaccuracies in the valuation of property, plant, and
                            equipment.


                            DOD recognizes that it needs to make substantial improvements to its
DOD Has Made Some           logistics system. In fact, DOD’s goals, concepts, and top management
Progress in Reducing        commitment to reengineer its business practices closely parallel those we
Inventory                   have seen in the private sector. Since fiscal year 1989, DOD has reduced
                            secondary inventory levels by $22.9 billion. While this is a significant
                            reduction, we believe much of it was the result of reduced force levels,
                            which reduced overall demands on the logistics system. DOD has made
                            little progress in developing the management tools to help solve its
                            long-term inventory management problems.

                            DOD recognizes that it can no longer continue its current logistics practices
                            if it is to effectively carry out its mission in today’s environment. For
                            example, Air Force officials stated that budgetary constraints in recent
                            years have led to substantial reductions in personnel, leaving the
                            remaining work force to deal with a logistics operation that has
                            traditionally relied on large numbers of personnel. DOD has also recognized
                            that, with the end of the Cold War, dramatic changes need to be made and
                            goals, objectives, and processes similar to those being used in the private
                            sector need to be established. Aggressively pursuing these goals would fit
                            into DOD’s plans to reduce infrastructure and operations and support costs
                            so that funds could be freed up to support its current weapons
                            modernization efforts.


Prime Vendor Programs for   In response to our recommendations, DOD has adopted best practices to
Personnel Supplies          improve the management of personnel items, but these initiatives impact
                            less than 3 percent of DOD’s secondary items. Between 1991 and 1995, we
                            issued a series of reports that identified and recommended ways DOD could
                            apply best management practices to personnel items. These reports
                            focused on improved partnerships between suppliers and DOD facilities,
                            principally through the use of prime vendors. A prime vendor provides
                            timely and direct delivery between customers and suppliers, and orders
                            additional stock from manufacturers on short notice, with quick
                            turnaround, to minimize inventory holding costs. This approach reduces
                            the need for DOD to stock and distribute inventory from multiple locations.



                            Page 8                                                     GAO/T-NSIAD-97-109
                                        Since 1993, DLA has taken steps to use prime vendors for personnel items.
                                        One of DLA’s most successful initiatives has been the implementation of a
                                        prime vendor program for medical supplies and pharmaceutical products.
                                        We reported in 1995 that approximately 150 DOD hospitals and medical
                                        treatment facilities were using prime vendors in 21 different geographic
                                        regions across the United States. The use of this program has allowed DOD
                                        to reduce stock levels at both wholesale and retail locations. Reducing
                                        inventory levels has also enabled DOD to reduce the warehouse space
                                        needed to store these items. At one storage depot alone, DLA reduced the
                                        storage space used for medical and pharmaceutical items by about
                                        40 percent over a 3-year period (see fig. 3).


Figure 3: Vacated DLA Warehouse - 1991 vs 1994




                                        We estimate that between September 1991 and September 1996, DOD
                                        reduced its pharmaceutical, medical, and surgical inventories and
                                        associated management costs by about $714 million through the use of



                                        Page 9                                                  GAO/T-NSIAD-97-109
                                          best practices, such as prime vendors. The majority of savings has resulted
                                          from the issuance of medical supplies to military customers without
                                          having to replace inventories through the purchase of additional stocks.
                                          Similar prime vendor programs are being implemented for food and
                                          clothing items.

                                          The prime vendor program also enables DOD hospitals to reduce inventory
                                          costs. For example, we reported in August 1995 that the Walter Reed Army
                                          Medical Center, in addition to a $3.8 million reduction in pharmaceutical
                                          inventories, saves over $6 million a year in related inventory management
                                          expenses by using a prime vendor. In addition, as a result of the
                                          elimination of inventories after the prime vendor program was established,
                                          Walter Reed was able to convert a former warehouse holding medical
                                          supplies into a medical training facility. (see fig. 4).


