Defense Inventory
Several Actions Are Needed to Further DLA's Efforts to Mitigate Shortages of Critical Parts Gao ID: GAO-03-709 August 1, 2003DOD's management, funding, and reporting of spending for spare parts programs have been a focus of GAO high risk reports for over a decade. They noted that spare parts shortages adversely affect military operations and readiness. Despite funding of about $1.9 billion over fiscal years 1999-2002 to increase availability of spare parts, managing to mitigate shortages still challenges the Defense Logistics Agency (DLA). GAO examined if (1) DLA's strategic planning addresses mitigating critical spare parts shortages that affect readiness, (2) strategic initiatives will likely mitigate these shortages, (3) a DOD-directed initiative has improved availability of critical aviation parts, and (4) DLA can identify the impact of added investment on parts availability.
DLA's Strategic Management System, meant to transform its 2002-2007 logistics operations, addresses the mitigation of readiness-affecting shortages of critical spare parts. The system includes a strategic plan with goals, strategies, and objectives; a balanced scorecard to monitor progress; and a business plan that contains 97 initiatives. Of these initiatives, DLA identified 24 as linked to spare parts shortages. The DLA strategic system incorporates attributes of strategic planning outlined in the Government Performance and Results Act of 1993. The 24 initiatives, if fully implemented, could help mitigate critical spare parts shortages and improve supply readiness because, in part, they address causes for the shortages. Of the 24 DLA-identified initiatives, 18 should improve availability of parts identified by the services as critical to readiness; and 6 should indirectly improve parts availability through modernized logistics systems and business processes. A $500-million DOD-directed aviation investment initiative, not part of DLA's strategic system, increased critical parts availability and likely supply readiness. It improved the aggregate, or total average, availability of three critical groups of DLA-managed parts in the first 3 fiscal years--2000-2002--of the 4-year initiative. However, DLA's aggregate 85-percent goal does not clearly reveal that many parts are still far below 85 percent. For example, at the end of fiscal year 2002, of the 10,291 critical aviation parts selected for investment, about 4,900 met or exceeded the aggregate measure, but over 5,400 did not. Of these, about 2,900 parts were available under 35 percent of the time. A DOD regulation, since revised to allow waivers, caused 3,342 parts to be below the 85-percent availability goal. DLA can estimate the impact of increased funding on supply availability. Investment costs, however, will be significant--DLA estimated $748 million to obtain an 85-percent minimum availability of the 219,071 most critical parts. Also, necessary inventory levels may take years to build, and increases in unit readiness are not assured because supply is only one readiness factor.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-709, Defense Inventory: Several Actions Are Needed to Further DLA's Efforts to Mitigate Shortages of Critical Parts
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Report to the Chairman, Subcommittee on Defense,
Committee on Appropriations, House of Representatives:
August 2003:
Defense Inventory:
Several Actions Are Needed to Further DLA's Efforts to Mitigate
Shortages of Critical Parts:
GAO-03-709:
GAO Highlights:
Highlights of GAO-03-709, a report to the Chairman, Subcommittee on
Defense, Committee on Appropriations, House of Representatives
Why GAO Did This Study:
DOD‘s management, funding, and reporting of spending for spare parts
programs have been a focus of GAO high risk reports for over a decade.
They noted that spare parts shortages adversely affect military
operations and readiness. Despite funding of about $1.9 billion over
fiscal years 1999-2002 to increase availability of spare parts,
managing to mitigate shortages still challenges the Defense Logistics
Agency (DLA).
GAO examined if (1) DLA‘s strategic planning addresses mitigating
critical spare parts shortages that affect readiness, (2) strategic
initiatives will likely mitigate these shortages, (3) a DOD-directed
initiative has improved availability of critical aviation parts, and
(4) DLA can identify the impact of added investment on parts
availability.
What GAO Found:
DLA‘s Strategic Management System, meant to transform its 2002-2007
logistics operations, addresses the mitigation of readiness-affecting
shortages of critical spare parts. The system includes a strategic
plan with goals, strategies, and objectives; a balanced scorecard to
monitor progress; and a business plan that contains 97 initiatives. Of
these initiatives, DLA identified 24 as linked to spare parts
shortages. The DLA strategic system incorporates attributes of
strategic planning outlined in the Government Performance and Results
Act of 1993.
The 24 initiatives, if fully implemented, could help mitigate critical
spare parts shortages and improve supply readiness because, in part,
they address causes for the shortages. Of the 24 DLA-identified
initiatives, 18 should improve availability of parts identified by the
services as critical to readiness; and 6 should indirectly improve
parts availability through modernized logistics systems and business
processes.
A $500-million DOD-directed aviation investment initiative, not part
of DLA‘s strategic system, increased critical parts availability and
likely supply readiness. It improved the aggregate, or total average,
availability of three critical groups of DLA-managed parts in the
first 3 fiscal years”2000-2002”of the 4-year initiative. However,
DLA‘s aggregate 85-percent goal does not clearly reveal that many
parts are still far below 85 percent. For example, at the end of
fiscal year 2002, of the 10,291 critical aviation parts selected for
investment, about 4,900 met or exceeded the aggregate measure, but
over 5,400 did not. Of these, about 2,900 parts were available under
35 percent of the time. A DOD regulation, since revised to allow
waivers, caused 3,342 parts to be below the 85-percent availability
goal.
Aviation Initiative‘s Effect on Parts Availability over 3 Years:
[See PDF for image]
[End of figure]
DLA can estimate the impact of increased funding on supply
availability. Investment costs, however, will be significant”DLA
estimated $748 million to obtain an 85-percent minimum availability of
the 219,071 most critical parts. Also, necessary inventory levels may
take years to build, and increases in unit readiness are not assured
because supply is only one readiness factor.
What GAO Recommends:
GAO recommends DOD direct DLA to (1) submit requests for waivers to a
DOD regulation to allow the investment necessary to attain a minimum
85-percent availability goal for each critical part that affects
readiness, (2) change its aggregate supply availability goal to an 85-
percent minimum goal and establish annual performance targets for
measuring progress, and (3) prioritize funding to achieve the minimum
85-percent goal.
In written comments, DOD generally concurred with the intent of our
recommendations, but not with all of the specific actions.
www.gao.gov/cgi-bin/getrpt?GAO-03-709.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact William M. Solis at
(202) 512-8365 or solisw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DLA's Strategic Management System Addresses Mitigating Critical Spare
Parts Shortages That Adversely Affect Readiness:
Some Strategic Initiatives Could Help Mitigate Spare Parts Shortages
and Improve Supply Readiness:
A Separate DOD-Directed Aviation Investment Initiative Has
Significantly Increased Availability of Some Critical Aviation Parts,
but Others Remain in Short Supply:
DLA Can Estimate the Impact of Additional Investment on Supply
Availability, Which Contributes to Supply Readiness:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: Schematic of Defense Logistics Agency Strategic
Management System:
Appendix IV: Description of DLA Initiatives Aimed at Mitigating
Spare Parts Shortages:
Strategic Materiel Sourcing Initiative:
Manufacturing on Demand:
Organic Manufacturing Initiative:
Improved Supply Availability Initiative:
Backorder Reduction Initiative:
Customer Relationship Management and Service Level Agreements
Initiatives:
National Inventory Management Strategy Initiative:
Inventory Accuracy Improvement Initiative:
Product Conformance, Aviation:
Appendix V: Description of DLA Initiatives Aimed at Improving Logistics
Systems and Processes:
Business Systems Modernization Initiative:
Distribution Planning and Management System Initiative:
Strategic Distribution Initiative:
Logistics Response Time Reduction Initiative:
Direct Vendor Delivery Processing Time Initiative:
Overall Purchase Request Processing Time Improvement Initiative:
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: DLA's 2002-2007 Strategic Goals and the Number of Strategies,
Objectives, and Initiatives:
Table 2: Representative Strategies, Objectives, and Action Plan
Initiatives of DLA's 2002-2007 Strategic Plan Customer Goal (strategic
goal 1):
Table 3: DLA Initiatives Specifically Aimed at Improving Spare Parts
Shortages4:
Table 4: DLA System and Process Initiatives:
Table 5: Impact of Investment Results on All Tier Groups of Critical
Aviation Parts, as of the End of Fiscal Year 2002:
Table 6: Impact of Investment Results on Tier 1 Most Critical Aviation
Parts, as of the End of Fiscal Year 2002:
Table 7: Impact of Investment Results on Tier 2 Critical Aviation Parts,
as of the End of Fiscal Year 2002:
Table 8: Impact of Investment Results on Tier 3 Least Critical Aviation
Parts, as of the End of Fiscal Year 2002:
Table 9: Estimated Investment to Achieve Various Minimum Supply
Availability Rates for the Most Critical Aviation, Land, and Maritime
Military Service Parts:
Table 10: Expected Benefits of the National Inventory Management
Strategy to the Services and DLA:
Table 11: Response Time Improvement by Item Category:
Figure:
Figure 1: DLA's Supply-Chain Management Process:
Abbreviations:
DLA: Defense Logistics Agency:
DOD: Department of Defense:
GPRA: Government Performance and Results Act:
Letter August 1, 2003:
The Honorable Jerry Lewis
Chairman
Subcommittee on Defense
Committee on Appropriations
House of Representatives:
Dear Mr. Chairman:
The Defense Logistics Agency (DLA) manages about 4.6 million consumable
items, including weapon systems spare parts, with sales of over
$20 billion in fiscal year 2002. In the Department of Defense's (DOD)
February 2003 budget submission to the Congress, DLA reported achieving
an aggregate weapon system supply availability rate of 85 percent. DLA
began to strategically address ways to mitigate spare parts shortages
and improve its logistics infrastructure and operations as early as
1988. However, managing to mitigate critical spare parts shortages is a
continuing challenge for DLA and defense managers, even though over
$1.9 billion was devoted to increasing the availability of spare parts
in the fiscal years 1999-2002 period. Concerns remain about DOD's
continuing shortages of critical spare parts for aircraft, ships,
vehicles, and weapons systems and their resulting detrimental effect on
military readiness. Also, since 1990, we have repeatedly reported that
DOD's inventory management systems and procedures were ineffective and
wasteful, putting DOD at high risk for unnecessary spending that,
through good stewardship, could be directed to higher priorities such
as modernization or readiness. In our January 2003 High Risk Series
report,[Footnote 1] we wrote that DOD was experiencing equipment
readiness problems because of a lack of key spare parts; and we
recommended that DOD act to address these shortages. While recognizing
that spare parts shortages will never be eliminated, it is reasonable
to expect DOD and DLA to place a high priority on mitigating, or
reducing, the shortages that adversely impact readiness. Such priority
would be inherent in the overall stewardship of funds and
accountability for making spare parts investment decisions that provide
a good readiness return. As recently as August 2002, DOD recognized
the need to overcome critical spare parts shortages and recommended
changes to improve the readiness of weapon systems.[Footnote 2]
This report is one in a series of reports[Footnote 3] that responds to
your request that we identify ways to improve the availability of spare
parts. As agreed, this report focuses on DLA's strategic efforts to
transform the way it conducts its logistics business operations,
including spare parts. More specifically, this report focuses on
whether (1) DLA's strategic planning addresses mitigating critical
spare parts shortages that adversely affect readiness,[Footnote 4]
(2) DLA's strategic logistics initiatives will likely help mitigate
spare parts shortages that affect readiness, (3) a separate DOD-
directed aviation initiative has improved the availability of critical
aviation parts, and (4) DLA can identify the impact of increased
investments on the availability of critical spare parts.
To accomplish these objectives, we analyzed DLA plans, initiatives, and
performance metrics applicable to the management and oversight of
DLA's Strategic Management System. We interviewed officials, as well as
obtained and analyzed information on inventory management practices and
critical spare part shortages, at DLA headquarters, Fort Belvoir,
Virginia, and the inventory control point for aviation in Richmond,
Virginia. Our criteria for evaluating DLA's strategy and initiatives
included the Government Performance and Results Act (GPRA) of
1993,[Footnote 5] previous GAO reports, and appropriate DOD reports and
guidance. Our scope and methodology are discussed in further detail in
appendix I.
