Defense Inventory:

Defense Logistics Agency Needs to Expand on Efforts to More Effectively Manage Spare Parts

GAO-10-469: Published: May 11, 2010. Publicly Released: Jun 10, 2010.

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The Defense Logistics Agency (DLA) procures and manages large supplies of spare parts to keep military equipment ready and operating. At a time when U.S. military forces and equipment are in high demand and the nation faces long-term fiscal challenges, it is critical that DLA ensure that the warfighter is supplied with the right items at the right time and exercise good stewardship over the billions of dollars invested in its inventories. GAO has identified supply chain management as a high-risk area due in part to high levels of inventory beyond what is needed to support requirements and problems in accurately forecasting demand for spare parts. GAO's objectives were to (1) determine the extent to which DLA's inventory of spare parts reflects the amount needed to support requirements; and (2) identify causes, if applicable, for DLA's having spare parts inventory that does not align with requirements. GAO analyzed DLA inventory data for fiscal years 2006 through 2008.

GAO's review showed that DLA can enhance its efforts to manage spare parts more effectively primarily by focusing on the front end of the process when decisions are being made on what items to buy and how many in response to requirements. GAO's analysis of DLA data showed the agency had significantly more spare parts secondary inventory than was needed to meet current requirements in fiscal years 2006 through 2008. Current requirements include all the requirements used by DLA to determine when to order new parts, which Department of Defense (DOD) guidance refers to as the "requirements objective." The average annual value of the inventory for the 3 years reviewed was about $13.7 billion. Of this total, about $7.1 billion (52 percent) was beyond the amount needed to meet the requirements objective, and about $5.1 billion (37 percent) was not needed to meet the requirements objective plus 2 years of estimated future demand. Of the $5.1 billion, DLA had an average of $4.1 billion in retention stock (materiel for possible contingencies or materiel deemed to be more economical to keep than to dispose of) and had identified $1 billion as potential excess (for reutilization or disposal). Although DOD policy requires that DLA minimize investment in inventory while also meeting requirements, at least seven factors are continuing to cause DLA to order and stock parts that do not align with requirements. Three factors relate to how many parts to buy: inaccurate demand forecasting for parts, unresolved problems with accurately estimating lead times needed to acquire spare parts, and challenges in meeting the military services' special requests to DLA for future spare parts support for weapon systems. Three more factors relate to DLA initiatives that, while showing promise for reducing the acquisition and retention of parts not needed to meet requirements, do not appear to be achieving their full potential: closing gaps in providing accurate, timely data to inventory managers as input into purchase decisions; modifying or canceling planned purchases that may no longer be needed to meet currently estimated requirements; and reducing contingency retention stock that may no longer be needed. Lastly, DLA is not tracking the overall cost efficiency of its inventory management. Although DLA has recognized and begun to address many of these factors, its current efforts may not be fully effective at reducing the significant mismatches GAO identified between spare parts inventory levels and requirements. Acquiring inventory for which demand is much lower than expected reduces the amount of funding available for other military needs.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In 2011, the Office of the Secretary of Defense, the military services, and DLA began to implement the Comprehensive Inventory Management Improvement Plan. The plan has several sub-plans intended to address a range of inventory problems, including improving the department's ability to forecast inventory demand. The demand forecasting sub-plan serves as the action plan for the services and DLA for improving demand forecasting. The plan includes goals, objectives, timeframes, and the development of metrics for tracking forecasting error and bias. The action plan will enable DLA to more accurately forecast its inventory requirements.

