Commercial Practices

The value of the Defense Department's (DOD) secondary inventories, which include spare parts for weapon systems, electronic, and other hardware, increased by $60 billion between 1980 and 1988. Private sector firms are streamlining their operations by adopting innovative inventory management strategies that cut costs and improve service. In most areas, however, DOD has not streamlined operations and continues to buy and store redundant levels of electronic items, valued at more than $2 billion. The size of DOD's electronic inventory reflects a philosophy of meeting customer needs by having huge stocks on hand. The Defense Logistics Agency's large inventory turns over slowly--about once every four years on average, contains large levels of excess and obsolete items, and costs DOD millions of dollars each year to hold. DOD is trying to improve its logistics system, including using private sector practices--long-term contracting, electronic ordering systems, and direct delivery program--to manage some electronic supplies. Efforts to implement these practices, however, affect only a small portion of electronics supplies.

GAO found that: (1) the private sector is streamlining its logistics practices to reduce costs and improve service; (2) DOD has not streamlined its operations and maintains excessive inventories of electronic items that are obsolete; (3) DOD turns over its electronic inventories once every 4 years, while private sector companies turn theirs over every 3 months; (4) annual DOD electronics inventory holding costs are estimated to be as much as $330 million; (5) private companies rely on established commercial supply and distribution networks to manage, store, and deliver inventory on a frequent, regular basis, which results in lower inventories and costs; (6) although DOD guidance encourages the use of commercial practices to manage inventories, the Defense Logistics Agency (DLA) has used private-sector practices for only a small portion of its electronics supplies; (7) DLA is pilot testing innovative commercial practices at two maintenance and repair facilities, but to ensure success, DOD must change its overall inventory management philosophy and implement these practices while meeting federal procurement requirements; and (8) proposed legislation to reform the federal procurement system could make it easier for DOD to implement commercial inventory practices.