Defense Inventory
Navy Logistics Strategy and Initiatives Need to Address Spare Parts Shortages Gao ID: GAO-03-708 June 27, 2003Since 1990, GAO has identified DOD inventory management as high risk because of long-standing management weaknesses. In fiscal years 2001 and 2002, Congress provided the Navy with more than $8 billion in operations and maintenance funds to purchase spare parts in support of the service's operations. Nevertheless, spare parts availability has fallen short of the Navy's goals in recent years. GAO examined the extent to which Navy strategic plans address mitigation of critical spare parts shortages, the likelihood that key supply system improvement initiatives will help mitigate spare parts shortages and enhance readiness, and the Navy's ability to identify the impact on readiness of increased spare parts investments.
The Navy's servicewide strategic plan does not specifically address means to mitigate critical spare parts shortages. Its 2001 plan contained strategic goals, objectives, and performance measures, but the service did not use it to systematically manage implementation of logistics reform initiatives. The Navy is developing a new logistics strategic plan, but this document has not yet been published. Consequently, the service presently lacks an effective top-level plan that integrates a specific focus on mitigating spare parts shortages into its logistics transformation initiatives. Without such a plan, the Navy lacks guidance necessary to ensure its logistics initiatives mitigate critical spare parts shortages. GAO examined six of the key initiatives that the Navy has undertaken to improve the economy and efficiency of its supply system. While some of these initiatives have increased availability of select spare parts, GAO cannot determine their potential to mitigate critical spare parts shortages because they were not designed specifically to remedy this problem. For example, the Performance Based Logistics initiative aims to improve supply support at equal or lower cost by outsourcing a broad range of services. Though the initiative has increased availability of certain items, GAO could not measure the extent to which Performance Based Logistics contracts have mitigated critical spare parts shortages. The Navy has determined that an additional investment of $1.2 billion would be necessary to achieve supply availability levels that support the service's readiness objectives. However, the Navy did not ask for this funding in its fiscal year 2004 budget request, nor did it report linkages between resource levels and readiness rates for individual weapon systems, as recommended by the Office of the Secretary of Defense in 2002. The Navy did provide aggregate readiness data to the Office of the Secretary of Defense, but officials stated that they lacked information technology necessary to link readiness rates by weapon system to budget categories. DOD has an 85 percent supply availability goal, which means that 85 percent of the requisitions sent to wholesale supply system managers can be immediately filled from on-hand inventories. Navy supply system models are focused on achieving this goal in the aggregate. However, the Navy's overall wholesale supply system performance has fallen short of expectations in each of the last 3 fiscal years for both aviation- and ship-related repairable spare parts. Supply availability ranged between approximately 69 percent and 71 percent for aviation-related items, and between 79 percent and 84 percent for ship-related parts.
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Director: Team: Phone:GAO-03-708, Defense Inventory: Navy Logistics Strategy and Initiatives Need to Address Spare Parts Shortages
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Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, House of Representatives:
United States General Accounting Office:
GAO:
June 2003:
Defense Inventory:
Navy Logistics Strategy and Initiatives Need to Address Spare Parts
Shortages:
GAO-03-708:
GAO Highlights:
Highlights of GAO-03-708, a report to the Subcommittee on Defense,
Committee on Appropriations, House of Representatives
Why GAO Did This Study:
Since 1990, GAO has identified DOD inventory management as high risk
because of long-standing management weaknesses. In fiscal years 2001
and 2002, Congress provided the Navy with more than $8 billion in
operations and maintenance funds to purchase spare parts in support of
the service‘s operations. Nevertheless, spare parts availability has
fallen short of the Navy‘s goals in recent years. GAO examined the
extent to which Navy strategic plans address mitigation of critical
spare parts shortages, the likelihood that key supply system
improvement initiatives will help mitigate spare parts shortages and
enhance readiness, and the Navy‘s ability to identify the impact on
readiness of increased spare parts investments.
What GAO Found:
The Navy‘s servicewide strategic plan does not specifically address
means to mitigate critical spare parts shortages. Its 2001 plan
contained strategic goals, objectives, and performance measures, but
the service did not use it to systematically manage implementation of
logistics reform initiatives. The Navy is developing a new logistics
strategic plan, but this document has not yet been published.
Consequently, the service presently lacks an effective top-level plan
that integrates a specific focus on mitigating spare parts shortages
into its logistics transformation initiatives. Without such a plan,
the Navy lacks guidance necessary to ensure its logistics initiatives
mitigate critical spare parts shortages.
GAO examined six of the key initiatives that the Navy has undertaken
to improve the economy and efficiency of its supply system. While some
of these initiatives have increased availability of select spare
parts, GAO cannot determine their potential to mitigate critical spare
parts shortages because they were not designed specifically to remedy
this problem. For example, the Performance Based Logistics initiative
aims to improve supply support at equal or lower cost by outsourcing a
broad range of services. Though the initiative has increased
availability of certain items, GAO could not measure the extent to
which Performance Based Logistics contracts have mitigated critical
spare parts shortages.
The Navy has determined that an additional investment of $1.2 billion
would be necessary to achieve supply availability levels that support
the service‘s readiness objectives. However, the Navy did not ask for
this funding in its fiscal year 2004 budget request, nor did it report
linkages between resource levels and readiness rates for individual
weapon systems, as recommended by the Office of the Secretary of
Defense in 2002. The Navy did provide aggregate readiness data to the
Office of the Secretary of Defense, but officials stated that they
lacked information technology necessary to link readiness rates by
weapon system to budget categories. DOD has an 85 percent supply
availability goal, which means that 85 percent of the requisitions
sent to wholesale supply system managers can be immediately filled
from on-hand inventories. Navy supply system models are focused on
achieving this goal in the aggregate. However, the Navy‘s overall
wholesale supply system performance has fallen short of expectations
in each of the last 3 fiscal years for both aviation- and ship-related
repairable spare parts. Supply availability ranged between
approximately 69 percent and 71 percent for aviation-related items,
and between 79 percent and 84 percent for ship-related parts.
What GAO Recommends:
GAO recommends that the Secretary of Defense
* develop a framework for mitigating critical spare parts shortages as
part of either the Sea Enterprise Strategy or the Naval Supply Systems
Command Strategic Plan, and
* implement, with a specific completion milestone, the Office of the
Secretary of Defense‘s recommendation to report the impact of funding
on weapon system readiness.
In written comments, DOD generally concurred with the intent of our
recommendations, but not with the specific actions.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Navy Logistics Strategic Plans Do Not Specifically Focus on Mitigating
Spare Parts Shortages:
Several Key Initiatives Show Potential for Improved Spare Parts
Support:
Impact of Additional Spare Parts Funding on Supply Availability and
Readiness Estimated but Not Reported:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Scope and Methodology:
Appendix I: Comments from the Department of Defense:
Figure:
Figure 1: Investment Criteria and Funding Trends for Logistics
Engineering Change Proposals:
United States General Accounting Office:
Washington, DC 20548:
June 27, 2003:
The Honorable Jerry Lewis
Chairman,
Subcommittee on Defense
Committee on Appropriations
House of Representatives:
Dear Mr. Chairman:
In fiscal years 2001 and 2002, the Navy spent $8.1 billion from
operations and maintenance appropriations for spare parts.[Footnote 1]
At the end of fiscal year 2002, the Navy maintained inventories of
spare parts with an estimated value of $30 billion.[Footnote 2]
However, the Navy continues to report that its parts availability level
is below the 85 percent goal. While recognizing that spare parts
shortages may never be eliminated, it is reasonable to expect the
services to place a priority on efforts to mitigate (reduce) those
shortages that adversely affect readiness. This priority should be
inherent in the service's overall planning and stewardship of funds
they request from Congress, and in their accountability for making
spare parts investment decisions that provide a good readiness return.