Results in Brief:
DLA's strategic logistics planning specifically addresses mitigating
critical spare parts shortages that adversely affect readiness through
a major component of its Strategic Management System--the business
plan. The business plan does so by focusing initiatives on some of the
primary causes of critical shortages and increasing investment in the
safety level of parts--the number of parts in the inventory that
triggers reordering. The Strategic Management System incorporates four
components: (1) a strategic plan that contains DLA's corporate goals,
objectives, and strategies; (2) a balanced scorecard that provides a
basis for assessing how well the strategic plan is working; (3) a
business plan containing 97 initiatives in varying stages of
implementation that specify the actions needed to achieve the strategic
plan's goals, strategies, and objectives; and (4) a review and analysis
process that assesses performance. The 2002-2007 strategic management
system is an improvement over previous efforts because it contains
performance metrics and management feedback mechanisms for measuring
performance progress consistent with key attributes of strategic
planning included in GPRA. The system is also designed to incorporate
future changes as necessary to reflect and improve business operations.
If fully implemented as planned by 2009, 24 of the 97 initiatives
contained in DLA's business plan could either directly or indirectly
contribute to mitigating spare parts shortages and improve supply
support readiness. A group of 18 initiatives is aimed at mitigating
critical spare parts shortages by improving the availability of
specific parts that the services have identified as critical to
readiness. For example, a few initiatives in this group are designed to
obtain sources of supply for critical, hard-to-find parts or to
identify and contract with key material suppliers for low-demand, long-
lead-time parts. Others in the group focus on addressing some of the
recurring causes of spare parts shortages. A second group of six
initiatives seeks to modernize DLA's entire logistics management system
to improve business processes and systems and better support its
customers. While these initiatives show potential, until they are fully
implemented the extent to which they will contribute to mitigating
spare parts shortages is not certain.
A separate initiative not included in DLA's business plan--a $500-
million aviation investment initiative--has steadily improved the
supply availability of DLA-managed critical aviation spare parts.
Nonetheless, shortages exist, in part because the aggregate supply
availability measure DLA used to assess its effectiveness does not
reveal the lower supply availability rates of many critical spare
parts. Furthermore, DLA's progress in buying these critical spare parts
was impeded by a DOD regulation that has since been revised (May 23,
2003) to allow a waiver for such purchases. The availability of
critical aviation parts increased over the first 3 fiscal years (2000-
2002) of the 4-year initiative that is aimed at achieving DLA's
aggregate, or total average, supply availability goal of 85 percent.
This means that the parts, on average, will be available to meet
customer demand 85 percent of the time. Using this aggregate goal,
however, does not reveal the actual availability of many critical
aviation spare parts because many parts are at or over 85 percent,
while others continue to be far less available. For example, by fiscal
year 2002, of the about 10,300 critical parts that were selected for
aviation investment, almost 4,900, or 48 percent, met or exceeded the
DLA goal of 85 percent.[Footnote 6] The remaining 5,400 parts were
available less than 85 percent of the time. Of these, over 2,900--such
as engine mount fittings for the B-52 bomber, shoulder bolts for the
F-14 Tomcat, and landing gear axles for the UH-60A helicopter--were
available less than 35 percent of the time. Furthermore, the
availability of 3,342 of these critical parts was below the 85-percent
aggregate goal because a DOD regulation, recently revised, constrained
how many DLA could buy based on the lead time required to acquire the
part. A subsequent investment initiative, planned for fiscal year 2004,
is designed to increase availability of aviation, as well as land and
maritime, critical spare parts and may improve supply readiness. This
initiative has an 80-percent minimum availability goal for each of the
critical DLA-managed parts but is dependent on funding as well as a
waiver of the lead-time requirement as allowed in the revised DOD
regulation.
DLA can estimate how additional investments in critical spare parts can
improve supply availability to the military services. For example,
based on a DLA November 2002 estimate, a one-time cost of $748 million
would achieve a minimum 85-percent availability for each of DLA's
219,071 aviation, land, and maritime most critical items. The cost to
achieve a 90-percent minimum availability for each of these items would
be about $1.3 billion and the cost to achieve a 95-percent minimum
would be about $2.2 billion. However, while selectively buying more
critical spare parts will likely increase supply availability, doing so
will not necessarily increase the overall readiness posture of the
forces because supply is only one of several factors[Footnote 7] that
contribute to the overall readiness posture of operating units.
Therefore, an operating unit having sufficient spare parts could still
have readiness deficiencies due to factors such as maintenance or
training needs.
We are making several recommendations to help ensure that DLA's service
customers have an adequate supply of critical spare parts that affect
the readiness of weapon systems. These involve (1) DLA's submission of
needed waivers as allowed in the recently revised DOD regulation that
limits the safety level investment in critical spare parts, (2) a
change in DLA's current aggregate supply availability goal to a minimum
85-percent goal, and (3) prioritizing funding to achieve the 85-percent
goal. DOD concurred with the report and the intent of our
recommendations but did not agree with all actions we prescribed. The
department's comments and our evaluation of them are on page 25 of this
report.
Background:
DLA is a DOD Combat Support Agency under the supervision, direction,
authority, and control of the Under Secretary of Defense for
Acquisition, Technology, and Logistics. DLA's mission is "To provide
best value logistics support to America's Armed Forces, in peace and
war—around the clock, around the world." In carrying out its mission,
DLA manages an $80.5 billion inventory comprised of about 4.6 million
consumable items including commodities such as energy, food, clothing,
and medical supplies. DLA also buys and distributes hardware and
electronics items used in the maintenance and repair of equipment and
weapons systems. DLA sales and services amounted to over $20 billion in
fiscal year 2002.
Customers, mainly the military services, determine their requirements
for material and supplies and submit requisitions to any of four DLA
supply centers.[Footnote 8] The centers then consolidate the
requirements and procure the supplies for their customers. DLA provides
its customers with requested supplies in one of two ways. Some items
are delivered directly to customers from commercial vendors while other
items are stored and distributed through worldwide distribution depots
owned and managed by both DLA and the military services. DLA refers to
this ordering and delivery process as materiel management or supply-
chain management.[Footnote 9] Figure 1 depicts this process.
Figure 1: DLA's Supply-Chain Management Process:
[See PDF for image]
[End of figure]
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 those goals and objectives are to
be achieved.
DLA has been guided by formal strategic plans since 1988. The 1988 plan
did not identify strategic measures or performance targets for
achieving strategic goals and objectives. Subsequent strategic plans
incorporated GPRA attributes but still lacked strategic measures.
DLA approved the current 6-year 2002-2007 Strategic Plan--on
February 19, 2002, updating DLA's 2000 Strategic Plan. The DLA
Strategic Management System formalizes, aligns, and integrates
planning and performance measurement processes. The system
incorporates four components: a strategic plan with goals and
objectives; a balanced scorecard,[Footnote 10] with strategies and
performance measures; a business plan containing initiatives; and a
review and analysis process that assesses performance. The balanced
scorecard and business plan reflect decisions on the initiatives in
which DLA will invest, and these investments and performance target
levels form the basis for DLA's budget request. The strategies,
performance measures, and objectives address mitigating critical spare
parts shortages. Performance measures provide DLA management a means of
assessing progress and making adjustments as necessary to achieve its
goals and strategies. The system's review and analysis process involves
examining progress against objectives and targets to make necessary
adjustments to plans and objectives to meet customer requirements. In
developing and revising the Strategic Management System, DLA's
procedures require it to incorporate higher-level plans such as, the
National Military Strategy, the Quadrennial Defense Review, and Defense
Planning Guidance. According to a DLA planning official, DLA's first
corporate assessment of the 2002-2007 Strategic Plan is scheduled for
2003. Appendix III graphically displays the DLA Strategic Management
System.
DLA's Strategic Management System Addresses Mitigating Critical Spare
Parts Shortages That Adversely Affect Readiness:
DLA's Strategic Management System's business plan specifically
addresses mitigating critical spare parts shortages that adversely
affect readiness. The strategic logistics planning process, currently
being implemented, is DLA's framework for logistics transformation,
strategic measurement, and performance management. Three of its
components--a strategic plan, a balanced scorecard, and a business
plan--incorporate GPRA attributes, address spare parts shortages, and
act to improve overall logistics systems and business processes, all of
which could improve overall supply support to DOD customers.
DLA's 2002-2007 Strategic Plan:
The DLA strategic plan covers a 6-year period that includes the year
of publication--2002--and 5 additional years consistent with GPRA
guidelines. It focuses on long-term outcomes and contains DLA's
corporate mission, vision, and values statements and the agency's
4 strategic goals, 13 strategic strategies, and 39 strategic
objectives. The goals that address customer service, customer outcomes,
or management of DLA resources for customer value address spare parts
shortages directly or indirectly through improved service to the
military service customers. Table 1 identifies DLA's four strategic
goals and the respective number of strategies, objectives, and
initiatives to be measured for achieving the plan's strategic goals and
strategies. Table 2 illustrates the relationships between the Customer
Goal (strategic goal 1) and representative strategic strategies,
objectives, and action plan initiatives, relative to spare parts and
customer service.
Table 1: DLA's 2002-2007 Strategic Goals and the Number of Strategies,
Objectives, and Initiatives:
DLA strategic goal: Goal 1--Provide responsive, best value supplies and
services consistently to our customers; Number of strategies: 3;
Number of objectives: 8; Number of initiatives: 8.
DLA strategic goal: Goal 2--Structure internal processes to deliver
customer outcomes effectively and efficiently; Number of strategies:
4; Number of objectives: 18; Number of initiatives: 37.
DLA strategic goal: Goal 3--Ensure our workforce is enabled and
empowered to deliver and sustain logistics excellence; Number of
strategies: 3; Number of objectives: 5; Number of initiatives: 36.
DLA strategic goal: Goal 4--Manage DLA resources for best customer
value; Number of strategies: 3; Number of objectives: 8; Number of
initiatives: 16.
DLA strategic goal: Total; Number of strategies: 13; Number of
objectives: 39; Number of initiatives: 97.
Source: GAO analysis of DLA data.
[End of table]
Table 2: Representative Strategies, Objectives, and Action Plan
Initiatives of DLA's 2002-2007 Strategic Plan Customer Goal (strategic
goal 1):
DLA strategic goal: Goal 1--Provide responsive, best value supplies and
services consistently to customers; Strategic strategies: Focus,
manage, and measure logistics support by customer segment based on
customer requirements; Strategic objectives: Improve customer
satisfaction to 90% by the end of fiscal year 2007; Strategic action
plan initiatives: Refine customer satisfaction survey; Implement
customer Relationship Management; Service Level Agreements with major
customer segments.
Strategic objectives Supply
availability, for weapons systems and overall, shall be equal to or
greater than 85% for each military service for each fiscal year;
Strategic action plan initiatives: Improved supply availability.
Strategic objectives: Strategic strategiesDLA strategic goal:
Negotiate and honor performance agreements with customer segments.:
Implement measurement of Customer Wait Time as the DOD logistics
timeliness metric by the end of fiscal year 2007; Strategic action
plan initiatives: Negotiate and
honor performance agreements with customer segments.: Customer Wait
Time as the DOD Logistics Timeliness Measure.
Strategic objectives: DLA strategic goal: Reduce hardware backorders to
250,000 by the end of fiscal year 2007; Strategic action plan
initiatives: DLA strategic goal: Backorder Reduction.
Strategic strategies
Negotiate and honor performance agreements with customer segments;
Strategic objectives Improve
responsiveness by all modes of customer contact so that 85% of customer
contacts meet standards by fiscal year 2007; Strategic action plan
initiatives Establishment of
practical responsiveness standards for each mode of customer contact
with DLA and actions to improve responsiveness for each mode.
Strategic objectives: Cost-
effectively increase hardware combat support capability through
utilizing Strategic Materiel Sourcing techniques and partnering with
industry by forging 17 long-term strategic supplier alliances by fiscal
year 2004.
Source: GAO summary of DLA data.