Figure 4: A Converted Warehouse at the Walter Reed Army Medical Center




Services’ Initiatives for                 Each service is developing initiatives to improve the management of its
Improving Reparable Parts                 logistics pipeline for reparable aircraft parts to make their logistics
Management                                processes faster, better, and cheaper. For example:

                                      •   As we reported in 1996, the Air Force has described its “Lean Logistics”
                                          initiative as the cornerstone of all future logistics system improvements.
                                          These efforts, spearheaded by the Air Force Materiel Command, are aimed
                                          at dramatically improving service to the end user while simultaneously




                                          Page 10                                                  GAO/T-NSIAD-97-109
    reducing pipeline time, excess inventory, and other logistics costs. In
    June 1996, the Air Force began testing certain practices through
    demonstration projects at each of the five Air Logistics Centers. In fiscal
    year 1997, the Air Force also plans to examine the application of an
    integrated supplier program and other logistics practices we have
    recommended.
•   Under its regional supply and maintenance initiatives, the Navy is
    identifying redundant capabilities and consolidating operations into
    regionally based activities. In one region, the Navy is consolidating
    32 locations used to calibrate maintenance test equipment into 4 locations.
    The Navy believes that eliminating the fragmented management approach
    to supply management and maintenance will allow it to decrease
    infrastructure costs by reducing redundancies and eliminating excess
    capacity. The Navy also believes that moving away from highly
    decentralized operations will better position it to improve and streamline
    operations Navy-wide. The Navy has also established an initiative looking
    at ways to reduce the amount of time it takes a customer to receive a part
    after placing an order to the logistics system. We reported in July 1996 that
    these initiatives were in the early phases, so broad-based improvements
    had not yet occurred.
•   The Army developed the “Velocity Management” program to speed up key
    aspects of the logistics system and reduce the Army’s need for large
    inventory levels. The Army established the program with 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. Under this program, the Army has established
    Army-wide process improvement teams for the following four areas:
    ordering and shipping of parts, the repair cycle, inventory levels and
    locations, and financial management. Also, the Army is establishing
    local-level site improvement teams under this program to examine and
    improve the logistics operations of individual Army units.

    Because these programs have only recently begun, they have had limited
    impact in improving DOD’s overall logistics operations.




    Page 11                                                    GAO/T-NSIAD-97-109
                         On the basis of the work we have done comparing DOD and private sector
Aggressive Actions       logistics practices, we believe substantial opportunities exist for DOD to
Are Needed to            build on its current improvement efforts. Overall, DOD has been slow in
Resolve                  adopting new management practices for hardware items and has not
                         incorporated some of the most advanced practices found in the private
Long-Standing            sector for reparable parts. From our discussions with more than 50
Problems                 companies, we identified best practices that, if applied in an integrated
                         manner, could help streamline DOD’s logistics operations, save billions of
                         dollars, and improve support to the military customer. In the short term,
                         however, DOD must continue to emphasize the efficient operation of its
                         existing logistics systems. In the long term, DOD must establish goals,
                         objectives, and milestones for changing its culture.


Short-Term Solutions     In the short term, DOD needs to continue emphasizing the efficient
                         operation of its existing inventory systems. As previously reported, this
                         includes committing to improved inventory management by top
                         management’s emphasis on (1) inventory indicators that highlight
                         reduction and disposal of unneeded inventory; (2) implementation of
                         efficient and effective inventory management practices; and (3) training
                         personnel in those practices and rewarding the right behavior, improving
                         the accuracy of data such as requirements and the quantity, condition, and
                         value of inventory items managed through current logistics and financial
                         systems, and aggressively enforcing existing policies and procedures that
                         will minimize the acquisition and accumulation of unnecessary inventory.


Long-Term Solutions      In the long term, overall solutions include mapping a strategy for
                         completing its culture change initiatives; setting aggressive goals,
                         objectives, and milestones for identifying and implementing viable and
                         more cost-effective commercial practices for supplying its forces;
                         establishing goals, objectives, and milestones for determining where
                         outsourcing logistics functions represents a cost-effective and efficient
                         alternative to traditional methods; and providing inventory managers with
                         the automated, integrated accounting and management systems necessary
                         to manage its inventory in a world-class manner. These long-term
                         solutions will address systemic problems that have contributed to DOD’s
                         accumulation of unneeded inventory.


