Defense Management
DLA Has Made Progress in Improving Prime Vendor Program, but Has Not Yet Completed All Corrective Actions Gao ID: GAO-07-396R February 26, 2007The Department of Defense (DOD) operates a worldwide supply system, with the vast majority of the items being managed by the Defense Logistics Agency (DLA). Media reports in October 2005 raised concerns about the use of the prime vendor concept and the prices that DLA was paying for items acquired through a prime vendor, and the House Armed Services Committee held a hearing on the matter on November 9, 2005. As a result of the hearing, DLA officials recognized the need to improve management oversight and internal controls over the program, and they proposed a series of corrective actions. Under the prime vendor concept, DOD relies on a distributor of a commercial product line, who provides that product line and incidental services to customers in an assigned region or area of responsibility. Products or services are to be delivered within a specified period of time after order placement. The prime vendor provides the product either at the cost paid to obtain it or at a price agreed upon in advance with DLA plus a handling fee. The use of prime vendor contracts is governed by the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement. DLA manages the program and the Director of DLA reports to the Under Secretary of Defense for Acquisition, Technology, and Logistics through the Deputy Under Secretary of Defense for Logistics and Materiel Readiness. The Defense Supply Center Philadelphia (DSCP), a field activity of DLA, is the lead center for managing prime vendor contracts for three major supply chains: medical materiel, subsistence/garrison feeding, and construction and equipment. In June 2006, we summarized the main findings of DLA internal reviews, and an external review conducted by the Defense Contract Management Agency at DLA's request, of DLA's prime vendor programs. The findings highlighted five deficiencies, as follows: (1) management metrics that were too narrowly focused on sales; (2) a prime vendor concept that was not suitable for all commodities; (3) a lack of management oversight; (4) inadequate pricing reviews; (5) a lack of knowledge or skills in the workforce. We also reported that DLA had experienced persistent problems in overseeing prime vendor contracts, despite the existence of oversight policies and procedures and the identification of corrective actions prior to November 2005. Those problems persisted because DLA and DSCP management had not provided the oversight needed to ensure that the policies, procedures, and corrective actions were implemented. We therefore recommended that the Secretary of Defense ensure that the Director of the DLA provide continual management oversight of the corrective actions DLA was taking to address the problems in its prime vendor program. A House Armed Services Committee report accompanying the fiscal year 2007 Defense Authorization bill directed GAO to review DLA's actions and submit a report to the defense committees no later than March 1, 2007. Our objective was to determine the extent to which DLA's corrective actions have addressed the main deficiencies in the prime vendor program.
DLA has made progress in identifying and implementing a series of corrective actions to address the five main deficiencies we indicated earlier in the management of its prime vendor program, but it has not yet completed all the actions, and some deficiencies remain. Until DLA completes all the actions, we cannot fully assess whether they will be effective in correcting all the deficiencies and sustaining the improvements. DLA has effectively rectified two of the deficiencies by completing actions to broaden its management metrics and adjust its acquisition strategy for commodities that were not suitable for the prime vendor concept. However, it is still in the process of implementing corrective actions to remedy the three remaining deficiencies noted in our June 2006 report--those relating to management oversight, pricing reviews, and workforce knowledge and skills. To address these three deficiencies, DLA has issued a new policy and DSCP has developed implementing procedures that prescribe oversight for prime vendor contractors; authorized additional positions to enhance oversight and developed training requirements for its staff; and introduced specific requirements for supply chains to conduct price reasonableness determinations and more price reviews. Nevertheless, these improvements are still a work in progress. For example, a new division at DSCP, established to ensure that supply chains are following procedures, is still in the process of hiring and training staff and has recently revised its procedures. Further, personnel responsible for one commodity within the construction and equipment supply chain had not conducted price reasonableness determinations as required by the new policy, resulting in a backlog of 11,260 items that needed review, representing an estimated value of $96 million. As of January 2007, DSCP personnel had reduced the backlog to 480 items that needed additional research. Finally, some supply chains have not yet been able to meet their staffing requirements. The shortage of personnel in the supply chains has led to heavier workloads for current staff as well as to delays in completing contract actions. Until DLA completes all the corrective actions that are still in process, it remains at risk of being overcharged for the products it is purchasing. DLA faces further challenges in sustaining the improvements it has made because of impending leadership changes and by virtue of its history of not following through on correcting deficiencies. Our prior work has shown that one of the elements needed for sustaining management improvement initiatives is demonstrated leadership commitment. While the current leadership at DLA and DSCP have demonstrated their commitment to implementing the corrective actions, personnel turnover can be expected in a large organization such as DLA--for example, the Commander of DSCP will reach the end of his 2-year term in mid-2007--and future leaders may not necessarily complete the corrective actions. DLA's history reflects the vulnerability of the prime vendor program to systemic pricing problems, because management has not always provided the oversight necessary to ensure that corrective actions were implemented. Because of these factors, and to mitigate its risk of being overcharged for its purchased products, DLA needs to ensure that the course of corrective actions is completed and the actions are working as intended and the improvements in oversight are sustained.
