DOD Supply Chain Management
The Department of Defense (DOD) manages more than 5 million secondary inventory items, such as spare parts, with a reported value of approximately $98 billion, as of September 2013. Effective and efficient supply chain management is critical for supporting the readiness and capabilities of the force and for DOD to avoid spending resources on unneeded inventory that could be better applied to other defense and national priorities. However, DOD has experienced weaknesses in the management of its supply chain, particularly in the following areas:
- Inventory management. DOD’s inventory management practices and procedures have been ineffective and inefficient. DOD has had high levels of inventory that were excess to requirements and weaknesses in accurately forecasting the demand for inventory items.
- Materiel distribution. DOD also has faced challenges in delivering supplies and equipment, including unmet delivery standards and time lines for cargo shipments as well as incomplete delivery data for many surface shipments.
- Asset visibility. DOD has had weaknesses in maintaining visibility of supplies, such as problems with inadequate radio-frequency identification information to track all cargo movements.
We added this area to the High Risk List in 1990. In our 2013 update, we reported that DOD had made moderate progress in addressing weaknesses in supply chain management, but had not resolved several long-standing problems.
Since our last high-risk update, DOD has made progress in addressing all three dimensions of its supply chain management areas: inventory management, materiel distribution, and asset visibility. For inventory management, DOD has satisfied all of our high-risk criteria except for one: demonstrated progress. For materiel distribution, DOD has demonstrated leadership commitment and the capacity—personnel and resources—to make improvements, although work remains to fully address the remaining three criteria (corrective action plan, monitoring, and demonstrated progress). For asset visibility, DOD has demonstrated leadership commitment and has made considerable progress in addressing the remaining four criteria through actions like development of its January 2014 Strategy for Improving DOD Asset Visibility, which represents its corrective action plan.
Leadership commitment: Senior officials have continued to demonstrate commitment and top leadership support for addressing the department’s inventory management challenges. These leaders include the Assistant Secretary of Defense for Logistics and Materiel Readiness and officials from the military services and Defense Logistics Agency (DLA). They have taken actions to institutionalize this commitment to help ensure the long-term success of the department’s efforts. In addition, senior DOD officials have met with us to discuss the department’s plans and progress in addressing inventory management. While meeting, we provided feedback on the department’s efforts.
Capacity: DOD has demonstrated that it has the capacity—personnel and resources—to strengthen inventory management. For example, in May 2012 we reported that the department had established three workgroups—forecasting and demand planning, inventory and retention, and supply chain metrics—that were responsible for implementing actions focused on the respective areas. Each workgroup included representatives from each of the military services and DLA. Furthermore, DOD has dedicated financial resources to evaluating aspects of inventory management, such as commissioning several studies designed to improve forecasting for spare parts.
Corrective action plan: In 2010, DOD established and began implementing a corrective action plan that has actions and goals into fiscal year 2016. In the plan, DOD established overarching goals to reduce on-order excess inventory—items that have already been purchased but may be excess due to changes in requirements—and on-hand excess inventory—items that have been categorized for potential reuse or disposal. DOD developed actions with milestones to improve inventory management in nine key areas, including demand forecasting for spare parts. Additionally, according to DOD officials, the department has started to identify actions to be included in its follow-on corrective action plan, which is intended to guide the department’s improvement efforts beyond fiscal year 2016.
Monitoring: As we reported in May 2012, DOD established a performance management framework, including metrics and milestones, to track the implementation and effectiveness of its corrective action plan. The Deputy Assistant Secretary of Defense for Supply Chain Integration oversees implementation of the corrective action plan and monitors the associated metrics through progress review meetings with the military services and DLA. The meetings are held about every month. The deputy assistant secretary is advised by the Supply Chain Executive Steering Committee, which is composed of executive-level members from the military services and DLA, on matters related to supply chain management, including implementation of the corrective action plan. The steering committee is used as a forum to resolve issues encountered in implementation of the corrective action plan that cannot be resolved among the implementation workgroups. Lastly, the deputy assistant secretary reports performance against on-hand and on-order excess inventory goals to the DOD Deputy Chief Management Officer for inclusion in the department’s annual performance plan, which is part of the President’s budget request.
Demonstrated progress: DOD has made considerable progress in reducing on-hand excess inventory and improving inventory management:
- DOD reported that it reduced on-hand excess inventory from 9.4 percent at the end of fiscal year 2009 to 7.3 percent at the end of fiscal year 2013. DOD calculates the percentage by dividing the amount of on-hand excess inventory by the total amount of on-hand inventory.