Since 1990, we have identified the Department of Defense's (DOD)
inventory management as high risk because of long-standing management
weaknesses. In our January 2003 High Risk Series Report, we wrote that
DOD was experiencing equipment readiness problems because of a lack of
key spare parts, and we recommended that DOD take actions to address
those shortages.[Footnote 3] As recently as August 2002, DOD recognized
the need to overcome critical spare parts shortages and recommended
changes to improve weapon system readiness.[Footnote 4]
This is one in a series of reports that respond to your request that we
identify ways to improve the availability of spare parts for aircraft,
ships, vehicles, and weapon systems.[Footnote 5] As agreed with your
office, this report addresses the following questions:
* Does the Navy's strategic plan for logistics address the mitigation
of critical spare parts shortages--those that adversely affect
readiness? [Footnote 6]
* Will key Navy logistics initiatives likely mitigate spare parts
shortages that affect readiness?
* Does the Navy have the ability to identify the impact on readiness of
increased investments for spare parts?
To accomplish these objectives, we analyzed plans and initiatives
applicable to the management of the Navy's inventory management system.
We interviewed officials and obtained information on inventory
management practices at Navy headquarters, the Naval Supply Systems
Command, the Naval Inventory Control Point, the Naval Sea Systems
Command, and the Naval Air Systems Command. We reviewed project plans,
implementation status, and performance measures for six supply system
improvement initiatives that Navy headquarters and Supply Systems
Command officials highlighted as key efforts for mitigating future
spare parts shortages and enhancing equipment readiness. We used the
Government Performance and Results Act of 1993, prior GAO reports, and
other key DOD documents as criteria to evaluate the Navy's strategic
plans and initiatives.[Footnote 7] More details on our scope and
methodology may be found on page 25.
Results in Brief:
The Navy's servicewide strategic plan does not specifically address
means to mitigate critical spare parts shortages. As a result, the Navy
lacks overarching guidance on how to systematically reduce these
shortages and assess progress toward improving related readiness. In
fiscal year 2001, the Navy published its High Yield Logistics
Transformation Plan, which was aimed at improving Navy logistics
overall. This plan contained attributes of an effective strategic plan,
such as goals, objectives, and performance measures, but it did not
specifically address the mitigation of spare parts shortages.
Similarly, while a key subordinate planæ the Naval Supply Systems
Command's strategic plan--has a strategy to ensure that the
availability of spare parts meets required performance levels, its
objectives do not specifically focus on mitigating critical spare parts
shortages. This plan also did not incorporate strategic objectives
identified in the Navy's High Yield Logistics Transformation Plan.
Furthermore, after DOD published a new strategic plan, called the
Future Logistics Enterprise, in June 2002, which outlined several new
transformation strategies and goals, the Navy stopped tracking and
reporting its progress in implementing the High Yield Logistics
Transformation Plan initiatives. In October 2002, the Navy embarked on
a new strategic planning effort, referred to as Sea
Enterprise.[Footnote 8] The Navy expects the Sea Enterprise strategy to
address how it will improve the efficiency and effectiveness of all
aspects of its business operations, including organizational
alignments, logistics requirements, and reinvestment of savings, to
purchase new weapon systems and enhance combat capability. However, the
Sea Enterprise strategy has not been published, and as a result, the
service presently lacks an effective top-level plan that integrates a
specific focus on mitigating spare parts shortages into its logistics
transformation initiatives. Without such a plan, the Navy lacks
guidance necessary to ensure its logistics initiatives mitigate
critical spare parts shortages.
We reviewed six initiatives that Navy officials identified as key to
improving the economy and efficiency of supply support. While some of
these initiatives have improved the overall supply availability of some
spare parts, we cannot determine their potential for mitigating
critical parts shortages because they were not designed to specifically
address this problem.[Footnote 9] For example, through the Performance
Based Logistics initiative, the Navy aims to improve supply support at
equal or reduced cost by outsourcing various logistics services, such
as spare parts warehousing, repair, and inventory requirements
analysis. The Total Asset Visibility initiative was undertaken to
ensure full accountability of items in the Navy's spare parts
inventories and to facilitate redistribution of parts between Navy
customers. Lastly, the Logistics Engineering Change Proposals
initiative provides funding to improve the reliability of spare parts.
These initiatives have a potential for improving the efficiency of the
Navy's supply system. However, in the absence of an overarching plan
that specifically addresses critical spare parts shortages, we cannot
measure the impact of each initiative on critical spare parts
availability, nor can we assess any related effects on weapon system
readiness.
The Navy has analyzed the impact of additional funding on the
availability of spare parts and equipment readiness, but has not
reported this information as part of its budget documentation. For
example, it has determined that an additional $1.2 billion would be
necessary to support the Chief of Naval Operations' readiness
objectives. The Navy's analysis shows that constraints in repair
pipeline requirement models accounted for a 6 to 8 percent decline in
supply availability, which equates to an estimated 5 to 6 percent
decline in fully mission capable rates for naval aircraft.[Footnote 10]
However, the service did not ask for this funding as part of its fiscal
year 2004 budget request, but may do so for fiscal year 2005. Also, its
fiscal year 2004 budget materials did not report the link between
resource levels and readiness for individual weapons, as recommended by
the Office of the Secretary of Defense in an August 2002 study. While
the service provided aggregate readiness information to the Office of
the Secretary of Defense, Navy officials said that the service cannot
directly link funding to readiness data by weapon system and budget
category until better information technology becomes available.
Information linking parts availability and individual weapon system
readiness would be valuable information to DOD in making inventory
investment decisions and to Congress when deciding how best to allocate
resources to reduce shortages and improve readiness.
To ensure that Navy customers have an adequate supply of critical spare
parts when and where they are needed, we are recommending the Secretary
of Defense direct the Secretary of the Navy to include as a part of
ongoing and anticipated updates to the Navy strategic planning process,
a framework for mitigating critical spare parts shortages that include
long-term goals; measurable, outcome-related objectives;
implementation goals; and performance measures. We also recommend the
Navy provide decision makers with information that links investments in
spare parts inventories to weapon system readiness targets. In written
comments on a draft of this report, DOD generally concurred with the
intent of our recommendations, but not all suggested actions. DOD said
the Navy would address spare parts shortages by improving its overall
supply support processes. However, they stated that the Navy would not
be modifying the Naval Supply Systems Command Strategic Plan or the
higher-level Sea Enterprise strategy to include a specific focus on the
mitigation of spare parts shortages. They also cited several key
process improvements that are designed to lessen the overall need for
spare parts. We endorse the Navy's efforts to pursue the planned
process improvements, but disagree that these process improvements
alone are sufficient to satisfy our recommendation. We continue to
believe that the effectiveness of the service's efforts would be
enhanced if its strategic plans and initiatives included goals,
objectives, and milestones for mitigating critical spare parts
shortages. DOD also stated that the Navy would be linking spare parts
investments to individual weapon system readiness in future budget
submissions when the required data becomes available. However, we
remain concerned that the Navy has not specified a time frame for
developing information systems that link readiness and spare parts
budget data, and have modified our second recommendation accordingly.
The Department's comments and our evaluation are on pages 23-25 of this
report.