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-07-396R, Defense Management: DLA Has Made Progress in Improving Prime Vendor Program, but Has Not Yet Completed All Corrective Actions
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February 26, 2007:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Duncan L. Hunter:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
Subject: Defense Management: DLA Has Made Progress in Improving Prime
Vendor Program, but Has Not Yet Completed All Corrective Actions:
The Department of Defense (DOD) operates a worldwide supply system,
with the vast majority of the items being managed by the Defense
Logistics Agency (DLA).[Footnote 1] Media reports in October 2005
raised concerns about the use of the prime vendor concept and the
prices that DLA was paying for items acquired through a prime vendor,
and the House Armed Services Committee held a hearing on the matter on
November 9, 2005.[Footnote 2] As a result of the hearing, DLA officials
recognized the need to improve management oversight and internal
controls over the program, and they proposed a series of corrective
actions.
Under the prime vendor concept, DOD relies on a distributor of a
commercial product line, who provides that product line and incidental
services to customers in an assigned region or area of responsibility.
Products or services are to be delivered within a specified period of
time after order placement. The prime vendor provides the product
either at the cost paid to obtain it or at a price agreed upon in
advance with DLA plus a handling fee. In fiscal year 2006, prime vendor
sales accounted for approximately $7.25 billion, or 20 percent, of
DLA's total sales and service of $36 billion.
The use of prime vendor contracts is governed by the Federal
Acquisition Regulation (FAR) and the Defense Federal Acquisition
Regulation Supplement. DLA manages the program and the Director of DLA
reports to the Under Secretary of Defense for Acquisition, Technology,
and Logistics through the Deputy Under Secretary of Defense for
Logistics and Materiel Readiness. The Defense Supply Center
Philadelphia (DSCP), a field activity of DLA, is the lead center for
managing prime vendor contracts for three major supply chains: medical
materiel, subsistence/garrison feeding, and construction and equipment.
Medical materiel includes pharmaceutical and medical/ surgical items.
Subsistence includes food for troop feeding. The construction and
equipment supply chain comprises several commodities, including
maintenance, repair, and operations (MRO),[Footnote 3] lumber, and
metals. DSCP is also the lead center for the clothing and textiles
supply chain, which does not include any prime vendor contracts.
In June 2006, we summarized the main findings of DLA internal reviews,
and an external review conducted by the Defense Contract Management
Agency at DLA's request, of DLA's prime vendor programs.[Footnote 4]
The findings highlighted five deficiencies, as follows:
* management metrics that were too narrowly focused on sales,
* a prime vendor concept that was not suitable for all commodities,
* a lack of management oversight,
* inadequate pricing reviews,[Footnote 5] and:
* a lack of knowledge or skills in the workforce.
We also reported that DLA had experienced persistent problems in
overseeing prime vendor contracts, despite the existence of oversight
policies and procedures and the identification of corrective actions
prior to November 2005. Those problems persisted because DLA and DSCP
management had not provided the oversight needed to ensure that the
policies, procedures, and corrective actions were implemented. We
therefore recommended that the Secretary of Defense ensure that the
Director of the DLA provide continual management oversight of the
corrective actions DLA was taking to address the problems in its prime
vendor program.
A House Armed Services Committee report accompanying the fiscal year
2007 Defense Authorization bill directed GAO to review DLA's actions
and submit a report to the defense committees no later than March 1,
2007. Our objective was to determine the extent to which DLA's
corrective actions have addressed the main deficiencies in the prime
vendor program. To accomplish this objective, we reviewed the actions
DLA and DSCP have taken. We also reviewed a new DLA policy that governs
the use of prime vendor contracts and DSCP's adherence to that policy
and implementing procedures. In addition, we reviewed internal
assessments of DLA's and DSCP's management of prime vendor contracts,
as well as prior GAO reports. Further, we interviewed DLA and DSCP
officials, as well as officials in the Office of the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness. We conducted
our review between August 2006 and January 2007, in accordance with
generally accepted government auditing standards. Our scope and
methodology are discussed in further detail at the end of this report.
Results in Brief:
DLA has made progress in identifying and implementing a series of
corrective actions to address the five main deficiencies we indicated
earlier in the management of its prime vendor program, but it has not
yet completed all the actions, and some deficiencies remain. Until DLA
completes all the actions, we cannot fully assess whether they will be
effective in correcting all the deficiencies and sustaining the
improvements. DLA has effectively rectified two of the deficiencies by
completing actions to broaden its management metrics and adjust its
acquisition strategy for commodities that were not suitable for the
prime vendor concept. However, it is still in the process of
implementing corrective actions to remedy the three remaining
deficiencies noted in our June 2006 report--those relating to
management oversight, pricing reviews, and workforce knowledge and
skills.[Footnote 6] To address these three deficiencies, DLA has issued
a new policy and DSCP has developed implementing procedures that
prescribe oversight for prime vendor contractors; authorized additional
positions to enhance oversight and developed training requirements for
its staff; and introduced specific requirements for supply chains to
conduct price reasonableness determinations and more price reviews.