[End of table]
The Balanced Scorecard:
The balanced scorecard component of DLA's strategic system identifies
and links DLA's strategic goals and strategies to transform DLA
operations, including customer service, over the next 2 to 5 years. It
also provides metrics to measure strategic plan progress including
"lead" and "lag" indicators. For example, a lead performance indicator
for a Goal 1 strategy--"Negotiate and honor performance agreements with
customer segments"--measures the percent of customer agreements
negotiated. A lag performance indicator for that same strategy measures
the percent of negotiated agreements fulfilled.
DLA's balanced scorecard component "cascades" to each of its Defense
Supply Centers located in Richmond, Virginia; Columbus, Ohio; and
Philadelphia, Pennsylvania. The centers' balanced scorecards identify
the "how and to what extent" their strategies support DLA's corporate
balanced scorecard. The centers' scorecards are expected to reflect
DLA's overall vision of "Right Item, Right Time, Right Place, Right
Price, Every Time—Best Value Solutions for America's Warfighters" and,
in this way, provide a consistent vision to DLA customers,
stakeholders, and employees.
The Business Plan:
DLA's business plan is a 2-year, agency-wide operating plan that
(1) tracks DLA's 97 initiatives in varying stages of implementation and
(2) highlights the investments and actions necessary to achieve
strategies and business objectives in the near-term. DLA considers 43
of these initiatives as strategic because they are required to achieve
DLA's vision and strategy. Another 45 initiatives DLA considers
critical to maintain or improve DLA operations and guarantee both
effectiveness and efficiency. Also, DLA considers nine initiatives
mandatory because they are directed by higher authority and may also be
strategic or critical. The 97 initiatives, at the time of our review,
were in varying stages of implementation.
DLA's business plan, issued in May 2002, is the newest component of the
Strategic Management System. Its initiatives are described in action
plans, which cite who is responsible for the action; the amount of
investment required; how the action supports strategic plan goals,
strategies, and objectives; and the major events and time frames to
achieve the action. Of the 97 DLA initiatives contained in DLA's
Strategic Management System, DLA identified 18 that are aimed
specifically at mitigating spare parts shortages and 6 that are aimed
at improving DLA's internal logistics operating systems and processes
that may improve logistics support to customers and thus help reduce
critical readiness-degrading spare part shortages affecting the
military forces. The remaining 73 initiatives relate to DLA's
financial, human capital, and information technology areas that could
improve DLA's ability to better serve its customers but do not
specifically relate to acquiring spare parts to fill shortages. Thus,
they are not addressed in this report.
Some Strategic Initiatives Could Help Mitigate Spare Parts Shortages
and Improve Supply Readiness:
DLA has a number of initiatives that, if fully implemented, could
either directly or indirectly contribute to mitigating critical spare
parts shortages and may improve supply support readiness. Twenty-four
of the 97 initiatives contained in its Strategic Management System, and
1 separate ongoing DOD-directed initiative, according to DLA, are aimed
at achieving these results. Such improvements are likely, in part,
because some of the 24 initiatives address recurring causes for the
shortages.
If Fully Implemented, DLA Initiatives Could Directly Reduce Critical
Shortages and Improve Supply Support Readiness:
If fully implemented as planned by the end of 2009, 18 initiatives in
DLA's Strategic Management System could directly help mitigate spare
parts shortages and may improve supply support readiness. These
initiatives focus heavily on (1) obtaining strategic sourcing, which
involves alliances and long-term agreements with suppliers of critical
parts; (2) partnerships and agreements with customers; (3) an improved
supply availability to customers; (4) a reduction of backorders; and
(5) the development of a national inventory system. Several of these
initiatives also address some recurring causes of shortages. For
example, one initiative is aimed at reducing spare parts shortages by
identifying manufacturers that produce parts, such as cast and forged
parts and microcircuits, that are no longer produced by the original
equipment manufacturers, yet are still critical components of weapon
systems. Another initiative will likely mitigate spare parts shortages
because it is designed to guarantee DLA sources of low-demand, high-
dollar items by forming long-term contracts with their manufacturers.
Another initiative is designed to develop agreements between suppliers
and DLA to arrange long-term contracts for sole-source items.
Some of the initiatives more specifically address recurring causes for
critical spare parts shortages. For example, a Defense Supply Center
Richmond official identified two predominant causes for a number of
critical spare parts shortages--unexpected service demand and sole
source manufacturers not producing quantities DLA needed to fill
customer orders. The customer relationship management initiative is
designed to address unexpected service demands by using collaborative
demand planning between DLA and the services to determine how much of a
particular part is needed during wartime as opposed to peacetime.
According to DOD, this initiative addresses the readiness-based sparing
concept[Footnote 11] by using service level agreements to provide
tailored support levels for weapon systems parts. Several supplier
relationship initiatives are aimed at addressing problems with sole
source manufacturers not producing quantities DLA needs to fill
customer orders.
Table 3 briefly describes the 18 initiatives DLA Logistics Operations
officials identified in the Strategic Management System's business plan
component that are currently aimed at mitigating spare parts shortages.
It also provides an estimated completion date for the ongoing
initiatives. Appendix IV describes the initiatives in more detail.
Table 3: DLA Initiatives Specifically Aimed at Improving Spare Parts
Shortages:
Initiative: Strategic Materiel Sourcing; Description: Procure items
needed for readiness by applying commercial best practices to several
initiatives that fall under the initiative's "umbrella" including
Strategic Supplier Alliances, Strategic Materiel Sourcing/Rapid
Manufacturing initiative, Supplier Relationship Management, Corporate
Contracts, and Prime Vendor Contracts; Estimated completion date:
Fiscal year 2005.
Initiative: Strategic Supplier Alliances; Description: Develops
agreements between suppliers and DLA to arrange long-term contracts for
sole-source items using best commercial practices; Estimated
completion date: Fiscal year 2005.
Initiative: Strategic Materiel Sourcing/Rapid Manufacturing
Initiative; Description: Guarantee DLA sources of low-demand, high-
dollar items by forming long-term contracts with their manufacturers
stipulating that DLA will also purchase other low-priced, higher-demand
items from those same manufacturers; Estimated completion date:
Ongoing business practice[A].
Initiative: Supplier Relationship Management; Description: Facilitates
communication between DLA and its suppliers with the end goal of
receiving the desired quantity of a particular item when it is needed;
Estimated completion date: Fiscal year 2005.
Initiative: Corporate Contracts; Description: Long-term contracts with
a single source that provides multiple items, which reduces spot buying
activity and business transaction costs; Estimated completion date:
Ongoing business practice[A].
Initiative: Prime Vendor Contracts; Description: Long-term contracting
that allows military customers to requisition market ready or
commercial products directly from a commercial distributor as the items
are needed; Estimated completion date: Ongoing business practice[A].
Initiative: Manufacturing on Demand; Description: Identifies
manufacturers for parts that are no longer produced by the original
source, yet are still critical components of weapon systems. Includes
Casting and Forging, the Generalized Emulation of Microcircuits,
Warstoppers, and the Strategic Material Sourcing/Rapid Manufacturing
initiative; Estimated completion date: Ongoing business practice[A].
Initiative: Casting and Forging; Description: Obtains cast and forged
spare parts that are difficult to find and often are no longer produced
by the original manufacturer; Estimated completion date: Ongoing
business practice[A].
Initiative: Generalized Emulation of Microcircuits; Description:
Identifies sources of replacement microcircuits that are critical
components of older weapons systems still used by the services;
Estimated completion date: Ongoing business practice[A].
Initiative: Warstoppers; Description: Identifies (1) critical,
mission-essential items with long production lead-times that are low-
demand items during peacetime but experience high demand during periods
of war and (2) vendors that will be able to meet the wartime surge and
sustain wartime requirements for those items; Estimated completion
date: Ongoing business practice[A].
Initiative: Organic Manufacturing; Description: Production process of
items that must be produced by government owned and operated facilities
because the private sector no longer produces the parts; Estimated
completion date: Ongoing business practice[A].
Initiative: Improved Supply Availability; Description: Increases
supply availability in accordance with DLA's goal of improving supply
availability, specifically, maintaining aggregate 85 percent, or
greater, supply availability for weapon systems for each of the
military services for each fiscal year; Estimated completion date:
Assessed and reported in monthly reviews.
Initiative: Backorder Reduction; Description: Reduce backorders to
increase supply availability and customer support; Estimated
completion date: Assessed and reported in monthly reviews.
Initiative: Customer Relationship Management; Description:
Incorporates customer input into DLA's business practices to improve
customer service and anticipate customer needs; Estimated completion
date: Initial Operational Capability fiscal year 2005; Full Operational
Capability fiscal year 2009.
Initiative: Service Level Agreements; Description: Establishes a set of
common expectations between DLA and customers and encourages
collaboration between them to improve customer satisfaction; Estimated
completion date: Fiscal year 2004.
Initiative: National Inventory Management Strategy; Description:
Combines the consumable inventories of the services, with DLA's
inventory, resulting in a single national inventory that will improve
supply performance by eliminating redundancy and improving asset
visibility; Estimated completion date: Fiscal year 2009.
Initiative: Inventory Accuracy Improvement; Description: Improve
inventory record accuracy by using independent contractors to perform
sample inventories of DLA items; Estimated completion date: Fiscal
year 2007.
Initiative: DLA Product Conformance, Aviation; Description: Conducts
monthly quality assurance testing to baseline aviation products to
identify necessary improvements to meet performance goals for critical
items; Estimated completion date: Assessed and reported in monthly
reviews.
Source: DLA (data), GAO (presentation).
[A] A business practice that DLA has implemented to fulfill specific
goals and to better meet customers' needs. Such practices have
performance targets and measures that are assessed periodically.
[End of table]
Several DLA Initiatives Focus on Improving Logistics Systems
and Processes That Indirectly Reduce Spare Parts Shortages:
DLA also identified six Strategic Management System initiatives that
could decrease shortages and increase supply availability by developing
or adjusting systems and business processes to improve its logistics
operations and better serve its customers. However, some of these
initiatives are not expected to be fully implemented until 2007. These
initiatives include Business Systems Modernization, Distribution
Planning and Management System, Strategic Distribution, Logistics
Response Time Reduction, Direct Vendor Delivery Processing Time,
and Improving Overall Purchase Request Processing Time. Business System
Modernization faces a number of challenges before being fully
implemented. In June 2001, we reported some information technology
concerns with the initiative, which increased program risk that DOD
agreed to address.[Footnote 12] Table 4 identifies the system and
process initiatives and provides a brief description of intended
results. It also provides an estimated completion date for the ongoing
initiatives. Appendix V describes each initiative in greater detail.
Table 4: DLA System and Process Initiatives:
Initiative: Business Systems Modernization; Description:
Transformation of how DLA conducts its logistics operations including
the replacement of legacy systems with new software, reengineering by
fielding best practices, improving customer service through
collaboration with customers and suppliers, and providing best value
solutions; Estimated completion date: Fiscal year 2006.
Initiative: Distribution Planning and Management System; Description:
Improves DLA business processes by enhancing existing systems with new
commercial best practices that include reengineered logistics processes
and industry-based integrated supply chain solutions. Electronic
logistics data will provide real-time information about orders,
including asset visibility of requisitioned spare parts, as they are in
transit to the customer; Estimated completion date: Fiscal year 2007.
Initiative: Strategic Distribution; Description: Identifies
international locations that can be used as strategic distribution
points; Estimated completion date: Fiscal year 2007.
Initiative: Logistics Response Time Reduction; Description: Improves
supply chain performance by reducing the number of days that its
customers must wait for medical, pharmaceutical, clothing, and textile
items, as well as repair parts; Estimated completion date: Assessed
and reported in monthly reviews.
Initiative: Direct Vendor Delivery Processing Time; Description:
Improves the average processing time to 13 days for planned direct
vendor delivery from the inventory control point/vendor; Estimated
completion date: Assessed and reported in monthly reviews.
Initiative: Improve Overall Purchase Request Processing Time;
Description: Improve purchase request processing time by reducing
inventory control point processing time; Estimated completion date:
Assessed and reported in monthly reviews.
Source: DLA (data), GAO (presentation).
