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entitled 'Defense Inventory: The Department Needs a Focused Effort to 
Overcome Critical Spare Parts Shortages' which was released on June 27, 
2003.

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Report to the Chairman, Subcommittee on Defense, Committee on 
Appropriations, House of Representatives:

United States General Accounting Office:

GAO:

June 2003:

Defense Inventory:

The Department Needs a Focused Effort to Overcome Critical Spare Parts 
Shortages:

GAO-03-707:

GAO Highlights:

Highlights of GAO-03-707, a report to the Subcommittee on Defense, 
Committee on Appropriations, House of Representatives

Why GAO Did This Study:

The Department of Defense’s (DOD) annual appropriation totals billions 
of dollars for spare parts. In addition, it has received supplemental 
funding totaling $1.5 billion since fiscal year 1999 to increase the 
availability of spare parts. However, DOD continues to experience 
critical spare parts shortages that impact military readiness. GAO 
examined whether (1) DOD’s logistics strategic plan addresses the 
mitigation of critical spare parts shortages that adversely affect 
readiness, (2) DOD’s logistics initiatives are likely to mitigate 
spare parts shortages that affect readiness, and (3) DOD has the 
ability to identify the effect of increased investments for spare 
parts on readiness.

What GAO Found:

The Office of the Secretary of Defense’s (OSD) logistics strategic 
plan focuses on transforming the department’s logistics operations by 
emphasizing weapon system support, customer service, and enterprise 
integration, but does not specifically address mitigating spare parts 
shortages. In addition, while it contains some key attributes of a 
strategic plan, such as broad goals and implementation strategies, it 
lacks other key attributes. In June 2002, the department published the 
Future Logistics Enterprise, which serves as the strategic plan behind 
efforts to transform logistics operations within the department to 
ensure consistent, reliable support that meets the warfighters’ 
requirements. This plan presents its vision for accelerating logistics 
improvement, enhancing support to the warfighter and aligning 
logistics processes with the operational demands of the 21st 
Century.  

While the Future Logistics Enterprise plan identifies six 
departmentwide initiatives under three broad topical areas to improve 
weapon system availability, none of the initiatives specifically 
address mitigating critical spare parts shortages. However, DOD has 
directed a separate Defense Logistics Agency effort to improve the 
availability of critical aviation spare parts. Under the three topics 
of weapon system support, customer service, and enterprise 
integration, OSD’s six agencywide initiatives aim to improve supply 
operations and readiness. In fact, two—Condition Based Maintenance 
Plus and Total Life Cycle System Management—specifically identify 
improving readiness as an objective. For example, the Condition Based 
Maintenance Plus initiative is designed to improve maintenance 
capabilities and business processes that could increase operational 
availability and readiness throughout the life cycle of the 
department’s weapon systems. If successfully implemented, this 
initiative would improve maintenance operations and might affect spare 
parts shortages, but it does not have goals and performance measures 
related to mitigating spare parts shortages. As a result, DOD may not 
know whether it is investing its resources in the most efficient and 
effective manner. 

Recent OSD efforts to link funding to readiness could enhance its 
ability to identify the affect of funding for critical spare parts on 
readiness. In an August 2002 study report, the DOD Comptroller 
identified the value of investing in critical parts that adversely 
affect readiness and recommended the Defense Logistics Agency and the 
services link budget requests to weapon system readiness rates. The 
Comptroller’s recommendations stemmed from concern that the Defense 
Logistics Agency and the services’ inventory systems tend to purchase 
low-cost/high-demand items and not those that would most improve 
readiness rates. While citing some improvement, the Comptroller made 
eight recommendations, four of which were specifically aimed at 
improving efforts to increase investment in critical spare parts and 
link funding requests to readiness rates. In addition, the Comptroller 
changed the budget justification document (budget exhibit) to provide 
such information to Congress.

What GAO Recommends:

GAO recommends that the Secretary of Defense:

* Incorporate clear goals, objectives, and performance measures 
pertaining to mitigating spare parts shortages in the Future Logistics 
Enterprise or appropriate agencywide initiatives to include efforts 
recommended by the Under Secretary of Defense Comptroller in his 
August 2002 study report.

* Establish milestones and define how it will measure progress in 
implementing the August 2002 Inventory Management Study 
recommendations.

