Defense Inventory:

Applying Commercial Purchasing Practices Should Help Reduce Supply Costs

NSIAD-93-112: Published: Aug 6, 1993. Publicly Released: Aug 6, 1993.

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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) inventory decisions for secondary items, focusing on: (1) cost considerations; (2) use of the DOD replenishment formula; and (3) private-sector methods for making purchasing decisions.

GAO found that: (1) the Air Force does not use the DOD replenishment formula to establish reparable order quantities because it is impracticable; (2) the Defense Logistics Agency (DLA) uses a modified replenishment formula when ordering secondary items because of the formula's cost constraints; (3) the DOD replenishment formula, which is based on the economic order quantity formula, is flawed due to unreliable cost estimates and invalid procedures for determining obsolescence costs; (4) noncost constraints, such as maximum and minimum order limits, limit the use of the DOD replenishment formula and increase ordering costs; (5) the private-sector companies surveyed do not use the economic order quantity formula, since some of its underlying assumptions are invalid and it foregoes possible efficiency gains; (6) the companies successfully use alternative purchasing methods tailored to their operations; (7) three companies are implementing a new logistics system that integrates the efforts of the supplier, distributor, and customer; (8) the success of alternative purchasing methods depends on the cooperation of suppliers and the retraining of employees to maintain lower inventories; (9) two formulas based on economic order quantity principles recognize fluctuations in demand which significantly reduces ordering and holding costs; and (10) DOD is implementing commercial inventory practices to address its inventory problems.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD said that its components are actively pursuing the use of direct delivery contracts and other commercial inventory practices. DOD also said that it recently issued new directives providing additional guidance on expanding the use of commercial inventory practices.

    Recommendation: Due to the many and long-standing difficulties associated with the DOD replenishment formula and the success of some private-sector companies in replacing this type of formula with newer replenishment strategies, the Secretary of Defense should consider, for common items such as medical supplies which have an extensive commercial manufacturing base, using quick response commercial purchasing processes similar to those being used by private-sector companies to maintain a constant flow of inventory without maintaining large inventories.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: According to DOD, its components are actively pursuing alternatives such as direct delivery and other commercial inventory practices.

    Recommendation: Due to the many and long-standing difficulties associated with the DOD replenishment formula and the success of some private-sector companies in replacing this type of formula with newer replenishment strategies, the Secretary of Defense should consider, for other items such as military-unique items, using alternative economic order quantity-based replenishment strategies reflecting the variability of demand.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: In addition to new guidance on using commercial practices, DOD said that its practices are currently in place: (1) each component closely monitors stock levels using a variety of inventory stratification tools and measures; (2) the Navy has achieved significant procurement leadtime reductions as part of the Inventory Reduction Plan; and (3) the Air Force Blue Ribbon Contractor Program is used to identify contractors who meet program performance standards.

    Recommendation: The Secretary of Defense should continue to emphasize to the services and DLA the importance of implementing other proven, innovative commercial inventory practices. These practices include, but are not limited to: (1) close monitoring of stock levels, using such tools as the inventory turnover rate; (2) programs to improve the performance of vendors and manufacturers that evaluate estimated product arrival time, quality, service, and ability to meet a sudden increase in demand, such as a national security emergency; (3) programs to improve the performance of employees that evaluate their performance in managing inventories efficiently, eliminating wasteful practices, and achieving cost savings; and (4) awards, incentives, promotions, and training on commercial inventory practices to foster better management of inventories.

    Agency Affected: Department of Defense

 

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