[End of table]
A Separate DOD-Directed Aviation Investment Initiative Has
Significantly Increased Availability of Some Critical Aviation Parts,
but Others Remain in Short Supply:
A separate DOD-directed, $500 million aviation investment initiative--
although not included in DLA's business plan--has significantly
improved the availability of many critical aviation spare parts and
most likely supply readiness. During its first 3 fiscal years, 2000-
2002, the initiative, called the Aviation Investment Strategy,
significantly improved critical aviation parts. Shortages, however,
will continue, in part, because the 85-percent aggregate goal does not
reveal that while 47 percent of the critical aviation spare parts were
raised to this level, many--5,414 (53 percent) as of the end of fiscal
year 2002--are below the goal. Of that number, 2,904 parts, or over
half, were available less than 35 percent of the time. In addition,
DLA officials informed us that DLA's progress in buying these critical
spare parts was impeded by a DOD regulation that has since been revised
on May 23, 2003, to allow a waiver for such purchases.
DOD transferred $500 million from the services' operations and
maintenance funds to support the initiative. The low availability of
critical aviation parts had occurred because of (1) steady declines in
inventory levels during the 1990s and (2) inventory models that
optimized total stock availability, while constrained by total cost,
and did not favor investing in low-demand, high-cost parts regardless
of readiness impact. These conditions prompted the Office of the
Secretary of Defense in 1999 to direct DLA's investment of
$500 million, through the initiative, in safety level inventories of
selected aviation critical parts to achieve the aggregate 85-percent
goal. Our analysis of over 10,000, out of a total of over 15,000,
critical aviation parts before and after investment indicates that
their availability significantly improved over the fiscal years 2000-
2002 period. Also, additional improvement could result as DLA invests
the initiative's remaining $119 million in fiscal year 2004--the fourth
and last year of investment allocation--in the initiative's remaining
parts.[Footnote 13] However, 5,414 of these critical aviation parts
were below DLA's 85-percent goal as of the end of fiscal year 2002.
DLA measures its supply support effectiveness by its ability to provide
customers the parts they need based on meeting an aggregate 85-percent
availability rate. This means that the first time a customer
requisitions a part, it will be available for delivery, on average,
85 percent of the time. Using an aggregate measure means that the
actual supply availability for individual parts will vary--some items
will be above 85 percent and some well below 85 percent. But DLA
targets the average availability of the group at 85 percent.
Our analysis shows significant improvement in the availability of
critical aviation spare parts resulting from investments made during
fiscal years 2000 to 2002. It also shows that many critical aviation
parts will continue to be available well below 85 percent of the time.
This occurred, in part, because of DLA's 85-percent aggregate measure
of supply support effectiveness that was applied to each of three
critical part groups,[Footnote 14] and not individual parts, and a DOD
regulation that until recently limited the safety level inventory
investment. Thus, many parts in the initiative will have availability
rates at 85 percent or higher after they receive investment allocation,
but other parts will continue to experience low availability until
further investment is made. For example, of the 10,291 parts that
received investment through fiscal year 2002, 1,397 had supply rates
greater than or equal to 85 percent before the initiative's investment.
After investment through the initiative for 3 years, that number
increased to 4,877--about a 250-percent increase. However, 5,414 parts
still had availability rates less than the DLA 85-percent aggregate
goal; and 2,904, or 54 percent, of these parts--such as engine mount
fittings for the B-52 bomber, shoulder bolts for the F-14 Tomcat, and
landing gear axles for the UH-60A helicopter--were available below
35 percent of the time. Nearly 2,400 of these were tier 1, or the most
critical, spare parts.
Tables 5 through 8 illustrate that this trend holds true, not only for
all parts in the Aviation Investment Strategy initiative as a whole,
but also for each of the three critical part groups. Table 5 shows the
aggregate improvement for 10,291 DLA-managed critical aviation parts
through investment year 2002 by various availability percent
stratifications. Table 6 shows the same information for the 8,300 Tier
1 parts, the most critical group; table 7 reflects the results of the
1,415 parts in the Tier 2 critical part group, and table 8 shows the
results of the 576 parts in the Tier 3 least critical part group.
Furthermore, similar improvement occurred in each of the military
services over the same period.
Table 5: Impact of Investment Results on All Tier Groups of Critical
Aviation Parts, as of the End of Fiscal Year 2002:
Supply availability percent stratification: 85 and above; Status before
investment (number of items in base year preceding investment): 1,397;
Status after investment (number of items): 4,877; Difference: 3,480;
Percent: change: 249.
Supply availability percent stratification: 84 to 75; Status before
investment (number of items in base year preceding investment): 881;
Status after investment (number of items): 641; Difference: -240;
Percent: change: -27.
Supply availability percent stratification: 74 to 65; Status before
investment (number of items in base year preceding investment): 905;
Status after investment (number of items): 524; Difference: -381;
Percent: change: -42.
Supply availability percent stratification: 64 to 55; Status before
investment (number of items in base year preceding investment): 860;
Status after investment (number of items): 455; Difference: -405;
Percent: change: -47.
Supply availability percent stratification: 54 to 45; Status before
investment (number of items in base year preceding investment): 803;
Status after investment (number of items): 516; Difference: -287;
Percent: change: -36.
Supply availability percent stratification: 44 to 35; Status before
investment (number of items in base year preceding investment): 791;
Status after investment (number of items): 374; Difference: -417;
Percent: change: -53.
Supply availability percent stratification: Below 35; Status before
investment (number of items in base year preceding investment): 4,654;
Status after investment (number of items): 2,904; Difference: -1,750;
Percent: change: -38.
Total; Status before
investment (number of items in base year preceding investment): 10,291;
Status after investment (number of items): 10,291.
Source: GAO analysis of DLA data.
[End of table]
Table 6: Impact of Investment Results on Tier 1 Most Critical Aviation
Parts, as of the End of Fiscal Year 2002:
Supply availability percent stratification: 85 and above; Status before
investment (number of items in base year preceding investment): 1,101;
Status after investment (number of items): 3,886; Difference: 2,785;
Percent: change: 253.
Supply availability percent stratification: 84 to 75; Status before
investment (number of items in base year preceding investment): 694;
Status after investment (number of items): 495; Difference: -199;
Percent: change: -29.
Supply availability percent stratification: 74 to 65; Status before
investment (number of items in base year preceding investment): 730;
Status after investment (number of items): 436; Difference: -294;
Percent: change: -40.
Supply availability percent stratification: 64 to 55; Status before
investment (number of items in base year preceding investment): 690;
Status after investment (number of items): 373; Difference: -317;
Percent: change: -46.
Supply availability percent stratification: 54 to 45; Status before
investment (number of items in base year preceding investment): 657;
Status after investment (number of items): 422; Difference: -235;
Percent: change: -36.
Supply availability percent stratification: 44 to 35; Status before
investment (number of items in base year preceding investment): 636;
Status after investment (number of items): 293; Difference: -343;
Percent: change: -54.
Supply availability percent stratification: Below 35; Status before
investment (number of items in base year preceding investment): 3,792;
Status after investment (number of items): 2,395; Difference: -1,397;
Percent: change: -37.
Total; Status before
investment (number of items in base year preceding investment): 8,300;
Status after investment (number of items): 8,300.
Source: GAO analysis of DLA data.
[End of table]
Table 7: Impact of Investment Results on Tier 2 Critical Aviation
Parts, as of the End of Fiscal Year 2002:
Supply availability percent stratification: 85 and above; Status before
investment (number of items in base year preceding investment): 222;
Status after investment (number of items): 706; Difference: 484;
Percent: change: 218.
Supply availability percent stratification: 84 to 75; Status before
investment (number of items in base year preceding investment): 125;
Status after investment (number of items): 106; Difference: -19;
Percent: change: -15.
Supply availability percent stratification: 74 to 65; Status before
investment (number of items in base year preceding investment): 123;
Status after investment (number of items): 64; Difference: -59;
Percent: change: -48.
Supply availability percent stratification: 64 to 55; Status before
investment (number of items in base year preceding investment): 126;
Status after investment (number of items): 59; Difference: -67;
Percent: change: -53.
Supply availability percent stratification: 54 to 45; Status before
investment (number of items in base year preceding investment): 112;
Status after investment (number of items): 61; Difference: -51;
Percent: change: -46.
Supply availability percent stratification: 44 to 35; Status before
investment (number of items in base year preceding investment): 98;
Status after investment (number of items): 57; Difference: -41;
Percent: change: -42.
Supply availability percent stratification: Below 35; Status before
investment (number of items in base year preceding investment): 609;
Status after investment (number of items): 362; Difference: -247;
Percent: change: -41.
Total; Status before
investment (number of items in base year preceding investment): 1,415;
Status after investment (number of items): 1,415.
Source: GAO analysis of DLA data.
[End of table]
Table 8: Impact of Investment Results on Tier 3 Least Critical Aviation
Parts, as of the End of Fiscal Year 2002:
Supply availability percent stratification: 85 and above; Status before
investment (number of items in base year preceding investment): 74;
Status after investment (number of items): 285; Difference: 211;
Percent: change: 285.
Supply availability percent stratification: 84 to 75; Status before
investment (number of items in base year preceding investment): 62;
Status after investment (number of items): 40; Difference: -22;
Percent: change: -35.
Supply availability percent stratification: 74 to 65; Status before
investment (number of items in base year preceding investment): 52;
Status after investment (number of items): 24; Difference: -28;
Percent: change: -54.
Supply availability percent stratification: 64 to 55; Status before
investment (number of items in base year preceding investment): 44;
Status after investment (number of items): 23; Difference: -21;
Percent: change: -48.
Supply availability percent stratification: 54 to 45; Status before
investment (number of items in base year preceding investment): 34;
Status after investment (number of items): 33; Difference: -1; Percent:
change: -3.
Supply availability percent stratification: 44 to 35; Status before
investment (number of items in base year preceding investment): 57;
Status after investment (number of items): 24; Difference: -33;
Percent: change: -58.
Supply availability percent stratification: Below 35; Status before
investment (number of items in base year preceding investment): 253;
Status after investment (number of items): 147; Difference: -106;
Percent: change: -42.
Total; Status before
investment (number of items in base year preceding investment): 576;
Status after investment (number of items): 576.
Source: GAO analysis of DLA data.
[End of table]
Furthermore, our analysis of information provided by DLA revealed
that 3,342 of the 15,708 critical aviation parts in the Aviation
Investment Strategy initiative as of December 2002 could remain below
DLA's 85 percent aggregate availability rate, regardless of funds
available for investment. According to DOD officials, this is because
DOD Supply Chain Materiel Management Regulation 4140.1-R limits safety
level investments by requiring they meet a specific demand limit unless
that limit is waived in cases where application of the limit
significantly impairs weapon system support.[Footnote 15] Without such
a waiver, these spare parts could continually be below DLA's
availability goal, adversely affect readiness, and increase
DLA backorders. Furthermore, DLA's supply support effectiveness and
critical aviation spare parts availability to customers could continue
to be limited.
DLA is planning another investment strategy, scheduled to begin in
fiscal year 2004 called Weapon System Readiness Improvement, subsequent
to the conclusion of the Aviation Investment Strategy initiative that
could also improve supply readiness. It is expected to target critical
aviation, land, and maritime weapon systems spare parts for investment
to achieve a minimum availability of 80 percent for each part. However,
the same lead-time constraints contained in DOD's Supply Chain Materiel
Management Regulation 4140.1-R could also prevent some of these
critical spare parts from reaching the 80-percent availability goal,
meaning they will not be available to customers when needed.
An Office of the Secretary of Defense Inventory Management Study
conducted in August 2002 addressed a need for a focused investment in
critical spare parts that affect supply readiness. The study concluded
that low stockage levels for high-cost, low-demand consumable parts
were the predominate cause of supply-related Not Mission Capable rates
in the Air Force and Navy. Furthermore, it stated that DLA's
optimization requirements models favor the procurement of the higher-
demand, lower-cost parts, continuing the low availability trend for
critical spare parts. The Comptroller, Office of the Under Secretary of
Defense, recommended in the August 2002 DOD management study that DLA
and the services should continue efforts to ensure that high-cost, low-
demand items that would improve weapon system readiness are available
when needed--an effort that might require DLA to prioritize its funding
to increase appropriate weapon system inventories to meet higher
availability of critical parts.