Nevertheless, these improvements are still a work in progress. For
example, a new division at DSCP, established to ensure that supply
chains are following procedures, is still in the process of hiring and
training staff and has recently revised its procedures. Further,
personnel responsible for one commodity within the construction and
equipment supply chain had not conducted price reasonableness
determinations as required by the new policy, resulting in a backlog of
11,260 items that needed review, representing an estimated value of $96
million. As of January 2007, DSCP personnel had reduced the backlog to
480 items that needed additional research. Finally, some supply chains
have not yet been able to meet their staffing requirements. The
shortage of personnel in the supply chains has led to heavier workloads
for current staff as well as to delays in completing contract actions.
Until DLA completes all the corrective actions that are still in
process, it remains at risk of being overcharged for the products it is
purchasing. DLA faces further challenges in sustaining the improvements
it has made because of impending leadership changes and by virtue of
its history of not following through on correcting deficiencies. Our
prior work has shown that one of the elements needed for sustaining
management improvement initiatives is demonstrated leadership
commitment.[Footnote 7] While the current leadership at DLA and DSCP
have demonstrated their commitment to implementing the corrective
actions, personnel turnover can be expected in a large organization
such as DLA--for example, the Commander of DSCP will reach the end of
his 2-year term in mid-2007--and future leaders may not necessarily
complete the corrective actions. DLA's history reflects the
vulnerability of the prime vendor program to systemic pricing problems,
because management has not always provided the oversight necessary to
ensure that corrective actions were implemented. Because of these
factors, and to mitigate its risk of being overcharged for its
purchased products, DLA needs to ensure that the course of corrective
actions is completed and the actions are working as intended and the
improvements in oversight are sustained.
We are recommending that the Secretary of Defense require the Director
of the Defense Logistics Agency to determine whether all the corrective
actions in DLA's prime vendor program have been completed and are
producing the intended results. The results of the determination should
be communicated in writing to the Under Secretary of Defense,
Acquisition, Technology, and Logistics within 6 months of the issuance
of this report. In commenting on a draft of our report, DOD concurred
with our recommendation. We discuss DOD's comments later in this
correspondence.
Background:
Under the prime vendor concept, DOD relies on a distributor who
provides a commercial product line (such as electrical and plumbing
equipment) and incidental services to customers in an assigned region
or area of responsibility. Products or services are to be delivered
within a specified period of time after order placement. Since 1991, we
have identified the use of prime vendors as a best commercial practice
for inventory management.[Footnote 8]
In 1992, we identified DOD's contract management as one of our high-
risk areas, and it remains so today.[Footnote 9] One of the key reasons
why the area is high risk is that DOD does not provide adequate
oversight of defense contracts. One aspect of oversight is to ensure
that the government is obtaining fair and reasonable contract prices.
Our prior work on federal management issues suggests that certain
elements are particularly important in implementing and sustaining
management improvement initiatives that genuinely take root and
eventually resolve the problems they are intended to fix.[Footnote 10]
These elements include: demonstrated leadership commitment; integration
of improvement initiatives into the day-to-day activities of the
organization; thoughtful and rigorous planning to guide decisions,
particularly to address human capital (and technology) issues; and
organizational realignment to streamline operations and clarify
accountability. According to the Standards for Internal Control in the
Federal Government, effective management of an organization's
workforce--its human capital--is essential to achieving results and is
an important part of internal control.[Footnote 11] Management should
ensure that skill needs are continually assessed and that the
organization is able to obtain a workforce that has the required skills
necessary to achieve organizational goals. As a part of its human
capital planning, management should also consider how best to retain
valuable employees, plan for their eventual succession, and ensure
continuity of needed skills and abilities.
Progress Has Been Made, but Some Deficiencies Remain in DLA's Prime
Vendor Program Because All Actions Have Not Been Completed:
DLA has made progress in implementing the corrective actions to address
the problems identified in our June 2006 report; however, it has not
yet completed all the actions, and some program deficiencies remain.
Until DLA completes all the actions, we cannot fully assess whether
they will be effective in correcting all the deficiencies. DLA's
actions have corrected two of the main deficiencies identified in our
June 2006 report--management metrics that were too narrowly focused on
sales, and a prime vendor concept that was not suitable for all
commodities. DLA is now reviewing a broader range of prime vendor
contracting metrics, and it has adjusted its acquisition strategy for
commodities that were not suitable for the prime vendor concept.
Deficiencies remain, however, in the areas of management oversight, the
process of conducting price reasonableness determinations for one
commodity, and the shortage of staff with required skills. DLA is
continuing its work to address these three areas. However, DSCP's
Compliance Division had not, at the time of our review, been able to
complete all the oversight reviews called for by current DSCP
procedures. Contracting personnel responsible for one commodity, MRO
Supplies, had not completed price reasonableness determinations, as
required by DLA policy, which led to a backlog of around 11,260 items
that needed to be reviewed. The estimated value of these items was
around $96 million. Further, DSCP has had difficulty in finding
qualified personnel to perform contracting and oversight functions.