Organizational Culture   To address and resolve the issues we have discussed today, DOD faces
Challenges Facing DOD    major challenges as it pursues efforts to institutionalize a reengineered



                         Page 12                                                    GAO/T-NSIAD-97-109
                             logistics system. The “corporate culture” within DOD has been traditionally
                             resistant to change. Organizations often find changes in operations
                             threatening and are unwilling to change current behavior until proposed
                             ideas have been proven. This kind of resistance must be overcome if the
                             services are to expand their concept of operations. DOD’s top management
                             needs to continue its commitment to changing its inventory management
                             culture so that it provides its forces with necessary supplies in a timely
                             manner while avoiding the accumulation of unneeded materials. We
                             believe that the adoption of best practices is key to changing DOD’s
                             inventory management culture.


DOD Has Been Slow in         While DLA has taken steps to improve its logistics practices and reduce
Testing Best Practices for   inventories, such as through long-term contracting, direct vendor delivery,
Hardware Items               and electronic commerce, more aggressive steps could provide better
                             customer service while reducing logistics costs. DLA has not made enough
                             progress with its $5.7 billion inventory of hardware items because it still
                             has large amounts of items, such as bolts, valves, and fuses, that cost
                             millions of dollars to manage and store. We estimate that this inventory
                             could satisfy DOD’s requirements for the next 2 years, assuming demands
                             remain constant. In contrast, some private sector companies we visited
                             maintain inventory levels that last only 90 days. These companies have
                             achieved these lean inventory levels and saved millions in operating costs
                             by developing innovative supplier partnerships that give established
                             commercial distribution networks the responsibility to manage, store, and
                             distribute inventory on a frequent, regular basis.

                             Although we recommended in 1993 that DOD pursue innovative
                             partnerships with its suppliers to reduce logistics costs, DOD is only now in
                             the initial stages of testing this type of partnership through its “Virtual
                             Prime Vendor” program for hardware supplies. If successfully
                             implemented, this concept could enable DOD to improve service to its
                             customers and reduce overall logistics costs. In our opinion, this program
                             is close to those efforts we have observed in the private sector and
                             provides DOD with an excellent opportunity to achieve greater inventory
                             reductions by minimizing the need to store inventory at wholesale and
                             retail locations (see fig. 5). If DOD were able to achieve similar
                             performance from this effort as those in the private sector, hardware
                             inventories and related management costs could be reduced by billions of
                             dollars and parts needed to complete repairs would be more readily
                             available to the end user.




                             Page 13                                                    GAO/T-NSIAD-97-109
Figure 5: Traditional DOD Logistics System Compared to Best Management Practices

   Traditional Logistics System

                                                  DLA                                   Central
    Manufacturers                               Wholesale           Military            Storage            End-users
                                                 Depots           Warehouses           Locations




   Best Management Practices

                                                  DLA                                   Central
    Manufacturers            Key                                    Military                               End-users
                                                Wholesale                               Storage
                           Vendors                                Warehouses
                                                 Depots                                Locations

   Flow of supplies
   Orders




DOD Has Not Tested Most                   In addition to the opportunities to improve the management of hardware
Advanced Inventory                        items, there are even greater opportunities to improve DOD’s management
Practices for Reparable                   of reparable parts. As of September 30, 1995, DOD held more than
                                          $50 billion worth of these parts, but its efforts to streamline its logistics
Parts                                     system for them have not included key best practices we have identified.
                                          Over the past 13 months, we have reported on the various problems with
                                          DOD’s pipeline for reparable parts and on the substantial improvement
                                          opportunities available to DOD. For example:

                                      •   In 1996, we examined 24 different types of Army aviation parts, and
                                          calculated that the Army’s logistics system took an average of 525 days to
                                          ship broken parts from field units to the depot, repair them, and ship the
                                          repaired parts to using units. We estimated that all but 18 days
                                          (97 percent) was the result of unplanned repair delays, depot storage, or
                                          transportation time. We also calculated the Army uses its inventory six
                                          times slower than a major airline, British Airways. That airline had
                                          developed a process to move parts through its repair pipeline much faster.
                                          For example, one part we examined had an Army repair pipeline time of
                                          429 days; in contrast, British Airways was able to complete this process in
                                          116 days. (see fig. 6).