Background:
In prior reports, we have identified major risks associated with DOD's
spare parts inventory management practices. In 1996, and then again in
1998, we reported that the Navy's logistics system often could not
provide fleet customers with necessary parts in a timely manner,
despite billions of dollars invested in inventory.[Footnote 11] In
2001, we found that chronic spare parts shortages had degraded combat
readiness for selected Navy weapon platforms and had also contributed
to problems in retaining skilled maintenance personnel.[Footnote 12]
Navy item managers interviewed for the 2001 report indicated that spare
parts shortages resulted from inaccurate spare parts requirements
forecasts, as well as contracting problems with private companies and
repair delays at military and privately owned facilities. Most
recently, in our January 2003 report on major management challenges and
program risks, we recommended that DOD take action to address key spare
parts shortages as part of a long-range strategic vision and a
department wide, coordinated approach for improving logistics
management processes.[Footnote 13]
In addition to the risk associated with ineffective spare parts
management practices, DOD recently voiced concerns over the adverse
impact spare parts shortages have on readiness of weapon systems. In
its August 2002 report on its inventory management practices, DOD said
that the models it uses to determine inventory purchases are generally
biased towards the purchase of low-cost items with high demands, not
necessarily the items that would improve readiness the most.[Footnote
14] The report recommended that the services improve their ability to
make inventory purchase decisions based on weapon system readiness.
Furthermore, the report recommended that the services' requests for
funds to increase inventory investments be justified on the basis of
the corresponding increase in weapon system readiness.
The Navy provides the fleet with spare parts through a multitiered
inventory system.
* Retail inventory refers to spare parts that are stored shipside or
planeside in accordance with standardized spare parts allowance lists.
Retail level spare parts are funded by the Navy's procurement and
operations accounts. Funding for initial outfitting parts is provided
by procurement appropriations, while funding for replenishment parts is
provided by operations and maintenance appropriations.
* Wholesale inventory refers to spare parts the Navy buys to replenish
retail inventory. Initially Navy program managers tasked with
developing weapon systems purchase parts directly from vendors using
money from the procurement accounts. However, once a weapon system is
fully developed and integrated into the fleet, the Naval Supply Systems
Command assumes full responsibility for supporting that system through
funding provided by the Navy Working Capital Fund.[Footnote 15] At this
point, fleet customers use funding from outfitting procurement and
operations accounts to purchase parts from the Navy's wholesale
inventory. The wholesale system functions as a middleman by purchasing
spare parts from vendors with Navy Working Capital Fund dollars, and
then reselling these parts to fleet customers. In order to avoid
inventory shortages, the wholesale system must accurately forecast
demand for spare parts and factor in lead times for procurement and
repair actions to mitigate delays in delivery of parts to the fleet.
Furthermore, the wholesale system must maintain a cash balance in the
Navy Working Capital Fund that approximates 7 to 10 days and,
consequently, cannot stock more parts than it expects to resell to the
fleet.
* Sponsor-owned inventory refers to items that program managers
purchase with appropriated funds to develop, test, and sustain weapon
systems. Program managers store sponsor-owned materials to support work
conducted at various locations, including air and sea warfare centers.
DOD guidance provides, in part, that when items are no longer needed,
they may be returned to the wholesale supply system or reissued to
other fleet customers.[Footnote 16]
The Deputy Chief of Naval Operations for Fleet Readiness and Logistics
is responsible for strategic planning of logistics functions and
ensures that the logistics system supports the Navy's readiness
objectives. The Naval Supply Systems Command develops inventory
management policies, determines spare parts requirements, and
formulates the Navy Working Capital Fund budget. Within the Naval
Supply Systems Command, the Naval Inventory Control Point is assigned
primary responsibility for material management tasks, such as computing
requirements and providing procurement, distribution, disposal, and
rebuild direction. The Naval Air Systems Command, the Naval Sea Systems
Command, and the Space and Naval Warfare Systems Command, collectively
referred to as the hardware systems commands, interact with the
wholesale supply system to ensure that it procures sufficient
quantities of spare parts to satisfy the fleet's allowance
requirements.
Navy Logistics Strategic Plans Do Not Specifically Focus on Mitigating
Spare Parts Shortages:
The Navy's servicewide strategic plans do not specifically address
means to mitigate critical spare parts shortages. The Navy's fiscal
year 2001 High Yield Logistics Transformation Plan focused on improving
logistics overall, but did not state how the Navy expects to reduce
spare parts shortages. Also, while a key subordinate plan developed by
the Naval Supply Systems Command has a strategy to ensure the
availability of spare parts meets required performance levels; its
objectives do not specifically focus on mitigating critical spare parts
shortages. This subordinate plan does focus on improving supply
availability and reducing customer wait time, but does not specifically
address mitigation of spare parts shortages. Although the Navy is
developing a new strategy, the Sea Enterprise plan, it has not been
published, and therefore we do not know whether it will address ways to
mitigate critical spare parts shortages.
In fiscal year 2001, the Navy published a servicewide strategic plan--
the High Yield Logistics Transformation Plan--that identified
initiatives undertaken by its major support commands to improve the
service's logistics overall and to address objectives listed in DOD's
Fiscal Year 2000 Logistics Strategic Plan. While the High Yield Plan
contained attributes of an effective strategic plan consistent with the
Government Performance and Results Act of 1993 (GPRA), such as long-
term goals, objectives, and performance measures, it did not
specifically address key objectives for mitigating critical spare parts
shortages.[Footnote 17] The High Yield Plan identified nine major
goals, six of which are linked to DOD's fiscal year 2000 Logistics
Strategic Plan, and three that are unique to the Navy. The plan served
as a compendium of initiatives undertaken by Navy commands and program
offices to improve overall logistics support processes. In total, the
plan identified 80 individual initiatives; however, the plan did not
contain information that highlighted specific efforts to mitigate spare
parts shortages. Navy headquarters officials told us they stopped
efforts to report to DOD on the status of the 80 initiatives after DOD
published a new logistics strategic plan in June 2002, entitled the
Future Logistics Enterprise, that contained several new transformation
strategies.
The Naval Supply Systems Command Strategic Plan has a strategy to
ensure that the availability of spare parts meets required performance
levels and includes numerous goals, objectives, and initiatives to
improve supply availability. However, this strategy does not
specifically focus on mitigating spare parts shortages, nor does it
incorporate the objectives of the Navy's High Yield Transformation
Plan. In November 2001, the Naval Supply Systems Command updated its
1999 strategic plan to deliver combat capability through delivery of
quality supplies and services on a timely basis. The plan identified 5
major goals, 16 implementation strategies, and 63 individual
initiatives. Implementation status of each initiative is recorded in an
automated tracking system and briefed to command leadership several
times each year. Under its third goal--to achieve and demand the
highest quality of service--one of the Command's strategies is to
ensure the availability of spare parts meets required performance
levels, but its objectives do not specifically focus on mitigating
critical spare parts shortages, nor does the strategy link directly to
higher-level DOD and Navy strategic plans. Navy officials told us they
expect to start updating the plan during the summer of 2003. Without a
focus on mitigating spare parts shortages and linkage to the higher-
level plans, the Navy may lack assurance that its overall strategic
goals and objectives will be effectively addressed and that its key
initiatives will systematically address spare parts shortages.
In October 2002, the Navy embarked on a new servicewide strategic
planning effort, referred to as the Sea Enterprise, that seeks to
improve the efficiency and effectiveness of all aspects of the
service's business operations, including organizational alignments,
refining logistics requirements, and reinvesting savings to purchase
new weapon systems and enhance combat capability.[Footnote 18] As of
March 2003, the Sea Enterprise plan had not been published, and the
extent to which the new plan will address the mitigation of critical
spare parts shortages is unclear. Navy documents indicate that
officials were reviewing hundreds of ongoing and planned initiatives
for improving business operations, and that they planned to select
projects with the highest potential savings. The Navy expects to have
preliminary project plans and savings estimates available for
consideration in the fiscal year 2005 budget deliberations. Once key
initiatives are identified for the Sea Enterprise plan, a board of
directors will oversee development of implementation plans and monitor
progress toward achieving anticipated savings.