Finally, DSCP will experience changes in leadership, which could affect
the implementation of the corrective actions.
DLA Has Remedied Deficiencies Regarding Metrics and the Use of the
Prime Vendor Concept:
DLA's management oversight has traditionally focused on performance
metrics such as sales, fill rates, and customer satisfaction. Our June
2006 report[Footnote 12] noted that one factor that could have
influenced the lack of pricing reviews in some commodities was the
emphasis that DLA management had traditionally placed on increasing
sales to customers, rather than on the prices prime vendors charge for
items. In response to this finding, DLA and DSCP management are now
reviewing a much broader range of metrics to assess the prime vendor
programs. DLA has established a headquarters-level quarterly
acquisition integrity review process in order to provide more oversight
for all its field activity centers. The quarterly acquisition integrity
review assesses risk across all field activity centers (including
DSCP), and it contains updates on specific DLA oversight programs, such
as procurement management reviews, contract reviews, and integrated
acquisition review boards. The quarterly assessment also includes data
on field-specific oversight programs, such as price reviews and
compliance reviews. In addition to metrics on sales data and fill
rates, DSCP management, now on a monthly basis, reviews pricing and
contracting metrics such as price reasonableness determinations, price
changes, pricing history, and refund data. DLA has also developed
automated tools to assist in gathering and tracking these metrics.
Among other things, these tools track price change, price exception,
and price history data that are reviewed by DSCP management.
The prime vendor concept has also been reevaluated by DLA. Prime vendor
arrangements generally are chosen for the purchase of commercial off-
the-shelf items, not military-unique items. While the purpose of the
prime vendor concept has not changed, its application over time has
expanded to include more commodities. DLA has recognized that certain
commodities are better suited than others for the prime vendor concept,
and it has adjusted its acquisition strategy accordingly. For example,
DLA did not renew the prime vendor contracts for food service equipment
when they expired in June 2006, and will use long-term contracts to
acquire that commodity.[Footnote 13] DSCP management has conducted
analyses of its prime vendor programs and concluded that multiple
award, long-term contracts, which compete orders among vendors, are
more suitable for some commodities than for others.[Footnote 14] As a
result, the number of prime vendor programs has decreased from 15 to 7.
Table 1 lists the current acquisition strategies for the various
commodities.
Table 1: Acquisition Strategy for DLA Prime Vendor Programs:
Commodities originally acquired through DLA prime vendor programs: 1.
MRO Supplies[A];
Current acquisition strategy: Prime vendor program.
Commodities originally acquired through DLA prime vendor programs: 2.
MRO Services;
Current acquisition strategy: Prime vendor program.
Commodities originally acquired through DLA prime vendor programs: 3.
Special Operations;
Current acquisition strategy: Prime vendor program.
Commodities originally acquired through DLA prime vendor programs: 4.
Subsistence (Garrison Feeding);
Current acquisition strategy: Prime vendor program.
Commodities originally acquired through DLA prime vendor programs: 5.
Pharmaceutical;
Current acquisition strategy: Prime vendor program.
Commodities originally acquired through DLA prime vendor programs: 6.
Medical/Surgical;
Current acquisition strategy: Prime vendor program.
Commodities originally acquired through DLA prime vendor programs: 7.
Metals;
Current acquisition strategy: Prime vendor program[B].
Commodities originally acquired through DLA prime vendor programs: 8.
Food Service Equipment;
Current acquisition strategy: Will be long-term indefinite-delivery
contracts.
Commodities originally acquired through DLA prime vendor programs: 9.
Fire & Emergency Services;
Current acquisition strategy: Long-term indefinite-delivery contracts.
Commodities originally acquired through DLA prime vendor programs: 10.
Lumber;
Current acquisition strategy: Long-term indefinite-delivery contracts.
Commodities originally acquired through DLA prime vendor programs: 11.
Pallets;
Current acquisition strategy: Long-term indefinite-delivery contracts.
Commodities originally acquired through DLA prime vendor programs: 12.
Ecclesiastical;
Current acquisition strategy: Long-term indefinite-delivery contracts.
Commodities originally acquired through DLA prime vendor programs: 13.
Container Drums;
Current acquisition strategy: Long-term indefinite-delivery contracts.
Commodities originally acquired through DLA prime vendor programs: 14.
Material Handling Equipment;
Current acquisition strategy: Will be long-term indefinite-delivery
contracts.
Commodities originally acquired through DLA prime vendor programs: 15.
Administrative Products;
Current acquisition strategy: Blanket Purchase Agreement canceled.
Source: GAO analysis of DLA and DSCP data.
[A] This commodity has separate contracts for Central Command supplies
and non-Central Command supplies.
[B] Currently prime vendor, but acquisition strategy being developed.