    Recommendation: To minimize investment in unneeded spare parts inventory, the Secretary of Defense should direct the Director, Defense Logistics Agency, to establish an action plan for completing the agency's evaluation of identified demand planning issues, and include goals, objectives, resources, and time frames in this action plan.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The Office of the Secretary of Defense, the services, and DLA, as part of implementation of the Comprehensive Inventory Management Improvement Plan, are undertaking a number of actions to address procurement lead times, specifically evaluating existing initiatives department-wide to reduce procurement lead times (which includes both administrative and production lead time), improving lead time accuracy, and developing a standardized methodology to track and monitor changes to procurement lead time. DLA currently has several programs and efforts underway to reduce production lead time, such as strategic materiel sourcing, which involves increasing focus on pre-award collaboration, acquisition planning, and the fostering of enhanced business arrangements to better balance cost, schedule, performance, and sustainment of materiel. To identify root causes of inaccurate production lead time, DLA has conducted an analysis of long procurement lead time items to identify commonality for potential reduction efforts. DLA found that suppliers are able to shorten lead times in some instances because excess materiel was on hand from other contracts. On the other hand, DLA also found that lead times can be longer because of unexpected production delays, such as labor shortages and lack of materiel availability. According to DLA, procurement lead times are best when items are procured at a steady basis over a relatively long period of time; however, this is seldom the case for the majority of items because of the age of the weapon systems supported by DLA. Also, the production lead times for a supplier are negotiated and verified during contract negotiation and monitored continuously during contract administration. DLA has increased emphasis on reviewing lead time "outliers" to ensure lead times of record are reviewed and updated, to more accurately represent future lead time requirements. With these actions, DLA is working to more accurately estimate production lead times.

    Recommendation: To minimize investment in unneeded spare parts inventory, the Secretary of Defense should direct the Director, Defense Logistics Agency, to develop an approach for working with suppliers to assess the root causes of inaccurate production lead time estimates and implement corrective actions linked to these root causes.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: The Office of the Secretary of Defense, the services, and DLA have begun a process of identifying needed policy changes for supply support requests based on analysis conducted as part of the Comprehensive Inventory Management Improvement Plan. DLA has reinforced and reinvigorated effective internal controls in both special program requirements and supply support requests. DLA is ensuring that all special program requirements greater than $10,000 are validated by the customer and customers are given three times to validate special program requirements before procurement. DLA codes new items as non-stocked and does not generate a procurement action until receipt of the first customer order to prevent unnecessary purchases from supply support requests. DLA also has put increased emphasis on the special program requirement buy-back program, which looks at historical customer demands that occur after submission of special program requirements. Through this program, special program requirement procurement quantities are reduced based upon the degree of historical buy-back rates from those customers. Updates to these rates were made in fiscal years 2010 and 2011 to ensure they reflect current history. With these improvements to internal controls, DLA will more readily identify overestimates by the military departments and more accurately forecast spare part inventory requirements.

    Recommendation: To minimize investment in unneeded spare parts inventory, the Secretary of Defense should direct the Director, Defense Logistics Agency, to reinforce and reinvigorate effective internal controls aimed at evaluating and making adjustments to the military services' estimated additional requirements, including both supply support requests and special program requirements.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DLA established a headquarters team in 2011 to better synchronize special program requests, provisioning requests, and overall demand data exchange efforts. The Comprehensive Inventory Management Improvement Plan lays out action steps for DLA to pilot a department-wide, Office of Secretary of Defense-led, sales and operations planning process to enhance the demand and supply planning process across the department. The services and DLA are addressing the demand data exchange initiative during fiscal year 2012 which works to improve communication and expand the initiative across the enterprise. Furthermore, DLA has continued to monitor and evaluate the effectiveness of the demand data exchange and other collaborative demand strategies. In addition to the DLA collaboration team's internal communication efforts, the team has been engaged with each of the services to broaden use of demand data exchange and to plan for improvements to the process. In addition to expanding on Air Force and Navy participation, the team is actively working with the Army Material Command (AMC) in planning a transition from use of "transactional" special program requirements to the more collaborative demand data exchange process. Since 2011, the team is also involved with Navy in developing a more enhanced demand data exchange process called gross demand planning. The gross demand planning process will support Navy Fleet Readiness Centers through a more streamlined and less labor intensive version of demand data exchange. DLA's efforts to improve demand data exchange will provide item managers with more accurate, timely data which will help assist DLA to minimize investment in unneeded spare parts inventory.

    Recommendation: To minimize investment in unneeded spare parts inventory, the Secretary of Defense should direct the Director, Defense Logistics Agency, to conduct a program evaluation of the demand data exchange initiative to determine what, if any, additional actions should be taken to (1) improve communication and data exchange internally and with military customers and suppliers and (2) expand the initiative across the enterprise (for example, to other customers, items, and processes).