The August 2002 Office of the Secretary of Defense Inventory Management
Study stated that additional efforts are required to improve the supply
managers ability to make purchase decisions based on readiness impacts
instead of aggregate availability goals. It recommended long and short-
term actions intended to more closely align supply management
accountability with readiness. The long-term recommendation was to
ensure that the department's logistics systems provide the data needed
to link readiness and supply management decisions supporting readiness
based sparing models. It noted that the Army, Navy and DLA are in the
process of changing their supply management functions from legacy
systems to new commercial systems, but this change to new commercial
systems introduces an interoperability risk because the department does
not have an overarching enterprise architecture defining the
interoperability requirements. Therefore, the study also recommended
that in the interim time remaining before the new systems are
implemented the military departments should continue to apply higher
supply targets to the inventory items associated with weapons systems
that report readiness rates below established goals. It specified that
these supply targets should be measured by several factors including
supply availability.
DLA Can Estimate the Impact of Additional Investment on Supply
Availability, Which Contributes to Supply Readiness:
DLA can estimate that added investment in safety level inventories of
critical readiness-related spare parts will increase parts availability
and will likely improve supply readiness of the military services.
However, there is no assurance that increased investments would affect
overall unit readiness.
At our request, the DLA Office of Operations Research and Resource
Analysis provided investment estimates[Footnote 16] as of November 2002
to indicate what it would cost to achieve supply availability rates of
85, 90, and 95 percent for over 219,000 of the spare parts most
critical to readiness. Part criticality was determined by the military
services. Estimates disregard DOD's limiting regulatory requirement and
are based on a minimum availability rate for each part instead of an
aggregate. Because DLA maintains some parts at rates higher than
85 percent, the overall rate for the group will generally be higher
than the minimum. Table 9 shows the investment cost estimates at the
various supply availability rates and the effective overall
availability rate for 219,071 of the military services' most critical
aviation, land, and maritime parts. For example, an investment of
$748 million was estimated to achieve a minimum supply availability
rate of 85 percent for the most critical parts. When all parts that
exceed the minimum rate are considered, the overall supply availability
rate is estimated at 92 percent. As indicated in table 9, investment
costs increase considerably to achieve the 5 percent increments at the
higher minimum availability rates with little effect on the overall
rate.
Table 9: Estimated Investment to Achieve Various Minimum Supply
Availability Rates for the Most Critical Aviation, Land, and Maritime
Military Service Parts:
Dollars in millions.
Estimated investment; 85 percent: $748; 90 percent: $1,256;
95 percent: $2,215.
Overall supply availability rate; 85 percent: 92 percent; 90 percent:
93 percent; 95 percent: 96 percent.
Number of critical items; 85 percent: 219,071; 90 percent: 219,071;
95 percent: 219,071.
Source: GAO analysis of DLA data.
[End of table]
Inventory quantities needed to achieve these supply levels could take
years to acquire and affect a part's availability rate. It takes up to
3 years in some cases to procure certain critical parts; and when
delivered, the purchased quantities do not necessarily have an
immediate impact on supply availability rates. Some parts, particularly
aviation parts, have several years of acquisition lead time.[Footnote
17] For example, 351 critical aviation parts contained in the Aviation
Investment Strategy initiative have acquisition lead times of 2 years
or greater. Several parts even exceeded 3 years. In addition to this
acquisition lead time, an initiative official told us that it generally
takes about 2 years before parts received from vendors actually affect
or increase supply availability rates because initial investment
dollars are used to fill an item's backorders before increasing the
part's safety level quantities. Thus, it could take as long as 5 years
in total to improve the supply availability of long acquisition lead-
time parts.
Increasing safety levels of critical spare parts inventories will
likely increase supply availability and therefore supply support
readiness. However, because of the multiple factors that affect a
unit's readiness--including supply, equipment, training, and
personnel--investment in critical parts does not necessarily mean that
a unit's overall readiness posture will improve. For example, an
operating unit having sufficient spare parts could still have impaired
readiness due to maintenance, training, and personnel problems.
Conclusions:
It is important for DLA, the procurer and manager of most spare parts
for the military services, to have effective supply acquisition,
inventory management, and distribution systems to ensure DOD's
readiness. The agency's strategy for its logistics planning system and
its initiatives have the attributes that, if fully implemented, could
help resolve causes for shortages and improve supply support. The
strategy and initiatives also provide a baseline for measuring
progress. However, three things--DOD's Supply Chain Materiel Management
Regulation 4140.1-R, DLA's aggregate measurement goal for assessing
supply effectiveness, DLA's requirements models that do not prioritize
high-cost, low-demand critical spare parts--could significantly lessen
DLA's potential to mitigate critical spare parts shortages and increase
military readiness. Unless waivers to the lead-time demand limits are
requested and approved as appropriate under the current regulation, the
availability of certain critical spare parts for customers could
continue to be less than 85 percent--many even below 35 percent. Thus,
DLA's follow-on investment initiative scheduled to begin in fiscal year
2004 will not be as effective as it could be in increasing the
availability of critical parts that, in turn, may increase military
readiness. Continuing to manage critical spare parts based on an 85-
percent aggregate availability goal also contributes to the disparity
in the availability of these parts. Absent a minimum availability goal
for buying and stocking critical spare parts and annual performance
targets for assessing progress toward that goal, many critical spare
parts shortages that impede readiness could continue. Furthermore,
prioritizing investments in spare parts is important. Had DOD not
directed DLA to focus $500 million on critical aviation parts in the
Aviation Investment Strategy, DLA would likely have continued using
quantitative models that prioritized buying and stocking low-cost,
high-demand parts and not those high-cost, low-demand parts that most
impact readiness. The success of the DOD-directed initiative has shown
that prioritizing funding for critical spare parts can improve their
availability over several years and likely enhance supply readiness.
Such a focused investment is also consistent with the recommendation of
the Comptroller, Office of the Under Secretary of Defense, to invest in
those high-cost, low-demand items that are critical to supply
readiness. Linking funding to the annual performance targets could be
an effective management tool for decision makers.
Recommendations for Executive Action:
To improve the supply availability of critical readiness degrading
spare parts that may improve the overall readiness posture of the
military services, we recommend that the Secretary of Defense direct
the Director of the Defense Logistics Agency to:
* submit, as appropriate, requests for waiver(s) of the provisions of
the DOD Supply Chain Materiel Management Regulation 4140.1-R that limit
the safety level of supply parts to specific demand levels. Such
waivers would allow DLA to buy sufficient critical spare parts that
affect readiness of service weapon systems to attain an 85-percent
minimum availability goal;
* change the agency's current aggregate 85-percent supply availability
goal for critical spare parts that affect readiness, to a minimum 85-
percent supply availability goal for each critical spare part, and
because of the long lead times in acquiring certain critical parts,
establish annual performance targets for achieving the 85-percent
minimum goal; and:
* prioritize funding as necessary to achieve the annual performance
targets and ultimately the 85-percent minimum supply availability goal.
Agency Comments and Our Evaluation:
In written comments on this report, DOD generally concurred with the
draft report and the intent of the recommendations, but not all of the
specified actions we recommended. Furthermore, DOD concluded its
proposed actions regarding each of our recommendations are sufficient
and no further directions or actions are required. DOD's written
comments are reprinted in their entirety in appendix II.
In concurring with the first recommendation, DOD acknowledged that the
amended DOD 4140.1-R, dated May 2003, gives the military services and
DLA authority to waive the lead-time demand maximum in cases where
creditable evidence exists. We agree with that action.
Although DOD concurred with the intent of our second and third
recommendations, DOD did not agree with the need to replace the
aggregate 85-percent supply availability goal with a minimum 85-percent
supply availability goal for critical spare parts, establish annual
performance targets for achieving the minimum goal, or prioritize
funding to achieve it. Instead, DOD said DLA is working toward a
readiness-based sparing concept of tailoring different support level
goals by item with a link between an item's availability and desired
inventory levels rather than one standard level of support for all
critical items. Additionally, DOD stated that setting an 85-percent
minimum goal across the universe of critical items would undermine the
efficiencies of optimization that may be achieved by working toward
different supply availability goals for different parts based on
readiness impact. It cited that its Customer Relationship Management
initiative, which is scheduled to start in fiscal year 2005 and be
fully operational in fiscal year 2009, will use service level
agreements to provide this type of tailored support. It stated that
funding would then be prioritized accordingly in concert with the
implementation of the new tailored approach.
We disagree that the actions DOD prescribes will be sufficient,
particularly in the near term, to address the need for DLA to increase
critical spare parts availability. As our report notes, DLA is
responsible for managing hundreds of thousands of critical parts that
the services have identified as crucial to weapons systems readiness.
However, many of these parts are not available to meet service needs.
DLA has been using the same 85-percent aggregate goal for stocking
these critical parts as it has for non-critical parts. Based on our
work, DLA was not managing its inventory by developing individual item
supply availability targets tailored to desired readiness levels.
Although DLA has started using service level agreements, which are a
component of DLA's Customer Relationship Management initiative, as our
report notes, these agreements have a limited scope and are considered
a work in progress. DLA plans to execute 11 agreements by the end of
fiscal year 2003 and as noted, full implementation for the Customer
Relationship Management initiative is scheduled for fiscal year 2009.
Furthermore, managing to an 85-percent aggregate goal does not reveal
the significant shortages in availability of many individual critical
parts. For example, after 3 years of focused investment to increase the
availability of over 10,000 critical aviation parts, 53 percent were
not available at the 85-percent aggregate goal and over half of these
parts were available below 35 percent of the time.
DOD's response proposes, what we agree is, an optimum approach that is
consistent with the desire expressed in the August 2002 Office of
Secretary of Defense Inventory Management Study for supply managers to
make purchase decisions based on readiness impacts instead of aggregate
availability goals. However, according to the August report,
implementing this approach is a long-term effort dependent on DLA and
the services' logistics systems providing the data needed to link
readiness and supply management decisions that has interoperability
risks because the department does not have an overarching architecture
for integrating such systems. The August report, therefore, recommended
that until these new systems are implemented to provide more visibility
into the relationship between inventory levels and weapon system
readiness, DLA and the military departments should continue to apply
higher supply availability targets to the inventory items associated
with weapon systems where readiness is below established goals.
As DLA plans another investment strategy, subsequent to the conclusion
of the Aviation Investment Strategy initiative, that will expand the
number of critical parts that are targeted for investment by including
land and maritime items, it needs a clear minimum goal for the
availability of these parts, annual performance targets for measuring
progress, and focused funding. Therefore, until the systems,
initiatives, and agreements are in place to support the department's
prescribed approach for optimizing efficiencies of supply availability
and investment, we continue to believe our recommendations to set a
minimum goal of 85 percent for each critical spare part, establish
annual performance targets for achieving the goal, and prioritize
funding accordingly are reasonable interim actions to meet the
services' readiness goals for parts they have identified as critical
to readiness.
We are sending copies of this report to the Secretary of Defense; the
Director, Defense Logistics Agency; 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. Other
contacts and key contributors are listed in appendix VI.
Sincerely yours,
William M. Solis,
Director Defense Capabilities and Management:
Signed by William M. Solis:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine the adequacy of DLA's strategic plans to address critical
spare parts shortages and their effect on readiness, we obtained and
analyzed DLA planning documents that pertained to spare parts or
logistics. We assessed the adequacy of DLA's strategic planning by
comparing DLA planning to the requirements outlined in the Government
Performance and Results Act of 1993 to determine if DLA's planning
contained key management attributes that are necessary to reduce spare
parts shortages. We interviewed DLA officials at DLA Headquarters, Fort
Belvoir, Virginia, regarding DLA strategic planning efforts and to
determine the extent to which DLA's strategic planning had been
coordinated with the Office of the Secretary of Defense and the
services.
To determine the likelihood that DLA's strategic logistics initiatives
will achieve their intended results and help mitigate spare parts
shortages that affect readiness, we obtained and analyzed information
and documentation related to (1) initiatives to overcome shortages,
(2) chronic shortage items degrading the readiness of forces, and
(3) chronic and recurring causes for shortages. We obtained a list of
initiatives that DLA officials identified as either specifically
improving spare parts shortages or improving systems and processes that
could impact shortages. We analyzed the initiatives to see if they
contained performance measures and milestones to track the progress of
the initiatives.
