oversight

Defense Inventory: Continuing Challenges in Managing Inventories and Avoiding Adverse Operational Effects

Published by the Government Accountability Office on 1999-02-25.

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

                    United States General Accounting Office

GAO                 Testimony
                    Before the Subcommittee on Military Readiness,
                    Committee on Armed Services, House of Representatives




For Release
Expected at
1:00 p.m., EST
                    DEFENSE INVENTORY
Thursday,
February 25, 1999

                    Continuing Challenges in
                    Managing Inventories and
                    Avoiding Adverse
                    Operational Effects
                    Statement by Henry L. Hinton, Jr., Assistant Comptroller
                    General, National Security and International Affairs
                    Division




GAO/T-NSIAD-99-83
                   Mr. Chairman and Members of the Subcommittee:

                   We appreciate the opportunity to testify today on the Department of
                   Defense’s (DOD) logistics capabilities and shortfalls. You asked us to look
                   at inventory issues as they relate to DOD’s operations and readiness. My
                   testimony today will focus on the results of our recent work pertaining to
                   (1) the status of DOD’s secondary inventory,1 (2) difficulties one military
                   service continues to have in obtaining repair parts to keep its combat
                   aircraft mission capable, (3) the adequacy of DOD’s controls over inventory
                   items in transit, (4) implementation of DOD’s efforts to have greater
                   visibility over its logistical assets through its Total Asset Visibility Program,
                   and (5) the continuing need to apply best private sector management
                   practices to Defense inventory management.



Results in Brief   Our work continues to show weaknesses in DOD’s inventory management
                   practices that are detrimental to the economy and efficiency of operations
                   and cause operational problems for DOD. DOD continues to maintain large
                   inventories that may be as much as 60 percent in excess of current needs.
                   Although DOD has made progress in reducing its inventories, further
                   reductions are needed. Additionally, other action is needed to avoid
                   unnecessary new purchases. DOD spends approximately $13 billion each
                   year on new inventory items. While new purchases may be initiated to
                   meet justified requirements, those requirements frequently change after
                   items are ordered, but affected orders are not always canceled. We found
                   that as of September 30, 1997, DOD did not need about $1.5 billion, or
                   18 percent, of the inventory it had ordered to meet current requirements.
                   Not canceling these orders further exacerbates DOD’s excess inventory
                   condition and also prohibits spending on other priority needs.

                   Despite having inventory items in excess of its current needs, DOD can also
                   be faced with situations of inventory shortages and other related supply
                   problems that can adversely affect operational requirements. In our review
                   of Air Force supply management we found that shortages in aircraft spare
                   parts caused a degradation in mission capable rates for key aircraft,
                   including the B-1B, C-5, and F-16. Shortages of spare parts occurred
                   because of inaccurate forecasting of inventory requirements, and other
                   management weaknesses.


                   1
                     Secondary inventory is defined as spare and repair parts, clothing, medical supplies, and other items
                   needed to support operating forces.




                   Page 1                                                      GAO/T-NSIAD-99-83 Defense Inventory
The vulnerability of in-transit inventory to waste, fraud, and abuse is
another area of concern. In February 1998, we reported that DOD did not
have receipts for about 60 percent of its 21 million shipments to end users
in fiscal year 1997. Further, in examining in-transit issues in the Navy, we
found that weaknesses continue to exist in exercising control over
inventory in transit. Over the last 3 years, the Navy wrote off as lost over
$3 billion in inventory in transit, including some classified and sensitive
items such as aircraft guided-missile launchers, military night vision
devices, and communications equipment.

For many years, DOD has had difficulties in obtaining timely and accurate
information on the location, movement, status, and identity of units,
personnel, equipment, and supplies and the capability to better manage
those assets using that information. To address this problem, DOD gave
renewed emphasis to its Total Asset Visibility program for tracking
equipment, supplies, and spare parts as well as requisitions on a continuous
basis. However, DOD does not expect to fully implement this program until
2004. Program implementation problems have resulted largely from
long-standing management issues that have hindered other major
management initiatives. These issues include cultural resistance to change,
service parochialism, and the lack of outcome-oriented goals, performance
measures, and management accountability.