Several Key Initiatives Show Potential for Improved Spare Parts
Support:
We reviewed six initiatives that the Navy has undertaken to improve the
economy and efficiency of supply support. While some of these
initiatives have improved the overall supply availability and
reliability of some spare parts, we cannot measure their potential for
mitigating critical parts shortages and their impact on weapon system
readiness because they were not designed to specifically address this
problem. The initiatives included projects to (1) obtain more cost
effective and timely support from contractors, (2) improve the
efficiency of inventory management practices, and (3) increase the
reliability of parts provided to military customers.
Performance Based Logistics Contracts Have Improved Availability of
Spare Parts:
Performance based logistics contracts have generally improved supply
support to the fleet, but the Navy does not assess the extent to which
better supply availability mitigates critical spare parts shortages or
enhances the fleet's combat readiness. Through performance based
logistics contracts, the Navy has outsourced a broad range of supply
support activities that have traditionally been carried out by the
Navy's organic supply system, such as warehousing, repairing and
distributing parts, and determining spare parts requirements. According
to Navy and interim DOD guidance, the primary objective of performance
based logistics is to improve supply support while maintaining or
reducing costs.[Footnote 19] Under more extensive partnerships,
contractors may redesign weapon system configurations to optimize
system performance, and may also reengineer or replace spare parts to
mitigate the effects of scarcity or obsolescence. In the most advanced
partnerships, contractors provide technical and engineering support to
fleet customers, perform weapon system overhauls, and guarantee timely
delivery of quality spare parts to fleet customers.
Our review of Navy aggregate and individual program statistics
indicated that performance based logistics arrangements have generally
improved supply support to the fleet. From January 2001 to July 2002,
the Navy's quarterly supply availability averaged 79.6 percent through
a combination of organic and contractor supply support. Without
performance based logistics contracts factored in to these data,
quarterly supply availability averaged 71.5 percent. We judgmentally
examined 10 of 118 active performance based logistics contracts, and
found that one contract had no specific vendor performance
standards.[Footnote 20] In 7 of the 9 remaining contracts, we found
that vendors either satisfied or exceeded supply support goals.
Moreover, for select cases in which data were available for comparison
with baseline data, we found that performance based logistics
partnerships improved supply support. For instance, one vendor
increased availability of parts for an aviation computer system
[Footnote 21] from pre-contract levels of 61 percent to current levels
of 100 percent, and filled all 489 outstanding backorders within 13
months after the contract was awarded. Similarly, another vendor
increased overall supply availability for the ARC-210 radio assembly
from pre-contract levels of 60 to 70 percent to a current average of 91
percent.
Despite positive supply availability effects attributed to performance
based logistics contracting, we could not measure the initiative's
overall impact on spare parts shortages. These contracts vary widely in
scope and, according to Navy policy, are intended to improve logistics
support while maintaining or reducing costs. Consequently, these
contracts do not aim specifically to increase the availability of spare
parts that experience chronic shortages, and are generally approved
only if they can generate savings for the Navy's wholesale supply
system. While Navy officials stated that improved supply support is
linked to enhanced equipment readiness, we could not determine whether
performance based logistics contracts have mitigated the readiness
effects of spare parts shortages.
The Navy's inability to quantify cost savings--or losses--generated by
individual contracts impedes the service's ability to prove the
initiative is achieving its objective. Navy and interim DOD guidance
specify that each performance based logistics contract is to improve
supply support to the warfighter without increasing cost; however, the
Navy does not track individual contract savings. Instead, Navy
officials approximate aggregate savings attributable to performance
based logistics contracting. Although the Navy reports that it has
reduced estimated expenditures for spare parts and labor by
approximately $100 million for the fiscal year 2000-2005 period, it
does not have the information that its leadership and other decision
makers may likely need in order to determine whether individual
contracts satisfy the initiative's cost saving objective.
The Potential for Total Asset Visibility Initiative to Improve
Inventory Management Practices Hindered by Implementation Challenges:
Under the Total Asset Visibility initiative, the Naval Supply Systems
Command has established asset visibility over a large portion of the
service's spare parts inventories. However, changing completion
milestone dates, difficulties in linking data contained in numerous
nonstandard automated data systems, and concerns over the lack of top-
level management emphasis--including effective business rules and
incentives that encourage customers to share parts--have hindered the
initiative's timely and effective implementation. Because of these
limitations, the extent to which this initiative will help mitigate
critical spare parts shortages and improve weapon system readiness is
uncertain. The Supply Systems Command has recognized these difficulties
and prepared a long-term plan to centrally manage supply, but the Navy
has not yet approved the plan for implementation.
The Total Asset Visibility initiative is intended to facilitate
redistribution of materials between Navy customers by allowing Navy
supply managers to fill critical orders from excess or unneeded stocks
held by other Navy customers. DOD's Material Management Regulation,
issued in May 1998, requires the services to provide timely and
accurate information on the location, movement, and status of all
material assets. The regulation stipulates that wholesale-level
inventory managers should have visibility of all in-storage materials,
including assets held by military units, maintenance depots, and
shipyards. Item managers may use this information to mitigate critical
spare parts shortages by redistributing items from one customer's
storage facility to another customer with more urgent needs. In our
October 1999 report, we stated that the Navy characterized its Total
Asset Visibility program as a "mature" initiative that would be fully
implemented by September 2002.[Footnote 22] To improve the potential
for timely and effective implementation, in our October 1999 report we
recommended that the Navy establish clearly defined goals, quantifiable
performance measures, and implementation milestones to better assess
the initiative's impact on supply system effectiveness. However, the
Navy has yet to establish such a plan.
At the end of fiscal year 2002, Navy data indicated that the Navy had
established asset visibility over 96 percent of the $42 billion
inventory that the service had targeted for inclusion under the
program. In May 2003, a Navy official stated that this data collection
did not target the full range of government-owned materials kept at
naval shipyards, aviation repair depots, and commercial contractor
facilities. Our work shows that while the Navy supply managers
currently have visibility over Navy-managed items held at naval retail
storage facilities and most sponsor-owned inventories kept at naval
warfare centers, access to unneeded materials held at these locations
must be arranged on a case-by-case basis. For example, the Navy has
implemented an inventory management visibility system for its retail-
level spare parts inventories held aboard ship and at major shore
stations. However, these assets are "owned" by the operating fleet
commands, and in practice are not subject to redistribution outside the
command. An official at the Naval Inventory Control Pointæthe activity
responsible for management of wholesale level inventories and
processing customer requisitionsæstated that while they have visibility
over retail level inventories held aboard ship and at shore stations
controlled by the fleet operational commands, they rarely ask for a
part, even though the retail-level inventories may have accumulated
parts in excess of local needs. The use of the asset visibility system
as a tool for mitigating spare parts shortages between Navy commands
could benefit from the development of business rules and management
incentives that encourage Navy customers to relinquish control and
ownership of unneeded supplies.
Progress toward achieving total asset visibility and accountability at
some storage locations has been hampered by difficulties in linking
data contained in numerous nonstandard information systems. For
example, after a 5-year test, the Naval Sea Systems Command terminated
efforts to establish centralized visibility and accountability over an
estimated $4.3 billion in government-furnished materials provided to
commercial shipbuilders. The test was terminated for a variety of
reasons, including the lack of common information systems that would
allow the transfer of data between commands, the lack of coordinated
management emphasis, and difficulties changing legacy contractual
reporting requirements. Moreover, at the Naval Air Systems Command,
officials stated that their subordinate activities currently record
inventory data on four different management information systems.