To determine the impact of a $500 million DOD-directed aviation
investment to improve the availability of critical spare parts, we
obtained and analyzed DOD-directed aviation investment data on supply
availability. We sorted the data by critical part group, predominant
user, funding year, fiscal year, and supply availability percentage
increments/stratifications (85 percent and greater, 84 to 75 percent,
74 to 65 percent, 64 to 55 percent, 54 to 45 percent, 44 to 35 percent,
and less than 35 percent) to detail changes in parts availability
before and after investment. We interviewed program and budget
officials at DLA Headquarters concerning which initiatives contained in
their strategic planning would impact spare parts shortages. We also
interviewed officials at the Defense Supply Center in Richmond,
Virginia, concerning the separate DOD-directed Aviation Investment
Initiative and the spare parts shortages that the services identified
as critical to weapon system readiness, as well as the key
DLA-identified initiatives. We focused on the Richmond Supply center
because it is the lead center for aviation and because aviation items
have been predominant readiness degrading items for the Air Force and
Navy.
To determine the extent to which DLA can identify how increased
investment impacts critical spare parts inventories and readiness, we
requested DLA's Office of Operations Research and Resource Analysis to
estimate the investment cost necessary to increase supply availability
of critical aviation spare parts to a minimum rate of 85 percent.
However, we did not independently validate or verify the accuracy of
DLA's estimates that show the relationship between investment and
supply availability or of DLA's optimization models that determine
logistics requirements, given funding constraints.
We performed our work from August 2002 to May 2003 in accordance with
generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Defense:
DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS
3500 DEFENSE PENTAGON WASHINGTON, DC 20301-3500:
JUL 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-
03-709, "DEFENSE INVENTORY: Several Actions Are Needed to Further DLA's
Efforts to Mitigate Shortages of Critical Parts," dated June 10, 2003
(GAO Code 350251). 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,
Diane K. Morales:
Signed for Diane K. Morales:
Enclosure:
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
GAO-03-709 / CODE 350251:
"DEFENSE INVENTORY: Several Actions Are Needed to Further DLA's Efforts
to Mitigate Shortages of Critical Parts":
RECOMMENDATION 1: To improve the supply availability of critical
readiness degrading spare parts that may improve the overall readiness
posture of the Military Services, GAO recommended that the Secretary of
Defense direct the Director of the Defense Logistics Agency (DLA) to
submit, as appropriate, requests for waiver(s) of the provisions of the
Materiel Management Regulation 4140.1-R that limit the safety level of
supply parts to specific demand levels. Such waivers would allow DLA to
buy sufficient critical spare parts that affect readiness of service
weapon systems to attain an 85 percent minimum availability goal. (p.
27/GAO Draft Report):
DoD RESPONSE: Concur with intent. The DoD 4140.1R dated May 2003 gives
the Military Services and DLA authority to waive the lead time demand
maximum in cases where creditable evidence exists. 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 Director of the Defense Logistics Agency to change the
agency's current aggregate 85 percent supply availability goal for
critical spare parts that affect readiness, to a minimum 85 percent
supply availability goal for each critical spare part, and because of
the long lead times in acquiring certain critical parts, establish
annual performance targets for achieving the 85 percent minimum goal.
(p. 27/GAO Draft Report):
DoD RESPONSE: Concur with intent. We agree that in some cases critical
items should be reviewed for higher levels of supply availability based
on readiness impact. However, we do not agree with replacing the
aggregate 85 percent supply availability goal with an 85 percent
minimum goal. DLA is working towards a readiness based sparing concept
of tailoring different support level goals by item with a link between
the item's availability and desired readiness levels, rather than
working towards achieving one standard level of support for all
critical weapons system items. Setting an 85 percent minimum goal
across the universe of critical items would undermine the efficiencies
of optimization that may be achieved by working towards different
supply availability goals for different parts, based no their readiness
impact. No further direction is required and action consistent with
this recommendation is complete.
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
direct the Director of the Defense Logistics Agency to prioritize
funding as necessary to achieve the annual performance targets and
ultimately the 85 percent minimum supply availability goal. (p. 27/GAO
Draft Report).
DoD RESPONSE: Concur with intent. We do not agree with funding towards
an 85 percent minimum supply availability goal. However, as DLA
implements the tailored approach defined in the response to
recommendation 2, funding will be prioritized according to the new
approach. As part of its Customer Relationship Management (CRM)
initiative and customer facing business operations; DLA continues to
work with its customers to develop and execute performance level
agreements, identified by DLA as service level agreements (SLAB),
focused on providing the type of tailored support addressed in the
response to recommendation 2. Initial operating capability for CRM is
scheduled for FY 05, with full operational capability scheduled for FY
09. Development of SLAB is an ongoing business process with no discrete
due date. No further direction is required and action consistent with
this recommendation is complete.
[End of section]
Appendix III: Schematic of Defense Logistics Agency Strategic Management
System:
[See PDF for image]
[End of figure]
[End of section]
Appendix IV: Description of DLA Initiatives Aimed at Mitigating
Spare Parts Shortages:
DLA identified 18 strategic initiatives in varying stages of
implementation in its Strategic Management System that are aimed at
mitigating shortages of spare parts, including critical ones. Of these,
three--Strategic Material Sourcing, Manufacturing on Demand, Customer
Relationship Management--are umbrella initiatives with five, three, and
one additional initiative, respectively, under them. What follows is
DLA's description of the initiatives. We have not verified the details
of these descriptions.
Strategic Materiel Sourcing Initiative:
The Strategic Materiel Sourcing initiative represents DLA's attempt to
procure items needed for readiness by applying commercial best
practices to several initiatives that fall under that initiative's
"umbrella," including Strategic Supplier Alliances, Strategic Materiel
Sourcing/Rapid Manufacturing initiative, Supplier Relationship
Management, Corporate Contracts, and Prime Vendor Contracts.
Strategic Supplier Alliance Initiative:
The Strategic Supplier Alliance develops agreements between suppliers
and DLA to arrange long-term contracts for sole-source items using best
commercial practices such as partner-driven, integrated supply chain
management whereby the buyer and seller cooperate to maximize their
mutual benefit. One of the initiative's goals is to improve the
readiness of weapon systems, and this is accomplished in part by
reducing the customer wait time for spare parts. Other potential
benefits include improved capacity utilization, increased process
reliability, reduced inventories, reduced cycle times, leveraging of
shareholder strength, increased flexibility, increased customer
service, shared innovations and technologies, and reduced total system
costs. The initiative is composed of a charter, goals, improvements,
and metrics.
According to a March 2002 report by the DOD Inspector General, a
Strategic Supplier Alliance with Honeywell International has had
positive results. The DOD Inspector General report stated that a DLA
alliance with Honeywell produced three primary sole-source contracts
for spare parts that resulted in improved wait time, reduced inventory
for DLA to manage, and lower prices for DLA customers. The report also
noted that (1) the contracts had resulted in a $9.8 million cost
reduction of DLA managed inventory for the first 221 catalog contract
items and (2) the alliance contracts will ultimately result in a price
reduction of $59 million over 12 years for the first 594 items placed
on the three contracts. Additionally, administrative lead-time for one
of the contract items was reduced from 180 to 10 days. Other potential
suppliers that DLA had identified as Strategic Supplier Alliance
candidates include Lockheed Martin, Northrop Grumman, and Rolls Royce.
Strategic Material Sourcing/Rapid Manufacturing Initiative:
The Strategic Material Sourcing/Rapid Manufacturing initiative is
likely to improve spare parts shortages because it is intended to
guarantee DLA sources of low-demand, high-dollar items by forming long-
term contracts with their manufacturers, stipulating that DLA will also
purchase other low-priced, higher-demand items from those same
manufacturers. The group of low-demand, high-priced items and the high-
demand, low-priced items to be purchased through one of the
initiative's contracts is referred to as a "market basket." Insurance
or numeric stockage objective and replenishment items with production
lead-times of 60 days or greater that are projected to be purchased
within the next 5 years will be included in the program, but critical
weapon system parts will be excluded. At the time of our review, this
initiative was still in the demonstration phase; and items were being
identified to include in the market baskets. According to DLA
officials, the demonstration phase will involve 18 groups of items
covering approximately 11,000 individual items. The candidate
population for the initiative includes 39,000 items with an annual
demand of $67 million. Also, long-term sources for hard-to-find spare
parts can be obtained by agreements tailored to the Strategic Material
Sourcing/Rapid Manufacturing Initiative program. The initiative's
contracts to produce a market basket's items for DLA can last up to
11 years: 5 years under the original contract and as many as three
additional 2-year options if performance targets are met.
Supplier Relationship Management Initiative:
The Supplier Relationship Management program seeks to improve
spare parts shortages by facilitating communication between DLA and its
suppliers with the end goal of receiving the desired quantity of a
particular item when it is needed. Supply Relationship Managers meet
periodically with the suppliers to ensure that the supplier will meet
the performance levels and targets, which are specified in the contract
with DLA, to provide spare parts.
Corporate Contracts:
Corporate contracts are a form of long-term contract that DLA uses to
negotiate an agreement with a manufacturer to supply a range of items.
With such a contract, DLA can use a single source to provide an
assortment of items that are managed by one or more inventory control
points. The one contract thus reduces spot buying activity and business
transaction costs. According to DLA, additional benefits potentially
include lower production costs, improved delivery, ease of use, and
reduced customer support infrastructure. Further, corporate contracts
will likely improve spare parts shortages by locating a long-term
source of spare parts with improved delivery, and this improved
delivery will increase supply availability, which contributes to
readiness. As of the beginning of fiscal year 2002, there were nearly
100 suppliers that had entered into corporate contracts with DLA.
Prime Vendor Initiative:
The Prime Vendor initiative is another DLA supply support vehicle that
uses single commercial distributors to supply customers through
long-term contracting in a particular region. Prime Vendor's long-term
contracts allow military customers to requisition market-ready or
commercial products directly from a commercial distributor as the items
are needed. The DLA supply centers negotiate the long-term contracts
with the vendors, and the customers can order the items directly from
the supplier via an electronic catalog. According to this initiative,
with Prime Vendor, the customer receives an order confirmation within
minutes; and the delivery is to occur within 24 to 48 hours.
According to DLA, because the military customers can direct-order items
when they need them directly from the vendor and receive them within
48 hours, spare parts shortages will improve, supply availability will
increase and readiness may be improved. Another benefit is the reduced
inventory management costs to DLA because there will be no need for DLA
to maintain items long-term in its warehouses if the customers are
ordering items directly from the manufacturer when they are needed.
Virtual Prime Vendor is the advancement of the Prime Vendor concept and
is designed to anticipate customer needs and provide items or services
as they are needed. Virtual Prime Vendor includes additional logistics
support and other services such as forecasting requirements, inventory
management, engineering support, technical services, and other services
related to customer satisfaction.
Manufacturing on Demand:
The Manufacturing on Demand initiative seeks to improve spare parts
shortages by identifying manufacturers for parts that are no longer
produced by the original source, yet are still critical components of
weapon systems, such as cast and forged parts and microcircuits. Such
spare parts often cannot be purchased from the original source because
the original manufacturer does not produce the part anymore or the
original manufacturer is no longer in business. Manufacturing on Demand
is the umbrella initiative for the Casting and Forging, the Generalized
Emulation of Microcircuits, and the Warstoppers initiatives. In
addition, it includes, in part, the Strategic Material Sourcing/Rapid
Manufacturing initiative, which is also under the Strategic Materiel
Sourcing initiative and is discussed there.
Casting and Forging Initiative:
DLA's Casting and Forging initiative seeks to improve spare parts
shortages by obtaining cast and forged spare parts that were difficult
to find and often no longer produced by the original manufacturer.