DOD must take both a short- and long-term approach to solving its
inventory management problems, consistent with the requirements of the
Government Performance and Results Act.2 In the short term, DOD still
needs to emphasize the efficient operation of existing inventory systems.
In the long term, DOD must establish goals, objectives, and milestones for
changing its culture and adopting new management tools and practices.
Since 1991 we have issued 11 reports that identified significant
opportunities, building on best private sector practices, to improve
logistics operations and lower costs. DOD has introduced some best
practice initiatives, but progress has been slow.




2
  The Results Act requires federal agencies (including DOD) to develop departmentwide strategic and
performance plans and reports. They must set strategic goals, measure performance, and report on the
degree to which goals were met. This is expected to provide the Congress and other decision makers
with objective information on the relative effectiveness and efficiency of federal programs. Annual
performance plans are included as appendix J to the Secretary of Defense’s Annual Report to the
President and the Congress.




Page 2                                                   GAO/T-NSIAD-99-83 Defense Inventory
             In addition, DOD has recognized the need for improvements in the
             inventory management area and addressed the issue in implementing
             requirements of the Results Act. One performance goal included in DOD’s
             recently issued performance plan for fiscal year 2000 is to streamline the
             DOD infrastructure by redesigning the Department’s support structure and
             pursuing business practice reforms. Among the indicators the plan
             indicated DOD would track were (1) logistics response time, (2) materiel
             asset visibility and accessibility, and (3) reduction of supply system
             inventory of repair parts and finished goods. We encourage DOD to take
             more aggressive actions to correct systemic problems so that its inventory
             management problems will not continue well into the next century. And,
             corrective actions must be built on the strong underpinnings of
             management information systems capable of providing reliable and timely
             information needed for management decision making.



Background   DOD has had inventory management problems for decades, but with more
             attention drawn to the problems since the end of the Cold War. In 1990, we
             identified DOD’s management of secondary inventories as a high-risk area
             because levels of inventory were too high and management systems and
             procedures were ineffective.3 We reported that DOD had spent billions of
             dollars on inventory that was not needed to support war reserve or current
             operating requirements and that it was burdened with managing and
             storing this inventory. Much of the inventory that exceeds current
             requirements was acquired because of outdated and inefficient inventory
             management practices.

             We reported in 1997 that DOD had made some progress, but significant
             challenges still remained. In an effort to apply industry best practices,
             DOD had implemented, in a limited manner, certain commercial practices
             such as a prime vendor4 concept that could lead to reduced inventory
             requirements. However, we also reported that the concept had been
             applied only to about 3 percent of the items for which this concept could be


             3In 1990,we began a special effort to review and report on the federal program areas that 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, brought a much needed focus on problems that were costing the government
             billions of dollars. We identified inventory management as high risk in our 1992, 1995, 1997, and 1999
             high-risk reports.

             4
               Prime vendors are contractors that buy inventory items from a variety of suppliers, store them in
             commercial warehouses, and ship them to customers as needed.




             Page 3                                                      GAO/T-NSIAD-99-83 Defense Inventory
                   used. We also reported that DOD had made progress in reducing its
                   inventory levels, but more remained to be done.5 From 1989 through the
                   end of fiscal year 1995, DOD reduced its secondary inventory levels from
                   $92.5 billion to $69.6 billion. However, virtually all the problems that
                   previously had contributed to billions of dollars of inventory that exceeded
                   current needs still existed. For example, DOD still lacked adequate
                   oversight of its inventory, financial accountability remained weak, and
                   requirements continued to be overstated. Improvements were still needed
                   in DOD’s information management systems.

                   The results of our more recent work involving inventory issues show that
                   despite additional progress in reducing inventory levels, previously existing
                   problems remain a concern. Also, while DOD has continued to emphasize
                   the need to move toward an industry best practices approach, more
                   remains to be done in that area also.