- DOD also reported that its percentage of on-order excess inventory dropped from 9.5 percent in fiscal year 2009 to 5.6 percent in fiscal year 2011, but then increased to 7.9 percent in fiscal year 2013. DOD calculates the percentage by dividing the amount of on-order excess inventory by the total amount of on-order inventory. DOD attributed the increase to several factors, including a mid-year reduction in Air Force flying hours caused by sequestration and issues associated with implementing the Navy’s enterprise resource planning system.
- DOD reviewed its on-order excess inventory management policies and processes in 2011 and 2012 and strengthened its guidance in 2014 on economic retention stock, those items that have been determined to be more economical to keep than to dispose of because the items are likely to be needed in the future.
- DOD has made some progress in improving its demand forecasting, its ability to predict future customer demands so inventory managers can develop inventory requirements to satisfy demands. It completed a series of reviews of its demand forecasting methods between 2010 and 2014, implemented an approach for setting inventory levels for consumable items with low or highly-variable demand in 2013 that has improved availability and reduced backorders for these items, and reported department-wide forecast accuracy metrics in beginning 2013.
Nevertheless, DOD faces challenges in reducing excess inventory, managing its economic retention stock, and continuing improvements in demand forecasting. For example, in June 2014 we found that DLA, which manages about one-fifth, or about $20.8 billion, of DOD’s $98 billion in inventory, had several weaknesses in its management of on-order excess inventory. Specifically, DLA was not regularly monitoring progress in reducing on-order excess inventory, lacked performance data, and did not have goals for supply-chain-specific on-order excess inventory, which would help to guide improvement. In response to these weaknesses, as of November 2014, DLA had established goals and DLA’s senior management had begun to regularly monitor performance against the goals.
Further, we found in June 2014 that DLA had disposed of $855 million in economic retention stock in order to meet its end of fiscal year 2013 goal for on-hand inventory. As a result, DLA risks having to repurchase hundreds of millions of dollars in inventory to meet customer demand and support the readiness of the military services. Lastly, DOD has not yet established a baseline against which to measure any improvement in its demand forecast accuracy. Further, DOD has not implemented actions, as appropriate, to improve forecasting for items with less variable demand or finalized plans for improving the methodologies to set inventory levels for reparable items with low or highly variable demand. Moreover, in June 2014 we found that DLA’s collaborative forecasting program—which developed forecasts for inventory valued at about $730 million—had not improved the aggregate forecasting accuracy for those items or used a comprehensive approach to manage the program. To address the weaknesses, DLA has begun to consider additional metrics to assess the performance of the effort, and senior management has begun to monitor demand forecasting accuracy across DLA.
Leadership commitment: Senior leaders have continued to demonstrate commitment and top leadership support for addressing the department’s materiel distribution challenges. These leaders include the Assistant Secretary of Defense for Logistics and Materiel Readiness, the Commander of United States Transportation Command (TRANSCOM), DLA officials, commanders of the combatant commands, and officials from the military services. For example, DOD has established the Distribution Steering Group—a working level group co-chaired by TRANSCOM and DLA which is composed of representatives from TRANSCOM, the Office of the Secretary of Defense (OSD), DLA, the military services, and the combatant commands—which meets quarterly to discuss issues related to distribution performance. In addition, DOD established two other oversight groups, which are composed of representatives from the same organizations: a Distribution Oversight Council that meets twice a year, and a Distribution Process Owner Executive Board, that is chaired by TRANSCOM.
Capacity: DOD demonstrated that it has the capacity—personnel and resources—to improve materiel distribution. DOD created a governance structure that includes staff, organizations, and working groups across the department to address issues related to materiel distribution execution. Additionally, DOD has undertaken several initiatives that have improved some segments of the distribution pipeline. For example, we found in August 2012 that by incorporating results-oriented management practices into the planning and development of improvement efforts, DOD was able to improve delivery times for some customers and increase the utilization of available assets. These efforts, according to DOD officials, resulted in $1 billion in cost avoidances through April 2013. Moreover, TRANSCOM has established the Distribution Performance Branch within its Strategy, Policy, Programs, and Logistics Directorate. The branch’s responsibilities include assessing global distribution performance, leading the negotiation of distribution performance standards with stakeholders, and converting data into objective performance reports.