[End of table]
In addition to adjusting the acquisition strategies for some prime
vendor programs, in November 2006, DLA hired a contractor to conduct
analyses to determine the cost savings, cost avoidance, and customer
benefits from each of the prime vendor programs. The contractor is
expected to complete the analyses by the end of March 2007.
Deficiencies Remain in Oversight, Price Reasonableness Determinations
for One Commodity, and Staffing:
DLA has taken actions to remedy deficiencies in the areas of management
oversight, the process of conducting price reasonableness
determinations for one commodity, and the shortage of staff with the
required skills. Nevertheless, these improvements are still a work in
progress.
Management Oversight Guidance Has Not Been Fully Implemented:
To improve its management oversight of the prime vendor program, DLA
has issued a new policy that increased the level of oversight required
for prime vendor contracts. DSCP, also, has updated its procedures to
implement this new policy. However, a new division established at DSCP
to ensure that supply chains are following procedures has not been able
to conduct all the assessments required by the new policy and
procedures.
Among the management oversight problems we identified in 2006 was
pricing, and one of the actions DLA took to address it was the
promulgation of a new policy in June 2006 to implement regulatory
guidance for prime vendor contracts. The key points of the June policy
included:
* specific requirements for management oversight, such as pricing and
compliance audits;
* requiring all prime vendor contracts to comply with an established
prime vendor pricing model;
* annual local procurement management reviews for all prime vendor
contracts; and:
* requiring approval by headquarters for all prime vendor contracts,
regardless of dollar value.
We found in our present review of the June 2006 policy that some of the
examples of commodities used to illustrate various prime vendor
arrangements were not associated with the correct pricing model. We
discussed the apparent discrepancy with DLA officials, and subsequent
to our discussions, DLA clarified the model and issued a revised policy
in November 2006. The revised policy, among other things, also
addressed management oversight, acquisition planning, and acquisition
workforce training.[Footnote 15]
DLA and DSCP management have taken a series of steps to improve
oversight of prime vendor programs. These include setting up a
Compliance Division within the Procurement Directorate at DSCP to
ensure that prime vendor contracts are being executed and administered
in accordance with applicable rules and regulations; increasing the
number of price reviews conducted by supply chains; and requiring that
all prime vendor contracts be approved by DLA headquarters. In
addition, the DLA Director provides updates on prime vendor program
issues, as needed, to the Deputy Under Secretary of Defense for
Logistics and Materiel Readiness, as part of their regularly scheduled
meetings to discuss DLA matters. Further, DLA is establishing a new
Acquisition Management Directorate at the headquarters level to
emphasize the importance of the entire acquisition workforce, and to
enhance oversight. Another step that DSCP management took to improve
oversight was to require all supply chains to use a standardized
mechanism to track repeat findings from procurement management reviews.
This mechanism allows management to determine the cause of a repeat
finding.
Oversight guidance has not been fully implemented, however. According
to the DSCP Guiding Principles for Acquisition, the Compliance
Division's quarterly reviews will include several assessments related
to price reasonableness determinations. As of early December 2006,
however, we found that the two reviews it had completed did not include
all the assessments called for in the DSCP guidance. Procurement
Directorate officials attributed the shortfall to the division's heavy
workload and the fact that it is not yet fully staffed. They further
observed that even if the division were fully staffed, conducting all
the assessments listed in the guidance would not be possible because
they are so extensive. The officials noted that the procedures were
determined in a relatively short time frame by another organization and
were not reviewed for practicability. The Compliance Division has
revised its standard operating procedures for the quarterly reviews to
more realistically reflect its current capabilities. A December 2006
DLA internal review of the corrective actions in the prime vendor
program, requested by DLA management, expressed concern that the new
procedures may weaken oversight.[Footnote 16] To address this concern,
the Compliance Division now reviews a sample of contract documentation
on a monthly basis to ensure that contracting officers are conducting
price reasonableness determinations. We believe that until the
Compliance Division is fully operational, management may lack all the
information needed to provide proper oversight.
The two completed quarterly reviews examined contracting officers'
documentation for determining prices to be fair and reasonable,
vendors' compliance with pricing methodology, and contract terms
specifying fill rates. These reviews found that contracting personnel
and vendors for most commodities provided adequate price reasonableness
documentation and complied with pricing methodology and contract terms.
However, in a few cases, either contracting personnel or the vendor did
not provide the price reasonableness documentation. The Compliance
Division subsequently met with contracting personnel in the various
commodities to clarify what documentation is needed to verify their
price reasonableness determinations.
Price Reasonableness Determinations for One Commodity Were Not Done as
Required:
To improve its pricing procedures for various commodities, DLA's 2006
policy established pricing models to be used for different types of
prime vendor contracts. The pricing models generally require price
reasonableness determinations to be made for all items priced at $2,500
or greater. However, for one prime vendor program--MRO Supplies
commodity within the construction and equipment supply chain--price
reasonable determinations are to be done for at least 30 percent of
items priced from $2,500 to $24,999 before the prime vendor can process
the order. The price reasonableness determinations for the remaining 70
percent of such items are to be done no later than 60 days after an
order is issued. DSCP officials implemented this procedure in February
2006--that is, prior to the June 2006 issuance of DLA's policy.