                                          Page 14                                                     GAO/T-NSIAD-97-109
Figure 6: Comparison of British Airways’ and Army’s Repair Pipeline 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 parts/    Repaired part
   transport from base                repair center and                                     queue time         turned into
                                      sent to storage or                                                       warehouse
                                      maintenance shops


   British Airways


   2 Days                                             1 Day                                113 Days                   Total =
                                                                                                                      116 days




                                       •   In July 1996, we reported that the Navy’s repair process can create as
                                           many as 16 time-consuming steps as parts move through the depot repair
                                           pipeline. Component parts can accumulate at each step in the process,
                                           which increases the total number of parts that are needed to meet
                                           customer demands and to ensure a continuous flow of parts. By tracking
                                           parts through each of the 16 steps and using the Navy’s flow time data, we
                                           estimated that it could take, on average, about 4 months from the time a
                                           broken part is removed from an aircraft to the time it is ready for reissue.
                                           Our analysis did not include the amount of time parts were stored in
                                           warehouses awaiting repair or issue to the customer.
                                       •   In February 1996, we reported that using its current logistics pipeline
                                           process, the Air Force can spend several months to repair the parts and
                                           then distribute them to the end user. One part we examined had an
                                           estimated repair cycle time of 117 days; it took British Airways only




                                           Page 15                                                            GAO/T-NSIAD-97-109
                                          12 days to repair a similar part. (see fig. 7). The complexity of the Air
                                          Force’s repair and distribution process creates as many as 12 different
                                          stopping points and several layers of inventory as parts move through the
                                          process. Parts can accumulate at each step in the process, which increases
                                          the total number of parts in the pipeline.


Figure 7: Comparison of British Airways’ and the Air Force’s Repair Pipeline for a Landing Gear Component

   Air Force

   2 Days                10 Days          0 Days            Unknown        90 Days        Unknown         15 Days   Total =
                                                                                                                    117 days +
                                                                                                                    unknown
                                                                                                                    time




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


   British Airways


    1 Day                 1 Day                1 Day Combined                 9 Days Combined             0 Days    Total =
                                                                                                                    12 days




                                          In our reports, we stated that DOD’s improvement efforts were not as
                                          extensive as they could be because they have not incorporated the best
                                          practices we have seen in the private sector. These best practices have
                                          successfully reduced costs and improved logistics operations. We have
                                          recommended that DOD test these concepts and expand them to other
                                          locations, where feasible.




                                          Page 16                                                           GAO/T-NSIAD-97-109
The four specific practices described below are key to the overall
improvement of the reparable parts pipeline. For the companies we
visited, they have resulted in substantial logistics system improvements
and reduced costs. When used together in an integrated fashion, they can
help maximize a company’s inventory investment, decrease inventory
levels, and provide a more flexible repair capability. (see figs. 8 and 9).




Page 17                                                    GAO/T-NSIAD-97-109
Figure 8: Current Repair Pipeline at the Corpus Christi Army Depot, Texas

                                                                                                    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 18                                                            GAO/T-NSIAD-97-109
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




                                        •   Third-party logistics services can assume warehousing and distribution
                                            functions, provide rapid delivery of parts, and state-of-the-art information
                                            systems that would speed the shipment of parts between the 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.



                                            Page 19                                                     GAO/T-NSIAD-97-109
          •   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.
          •   Innovative supplier partnerships, as discussed earlier, 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.