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DLA has taken action to increase reviews of items temporarily excluded from the over-procurement process. In fiscal years 2010 and 2011, on-order assets for items transferred to DLA from the services have been reviewed to determine if they exceed requirements. Additionally, Mine Resistant Ambush Protected items--previously excluded from the process--are being reviewed offline as well. DLA has increased emphasis on using the Top 100 Stratification over-procurement reports to identify items commonly over procured and cancel on-order excess. Additionally, DLA is forming an in-process team to include supply planners and acquisition specialists from each of the supply chains to improve the over-procurement process. In addition, DLA is redesigning the over-procurement process to establish the required level of authority to retain on-order materiel in excess of projected requirements as established by the approved acquisition objective. These actions will enable DLA to limit over procurement of inventory, and reduce the investment needed for its spare parts inventory.

    Recommendation: To minimize investment in unneeded spare parts inventory, the Secretary of Defense should direct the Director, Defense Logistics Agency, to evaluate the effectiveness of the agency's process for identifying and reducing potential over-procurements and determine the feasibility of applying the process on a wider scale.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: As part of the implementation of the demand forecasting sub-plan in the Comprehensive Inventory Management Improvement Plan, the Office of the Secretary of Defense, the services, and DLA performed an analysis that showed there was not a need for service-DLA risk-sharing because supply support requests forecasts were not causing DLA to procure excess inventory. As a result of the analysis, DOD was able to focus its improvement efforts on other root causes contributing to mismatches between inventory levels and requirement, such as improving the supply support request process.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology and Logistics, in conjunction with the Director, Defense Logistics Agency, and the Secretaries of the Army, the Navy, and the Air Force, to formally evaluate and report on the feasibility of requiring up-front military service funding for a portion of their supply support requests.

    Agency Affected: Department of Defense

  7. Status: Closed - Implemented

    Comments: As a result of a congressional requirement to develop a corrective action plan for inventory management, DOD established its Comprehensive Inventory Management Improvement Plan (CIMIP) in 2010. Through the implementation of CIMIP, which occurred in 2011 and 2012, the Office of the Secretary of Defense (OSD) maintains oversight of DOD inventory improvement efforts and tracks inventory metrics on a monthly basis. Some of these inventory metrics measure cost efficiency. For example, a key cost-efficiency metric tracked through the CIMIP is the percentage of on-order inventory that is excess to requirements. A sub-plan of the CIMIP serves as DOD's action plan to reduce on-order excess, and includes objectives and timeframes. DLA helped to develop the CIMIP, is implementing improvement efforts, and is included in OSD's monthly reviews. In addition to participating in the CIMIP, DLA tracks a number of inventory metrics internally.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology and Logistics, in conjunction with the Director, Defense Logistics Agency, and the Secretaries of the Army, the Navy, and the Air Force, to establish goals and metrics for tracking and assessing the cost efficiency of inventory management in accordance with DOD's policy requiring DLA and the services to minimize investment in secondary item inventory while providing inventory needed; develop and implement an approach for integrating these goals and metrics with inventory management improvement efforts; and incorporate the goals and metrics into existing management and oversight processes.

    Agency Affected: Department of Defense

  8. Status: Closed - Implemented

    Comments: As a result of this and other inventory-related recommendations and a congressional mandate, DOD developed a comprehensive plan for improving the inventory management systems of the military departments and DLA in late 2010. In part, this plan laid out several actions that occurred over 2011 and 2012 to improve the management of CRS across the department, including annual reviews of CRS. In June 2014, GAO reported that DLA had disposed of over a billion dollars in contingency retention stock in 2012 and 2013. Previously, according to DLA officials, the military services were allowed to exclude from disposal inventory associated with a particular weapon system that was not needed to meet requirements. Establishing new procedures, DLA, in collaboration with the military services, reduced the number of excluded weapon systems from 96 in fiscal year 2010 to 17 in fiscal year 2013. In addition, DLA imposed constraints on the amount of inventory that could be retained as contingency retention stock for the excluded weapon systems. Due to improving its policies, procedures, and operations for the management of CRS, DLA has improved the efficiency and effectiveness of its inventory management operations.

    Recommendation: The Secretary of Defense should direct the Secretaries of the Army, the Navy, and the Air Force to certify to DLA which items and what quantities of the contingency reserve stock should be retained, in response to DLA's requests that they do so, and direct the Under Secretary of Defense for Acquisition, Logistics and Technology to provide guidance and oversight of this certification process.

    Agency Affected: Department of Defense

 

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