Excess Inventory   Our recent work examining inventory issues shows that much of DOD’s
                   inventory remains significantly higher than needed to meet current
Levels Continue    requirements, even though DOD continues to make progress in reducing its
Despite Overall    inventory levels. Inventory levels we analyzed were reduced from
                   $69.7 billion as of September 30, 1996, to $65.8 billion as of September 30,
Reductions         1997. Yet, $39.4 billion of the $65.8 billion exceeded current requirements
                   shown in DOD’s requirements objective.6 In other words, based on the
                   requirements at September 30, 1997, DOD would not have bought
                   $39.4 billion of the inventory it had on hand. Further, the percentage of
                   inventory that exceeded current requirements remained about 60 percent
                   for the two periods analyzed and was about the same as of September 30,
                   1995.

                   We also found that DOD could potentially reduce inventory that exceeded
                   current requirements. The Department had no demand for about
                   $11 billion of the inventory that exceeded current requirements as of
                   September 30, 1997, but it did have customer demands for $26 billion.
                   However, assuming customer demands remain unchanged, $3.4 billion of
                   this inventory would last 20 or more years and $658 million would last more


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

                   6
                     The requirements objective represents the maximum amount of inventory authorized to sustain
                   current operations, including the funded war reserves.




                   Page 4                                                    GAO/T-NSIAD-99-83 Defense Inventory
                        than 100 years. Some of this inventory is more economical to retain than to
                        dispose of and possibly repurchase. Yet, to the extent it is economical to
                        dispose of the inventory, DOD’s cost of operations could be reduced.

                        In addition to retaining greater inventory levels than required, inventories
                        beyond current needs remain high because of new purchases, which total
                        about $13 billion annually. While new purchases may be initiated to meet
                        justified requirements, those requirements frequently change after items
                        are ordered. While some orders may be canceled, others may not, and not
                        all of the new purchases may be needed. We found that as of September 30,
                        1997, DOD did not need about $1.5 billion, or 18 percent, of the inventory it
                        had ordered to meet current requirements. We reported in April 1998 that
                        additional opportunities to cancel purchases had been missed because
                        appropriate economic analyses were not made, conflicting inventory and
                        contracting records were not reconciled, or item managers did not exercise
                        their responsibilities to direct cancellations of contracts.7



Inventory Shortages     Although historically, DOD has carried significant amounts of inventory
                        items in excess of current needs, it has also been faced with inventory
Can Also Be a Problem   shortages and other related supply problems that can adversely affect
                        operational requirements. Our recent review examining Air Force supply
                        management issues highlighted these problems.

                        We are now finalizing the results of our review of the supply management
                        activity group8 and its impact on the ability of its customers to obtain
                        aircraft spare parts when needed. We found that since the early 1990’s, data
                        from the Air Force have shown increased instances of aircraft that were
                        not mission capable due to spare parts shortages. Key aircraft that were
                        not mission capable due to supply problems increased from an average of
                        6.4 percent in fiscal year 1990 to 13.9 percent in fiscal year 1998; for some
                        types of aircraft the averages were much higher.


                        7NavyInventory Management: Improvements Needed to Prevent Excess Purchases
                        (GAO/NSIAD-98-86, Apr. 30, 1998).

                        8
                          The supply management activity group supports combat readiness by procuring materiel and making
                        repair parts available to Air Force military units and other customers who maintain military weapon
                        systems and equipment. This group is part of the Air Force Working Capital Fund, a revolving fund that
                        relies on sales revenue, rather than direct appropriations, to finance its operations. Working capital
                        funds are expected to (1) generate sufficient revenue to cover the full costs of their operations and
                        (2) operate on a break-even basis over time—that is, not make a profit nor incur a loss. Customers
                        primarily use operations and maintenance appropriations to pay for inventory items.




                        Page 5                                                     GAO/T-NSIAD-99-83 Defense Inventory
Overall, more aircraft were not mission capable due to supply shortage
problems in fiscal year 1998, even though Air Force bases have increased
the removal of inventory items from one aircraft to keep other aircraft
mission capable. This practice necessitated (1) personnel at individual
bases intentionally grounding one or more aircraft so they could remove
good parts from these aircraft to keep other aircraft mission capable,
(2) maintenance personnel at Air Force wings consistently doubling their
workload by removing inventory items from grounded aircraft to replace
broken items on other aircraft, and (3) some Air Force units not always
being able to perform their peacetime missions, such as required training,
and others not being able to meet airlift requests.