              Substantial opportunities exist for DOD to improve the management of its
Summary       $69.6 billion inventory as well as its $15 billion annual procurement of new
              parts. To do this, DOD needs to pursue both short- and long-term goals. In
              the short term, DOD needs to focus on improving the effectiveness of its
              current inventory management systems, such as those affecting
              requirements determination and inventory accountability. In the long term,
              DOD must focus on goals and objectives that will dramatically change its
              inventory management practices to provide a more cost-effective and
              efficient system while maintaining readiness and sustainability goals. The
              key to doing this is aggressively focusing on changing its culture and
              adopting new leading-edge business practices. Recently enacted
              legislation sets an overall framework within which DOD can establish
              objectives and measures for achieving these short- and long-term
              solutions. Close congressional oversight will continue to be a critical
              element as DOD establishes plans, goals, objectives, and milestones for
              addressing its inventory management processes.


              Mr. Chairman, this concludes our statement. We would be happy to
              answer any questions you or the Subcommittee may have.




              Page 20                                                    GAO/T-NSIAD-97-109
Page 21   GAO/T-NSIAD-97-109
Related GAO Products


              Inventory Management: The Army Could Reduce Logistics Costs for
              Aviation Parts by Adopting Best Practices (GAO/NSIAD-97-82, Apr. 15, 1997).

              High-Risk Series: Defense Inventory Management (GAO/HR-97-5, Feb. 1997).

              Defense Logistics: Much of the Inventory Exceeds Current Needs
              (GAO/NSIAD-97-71, Feb. 28, 1997).

              Defense Inventory: Spare and Repair Parts Inventory Costs Can Be
              Reduced (GAO/NSIAD-97-47, Jan. 17, 1997).

              Logistics Planning: Opportunities for Enhancing DOD’s Logistics Strategic
              Plan (GAO/NSIAD-97-28, Dec. 18, 1996).

              1997 DOD Budget: Potential Reductions to Operation and Maintenance
              Program (GAO/NSIAD-96-220, Sept. 18, 1996).

              Defense IRM: Critical Risks Facing New Materiel Management Strategy
              (GAO/AIMD-96-109, Sept. 6, 1996).

              Navy Financial Management: Improved Management of Operating
              Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94,
              Aug. 16, 1996).

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

              Defense Logistics: Requirement Determinations for Aviation Spare Parts
              Need to Be Improved (GAO/NSIAD-96-70, Mar. 19, 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).

              Defense Inventory: Opportunities to Reduce Warehouse Space
              (GAO/NSIAD-95-64, May 24, 1995).

              Best Practices Methodology: A New Approach for Improving Government
              Operations (GAO/NSIAD-95-154, May 1995).




              Page 22                                                     GAO/T-NSIAD-97-109
Related GAO Products




Defense Business Operations Fund: Management Issues Challenge Fund
Implementation (GAO/NSIAD-95-79, Mar. 1, 1995).

Defense Supply: Inventories Contain Nonessential and Excessive
Insurance Stocks (GAO/NSIAD-95-1, Jan. 20, 1995).

Defense Supply: Acquisition Leadtime Requirements Can Be Significantly
Reduced (GAO/NSIAD-95-2, Dec. 20, 1994).

Reengineering Organizations: Results of a GAO Symposium (GAO/NSIAD-95-34,
Dec. 13, 1994).

Commercial Practices: Opportunities Exist to Enhance DOD’s Sales of
Surplus Aircraft Parts (GAO/NSIAD-94-189, Sept. 23, 1994).

Organizational Culture: Use of Training to Help Change DOD Inventory
Management Culture (GAO/NSIAD-94-193, Aug. 30, 1994).

Partnerships: Customer-Supplier Relationships Can Be Improved Through
Partnering (GAO/NSIAD-94-173, July 19, 1994).

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).

Defense Transportation: Commercial Practices Offer Improvement
Opportunities (GAO/NSIAD-94-26, Nov. 26, 1993).

Defense Inventory: Applying Commercial Purchasing Practices Should
Help Reduce Supply Costs (GAO/NSIAD-93-112, Aug. 6, 1993).

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).

Organizational Culture: Techniques Companies Use to Perpetuate or
Change Beliefs and Values (GAO/NSIAD-92-105, Feb. 27, 1992).




Page 23                                                  GAO/T-NSIAD-97-109
           Related GAO Products




           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).




(709247)   Page 24                                                GAO/T-NSIAD-97-109
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