Typically, foundries and forging operations are known as "third tier"
suppliers that do not manufacture spare parts for a weapon system once
it is out of production. DLA coordinates with the American Metalcasting
Consortium and the Forging Defense Manufacturing Consortium to
locate manufacturers that will produce critically needed spare parts
with materials and processes that DLA and the consortiums deemed
suitable. The American Metalcasting Consortium alone involves 230
companies, 37 contractors, and 94 shops that account for the production
of 455 parts for 59 weapon systems. In sum, as of January 2003, the
casting and forging program was producing over 560 parts from 65
different weapon systems, according to DLA officials.
Generalized Emulation of Microcircuits Initiative:
The Generalized Emulation of Microcircuits initiative was designed
to identify a source of replacement microcircuits that are critical
components of older weapon systems still used by the services. The
original microcircuits on older weapon systems are now obsolete because
technology has advanced since their introduction, and the original
manufacturers do not produce the microcircuits anymore because the
commercial demand is not high enough to encourage them to incur
production costs. However, these microcircuits are still critically
needed on several weapon systems; therefore, DLA currently has a
contract with the Sarnoff Corporation to provide replacements for the
microcircuits that are no longer in production by imitating their
original designs. This initiative seeks to improve the supply of these
critically needed spare parts through the development of a steady
supply source, and high supply availability could contribute to supply
readiness. Other potential benefits of emulated microcircuits include
the elimination of redesign costs, audited reliability testing/
screening, indefinite supply availability, and direct orders placed
with the supplier. Additionally, the replacement supply of
microcircuits could provide another option for maintaining mission-
ready status for weapons systems such as MLRS, Patriot, AV-8B, B-2, and
the B-52. As of May 2003, this initiative has emulated over 300 designs
from the government-owned library and has supplied over 45,000
microcircuit devices to customers, which include DLA, Hanscom Air Force
Base, Naval Surface Warfare, Warner Robins Air Force Base, and the
National Aeronautics and Space Administration.
Warstoppers Initiative:
The Warstoppers initiative seeks to impact the shortage of spare parts
by identifying (1) critical, mission-essential items with long
production lead-times that are low-demand items during peacetime but
experience high demand during periods of war and (2) vendors that will
be able to meet the wartime surge and sustain wartime requirements for
those items. An integral part of this initiative is DLA's industrial
base evaluation tool known as the World Wide Web Industrial
Capabilities Assessment Program. The program is DLA's effort to collect
current data directly from private industry, via the Internet, on
thousands of parts and then analyze that data to identify actual or
potential part availability problems when there is a surge in demand
for those parts in wartime. The program also emphasizes investment in
technology resources and the pre-positioning of raw materials so that
items can be produced as needed during wartime with reduced lead-times,
rather than procuring items and storing them as war reserves. According
to this initiative, it is more cost effective to invest in the
industrial base that will produce critical items than to store
quantities of those same items as war reserve inventory until they are
needed.
In July 2002, we reported[Footnote 18] that the World Wide Web
Industrial Capabilities Assessment Program "has several attributes
reflecting sound management practices that are required for reliable
industrial base capability assessments." According to DLA, benefits of
Warstoppers include reduced lead-times, reduced prices, and reduced
wartime inventory costs. Examples of acquisitions for weapon system
spare parts that benefited from the Warstoppers program include DC
motors for the H-2, H-60, AH-1, and UH-1 helicopters; hydraulic tubes
for the F-15 fighter; and the clip-on nut used on several weapon system
engines.
Organic Manufacturing Initiative:
Organic Manufacturing refers to the production of items by government-
owned and -operated facilities because the private sector cannot meet
the need for those parts. Government facilities that produce these
parts include arsenals, military repair depots, and other DOD-operated
factories. These facilities produce the hard to find items when no
offer is received to produce them, there is no source, the part is an
Emergency Supply Operations Center Requirement, the private sector
price is unacceptable, or the private sector delivery time frame is
unacceptable. Organic manufacturing improves spare part shortages by
producing items for 34 Level-A (most critical) weapon systems including
multiple weapon systems at 35 organic manufacturing sources.
Improved Supply Availability Initiative:
DLA uses supply availability as a measure of supply effectiveness.
DLA's goal is to maintain an aggregate 85 percent, or greater, supply
availability for weapon systems parts for each of the military services
for each fiscal year. By increasing supply availability, backorders for
spare parts are reduced, and the readiness of weapon systems could
increase because the critical spare parts essential to mission
performance would be available at a higher rate.
The 85-percent supply availability initiative supports DLA Strategic
Plan Goal 1--to provide responsive, best value supplies and services
consistently to its customers. According to DLA officials, the 85-
percent target availability rate is based on the statistical rule that
85 percent of the population lies within one standard deviation of the
mean. Further, DLA officials maintain that 85 percent is an acceptable
supply availability goal because it is cost-effective, and supplying
items at rates above 85 percent would be cost prohibitive. However, as
discussed earlier in this report, the 85-percent availability rate is
an aggregate rate, meaning that DLA's items are to be available
85 percent of the time on average. The 85-percent measure does not
specifically relate to each individual item that DLA manages. Rather,
it is an average measure of the supply availability of each item, which
means that some items are available at rates greater than 85 percent of
the time, and other items are available at rates well below 85 percent.
Backorder Reduction Initiative:
Backorder reductions support DLA's Strategic Plan Goal 1; and the
backorder reduction initiative supports the DLA strategy to focus,
manage, and measure logistics support by customer segment, based on
customer requirements. Through the initiative, DLA plans to reduce
hardware backorders to 250,000 by the end of fiscal year 2007. A
benefit to backorder reductions in addition to contributing to
readiness, according to a DLA official, is the reduction of
cannibalization, where parts are taken from one system and used on
another. DLA officials also stated that backorders are filled on
average in 80 days and about one-third are filled within 30 days. DLA
reported in the spring of 2003 that backorders had been reduced from a
high of approximately 525,000 in May 2000 to a little over 314,000 in
September 2002. This means that more items are available to DLA
customers.
Customer Relationship Management and Service Level Agreements
Initiatives:
The Customer Relationship Management program is an initiative
designed to foster a better relationship between DLA and the services
by incorporating input from the services. The customer relationship
management element of DLA's business practices is designed to use
information obtained to provide customer service and anticipate the
individual needs of each customer. The focus of the initiative is on
collaborative demand planning between DLA and the customer to determine
how much of a particular part is needed for wartime activities
as opposed to peacetime activities. Through its processes and system
that emphasizes customer satisfaction, the Customer Relationship
Management initiative supports the DLA plan to (1) provide responsive,
best value supplies and services; (2) focus, manage, and measure
logistics support; and (3) improve customer support.
The Service Level Agreements initiative is an integral component of the
Customer Relationship Management initiative. Service level agreements
are formally negotiated between DLA and its customers and set
priorities to meet customer needs, performance measures, and targets.
The initiative seeks to establish a set of common expectations between
DLA and its customers and to encourage collaboration. This
collaboration seeks to improve customer satisfaction, which is an
objective DLA is targeting at 90 percent by the end of fiscal year
2007. The application of service level agreements also seeks to support
DLA's plan to (1) provide responsive, best value supplies and services
consistently to its customers and (2) negotiate and honor performance
agreements with its customers. Each service level agreement typically
is composed of a scope/objective, detail of service to be provided, and
the performance measurement standards to be met. According to DOD this
initiative addresses the readiness based sparing concept by using
service level agreements to provide tailored support levels for weapon
systems parts.
Service Level Agreements have a limited scope and are considered a work
in progress. According to a DLA official, DLA is negotiating with the
Air Force Materiel Command to develop a service level agreement, and
other agreements are planned with NADEP and NAVAIR. In total, DLA plans
to execute 11 agreements by the end of fiscal year 2003. The Service
Level Agreement initiative is likely to improve spare parts shortages
by its existence as a contracting instrument of the CRM program that is
a product of encouraged communication between the customers and DLA to
anticipate customer demand.
Other Customer Relationship Management initiatives involve:
* identifying the appropriate customers to receive service level
agreement offers,
* establishing a process to approach and train customers,
* designing the future DLA organization focusing on customer
interactions,
* establishing key performance indicators consistent with BSC,
* developing the right customer communication plan, and:
* determining the customers to contact personally.
National Inventory Management Strategy Initiative:
According to DLA, the National Inventory Management Strategy initiative
seeks to achieve a DLA managed single National Inventory combining
military service managed consumable inventories with DLA's inventory.
DLA anticipates that a national inventory will provide total asset
visibility to DOD-wide inventories and improve supply performance by
eliminating redundancy in all levels of inventory and information
systems managed by DLA and the services. DLA expects the National
Inventory Management Strategy to increase DLA efficiency in providing
items to its customers because it allows DLA to locate all of the parts
that the services previously managed. This total visibility will allow
DLA to determine how many parts are in the inventory, which parts have
shortages, and where they are needed. The faster DLA can locate a part,
the faster it can supply that part to the customer. Table 10 highlights
some of the expected initiative benefits to the services and to DLA.
Table 10: Expected Benefits of the National Inventory Management
Strategy to the Services and DLA:
Benefits to the services: Higher levels of supply readiness; Benefits
to DLA: Supplier of choice.
Benefits to the services: Tailored logistics support solutions;
Benefits to DLA: Core competencies.
Benefits to the services: Optimized supply chain; Benefits to DLA:
Better decisions.
Benefits to the services: Focus on core competency; Benefits to DLA:
Resource allocation.
Benefits to the services: Better resource use.
Source: DLA (data), GAO (presentation).
[End of table]
In addition, according to DLA, a uniform DLA-managed system will help
reduce wait time for items because supplies will be regionally located
according to regional usage and customer input. Reducing customer wait
time should increase the availability of many spare parts, and the
increase in parts availability will contribute to the supply readiness
of the military services. The National Inventory Management Strategy
initiative also incorporates milestones for completion, and performance
metrics will be jointly established by DLA and the services. According
to a DLA official, the initiative's metrics include (1) supply chain
availability, (2) item transfer, (3) customer relations, and
(4) resource management. The initiative supports DLA's Strategic Plan
to structure internal processes to deliver customer outcomes
effectively and efficiently, reduce redundant DOD inventory and improve
responsiveness, and improve supply chain effectiveness.
DLA has over a hundred potential sites to include in the National
Inventory Management Strategy initiative; and current pilot sites using
the initiative, according to a DLA official, include the Defense Depot
Yokosuka, Japan, where DLA has assumed control of managing 11,000 items
previously owned by the Navy; Naval Air Station Lemoore, California,
where DLA has improved supply support; and Naval Air Italy. Additional
pilot program sites, according to a DLA official, will include Fort
Carson, Colorado; Camp Lejeune, North Carolina; Tinker Air Force Base,
Oklahoma; and Ingleside Navy Base, Texas. The National Inventory
Management Strategy is being developed in four phases. As of April
2003, this initiative was in its testing period (Phase III) with the
DOD-wide implementation process scheduled from fiscal years 2004 into
2009.
Inventory Accuracy Improvement Initiative:
The Inventory Accuracy Improvement initiative is designed to improve
inventory record accuracy by using independent contractors to perform
sample inventories for over 4 million DLA-managed items. This
initiative seeks to support DLA's plan to structure internal processes
to deliver customer outcomes effectively and efficiently and improve
processes. Also, DLA plans to improve inventory accuracy for high-
dollar, general supplies to at least 99 percent by the end of fiscal
year 2007, and it plans to achieve a 95-percent accuracy level for all
other items by the end of fiscal year 2007 as well. Improved inventory
accuracy will likely improve spare parts shortages by giving inventory
managers better supply information about items that are critically
needed for systems that affect readiness. This information can factor
into the decision to purchase more of those critical spare parts to
increase their supply availability, which in turn can contribute to
supply readiness of the services. DLA developed the inventory
improvement accuracy initiative based on a GAO report released in June
1999.[Footnote 19]
Product Conformance, Aviation:
DLA expects that the Product Conformance initiative is designed to
improve aviation spare parts shortages by conducting monthly quality
assurance testing to baseline aviation products and identifying where
improvements are necessary to meet performance goals for items that the
services have identified as critical. According to a DLA official, the
Product Conformance initiative has four metrics: (1) identification of
critical items by the services, (2) the impact the critical items will
have on readiness, (3) identification by the services of procurement
sources to procure those items, and (4) the cost of the items. DLA's
aim is to achieve 97-percent production conformance for critical
aviation material on hand by the end of fiscal year 2005 and 99 percent
conformance by the end of fiscal year 2007. Also, DLA explains that
Product Conformance supports DLA's plan to (1) structure internal
processes to deliver customer outcomes effectively and efficiently,
(2) improve processes, and (3) leverage industry.