Financial management, inventory management, and item repair problems
resulted in parts shortages for 155 inventory items that we reviewed on
B-1B, C-5, and F-16 aircraft. In fiscal year 1997, the Air Force’s inability to
determine its inventory requirements and budget for those requirements
was the primary source of parts shortages.

More specifically, the Air Force’s supply management activity group’s fiscal
year 1997 budget underestimated funding requirements for the group’s
wholesale division by about $500 million because (1) all inventory
requirements were not included in the budget and (2) inventory
requirements increased after the Air Force had developed its budget. As a
result, the supply management activity group could finance only 82 percent
of its fiscal year 1997 inventory requirements. At the same time, supply
managers exacerbated their fiscal year 1997 support problems by using
their limited obligation authority to buy items that were excess to their
current operating requirements. An indication of the magnitude of this
problem was that, as of September 1997, the Air Force had reported
$1.7 billion of inventory items on order, of which about $409 million, or
about 24 percent, was excess to its current needs.

We found that many of the 155 items reviewed were problems, at least in
part, because the Air Force did not achieve the reduced pipeline processing
time goals that are the cornerstone of its Agile Logistics program9 and that
were the basis for a $948 million reduction in the supply management
activity group's budget. This untimely processing of repairable items



9
  The objectives of the Agile Logistics program are to (1) reduce the time it takes to repair components
and aircraft, (2) reduce the amount and costs of supply inventories, (3) match the repair of items with
the demand from customers, and (4) prioritize repairs when multiple priorities exist.




Page 6                                                      GAO/T-NSIAD-99-83 Defense Inventory
                         adversely affected the supply activity group's ability to support its
                         customers because it caused the Air Force to have too many items in the
                         supply pipeline (items in transit from bases to depots and items in the
                         process of being repaired), and not enough useable items available at
                         bases. Two major causes of the problem was (1) a lack of accurate data
                         and effective procedures for monitoring pipeline processing times and
                         taking timely and appropriate corrective action, when necessary and
                         (2) that depot maintenance activities ability to repair items was limited by
                         shortages of component parts to fix broken repairable items, repair shop
                         personnel, and equipment used to test repairable items after being fixed.

                         In its fiscal year 2000 budget document for the supply group, the Office of
                         the Under Secretary of Defense (Comptroller) raised concerns about the
                         readiness of all military services and cited a lack of spare parts as a major
                         contributor to the decline in the mission capability of aircraft. To help
                         improve readiness, $141.4 million in obligation authority was added to the
                         Air Force supply group’s fiscal year 2000 budget to buy and repair inventory
                         items. However, the budget document raised concerns about the Air
                         Force’s ability to use this additional obligation authority to purchase the
                         correct inventory items. Accordingly, the Deputy Secretary of Defense
                         directed the Air Force Materiel Command to review the process it uses to
                         review and revise the inventory requirements of its customers. This review
                         is now underway and is to identify the underlying cause of the forecasting
                         problems. A report is due to the Office of the Under Secretary of Defense
                         by May 15, 1999.



Continuing               The vulnerability of in-transit inventory to waste, fraud, and abuse is
                         another area of concern. In February 1998, we reported that DOD did not
Weaknesses in            have receipts for about 60 percent of its 21 million shipments to end users
Adhering to              in fiscal year 1997.10 Among the DOD components, the Army accounted for
                         about one fourth and the Navy accounted for about half of DOD’s
Procedures for           12.4 million unacknowledged receipts. Later work shows that, over the last
Controlling In-Transit   3 years, the Navy alone wrote off as lost over $3 billion in inventory in
Items                    transit.

                         Recently, in examining in-transit issues in the Navy, we found that
                         weaknesses continue to exist in exercising control over inventory in


                         10
                              Department of Defense: In-Transit Inventory (GAO/NSIAD-98-80R, Feb. 27, 1998).




                         Page 7                                                     GAO/T-NSIAD-99-83 Defense Inventory
transit. As a result, enormous amounts of inventory are at risk of
undetected theft or misplacement. For fiscal years 1996 through 1998, the
Navy reported in-transit inventory losses totaling over $3 billion, including
some classified and sensitive items such as aircraft guided-missile
launchers, military night vision devices, and communications equipment.