Recognizing current Navy supply system inefficiencies, the Naval Supply
Systems Command has proposed a single worldwide inventory management
system whereby a national inventory manager would determine
requirements for all wholesale inventories, retail ashore, and afloat
allowances. The national inventory manager would direct the
distribution of materials and maintain day-to-day visibility and
control of spare parts inventories regardless of location or funding
source. The national inventory manager would also retain ownership of
the material until the items were consumed, at which time the stock
fund would receive a reimbursement to finance the cost of stock
replenishment. At the time of our review, the Navy had not approved the
plan. Naval Supply Systems Command representatives believe this concept
would eliminate many of the redundancies and inefficiencies in the
current inventory management framework. In addition, they said
effectiveness of the concept would be dependent upon the full and
timely implementation of a common information system shared by all Navy
customers regardless of location, or their place in the command
hierarchy. Navy officials are planning to replace many of their
nonstandard information systems within the next 5 to 10 years.
Logistics Engineering Change Proposals Provide More Reliable Spare
Parts at Lower Cost, but Investment Criteria Limit the Initiative's
Scope:
The Navy's Logistics Engineering Change Proposal initiative has
demonstrated potential to enhance equipment readiness by improving the
quality of spare parts, and thus reducing the frequency of maintenance
actions. However, our work shows that the initiative's impact may be
limited by criteria that require rapid return on investment in spare
parts engineering projects and discourage large investments in such
projects. By reducing expenditures on low-quality items, this
initiative has generated measurable savings for the Navy supply system,
and could yield further savings if expanded to include more types of
spare parts.
The Navy undertook the Logistics Engineering Change Proposal initiative
to systematically provide Navy customers with more reliable and less
costly spare parts. This initiative's primary objective is to make up-
front investments in high-quality replacement parts as a means of
avoiding higher long-term material and labor costs associated with
frequent replacement of low-quality items. Through the engineering
change proposal process, the Navy identifies items with high failure or
turnover rates, and then conducts a logistics and engineering
assessment to determine how the quality of these items could be
improved. In some instances, parts are reengineered; in other cases,
alternative parts are tested for reliability and system compatibility,
and then installed to replace lower quality items. To ensure that
engineering change proposals offer a cost-effective alternative to
standard components, the Navy conducts a cost analysis for each
project. To be approved, projects must be expected to realize a 2-to-1
return on investment over the first 5 years after the redesigned part
is initially installed in the fleet.
We reviewed 21 projects in which reengineered parts had been fully
installed in operational equipment. All 13 projects for which
comparative performance data were available demonstrated gains in
reliability.[Footnote 23] These reliability improvements implicitly
mitigate spare parts shortages and enhance fleet readiness by reducing
the frequency of maintenance actions. The Replacement Inertial
Navigation Unit--a navigation component installed on P-3 aircraft--
illustrates this point.[Footnote 24] According to Navy documents, the
original item was no longer in production, and was costly to maintain
due to high failure rates. The replacement model, however, boosted the
part's mean time between failure from 56 to 5,375 hours, and is
expected to save the Navy approximately $69.4 million in spare parts
expenditures over the lifetime of the project.
While material quality improvements resulting from engineering change
projects implicitly enhance fleet readiness, we believe that this
initiative's scope and overall impact are limited because of
restrictive return on investment criteria.[Footnote 25] Navy officials
told us several potential projects had been rejected in recent years
due to insufficient projected return on investment. For example,
officials said that a reengineered F-18 navigation component that
offered superior reliability over the existing component was rejected
because its predicted return on investment would fall substantially
below the return on investment threshold. Moreover, they stated that
the Navy considered the project's anticipated first year investment of
approximately $155 million unaffordable. Figure 1 illustrates the
changes in investment criteria and funding since the inception of the
engineering change initiative. As shown, the return on investment
expectation ranged from break even in 5 years to the current criterion,
which requires a 2-to-1 return on investment over the first 5 years
after the redesigned part is initially installed. In addition, the
amount of available investment funding declined from more than $100
million in fiscal years 1997 and 1998 to a current total of about $40
million.
Figure 1: Investment Criteria and Funding Trends for Logistics
Engineering Change Proposals:
[See PDF for image]
[End of figure]
Because of the long-term nature of these investments, they typically do
not yield savings in the early years while initial costs are being
incurred. According to the Navy's most recent assessment, 62 approved
aviation projects yielded about $2 million in net savings from fiscal
year 1997 through fiscal year 2002. These projects, along with 11
forthcoming ones, are expected to generate additional savings of
approximately $785 million from fiscal year 2003 to fiscal year
2010.[Footnote 26] In addition, Navy officials noted that unmeasured
savings may accrue through cost avoidance resulting from reduced
maintenance, processing, and transportation of broken or defective
items. Navy officials told us that the service is reviewing plans to
facilitate project approval by relaxing current return on investment
criteria. Management attention to the investment criteria could expand
the number of eligible parts, help mitigate spare parts shortages, and
increase the readiness return on investment.
The Serial Number Tracking Initiative Is Expected to Reduce Part Loss
and Facilitate Maintenance:
The Navy's Serial Number Tracking initiative shows potential to improve
supply support, as well as increase fleet readiness, by strengthening
controls over in-transit items and facilitating weapons system
maintenance. Furthermore, according to preliminary Navy estimates, the
Serial Number Tracking initiative will likely generate savings that
exceed the costs of program implementation. However, we could not
assess its impact on spare parts shortages because the initiative will
not be fully implemented until May 2004, and because the initiative's
performance metrics are not designed to measure its impact on spare
parts shortages.
The Naval Supply Systems Command undertook this initiative in response
to the Navy's Aviation Maintenance Supply Review, which recommended
that specific actions be taken to reduce overall maintenance and supply
costs, increase readiness, and make systemic improvements in support of
naval aviation forces. Since 1990, we have regarded DOD inventory
management as a high-risk area because of vulnerabilities to waste,
fraud, abuse, and mismanagement. In 1999, we reported that the Navy was
unable to account for over $3 billion in inventory that was in-transit
within and between storage facilities, repair facilities, and end-
users.[Footnote 27] A business case analysis commissioned by the Naval
Supply Systems Command in support of the Serial Number Tracking
initiative found that improper accounting of in-transit repair items
generates considerable material losses, as well as additional labor
costs associated with lost maintenance history data and reconciling
records for lost or missing parts.
The Navy's Serial Number Tracking program has potential to enhance the
efficiency of maintenance and repair processing in a number of ways.
Once the program is fully implemented, parts transferred between Navy
customers, storage facilities, and repair sites will be marked with bar
codes, which maintenance and supply personnel will scan at every
transfer point to record each item's transit history. Navy customers
will then be able to access this information by logging in to a
centralized database. The Navy expects this process to minimize the
risk of in-transit part loss, as well as the chance of maintenance
record errors resulting from manual data entry. In addition to bar
coding, the Serial Number Tracking initiative provides for select
aviation components to be outfitted with computer chips, called contact
memory buttons, that store critical maintenance history and warranty
information. As parts circulate through the repair pipeline,
maintenance personnel will be able to scan the memory buttons in order
to identify what maintenance work has been previously executed, and
then determine what additional maintenance actions should be taken.
According to the Navy's analysis, serial number tracking will
streamline maintenance work by facilitating identification of
maintenance problems and part defects, measurement of part reliability,
and investigations of spare part engineering. Moreover, the initiative
could reduce time required to complete certain maintenance
actions.[Footnote 28]
The Navy has budgeted approximately $58 million over 5 years to
implement Serial Number Tracking. This amount includes engineering
research to determine which components are compatible with contact
memory button technology, installation of contact memory buttons and
barcodes, and outfitting maintenance facilities with scanning
equipment. Despite these start-up costs, the Navy anticipates that this
initiative will yield net savings of more than $193 million over 7
years, resulting primarily from reduced spare parts loss.