However, in September 2006, we found that none of the 70 percent of
items priced from $2,500 to $24,999 had been reviewed. As a result,
DSCP had accrued a backlog of price reasonableness determinations to
conduct, extending to 11,260 lines, with an approximate value of $96
million.
Management at DLA and DSCP had not developed a plan to address this
backlog until we identified the issue. According to DSCP officials,
several factors played into the development of the backlog. First, DSCP
could not easily identify the 70 percent of the items that needed a
price reasonableness determination. This problem has since been
addressed with the advent of a new automated management information
system. Second, according to DSCP officials, they did not have enough
personnel to address the backlog. DSCP officials told us that they are
actively working to address this issue. Finally, they said, the volume
of business also played a role in the growth of the backlog.
After we called their attention to this issue, DSCP officials developed
a plan to conduct the determinations and to prevent this magnitude of
backlog from developing again. DSCP officials reported as of late
January 2007 that they had completed an initial review of all 11,260
lines and price reasonable determinations had been made on 10,780 of
these lines. However, 480 lines required additional research to make
the price reasonableness determination. According to a DSCP official,
there is a possibility that some refunds may be required. We believe
that until DSCP completes the price reasonableness determinations for
all the items, there remains a risk that it was overcharged for some
items.
DLA and DSCP officials acknowledged that there was a risk but said that
they had taken action to mitigate it by modifying the prime vendor
contracts to include a purchasing review clause. This clause allows DLA
access to the contractor's records and information pertaining to those
items or services for which the government is relying on the
contractor's purchasing system to determine that competition was
obtained, or to justify that prices are fair and reasonable. In
addition, if a purchased product or service is determined to be
unreasonably priced, the contractor shall refund the government the
amount that is in excess of a reasonable price. DLA and DSCP officials
told us that incorporating the purchasing review clause mitigated the
risk of being overcharged. According to a DLA official, DSCP has
completed audits of four prime vendors to ensure compliance with the
clause, but the reports had not been finalized as of the end of January
2007. Because the clause is relatively new, it remains to be seen how
effective it will be.
Some Supply Chains Have Not Been Able to Meet Their Staffing
Requirements:
To improve the capability of its workforce, DLA has authorized
additional staffing at DSCP to perform price reasonableness
determinations, audits, and other oversight. DLA has also hired
additional personnel at headquarters to monitor findings from
procurement management reviews. One aspect of oversight is ensuring the
presence of a workforce that has the skills and knowledge needed to
oversee contracts. However, DSCP officials told us that they have been
unable to fill all of the newly authorized positions because of
difficulties in finding and hiring qualified personnel. These positions
require highly specialized contracting skills, which are difficult to
find. When a qualified acquisition person is found, the new staff
member must be trained in the nuances of the particular commodity, as
well as in the management of a prime vendor arrangement, in order to be
fully effective. The shortage of personnel in the supply chains has led
to heavier workloads for current staff as well as to backlogs of
contract actions.
Similarly, the Compliance Division does not yet have the skilled
workforce that it needs to perform its oversight function. The division
was authorized to have a staffing level of 17, yet as of December 2006,
only 15 slots have been filled. The director of the division told us
that the division was initially staffed by whoever was available. None
of those staff had training in conducting compliance reviews.
Currently, only about half of the personnel in this new division have
the training or skills needed to perform their tasks. DSCP is aware of
the inexperience of many Compliance Division personnel, and has
recently developed a training plan for them.
For their part, DLA and DSCP are exploring different methods of
recruiting qualified acquisition personnel. For example, DSCP
established a standing-register job opportunity announcement for
acquisition personnel, initially open to federal employees in the
Philadelphia area and subsequently broadened to include all federal
activities nationwide. Further, DSCP issued a recruitment bulletin
targeted toward separated, retired, or soon-to-retire military
personnel, and it has also used an Office of Personnel Management
announcement designed to recruit from the private sector. In addition
to recruiting qualified acquisition personnel, DLA and DSCP have
established a semiannual recruitment cycle to hire entry-level
acquisition personnel. Until DLA and DSCP are able to fill all the
positions, contract oversight may be inadequate.
DLA May Face Challenges in Sustaining Improvements:
Our previous work has shown that demonstrated leadership commitment is
an element of particular importance in implementing and sustaining
management improvement initiatives.[Footnote 17] The current leadership
at DLA and DSCP have demonstrated their commitment to correcting the
oversight problems. For example, the DLA senior acquisition executive
has briefed supply center staff on the importance of oversight, and the
DSCP Commander has made personnel changes to enhance oversight. DLA
management has also authorized more positions at DSCP and at
headquarters to strengthen contracting and oversight staff. Further,
DSCP management has requested approval for a new acquisition executive
position to oversee all procurement activity for the center, and it has
already received DLA approval for a Deputy Director position for the
Procurement Directorate. However, as with most federal agencies, the
leadership is continually changing. The current Director of DLA took
over that position in August 2006. The DSCP Commander will complete his
2-year term as Commander in mid-2007. A new Deputy Commander will
replace the current one, who is serving in a temporary capacity, in
early 2007. Further, DSCP is continuing to hire acquisition personnel.