Corrective action plan: DOD has implemented, or is in the process of implementing, some distribution-related initiatives that could serve as a basis for a corrective action plan. For example, DOD developed the DLA Distribution Effectiveness Initiative, formerly called Strategic Network Optimization, to improve logistics efficiencies in DOD’s distribution network and to reduce transportation costs by storing materiel at strategically located DLA supply sites. This initiative has goals, objectives, time frames for implementation, draft performance measures, a governance structure that includes key organizations involved in the distribution enterprise (DLA, the Deputy Assistant Secretary of Defense for Supply Chain Integration, TRANSCOM, and the military services), and business plans for each phase of implementation. The DLA Distribution Effectiveness Initiative is in the second of its three implementation phases; therefore, it is too early to tell whether it will address the root causes of materiel distribution challenges. DOD officials told us that the DLA Distribution Effectiveness Initiative could form the basis for their corrective action plan for distribution, but DOD is also exploring developing a separate, more comprehensive corrective action plan to improve distribution effectiveness. Other DOD initiatives have identified and implemented cost avoidance measures. While these are all positive steps for laying the framework for the development of a corrective action plan, DOD does not currently have a comprehensive plan for distribution that provides a means to measure distribution performance across the entire distribution enterprise, identify gaps, define root causes, develop solutions, or provide for substantially completing corrective measures.
Monitoring and demonstrated progress: DOD has established metrics and goals to monitor performance for certain segments of its distribution pipeline. For example, time definite delivery which is a measure of the probability that a customer will receive an order within an established time period, and customer wait time, the total elapsed time between issuance of a customer order and satisfaction of that order, are both used to monitor performance. TRANSCOM has established a metrics branch that periodically reviews the performance of combatant command distribution and that conducts annual workshops to review and revise distribution standards. However, performance is not meeting DOD’s established targets for distribution and DOD has not assessed the reliability of the data included in its performance metrics that limit their usefulness for monitoring performance and demonstrating progress.
As we found in October 2011 and in 2014, DOD’s means for assessing performance of the global distribution pipeline are limited and not comprehensive. For example, no single entity within DOD maintains visibility and oversight of the entire DOD-wide global distribution pipeline. Instead, management and oversight, including oversight of the available performance metrics, are fragmented between TRANSCOM—which focuses on the first three segments of distribution—and the combatant command—which focuses on the final segment at the tactical level. The first three segments cover shipments of items from warehouses, factories, or other points of origin to supply points in a military theater of operations, while the final segment refers to distribution that occurs from these supply points to forward operating bases and units. Moreover, for the first three segments of the pipeline that DOD has established performance metrics to measure, DOD has consistently not met established targets. Further, DOD does not have a means in place to comprehensively assess why these targets are not being met and to identify solutions to improve performance.
DOD monitors some distribution initiatives and has completed efforts that have resulted in progress, including the DOD Distribution Process Owner Strategic Opportunities, an effort that began in 2008 to identify opportunities to significantly improve the performance of distribution processes DOD-wide. This effort, according to DOD officials, resulted in $1 billion in cost avoidances through April 2013 as previously discussed. However, without a corrective action plan that measures distribution performance across the entire distribution pipeline, identifies gaps and the root causes of these gaps, develops solutions, and includes reliable metrics to measure performance of the entire distribution pipeline, except for on a case-by-case basis DOD will be limited in its ability to comprehensively monitor and independently validate the effectiveness and sustainability of solutions to demonstrate progress. Once the corrective action plan is developed and implemented, DOD should use the plan to monitor performance and demonstrate progress.
Leadership commitment: Senior leaders at the department have continued to demonstrate strong commitment to addressing asset visibility challenges as evidenced by the issuance of DOD’s January 2014 Strategy for Improving DOD Asset Visibility. Further, senior leaders are involved in the Supply Chain Executive Steering Committee, a senior-level body responsible for overseeing asset visibility improvement efforts.
Capacity: We reported in February 2013 that a comprehensive strategic plan for asset visibility should include the costs to execute the plan and the sources and types of resources and investments—including skills, human capital, technology, information and other resources—required to meet the goals and objectives in the plan. DOD has begun to identify the resources and investments that would be required to achieve the goals and objectives in its January 2014 Strategy. However, the estimates of cost developed by the Joint Staff, TRANSCOM, DLA, and the military services (referred to as the components) are generally at an aggregated level without details of the elements—such as human capital, information and contracts—they used to compute the estimates. As a result, cost information may lack transparency and the department may not have the information it needs to make well-informed decisions about asset visibility, including setting budget priorities. In December 2014, DOD shared with us actions it is making to address this weakness. Specifically, DOD plans to update its supporting execution plan format to instruct the components to break out their cost estimates to show elements such as manpower, materiel, and sustainment. DOD plans to include its updated supporting execution plan format in its 2015 update to the Strategy which, according to DOD, is expected to be issued in the third quarter of fiscal year 2015. Further, DOD is working to update all supporting execution plans to show the breakout of the cost estimates based on this common set of cost elements.