The Navy’s Inventory Control Point (NAVICP) at Philadelphia, which
manages the largest portion of the Navy’s inventory, reported the largest
losses, $2.5 billion, or 84 percent of the Navy’s in-transit losses. However,
our work at NAVICP Philadelphia showed that some of the items reported
as lost had, in fact, been accounted for in inventory records. We reviewed
94 shipments and found that 15 had been written off as lost despite the fact
that their receipts were recorded in the inventory records in advance of the
date they were written off.

Navy activities involved in issuing and receiving inventory items have not
routinely followed the Navy’s control procedures to ensure that in-transit
items are accounted for. Specifically, concerning NAVICP Philadelphia, we
found that: (1) Navy units have not always reported to the inventory
control point that they received requested items, (2) ineffective accounting
systems have been used to monitor receipts of warehoused items, (3) the
NAVICP and its shipping and receiving activities have not adequately
investigated unreported receipts of warehoused items, and (4) the NAVICP
has not monitored receipts of items it purchased from commercial sources.

We also found that oversight of in-transit inventories exercised by the
Naval Supply Systems Command and NAVICP Philadelphia has not been
adequate. Systems Command officials acknowledged that, to date, they
had not actively monitored in-transit inventory receipt and follow-up
efforts but had recently begun to review both systems and processes to
correct weaknesses. However, they have not established any performance
measures, milestones, or a timetable for reducing the vulnerability of
in-transit inventory to theft or loss.

The Strom Thurmond National Defense Authorization Act for Fiscal
Year 1999 requires DOD to develop a comprehensive plan to ensure
visibility over in-transit items and to submit its plan to the Congress by
March 1, 1999. For secondary items, DOD must address such issues as the
vulnerability of in-transit items to loss through fraud, waste, and abuse;
loss of oversight of in-transit items, including loss when items are being
transported by commercial carriers; and loss of accountability for in-transit




Page 8                                      GAO/T-NSIAD-99-83 Defense Inventory
                        items due to either a delay of delivery of the items or a lack of notification
                        of the delivery.



Continuing Efforts to   For many years, DOD has had difficulties in obtaining timely and accurate
                        information on the location, movement, status, and identity of units,
Achieve Total Asset     personnel, equipment, and supplies, and the capability to better manage
Visibility              those assets using that information. The continuing lack of adequate
                        visibility over operating materials and supplies substantially increases the
                        risk that millions of dollars will be spent unnecessarily to acquire more
                        items than would be needed if a clearer, more accurate picture existed of
                        items in inventory, in-transit, and in theater, and asset managers had the
                        ability to access and transfer those items. Asset visibility began to receive
                        heightened attention during the Gulf War when logistics pipelines became
                        clogged with thousands of duplicate requisitions, and more than half of the
                        40,000 large containers of equipment shipped in theater could not be
                        readily identified.

                        To address this problem, DOD gave renewed emphasis to its Total Asset
                        Visibility (TAV) program for tracking equipment, supplies, and spare parts
                        as well as requisitions on a continuous basis.11 In 1995, we reported that
                        DOD’s strategic plans for logistics called for improving asset visibility over
                        in-transit assets, retail level stocks, and automated systems. 12 DOD’s goal
                        initially was to completely implement its asset visibility plan by 1996. It
                        later changed that date to 2001, and subsequently extended it out to 2004.
                        Even so, significant issues remain to be resolved if DOD is to achieve its
                        goals for this program.

                        DOD’s Performance Plan for Fiscal Year 2000, developed in response to the
                        Government Performance and Results Act, defines asset visibility as the
                        percentage of DOD’s worldwide inventory in storage that is both visible and
                        accessible to Integrated Materiel Managers (IMMs). It states that IMMs are
                        the DOD organizations assigned wholesale management responsibility for
                        specific assets or classes of assets Departmentwide. The plan notes that 94
                        percent of DOD’s worldwide inventory is to be visible to military services
                        or Defense agency tracking systems but only 80 percent is accessible by the
                        appropriate IMMs who have wholesale management responsibilities for


                        11Defense    Total Asset Visibility Implementation Plan, USD (A&T), May 23, 1996.