In light of the personnel changes occurring at both the management and
operational level, the significant changes in program operating
procedures, and the establishment of new oversight mechanisms, DLA may
face challenges in sustaining the improvements it is implementing in
the prime vendor program. DLA's history reflects the vulnerability of
the prime vendor program to systemic pricing problems. Despite guidance
and reforms to which the agency has committed over time, these issues
have beset DLA for a long time, because management has not always
provided the oversight necessary to ensure that corrective actions were
implemented.
Conclusions:
DLA's recent progress in implementing actions to improve oversight of
the prime vendor program to date has been promising. However, systemic
pricing problems remain an area of risk for this program. Critical to
DLA's ability to realize substantial improvements in the oversight of
the prime vendor program will be rectifying the program's long-standing
problems described in this report. DLA's ability to address these
remaining problems is dependent on completing procedural improvements
and filling contract oversight positions with qualified staff. Whether
this will occur as intended is not a certainty. DLA's history of
problems in overseeing prime vendor contracts, the expected turnover in
leadership and operating personnel, and the significant changes made to
program operating procedures could pose significant risks to sustaining
the improvements made to program oversight. It is important that DLA
and DSCP management fully implement all the corrective actions and
sustain the improvements over the long term so the intended results are
achieved.
Recommendation:
We recommend that the Secretary of Defense direct the Under Secretary
of Defense, Acquisition, Technology, and Logistics to require the
Director of DLA to determine whether all the corrective actions in
DLA's prime vendor program have been completed and are producing the
intended results. This determination should identify any remaining or
additional actions necessary to remedy the deficiencies in the prime
vendor program. This determination should also specify a time frame for
the completion of these actions. The results of the determination
should be communicated in writing to the Under Secretary of Defense,
Acquisition, Technology, and Logistics within 6 months of the issuance
of this report.
Agency Comments:
In written comments on a draft of this report, the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness, which is
responsible for DLA oversight, concurred with our recommendation and
noted that DLA has made progress in implementing the corrective
actions, and is committed to ensuring that the remaining actions are
completed and are producing the intended results. The written comments
from the Deputy Under Secretary of Defense for Logistics and Materiel
Readiness are included in the enclosure following this report.
Scope and Methodology:
To determine the extent to which DLA's corrective actions have
addressed the major deficiencies in the prime vendor program, we
discussed the status of actions taken and results of these actions with
DLA and DSCP officials. Specifically, we discussed the changes to
management oversight, new procedures for price reviews, metrics used to
assess the prime vendor programs, acquisition strategies for
commodities originally classified as prime vendor programs, and efforts
to train and recruit personnel. In addition, we discussed with
representatives from the Office of the Deputy Under Secretary of
Defense for Logistics and Materiel Readiness their role in overseeing
the implementation of DLA's corrective actions and reviewed prime
vendor program briefings provided these officials by DLA. We also
reviewed and analyzed a new DLA policy governing the use of prime
vendor contracts, DSCP procedures for implementing the policy, DSCP's
adherence to the policy and procedures, internal assessments of DLA's
and DSCP's management of prime vendor contracts, and prior GAO reports.
Further, we reviewed a judgmental sample of documentation supporting
contracting officers' price reasonableness determinations for two
commodities within the construction and equipment supply chain.
Finally, we interviewed officials from the Deputy Under Secretary of
Defense for Acquisition and Technology, Defense Procurement and
Acquisition Policy organization to discuss their role in assisting DLA
with acquisition workforce planning. We conducted our review from
August 2006 through January 2007 in accordance with generally accepted
government auditing standards.
We are sending copies of this report to appropriate congressional
committees; the Secretary of Defense; the Under Secretary of Defense,
Acquisition, Technology and Logistics; the Deputy Under Secretary of
Defense for Logistics and Materiel Readiness; and the Director, Defense
Logistics Agency. 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 [Hyperlink, http://www.gao.gov].
Please contact me at (202) 512-5274 or needhamjk1@gao.gov if you or
your staff have any questions concerning this report. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Key contributors to this report
were Marilyn Wasleski, Assistant Director; Vijay J. Barnabas; John
Clary; Janay Sam; Karen Thornton; and Cheryl Weissman.