Corrective action plan: In February 2013, we recommended that DOD develop a strategy and execution plans that contain all the elements of a comprehensive strategic plan. DOD has taken steps to implement this recommendation by issuing its Strategy. The Strategy, which represents DOD’s corrective action plan for asset visibility, contains goals and objectives as well as supporting execution plans outlining specific initiatives intended to improve asset visibility. However, it is not clear how the initiatives link to the Strategy’s goals and objectives. Therefore, DOD needs to ensure there is a clear linkage between the goals and objectives in the Strategy and the initiatives intended to implement the Strategy. We previously identified leading practices to promote successful performance reviews, including ensuring alignment between agency goals, program activities, and resources. Without alignment between the goals and objectives in the Strategy and the initiatives intended to implement the Strategy, DOD may be unable to assess progress toward realizing its goals and objectives. DOD also shared with us, in December 2014, actions it is making to address this weakness. Specifically, DOD provided us a set of matrix charts that makes apparent the linkage between the goals and objectives in its Strategy and the supporting execution plans which support each of those goals and objectives. DOD is planning to include these charts in its 2015 update to the Strategy.
Monitoring: We reported in February 2013 that DOD lacked a formal, central mechanism to monitor the status of improvements or fully track the resources allocated to them. We also reported that, while DOD’s draft strategy included overarching goals and objectives that address the overall results desired from implementation of the strategy, it only partially included, among other factors, performance measures which are necessary for monitoring progress. We recommended in February 2013 that when finalizing its strategy for asset visibility, DOD should ensure it includes, among other things, performance measures for gauging results. DOD’s Strategy calls for organizations to identify at least one outcome or key performance indicator for assessing the successful implementation of each support execution plan. These key performance indicators are used to assess whether the initiatives are on target for implementation and achievement of performance expectations. However, it is not apparent what relation, if any, these performance indicators have to the overarching goals and objectives in the Strategy.
Although the linkage is not apparent, DOD has established a structure for overseeing and coordinating efforts to improve asset visibility. This structure includes the Asset Visibility Working Group, which is responsible for monitoring the implementation of the initiatives identified by the components. The components are to report quarterly to the Asset Visibility Working Group on the status of their initiatives. However, these reports do not include information on how the initiatives contribute toward achievement of the department’s asset visibility goals and objectives. Until DOD implements a process to monitor performance and progress toward achieving goals in the asset visibility area, it may lack the tools necessary to effectively assess the results of its initiatives.
Demonstrated progress: DOD’s Strategy and preliminary efforts to develop and implement initiatives intended to strengthen asset visibility represent a positive step; however, work remains to demonstrate that implementation of these initiatives will result in progress toward achieving the goals and objectives in the Strategy. DOD has made progress in implementing initiatives intended to improve asset visibility. For example, 6 of the 22 initiatives outlined in the supporting execution plans included in DOD’s Strategy have been reported by DOD as fully implemented. One such initiative, intended to create an integrated data environment for asset visibility information in transportation and supply data systems, has been fully implemented and is being used to enhance asset visibility. However, it is too early to tell if these combined efforts will result in measurable outcomes and progress in realizing DOD’s goals and objectives for improving asset visibility. Until DOD demonstrates that implementation of these initiatives will result in measurable outcomes and progress toward achieving the goals and objectives in the Strategy, it may be limited in its ability to demonstrate sustained progress in implementing corrective actions and resolving the high-risk area.
In the Fiscal Year 2014 National Defense Authorization Act, Congress mandated DOD to submit to the Congress, not later than 180 days after enactment of the act, a strategy and implementation plans for improving asset tracking and in-transit visibility. The act required that the strategy and implementation plans incorporate 11 elements, including goals and objectives, an estimate of the costs to execute the plan, a description of key external factors that could affect achievement of the goals, and steps to be taken to facilitate collaboration with industry to capture best practices. The act also mandated that we report to the Congress within one year after DOD’s strategy is submitted on the extent to which the strategy and implementation plans include the required elements. We have work ongoing to respond to the mandate and assess whether DOD’s January 2014 Strategy and an October 2014 report issued by DOD to respond to the mandate requirements, fully addresses all the elements required by the mandate.