Initiative to Improve Procedures for Returning Unserviceable Items to
Repair Sources Lacks Performance Measures:
The Naval Supply Systems Command and its Inventory Control Point staff
are implementing a project to redesign and shorten the time required
for unserviceable items to be returned to repair facilities. Navy
officials told us they anticipate that the reengineered process will
reduce the number of unfilled customer requisitions and create
efficiencies in the scheduling and repairing of broken parts. At the
time of our review, responsibility for overall project management was
transitioning from the Naval Supply Systems Command to the Naval
Inventory Control Point. Because there is no documented performance
plan, the extent to which data will be available to document the
initiative's impact on equipment readiness and mitigation of critical
spare parts shortages is unclear.
Currently, Navy officials said, the typical unserviceable item is
handled and processed 3 to 5 times during an average period of 35.8
days from initial turn-in by the fleet customer to receipt of the
broken part at the designated repair activity. The Navy envisions a
computer Web-based system whereby a sailor aboard ship can query a
computer system and get immediate shipping and packaging instructions.
This will reduce the number of shipping destinations and enable the
Navy to reduce overall costs. However, without a management plan that
specifies performance goals and implementation milestones, the Navy
cannot be assured that the initiative will be fully implemented and
achieve intended results.
Readiness-Based Sparing Initiative Could Help Mitigate Critical Spare
Parts Shortages If Expanded:
The Navy's use of the Readiness-Based Sparing initiative as a criterion
for stocking parts aboard ships appears to have potential for improving
critical spare parts availability and operational capability of
selected weapon systems.[Footnote 29] However, according to DOD,
because this model is not fully supported by current data collection
processes, much of the analysis must be developed off-line. Currently,
Navy officials stated that they have used readiness based sparing
techniques in determining spare parts allowances in support of some
older weapon systems and all new systems being provided to the fleet.
The Naval Supply Systems Command is continuing to develop computer
models that base allowances for weapon system component parts on
readiness considerations. Under the traditional approach, allowances
are largely based on historical failure rates of individual parts. The
Navy's new readiness-based models are geared to the operational
readiness requirements of selected critical subsystems, and consider
how random part failures might adversely affect the ability of the
installed component to perform the overall mission. Officials explained
that the traditional demand-based sparing model works well for
mechanical-type parts, which tend to break down at regular intervals as
a result of usage. However, experience has shown that newer electronic
components have much less predictable failure patterns. To compensate
for this, weapon system designers sometimes build in redundancies that
enable equipment to continue working even after random part failures
occur. For example, by using the readiness based sparing process, Navy
officials anticipate that the operational availability of the Close-In
Weapons System will improve from 45 percent under the demand-based
approach to 87 percent under the readiness-based allowance model, and
the AEGIS system from 24 percent to 91 percent, respectively.[Footnote
30]
Impact of Additional Spare Parts Funding on Supply Availability and
Readiness Estimated but Not Reported:
The Navy has analyzed how additional wholesale supply funding would
affect the availability of spare parts as well as equipment readiness
rates, and has determined that an additional investment of $1.2 billion
would be necessary to support readiness objectives established by the
Chief of Naval Operations. However, the Navy did not ask for this
funding as part of its fiscal year 2004 budget request, nor did its
budget estimates link planned spending to individual weapon system
readiness, as recommended by the Office of the Secretary of Defense in
an August 2002 study.
DOD has an 85 percent supply availability goal, which means that 85
percent of the requisitions sent to wholesale supply system managers
can be immediately filled from on-hand inventories. Navy supply system
models are focused on achieving this goal in the aggregate. However,
the Navy's overall wholesale supply system performance has fallen short
of expectations in each of the last 3 fiscal years for both aviation-
and ship-related repairable spare parts. Supply availability ranged
between approximately 69 percent and 71 percent for aviation-related
items, and between 79 percent and 84 percent for ship-related parts.
Navy officials commented that they have had difficulty achieving the
desired 85-percent goal for aviation parts due to a number of reasons,
including increased demand stemming from aging weapon systems and
accelerated operational requirements.
The Navy has estimated that an extra investment in the working capital
fund of approximately $1.2 billion would increase aviation-and ship-
related spare parts inventories to levels that support current
readiness standards.[Footnote 31] According to a recent study conducted
by the Naval Supply Systems Command, constraints in repair pipeline
requirement models accounted for a 6 to 8 percent decrease in supply
availability for aviation parts, which equated to an estimated 5 to 6
percent decline in fully mission capable rates for naval
aircraft.[Footnote 32] This study concluded that a working capital fund
investment of $225 million would remedy wholesale inventory
deficiencies resulting from inaccurate requirements models, and that
another $688.5 million would prevent further decline in supply
availability of aviation spare parts resulting from constraints that
prevent the working capital fund from procuring new inventory
requirements driven by increased demand. Furthermore, the study
calculated that an additional $300 million investment would be required
to increase supply availability across all inventory segments to 85
percent.
In its budget estimate submitted to Congress in February 2003, however,
the Navy did not ask for additional investment in the working capital
fund to meet the supply availability and aviation readiness rates
described above. At present, it is unclear whether the Navy will choose
to request funding for these requirements in later years. In its fiscal
year 2004 budget exhibits, the Navy linked its planned working capital
fund expenditures to aggregate spare parts availability, but not to
mission capable supply rates or other readiness rates for individual
weapon systems. The benefit of such a link was cited in an August 2002
study by the Office of the Secretary of Defense, which recommended that
service requests for funds for spare parts inventories be linked to
specific weapon system readiness. The service did provide aggregate
ship and aviation readiness information to the Office of the Secretary
of Defense. However, Navy officials said that the service cannot
directly link spare parts funding and readiness data by budget category
until better information technology becomes available. Without
information that links funding to readiness, the Navy's budget package
does not provide Congress the return on readiness investment
information it may need to make resource decisions.
Conclusions:
Since 1990, we have repeatedly reported that DOD's inventory management
practices are high risk. In our 2003 High Risk Series Report we
recommended that DOD take action to address key spare parts shortages
as part of a long-range strategic vision and a departmentwide,
coordinated approach to logistics management. However, our work shows
that the Navy currently lacks a servicewide strategic logistics plan
and supporting plan that include a specific focus on mitigating
critical spare parts shortages. In addition, the Navy's current key
logistics initiatives to improve the efficiency of supply and inventory
management practices do not include a specific focus on mitigating
these shortages. Instead, these initiatives address many underlying
issues, such as reducing customer wait time, increasing asset
visibility, improving the management of items turned in for repair, and
increasing the reliability of repair parts. Without a focus on
mitigating spare parts shortages, the Navy lacks a coordinated
approach, with attributes of an effective plan, such as goals,
objectives and performance measures, to systematically address the
shortages and assess progress in mitigating them. The ongoing
development of the Sea Enterprise plan and imminent update of the Naval
Supply Systems Command Strategic Plan provide an opportunity to include
this focus and provide the coordination needed to ensure that the
Navy's key logistics initiatives we reviewed can achieve their maximum
financial and readiness benefits. Lastly, without information that
links spare parts funding to individual weapon system readiness and
provides assurance that investments in spare parts are based on the
greatest readiness returns, such as that recommended in the August 2002
Inventory Management Study, Congress and other decision makers cannot
determine how best to prioritize and allocate future funding.
Recommendations:
We recommend that the Secretary of Defense direct the Secretary of the
Navy:
* develop a framework for mitigating critical spare parts shortages
that includes long-term goals; measurable, outcome-related objectives;
implementation goals; and performance measures as a part of either the
Navy Sea Enterprise strategy or the Naval Supply Systems Command
Strategic Plan, which will provide a basis for management to assess the
extent to which ongoing and planned initiatives will contribute to the
mitigation of critical spare parts shortages, and:
* implement the Office of the Secretary of Defense's recommendation to
report, as part of budget requests, the impact of funding on individual
weapon system readiness with a specific milestone for completion.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, DOD generally concurred
with the intent of both recommendations, but not the specific actions.