Signed by:
John K. Needham, Acting Director:
Defense Capabilities and Management:
[End of section]
Enclosure: Comments from the Department of Defense:
Deputy Under Secretary Of Defense For Logistics And Materiel Readiness:
3500 Defense Pentagon:
Washington, DC 20301-3500:
February 14, 2007:
Mr. John K. Needham:
Acting Director, Defense Capabilities and Management:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Needham:
This is the Department of Defense (DoD) response to the GAO draft
report GAO-07-396R, "Defense Management: DLA Has Made Progress In
Improving Prime Vendor Program, but Has Not Yet Completed All
Corrective Actions," dated January 31, 2007 (GAO Code 350893). The GAO
draft report recommends that the Director, Defense Logistics Agency
determine whether all the corrective actions to the Prime Vendor
Program have been completed and are producing the intended results and
that the results of his determination be communicated in writing to the
USD(AT&L) within 6 months from the date of the GAO report. The DoD
concurs with the recommendation.
Comments on the draft report recommendation are included in the
enclosure. The DoD appreciates the opportunity to comment on the draft
report.
Signed by:
Jack Bell:
Enclosure: As stated:
GAO Draft Report - Dated January 31, 2007 GAO Code 350893/GAO-07-396R:
"Defense Management: DLA Has Made Progress In Improving Prime Vendor
Program, but Has Not Yet Completed All Corrective Actions"
Department Of Defense Comments To The Recommendations:
Recommendation 1: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Acquisition, Technology and
Logistics) to require the Director of the Defense Logistics Agency to
determine whether all the corrective actions in DLA's prime vendor
program have been completed and are producing the intended results.
This determination should identify any remaining or additional actions
necessary to remedy the deficiencies in the prime vendor program. This
determination should also specify a timeframe for the completion of
these actions. The results of the determination should be communicated
in writing to the Under Secretary of Defense (Acquisition, Technology
and Logistics) within six months of the issuance of this report. (Pages
16-17/GAO Draft Report):
DOD Response: Concur. Defense Logistics Agency (DLA) has made
substantial progress to implement the corrective actions taken within
the prime vendor program and is committed to ensure all remaining
actions have been completed and are producing the intended results. DLA
continues to assess the implementation of the corrective actions
through management oversight processes, program reviews, and updates.
Within the six months specified, DLA will report in writing to the
Under Secretary of Defense, Acquisition Technology and Logistics, as to
whether all actions have been completed and are producing the intended
results and will identify any remaining or additional actions required
and specify a timeframe for the completion of the actions.
[End of section]
(350893):
FOOTNOTES
[1] DLA is DOD's largest combat support agency, providing worldwide
logistics support in both peacetime and wartime to the military
services as well as several civilian agencies and foreign countries.
[2] The prime vendor program uses a contractual arrangement with one or
more commercial vendors to supply a wide range of commercial off-the-
shelf material directly to military customers on a just-in-time basis.
[3] The MRO category is further broken out between supplies and
services, with separate prime vendor contracts for each.
[4] GAO, Defense Management: Attention Is Needed to Improve Oversight
of DLA Prime Vendor Program, GAO-06-739R (Washington, D.C.: June 19,
2006).
[5] The term "pricing review" was used in our June 2006 report to refer
to a review for price reasonableness. For purposes of this report and
in light of newly revised and clarified DLA policies, we use the term
"price reasonableness determination" to refer to the contracting
function of determining fair and reasonable pricing. We use the term
"price review" to refer to the oversight function of auditing the
contracting officer's price reasonableness determination.
[6] GAO-06-739R.
[7] GAO, Management Reform: Elements of Successful Improvement
Initiatives, GAO/T-GGD-00-26 (Washington, D.C.: Oct. 15, 1999).
[8] GAO, Defense Inventory: Opportunities Exist to Expand the Use of
Defense Logistics Agency Best Practices, GAO/NSIAD-00-30 (Washington,
D.C.: Jan. 26, 2000). A best commercial inventory practice is defined
in The National Defense Authorization Act for Fiscal Year 1998 as a
practice that enables the agency to reduce inventory levels and holding
costs while improving the responsiveness of the supply system to user
needs.
[9] GAO, Defense Contract Pricing, GAO/HR-93-8 (Washington, D.C.: Dec.
1, 1992), and High-Risk Series: An Update, GAO-07-310 (Washington,
D.C.: January 2007).
[10] GAO/T-GGD-00-26.
[11] GAO, Standards for Internal Control in the Federal Government,
AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[12] GAO-06-739R.
[13] According to DLA, a long-term contract is defined as an indefinite-
delivery contract in excess of 1 year (including options).
[14] Similar to the prime vendor program, DSCP will award multiple
award long-term contracts on a regional basis. DSCP will select several
contractors within each region, and then compete orders among these
contractors. According to DSCP officials, competing the orders will
reduce the need to conduct price reasonableness determinations for each
order, and the need to maintain price lists or catalogues, as in the
prime vendor program.
[15] According to a DLA official, there is no specific requirement for
annual local procurement management reviews in the revised policy
because that requirement already exists in field activity guidance;
further, the reviews cover all procurement activities, not just those
related to prime vendors.
[16] Defense Logistics Agency, Audit Report on Corrective Actions Taken
as a Result of Identified Deficiencies in the Prime Vendor Program
(Fort Belvoir, Va.: Dec. 21, 2006).
[17] GAO/T-GGD-00-26.
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