In June 2014, to improve management and minimize the amount of on-order excess inventory, we recommended that DLA, among other things, track and regularly review performance data, such as the amount of on-order excess inventory reviewed, modified, or canceled, and the reasons for not modifying or canceling on-order excess inventory. To fully address these recommendations and satisfy our high-risk criteria for demonstrating progress, DOD needs to take the following actions:
- Continue to demonstrate that progress made in reducing on-order and on-hand excess inventory is sustainable and take necessary actions to diagnose and address, as appropriate, the 2013 increase in the department-wide percentage of on-order excess inventory. For example, the military services’ and DLA’s senior management should be regularly monitoring on-order excess inventory and tracking and regularly reviewing performance data—such as the amount of on-order excess inventory reviewed, modified, or canceled, and the reasons for not modifying or canceling the orders—associated with DOD’s on-order excess inventory management processes.
- Enhance management and oversight of its economic retention stock to ensure that disposal decisions are analytically supported and consistent with guidance.
- Establish a baseline for DOD’s demand forecast accuracy metrics and identify and begin implementing corrective actions, as appropriate, to improve forecasting for the inventory items covered by these metrics, and implement methodologies to set inventory levels for non-forecastable reparable items. Further, DLA, in collaboration with the military services, needs to finalize the suite of metrics it plans on using to monitor the performance and value-added by the collaborative forecasting program and identify and begin implementing corrective actions to improve the results of collaborative forecasting across DOD.
DOD needs to take a number of actions to implement an adequate corrective action plan and a means to comprehensively monitor performance, including validating the effectiveness and sustainability of solutions, and demonstrate sustained progress in implementing solutions. Specifically, DOD needs to:
- develop a corrective action plan that
(1) includes a way to comprehensively measure performance and identify gaps across the entire distribution pipeline, to include the movement of items in theater to the final customer, which may be located at smaller forward operating bases beyond major hubs across the distribution pipeline;
(2) identifies the root causes for gaps in performance and provides a means for implementing solutions; and
(3) establishes implementation goals and timelines to monitor progress in implementing solutions;
- make demonstrated and sustained progress in implementing a corrective action plan that includes actions to address root causes of not meeting distribution standards and details how solutions designed to improve distribution performance will be implemented;
- develop measures to assess performance across the entire distribution pipeline, including from major hubs to smaller forward operating bases; and
- ensure performance metrics are based on reliable data to assess performance.
DOD needs to take a number of actions to address the four high-risk criteria (capacity, corrective action plan, monitoring, and demonstrated progress) that have been partially met. Specifically, DOD needs to
- include information in the Strategy and accompanying supporting execution plans on the factors—such as, but not limited to, human capital, information, and contracts—used in developing cost estimates for resources and investments. As previously discussed, DOD is taking actions to address this weakness and we would expect to see the actions included in DOD’s next update to its Strategy, which officials told us will be issued in the third quarter of fiscal year 2015.
- clearly specify the linkage between the goals and objectives in the Strategy and the initiatives intended to implement the Strategy. The actions taken by DOD to develop a matrix showing the linkage between the goals and objectives in the Strategy and the initiatives that support them appears promising, and we expect this linkage to be addressed in DOD’s next update to its Strategy.
- assess, and refine as appropriate, existing performance measures to ensure the measures assess implementation of individual initiatives as well as progress toward achievement of the overarching goal(s) and objective(s) outlined in the Strategy.
- continue the implementation of initiatives identified in the Strategy, refining them over time as appropriate. Additionally, DOD needs to demonstrate that implementation of these initiatives results in measurable outcomes and progress toward realizing the goals and objectives in the Strategy.
GAO-15-148: Published: Jan 27, 2015. Publicly Released: Jan 27, 2015.
GAO-14-495: Published: Jun 19, 2014. Publicly Released: Jun 19, 2014.
GAO-13-201: Published: Feb 28, 2013. Publicly Released: Feb 28, 2013.
GAO-13-283: Published: Feb 14, 2013. Publicly Released: Feb 14, 2013.
GAO-12-883R: Published: Aug 3, 2012. Publicly Released: Aug 3, 2012.
GAO-12-482: Published: May 3, 2012. Publicly Released: May 3, 2012.
GAO-12-493: Published: May 3, 2012. Publicly Released: May 3, 2012.
GAO-12-138: Published: Oct 7, 2011. Publicly Released: Oct 7, 2011.
GAO-11-240R: Published: Jan 7, 2011. Publicly Released: Jan 7, 2011.