DOD's written comments are reprinted in their entirety in appendix I.
In concurring with the intent of our first recommendation, DOD
expressed concern that because spare parts shortages are a symptom of
higher-level problems, including the need for more reliable spare parts
and more effective life cycle support processes, its management
improvement plans must focus on improving the processes, rather than on
the symptoms. According to DOD, the Naval Supply Systems Command's
current strategic plan and planned revisions are/will be focused on
improving the Navy's overall supply support processes to ensure that
its naval forces have sufficient support to achieve required readiness
performance levels. Therefore, DOD does not agree that the Navy needs
to modify the Naval Supply Systems Command Strategic Plan or include
provisions in the evolving Sea Enterprise strategy that are
specifically focused on spare parts shortages. DOD stated that the
Navy's process improvement initiatives are intended to reduce the need
for spare parts through the use of more effective inventory management
practices aboard ship, standardizing the use of readiness based sparing
concepts on board ship and at shore facilities, and developing an
effective total asset visibility plan. DOD believes that these efforts
will improve the efficiency and effectiveness of the Navy's supply
system and inherently minimize any future shortages of critical spare
parts.
We disagree that these process improvements alone are sufficient to
meet our recommendation. Our report recognizes that the Navy's
logistics plans focus on efforts to improve overall logistics support
practices, and upon successful implementation will likely contribute to
improved supply availability. Based on our report's findings, however,
we believe that the goals, objectives and milestones of the Naval
Supply Systems Command's strategic plans, or the higher-level Sea
Enterprise plan, should include a focus on the mitigation of critical
spare parts shortages. Without such a focus the Navy's efforts to
address the problem of critical spare parts shortages are more likely
to be duplicative or ineffective. Therefore, we believe implementation
of our recommended actions is necessary to ensure improved equipment
readiness for the Navy's legacy and future weapon systems.
In concurring with the intent of our second recommendation, DOD stated
that the Navy is investing in information systems to help it link
inventory investment decisions with weapon system readiness. DOD stated
that the Navy will provide information to link weapon system readiness
and inventory investments for its major weapon systems as information
becomes available. Because the Financial Management Regulation already
requires the Navy to submit this information as part of its annual
budget submission, DOD stated that more specific direction from DOD is
not necessary, and that current Navy actions satisfy the intent of our
recommendation.
We support the Navy's actions, but remain concerned that the service
has not specified milestones for developing information systems that
link readiness and spare parts budget data. Providing this information
in a timely manner will strengthen the Navy's stewardship and
accountability of requested funds, and will assist the Congress in
making spare parts investment decisions that provide a good readiness
return. We have therefore modified our second recommendation to include
a provision that the Navy establish completion milestones for
implementing the reporting requirement, as discussed above.
Scope and Methodology:
To determine if the Navy's strategic plans address spare parts
shortages, we obtained and analyzed pertinent spare parts and logistics
planning documents. We focused our analysis on whether these strategic
plans addressed spare parts shortages and included the performance plan
guidelines identified in the Government Performance and Results Act. We
interviewed officials in the Office of the Deputy Chief of Naval
Operations for Fleet Readiness and Logistics and in the Naval Supply
Systems Command to clarify the content, status, and linkage of the
various strategic plans.
To determine the likelihood that key supply system initiatives will
mitigate critical spare parts shortages and improve weapon system
readiness, we obtained and analyzed service documentation on six of the
initiatives that Navy officials believe are key to the future economy
and efficiency of the service's supply operations. We interviewed
officials in the office of the Deputy Chief of Naval Operations, the
Naval Supply Systems Command, the Naval Inventory Control Point, the
Naval Air Systems Command, and the Naval Sea Systems Command. We
obtained and analyzed Navy data pertaining to plans, objectives,
performance goals, and implementation status and challenges for each of
the six selected management initiatives.
To determine the extent to which the Navy can identify the impact of
additional investments in spare parts inventories, we interviewed
officials and analyzed documents at the Naval Inventory Control Point.
We also reviewed the Navy's fiscal years 2004 and 2005 budget estimates
provided to the Congress in February 2003, and considered DOD's
recommendations in its August 2002 Inventory Management Study. However,
we did not independently validate or verify the accuracy of the Navy's
supply availability performance data or the analysis that estimated the
increased funding needed to achieve the targeted supply system
performance.
We performed our review from August 2002 through March 2003 in
accordance with generally accepted government auditing standards.
We are sending copies of this report to the Secretary of Defense; the
Secretary of the Navy; the Director, Office of Management and Budget;
and other interested congressional committees and parties. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at http://
www.gao.gov.
Please contact me on (202) 512-8365 or Richard Payne on (757) 552-8119
if you or your staff have any questions concerning this report. Key
contributors to this report were Glenn Knoepfle, Paul Rades, Barry
Shillito, George Surosky, and Susan Woodward.
Sincerely,
William M. Solis,
Director
Defense Capabilities and Management:
Signed by William M. Solis:
[End of section]
Appendix I: Comments from the Department of Defense:
DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS
3500 DEFENSE PENTAGON WASHINGTON, DC 20301-3500:
JUN 23 2003:
Mr. William Solis, Director:
Defense Capabilities and Management U.S. General Accounting Office:
441 G Street, N.W. Washington, DC 20548:
Dear Mr. Solis:
This is the Department of Defense (DoD) response to the GAO draft GAO-
03-708, "DEFENSE INVENTORY: Navy Logistics Strategy and Initiatives
Need to Address Spare Parts Shortages," dated May 20, 2003 (GAO Code
350250). The DoD generally concurs with the intent of the
recommendations in the draft report.
Detailed comments on the draft report recommendations are included in
the enclosure. The DoD appreciates the opportunity to comment on the
draft report.
Sincerely,
Allen W. Beckett
Principal Assistant:
Signed by Allen W. Beckett:
Enclosure:
GAO DRAFT REPORT - DATED MAY 20, 2003 GAO CODE 350250/GAO-03-708:
"DEFENSE INVENTORY: Navy Logistics Strategy and Initiatives Need to
Address Spare Parts Shortages":
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Secretary of the Navy to develop a framework for mitigating
critical spare parts shortages that includes long-term goals;
measurable, outcome-related objectives; implementation goals; and
performance measures as part of either the Navy Sea Enterprise strategy
or the Naval Supply Systems Command Strategic Plan. This will provide a
basis for management to assess the extent to which ongoing and planned
initiatives will contribute to the mitigation of critical spare parts
shortages. (p. 23/GAO Draft Report):
DOD RESPONSE: Concur with intent. Rather then focus solely on spare
part shortages, the Navy's strategic initiatives are aimed at reducing
the need for spare parts or, at a minimum, reducing the number of spare
parts required to keep readiness at acceptable levels. Spare parts
shortages are seen as a symptom of a much higher-level problem of
reliability and weapon system life cycle support. Because of this
issue, the Naval Supply Systems Command (NAVSUP) strategic plan was
formulated to address all aspects of spares parts availability to
ensure our Naval forces have the correct levels of support to meet
required readiness performance levels. Specifically, NAVSUP is
developing a maritime inventory strategy that meets Chief of Naval
Operations (CNO) readiness goals and is consistent with Fleet
requirements. The NAVSUP strategic plan focuses on the issue of spare
parts shortages via initiatives in which NAVSUP strives to improve
afloat inventory management, standardize readiness based allowance
products afloat and ashore, consolidate inventory management functions,
reduce Customer Wait Time (CWT) while optimizing investment, and
develop a Total Asset Visibility (TAV) plan. All of these efforts will
improve the efficiency and effectiveness of the Naval supply system and
inherently minimize any shortages of critical parts. Therefore, no
further direction is required and action consistent with this
recommendation is complete.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the Secretary of Navy to implement the August 2002 Office of
Secretary of Defense recommendation to report, as part of budget
requests, the impact of funding on individual weapon system readiness.