                        12
                             High Risk Series: Defense Inventory Management (GAO/HR-95-5, Feb. 1995).




                        Page 9                                                       GAO/T-NSIAD-99-83 Defense Inventory
specific assets or classes of assets. 13 The plan attributes the lack of
visibility to data system interoperability problems. It states that the
Department’s strategy for fiscal year 2000 is to enhance the interface
among the services and Defense agencies to achieve a TAV level of 90
percent. It notes that a potential complication in executing the strategy is
the fact that TAV initiatives must compete with Year 2000 (Y2K)
requirements for scarce information technology resources but that
sufficient management attention would be placed on the timing of system
changes to mitigate the risks of funding shortfalls.

Our recent work found that while some component and theater-specific
asset tracking capabilities are reported to be operating, DOD-wide
information on progress in achieving TAV Program goals is minimal.
Consequently, although implementing improved asset visibility is a high
priority objective, DOD is uncertain about the extent to which it is
achieving the objectives of having timely, accurate information on
requisitions and assets and access to DOD assets.

Along with an unclear picture of the program’s status, planning for TAV has
been inadequate at the strategic and implementation levels. DOD does not
have a departmentwide TAV strategic plan to show how the various TAV
initiatives underway within individual DOD components contribute to
DOD’s goals for the Program.

While lacking a strategic plan, DOD does have an “implementation plan” for
TAV, although it has a number of weaknesses. The implementation plan has
established some broad program goals and areas of emphasis, but it does
not describe how TAV will be integrated into DOD work processes to
realize TAV Program goals. The plan also does not state how TAV systems
will integrate with and/or support other management information systems.
This is particularly important as it relates to financial management systems
and reporting.

TAV implementation problems have resulted largely from long-standing
management issues that have hindered other major management
initiatives. These issues include cultural resistance to change, service
parochialism, and the lack of outcome-oriented goals, performance


13Our recent work has found that the 94-percent visibility and 80-percent accessibility are against the
National Performance Review (NPR) goals. These NPR performance measures do not include
inventories in process or in transit.




Page 10                                                     GAO/T-NSIAD-99-83 Defense Inventory
                          measures, and management accountability. Resistance to changing from
                          reliance on just-in-case inventory approaches to just-in-time inventory
                          approaches is a significant challenge for DOD in its approach to inventory
                          management. Further, this new way of doing business requires timely and
                          accurate information about quantities and locations of items and a
                          willingness by item holders to transfer items to meet the priority needs of
                          others. Over time, we believe that the Results Act, with its strategic
                          planning and reporting requirements, and the Clinger/Cohen Act, which
                          emphasizes a performance-based approach to information technology
                          investments, could enhance DOD’s efforts to provide an effective
                          framework for addressing TAV’s implementation challenges, and achieving
                          its program goals.



Continuing Need to        We recently addressed Defense inventory management issues in our
                          Performance and Accountability Series dealing with major management
Expand Use of             challenges and program risks.14 We noted that since 1991, we have issued
Industry Best Practices   11 reports that identify significant opportunities for DOD to test and adopt,
                          where feasible, best inventory management practices used in the private
                          sector to improve logistics operations and lower costs. The business
                          practices we recommended have, for the most part, been used in the
                          private sector to enable customers to order supplies as they are needed and
                          receive them within hours.

                          For example, some commercial airlines have cut costs and improved
                          customer service by streamlining their overall logistics operations. The
                          most successful improvements took a supply-chain management approach,
                          which included using highly accurate information systems to track and
                          control inventory; employing various methods to speed the flow of parts
                          through the logistics pipeline; shifting certain inventory tasks to suppliers;
                          and having third parties handle parts repair, storage, and distribution
                          functions.