[End of section]
Appendix V: Description of DLA Initiatives Aimed at Improving Logistics
Systems and Processes:
DLA identified six strategic initiatives in varying stages of
implementation in its Strategic Management system that seek to
modernize and improve DLA's logistics processes and systems and better
serve its customers. DLA believes that doing so will indirectly improve
spare parts availability and supply readiness. The six include the
Business Systems Modernization, Distribution Planning and Management
System, Strategic Distribution, Logistics Response Time Reduction,
Direct Vendor Delivery Processing time, and Overall Purchase Request
Processing Time Improvement initiatives.
Business Systems Modernization Initiative:
Business Systems Modernization is an approximately $850-million
initiative that seeks to transform how DLA conducts its logistics
operations. The transition initiative includes the eventual replacement
of DLA's older logistics materiel management systems, or legacy
systems, with commercial off-the-shelf software by January 2006. The
Standard Automated Materiel Management System and the DLA Integrated
Subsistence Management System are the legacy logistics systems
that DLA has used to manage its inventory for over 30 years. Other
initiative objectives that DLA seeks to achieve by the end of 2005 are
reengineering by fielding best practices, improved customer service
through collaboration with customers and suppliers, and providing
best value solutions.
DLA explains that according to this initiative, commercial off-the-
shelf software will replace the legacy systems as a single, integrated
system. All order fulfillment, planning, and financial management
activities will be supported by the new software that impacts DLA's
financial, material management, and sales and distribution logistics
operations. DOD approved the initiative on December 21, 1999, and DLA
began a concept demonstration test phase, also referred to as "Release
1," of the new initiative software on July 31, 2002. DLA transferred
about 170,000 items for the initial test phase from its legacy systems
among its three inventory supply centers at Columbus, Ohio;
Philadelphia, Pennsylvania; and Richmond, Virginia. About 2.5 million
customer orders have been made using the new BSM technology involving
around $500 million in sales. A follow-on test phase, or "Release 2,"
of the initiative is scheduled to begin in July 2004, and it will
include 50 percent of the remaining items that DLA manages. As of April
2003, initiative implementation across DLA was targeted for
January 2006.
Distribution Planning and Management System Initiative:
The Distribution Planning and Management System initiative seeks to
improve DLA business processes by enhancing existing systems with new
commercial best practices that include re-engineered logistics
processes and industry-based integrated supply chain solutions.
Electronic logistics data will provide real-time information about
orders, including asset visibility of requisitioned spare parts, as
they are in-transit to the customer. The initiative supports DLA's plan
to structure internal processes to (1) deliver customer outcomes
effectively and efficiently, (2) design and implement a best value
enterprise information technology environment, and (3) improve
distribution responsiveness and reduce costs. By improving the supply
process by which spare parts are provided to customers, as well as
reducing wait time, the Distribution Planning and Management System
initiative could contribute to the improvement of spare parts shortages
and potentially the readiness of the military services. The initiative
seeks to meet assigned objectives for weapon systems readiness support.
According to DLA, additional benefits include cost reductions for
transportation and overall distribution; greater use of DOD negotiated
rates, more consolidated shipments, and increased productivity of
distribution and transportation operations. Additionally, DLA projects
that the completion of the initiative will result in net projected
savings to the agency of $63 million by the end of fiscal year 2007.
Strategic Distribution Initiative:
The Strategic Distribution initiative is intended to reduce
transportation costs by identifying international locations that can be
used as strategic distribution points. Because critically needed items
at the distribution points are located closer to the customer, customer
wait time is reduced. A reduction in customer wait time could improve
spare parts shortages by providing items to the customer faster than if
the items had to be delivered from more distant distribution points. An
additional benefit could be reduced shipping costs because strategic
distribution emphasizes the use of other shipping methods, such as
dedicated trucks for deliveries within the United States and surface
transports for overseas shipping, to replace air transport, which has a
higher material shipping cost. According to DLA officials, Strategic
Distribution has been used for 2 years in three locations: Germansheim,
Yokosuka, and Pearl Harbor.
Logistics Response Time Reduction Initiative:
The Logistics Response Time Reduction initiative is a DLA effort to
improve supply chain performance by reducing the number of days that
its customers must wait for subsistence, medical, pharmaceutical,
clothing, and textile items, as well as repair parts. According to DLA
officials, the initiative complements the Business Systems
Modernization initiative and is an integral part of the DLA transition
from older business practices and logistics management. Also, the
Logistics Response Time Reduction initiative supports DLA's strategic
goal to improve average performance for customer delivery by the end of
fiscal year 2007. Table 11 demonstrates the improvement in response
time for categories of DLA-managed items.
Table 11: Response Time Improvement by Item Category:
Item category: Repair Parts; Response time improvement: 15 days.
Item category: Medical and Pharmaceutical; Response time improvement:
1.9 days.
Item category: Subsistence; Response time improvement: 2.5 days.
Item category: Clothing and Textile; Response time improvement: 21
days.
Source: DLA.
[End of table]
The Logistics Response Time Reduction initiative also supports DLA's
strategic plan to structure internal processes to deliver customer
outcomes effectively and efficiently and improve supply chain
effectiveness. According to DLA, by improving the response time of
DLA's system for spare parts delivery, the availability of those parts
will increase, which could contribute to readiness.
Direct Vendor Delivery Processing Time Initiative:
Direct vendor delivery is the DLA arrangement with suppliers that
allows its customers to receive items from the suppliers directly,
instead of DLA receiving the items first and then distributing them to
the customers. Although DLA does not take delivery of the items, it
still monitors the delivery performance of the suppliers, and it is
also involved in the direct vendor delivery planning and procurement
processes. Customers may take direct delivery from direct vendor
delivery sales, but DLA obligates and commits the funds to pay the
supplier. The aim of the Direct Vendor Delivery Processing Time
initiative is to improve the average processing time for the planned
direct vendor delivery inventory control point/vendor to 13 days by the
end of fiscal year 2003, which matches the Uniform Materiel Movement
Issue Priority System processing time. By improving delivery time,
customer wait time is reduced, and supply availability is increased,
which can positively affect readiness. The Direct Vendor Delivery
Processing Time initiative also supports DLA's plan to structure
internal processes to deliver customer outcomes effectively and
efficiently, as well as leverage industry.
Overall Purchase Request Processing Time Improvement Initiative:
The Overall Purchase Request Processing Time Improvement initiative
is intended to improve purchase request processing time by reducing
inventory control point processing, as well as meeting lead-time
processing requirements 75 percent of the time by the end of fiscal
year 2007. Another objective is to reduce the number of open purchase
requests, according to a DLA official. This initiative seeks to improve
spare parts shortages by reducing customer wait time to receive
critically needed items, thus improving supply support. Also, this
initiative could also improve unit readiness by delivering critical
parts as they are needed to operate systems used by the military
services. According to a DLA official, the metrics developed for this
process improvement include (1) monitoring the number of open purchase
requests and (2) monitoring the number of purchase requests that
exceeded the administrative lead-time processing requirements. This
initiative supports DLA's plan to structure internal processes to
deliver customer outcomes effectively and efficiently as well as
improve processes.
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Richard G. Payne (757) 552-8119 Dudley C. Roache, Jr. (757) 552-8117:
Acknowledgments:
In addition to those named above, M. Todd Dice, M. Jane Hunt, Latrealle
Lee, Charles W. Perdue, Barry L. Shillito, and John Wren also made
significant contributions to this report.
(350251):
FOOTNOTES
[1] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C., Jan.
2003).
[2] Office of the Secretary of Defense, Inventory Management Study
(Washington, D.C.: Aug. 2002).
[3] U.S. General Accounting Office, Defense Inventory: The Army Needs a
Plan to Overcome Critical Spare Parts Shortages, GAO-03-705
(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 Department Needs a Focused Effort to Overcome Critical
Spare Parts Shortages, GAO-03-707 (Washington, D.C.: June 27, 2003);
Defense Inventory: Navy Logistics Strategy and Initiatives Need to
Address Spare Parts Shortages, GAO-03-708 (Washington, D.C.: June 27,
2003).
[4] For this report, we used "critical spare parts" to mean those parts
that directly affect the readiness of weapon systems. For example, DLA
periodically identifies parts, such as complete engines and engine
components for various aircraft, as "top degraders" of weapon system
readiness.
[5] Pub. L. No. 103-62, Aug. 3, 1993.
[6] It may take up to 2 years before an increase in supply availability
of a specific spare part is evident because current demands and
backorders are filled first before safety levels are increased.
[7] Factors impacting readiness posture include supply, maintenance,
equipment, training, and personnel.
[8] DLA's four supply centers are (1) Defense Supply Center, Columbus,
Ohio, which is responsible for land, maritime, and missile support;
(2) Defense Energy Support Center, Fort Belvoir, Va., the lead center
for comprehensive energy solutions, such as contract support and the
management of petroleum-based fuels; (3) Defense Supply Center,
Richmond, Va., which is responsible for air, aviation, and space
support; and (4) Defense Supply Center, Philadelphia, Pa., the lead
center for troop support items, such as food, clothing, and medical
supplies.
[9] The materiel management or supply chain management process
incorporates five major DLA business functions. These functions include
distributing materiel ordered from its inventory; purchasing fuels for
DOD and the U.S. government; storing strategic materiel; marketing
surplus DOD materiel for reuse, reutilization, or disposal; and
providing numerous information services, such as item cataloging, for
DOD and the United States and selected foreign governments.
[10] The balanced scorecard, introduced by Professor Robert Kaplan and
Dr. David Norton in 1992, is a component of the Strategic Management
System that links strategic goals, strategies, objectives, and measures
to an organization's strategic plan.
[11] The readiness-based sparing concept tailors different support
level goals by item with a link between the item's availability and
desired readiness levels, according to DOD.
[12] U.S. General Accounting Office, Information Technology: DLA Should
Strengthen Business Systems Modernization Architecture and Investment
Activities, GAO-01-631 (Washington, D.C.: June 29, 2001).
[13] As of December 2002, there were 15,708 parts in the Aviation
Investment Strategy initiative. We excluded 5,412 parts that remained
for targeted investment in the initiative's fourth year, fiscal year
2003, because the investment results of those parts were not available.
Additionally, we excluded five parts for which the Marine Corps was the
predominant user, leaving a balance for our analysis of 10,291.
[14] As identified by the military services, Tier 1 parts are the most
critical, Tier 2 parts are critical, and Tier 3 parts are the least
critical.
[15] Section C2.6.3.2.6.1 of DOD's Supply Chain Materiel Management
Regulation 4140.1-R states that to dampen any overstatement of safety
level requirements due to imprecise safety level models and thereby
avoid unnecessary procurement or repair actions, an item's safety
level shall be constrained to a maximum of three standard deviations of
lead-time demand or the lead-time demand, whichever is less. Lead-time
demand for a particular supply item is the number of the item needed in
a specified time period multiplied by the projected lead time for the
item. The regulation was amended on May 23, 2003, to allow waivers.
Under the amended regulation, the lead-time demand limit may be waived
for weapon system items where credible evidence exists that its
application significantly impairs weapon system support.
[16] We did not validate the accuracy of these estimates.
[17] Acquisition lead time is the administrative and production time
required between identification of a need to buy and the letting of a
contract or the placing of an order and receipt into the supply system
of materiel purchased.
[18] U.S. General Accounting Office, Defense Inventory: Improved
Industrial Base Assessments for Army War Reserve Spares Could Save
Money, GAO-02-650 (Washington, D.C., July 12, 2002).
[19] U.S. General Accounting Office, Financial Management: Better
Controls Essential to Improve the Reliability of DOD's Depot Inventory
Records, GAO/AIMD-99-132 (Washington, D.C., June 28, 1999).
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