(p. 23/GAO Draft Report):
DOD RESPONSE: Concur with intent. In June 2002, the OUSD(C) updated the
SM-3B budget exhibit, which is a weapon system breakout showing
readiness type data, requiring this information as part of the annual
budget estimate submission. The OUSD(C) recognized the fact that the
data provided may not be entirely complete until modernized systems are
in place. As indicated in the August 2002 OSD study on "Inventory
Management Practices," the Navy is:
investing in software technology systems to help link inventory
investment decisions with weapon system readiness results. Because this
effort will take some time to complete, the Under Secretary of Defense
(Comptroller) (USD (C)) has modified the budget exhibit on inventory
investment to include Not Mission Capable due to Supply (NMCS) for each
major weapon system. Since the Financial Management Regulation (FMR)
already requires the Navy to implement the recommendation from the
August 2002 study as data becomes available, no further direction is
required and action consistent with this recommendation is complete.
[End of section]
FOOTNOTES
[1] These figures are based on the Navy's OP-31 Budget exhibits, about
which we recently reported concerns. See U.S. General Accounting
Office, Defense Inventory: Better Reporting on Spare Parts Spending
Will Enhance Congressional Oversight, GAO-03-18 (Washington, D.C.: Oct.
24, 2002).
[2] This figure includes investments of about $21 billion in wholesale-
level inventories and about $9 billion in retail-level inventories kept
at Navy shore stations and aboard ship. The figure does not include the
value of government-owned spare parts and equipment purchased by
program sponsors and kept at end-use sites, such as naval warfare
centers, maintenance depots, and naval contractors.
[3] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.:
Jan. 2003).
[4] Office of the Secretary of Defense, Inventory Management Study
(Washington, D.C.: Aug. 2002).
[5] U.S. General Accounting Office, Defense Inventory: The Department
Needs a Focused Effort to Overcome Critical Spare Parts Shortages,
GAO-03-707 (Washington, D.C.: June 27, 2003); Defense Inventory: Air
Force Plans and Initiatives to Mitigate Spare Parts Shortages Need
Better Implementation, GAO-03-706 (Washington, D.C.: June 27, 2003);
Defense Inventory: The Army Needs a Plan to Overcome Critical Spare
Parts Shortages, GAO-03-705 (Washington, D.C.: June 27, 2003); Defense
Inventory: Several Actions Are Needed to Further DLA's Efforts to
Mitigate Shortages of Critical Parts, GAO-03-709 (forthcoming); Defense
Inventory: Air Force Item Manager Views of Repair Parts Issues
Consistent With Issues Reported in the Past, GAO-03-684R (Washington,
D.C.: May 21, 2003).
[6] For this report, critical spare parts are defined as those parts
that directly affect the readiness of weapon systems. For example, the
Navy periodically identifies parts such as nose landing gear for the F-
18 aircraft as "top degraders" of weapon system readiness.
[7] Pub. L. No. 103-62, Aug. 3, 1993.
[8] The Sea Enterprise plan is part of the Navy's Sea Power 21
initiative that defines capabilities of naval forces in the 21st
century. The vision for the 21st century will be achieved through a
triad of new organizational processes called Sea Trial, Sea Warrior,
and Sea Enterprise.
[9] Supply availability refers to the percentage of time that a fleet-
requisitioned item is immediately available from the Navy's wholesale
supply system. These data include both consumable and repairable items
for maritime and aviation weapon systems.
[10] Fully mission capable rates measure the ability of an aircraft to
perform all of its assigned missions.
[11] U.S. General Accounting Office, Inventory Management: Adopting
Best Practices Could Enhance Navy Efforts to Achieve Efficiencies and
Savings, GAO/NSIAD-96-156 (Washington, D.C.: July 12, 1996), and
Inventory Management: DOD Can Build on Progress by Using Best Practices
for Reparable Parts, GAO/NSIAD-98-97 (Washington, D.C.: Feb. 27, 1998).
[12] U.S. General Accounting Office, Navy Inventory: Parts Shortages
Are Impacting Operations and Maintenance Effectiveness, GAO-01-771
(Washington, D.C.: July 31, 2001).
[13] U.S. General Accounting Office, Performance and Accountability
Series: Major Management Challenges and Program Risks: Department of
Defense, GAO-03-98 (Washington, D.C.: Jan. 2003).
[14] Office of the Secretary of Defense, Inventory Management Study
(Washington, D.C.: Aug. 2002).
[15] The Navy refers to this weapons development milestone as the
Material Support Date.
[16] Department of Defense, Materiel Management Regulation, DOD 4140.1-
R, May 1998.
[17] GPRA requires establishment of a strategic plan for program
activities by each agency that includes, among other things, a mission
statement covering major functions and operations, outcome-related
goals and objectives, and a description of how these goals and
objectives are to be achieved.
[18] The Sea Enterprise plan is part of the Navy's Sea Power 21
initiative, which defines capabilities of naval forces in the 21st
century. The vision for the 21st century will be achieved through a
triad of new organizational processes called Sea Trial, Sea Warrior,
and Sea Enterprise.
[19] Department of the Navy, Office of the Assistant Secretary,
Research, Development and Acquisition: Performance Based Logistics
Guidance Document, Jan. 27, 2003; Deputy Secretary of Defense: Interim
Guidance Regarding Defense Acquisitions, Oct. 30, 2002.
[20] This contract, initiated in 1994, was for a commercial off-the-
shelf item that the Naval Inventory Control Point had not managed
organically. Consequently, the Naval Inventory Control Point lacked
baseline inventory management data necessary to establish vendor
performance standards.
[21] The stores management system is a computer interface installed on
aircraft that monitors, selects, launches, and jettisons weapons.
[22] U.S. General Accounting Office, Defense Inventory: Improved
Management Framework Needed to Guide Navy Best Practice Initiatives,
GAO/NSIAD-00-1 (Washington, D.C.: Oct. 21, 1999).
[23] Eight projects lacked data necessary to measure reliability
improvements.
[24] The P-3 is a long-range maritime surveillance aircraft.
[25] Navy officials told us that the Navy is reviewing plans to
facilitate project approval by relaxing current return on investment
criteria.
[26] Ten projects are scheduled to begin during fiscal year 2003, and
one project is scheduled for fiscal year 2004.
[27] U.S. General Accounting Office, Defense Inventory: Navy's
Procedures for Controlling In-Transit Items Are Not Being Followed,
GAO/NSIAD-99-61 (Washington, D.C.: Mar. 31, 1999).
[28] A Navy official cited the example of a maintenance team that had
reduced the time necessary to conduct an airframe maintenance inventory
from 3 days to 4 hours by using contact memory button technology.
[29] We are reporting separately on the Navy's overall efforts to
improve spare parts support to the operational fleet commanders.
[30] The Close-In Weapons System is a radar controlled rapid-fire gun
system that is installed on Navy ships to defend against anti-ship
cruise missiles. The AEGIS system is a shipboard defensive system that
is capable of automatically detecting, tracking, and destroying
airborne, seaborne, and land-launched weapons.
[31] We did not validate the accuracy of the Navy's additional
investment, spare parts availability, or readiness estimates.
[32] Fully mission capable rates measure the ability of aircraft to
perform all of their assigned missions.
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