                          Improved acquisition and delivery practices can reduce overall supply
                          system costs, eliminate large inventories, and enable companies to reduce
                          or eliminate the ordering of supplies that may not be needed or become
                          obsolete. To achieve similar inventory reductions, infrastructure savings,
                          and improved customer service, we have recommended that DOD expand


                          14
                            Major Management Challenges and Program Risks, Department of Defense (GAO/OCG-99-4,
                          Jan. 1999)




                          Page 11                                              GAO/T-NSIAD-99-83 Defense Inventory
             its current initiatives to their fullest extent and include tasks such as
             ordering, storing, and distributing supplies to the customer.

             DOD through its Defense Logistics Agency (DLA) has continued to
             emphasize the use of prime vendors to manage parts, reduce government
             inventories, and improve delivery times. However, limited progress has
             been made in expanding use of prime vendors for all classes of consumable
             items, particularly hardware items. Hardware items represent 97 percent
             of the 4 million items managed by DLA but accounted for only 1 percent of
             prime vendor sales in fiscal year 1997.

             Recently, the Congress enacted legislation requiring DLA and the military
             services to develop and submit schedules for implementing best
             commercial practices in its acquisition and distribution of inventory items.
             The legislation calls for the implementation of best practice initiatives to be
             completed within the next 3 years in the case of DLA and 5 years for the
             services. We are currently reviewing the implementation of these
             initiatives.



Conclusion   DOD must take both a short- and long-term approach to solving its
             inventory management problems, consistent with the requirements of the
             Government Performance and Results Act. In the short term, DOD still
             needs to emphasize the efficient operation of existing inventory systems.
             In the long term, DOD must establish goals, objectives, and milestones for
             changing its culture and adopting new management tools and practices.
             Since 1991 we have issued 11 reports that identified significant
             opportunities, building on best private sector practices, to improve
             logistics operations and lower costs. DOD has introduced some best
             practice initiatives, but progress has been slow.

             In addition, DOD has recognized the need for improvements in the
             inventory management area and addressed the issue in implementing
             requirements of the Results Act. One performance goal included in DOD’s
             recently issued performance plan for fiscal year 2000 is to streamline the
             DOD infrastructure by redesigning the Department’s support structure and
             pursuing business practice reforms. Among the indicators the plan
             indicated DOD would track were (1) logistics response time, (2) materiel
             asset visibility and accessibility, and (3) reduction of supply system
             inventory of repair parts and finished goods. We encourage DOD to take
             more aggressive actions to correct systemic problems so that its inventory
             management problems will not continue well into the next century. And,



             Page 12                                       GAO/T-NSIAD-99-83 Defense Inventory
                 corrective actions must be built on the strong underpinnings of
                 management information systems capable of providing reliable and timely
                 information needed for management decision making.

                 DOD’s Annual Performance Plan for fiscal year 2000 acknowledged that the
                 supply inventory is larger than required to support today’s smaller force
                 structure. It reported that the goal is to cut holdings from a fiscal year 1989
                 high of $107 billion to $56 billion by fiscal year 2000 and $48 billion by fiscal
                 year 2003. It noted, however, that improvements in total asset visibility
                 might cause documented inventory levels to increase. It also noted that,
                 selective inventory increases are being made in some areas (notably
                 aircraft parts) in response to operational requirements. It stated that a new
                 model reflecting these factors is expected to produce revised inventory
                 goals in late fiscal year 1999.

                 DOD’s conceptual framework for the future calls for the military services to
                 fuse information, logistics, and transportation technologies in a manner
                 that will allow them to (1) provide rapid crisis response; (2) track and shift
                 assets, even while enroute; (3) deliver tailored logistics packages when and
                 where needed; and (4) ensure the availability of spare parts and other items
                 to sustain combat operations. The concept is based, in part, on the premise
                 that supply managers will have precise visibility over assets and will be
                 able to make rapid and accurate logistics assessments and analyses, when
                 necessary. While the concept appears sound, it requires coordination of
                 multiple organizations, systems, and processes to be effective. And, it
                 requires the strong underpinnings of management information systems
                 capable of providing reliable and timely information needed for
                 management decision making.

                 Mr. Chairman, this concludes my prepared remarks. I would be pleased to
                 answer any questions that you or Members of the Subcommittee might
                 have.




709398   Leter   Page 13                                       GAO/T-NSIAD-99-83 Defense Inventory
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