In written comments, DOD generally concurred with the intent of our 
recommendations, but not with the approach recommended.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

DOD's Strategic Plan Is Aimed at Logistics Transformation, Not 
Specifically Spare Parts Shortages:

Initiatives Focus on Weapons System Availability, Not Critical Spare 
Parts Shortages:

Recent Efforts Could Strengthen Link Between Funding and Readiness:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Scope and Methodology:

Appendix I: Initiatives Included in the Future Logistics Enterprise:

Appendix II: Inventory Investment Budget Submission Material:

Appendix III: Comments from the Department of Defense:

Appendix IV: GAO Contacts and Staff Acknowledgements:

United States General Accounting Office:

Washington, DC 20548:

June 27, 2003:

The Honorable Jerry Lewis 
Chairman, 
Subcommittee on Defense 
Committee on Appropriations 
House of Representatives:

Dear Mr. Chairman:

The Department of Defense's (DOD) fiscal year 2002 parts related annual 
operations and maintenance funding totaled approximately $11.2 billion 
and working capital fund obligation authority totaled approximately 
$22.9 billion. Since fiscal year 1999, it has also received 
supplemental funding totaling $1.5 billion to increase the availability 
of spare parts. While the Army and Defense Logistics Agency are 
reporting that they are meeting the overall supply performance goal of 
having parts available to meet customer demands 85 percent of the time, 
the department still reports shortages of critical spare parts[Footnote 
1] that affect readiness. Recognizing that spare parts shortages will 
never be eliminated, it is reasonable to expect the department to place 
a priority on efforts to mitigate (reduce) those shortages that 
adversely affect readiness. This priority should be inherent in the 
overall planning and stewardship of funds requested from Congress and 
the accountability for making spare parts investment decisions that 
provide a good readiness return. In our January 2003 High Risk Series 
Report, we again identified DOD's management of inventory as high-risk 
because of long standing management weaknesses that could result in 
unnecessary expenditures and that DOD was experiencing equipment 
readiness problems because of the lack of spare parts.[Footnote 2]

This is one in a series of reports responding to your request that we 
identify ways to improve the availability of spare parts.[Footnote 3] 
As agreed, this report addresses the strategic planning efforts of the 
Office of the Secretary of Defense (OSD) to transform the way DOD 
conducts its logistics business operations in order to mitigate 
critical spare parts shortages. More specifically, we are reporting on 
the following:

1. Does OSD's logistics strategic plan address the mitigation of 
critical spare parts shortages--those that adversely affect readiness?

2. Will OSD logistics initiatives likely mitigate spare parts shortages 
that affect readiness?

3. Does OSD have the ability to identify the effect on readiness of 
increased investments for spare parts?

We reviewed the OSD's current logistics strategic planning document to 
determine whether it contained a focus on mitigating spare parts 
shortages. We also assessed the extent to which the strategy and 
initiatives provided a basis for guiding the defense agencies' and 
military services' efforts and were consistent with Government 
Performance and Results Act of 1993 (GPRA) guidelines for preparing a 
strategic plan.[Footnote 4] We interviewed OSD and Joint Staff 
officials about the strategic planning document to identify their views 
on mitigating spare part shortages and readiness. We also compared 
OSD's current initiatives to issues identified in GAO's High Risk 
Series to determine if they contained specific goals and objectives 
linked to mitigating spare parts and measures relating to readiness. To 
assess DOD's ability to link funding for spare parts to improved 
readiness, we reviewed DOD documents and reports relevant to linking 
additional funding for spare parts to readiness.

Results in Brief:

The Office of the Secretary of Defense's logistics strategic plan is 
focused on transforming the department's logistics operations through 
an emphasis on improving weapon system support, customer service, and 
enterprise integration. While this could improve weapon system 
readiness over time, it does not specifically focus on mitigating spare 
parts shortages. In addition, although it contains some key attributes 
of a strategic plan, such as broad goals and implementation strategies, 
it lacks other key attributes. In June 2002, the department published 
the Future Logistics Enterprise, which serves as the strategic plan 
behind efforts to transform logistics operations within the department 
to ensure consistent, reliable support that meets the warfighters' 
requirements. This plan presents its vision for accelerating logistics 
improvement, enhancing support to the warfighter and aligning logistics 
processes with the operational demands of the 21st Century. However, 
according to OSD officials, because the plan is focused on the high-
level goal of transforming operations, it does not focus on specific 
issues such as the need to mitigate spare parts shortages. Even though 
DOD considers the Future Logistics Enterprise plan to be in its 
infancy, the plan includes some key elements of a good plan. For 
example, it cites general goals such as meeting warfighter requirements 
and implementation strategies such as adopting Total Life Cycle Systems 
Management, and recognizes the need to develop broad performance 
measures such as weapons system availability. However, the plan lacks 
other key elements, which are considered important. It does not contain 
specific goals, objectives, or performance measures; does not require 
subordinate organizations such as the Defense Logistics Agency and the 
services to develop supporting plans or submit annual progress reports; 
and does not provide the comprehensive overarching guidance needed to 
integrate the multitude of ongoing initiatives. By not focusing on 
mitigating spare parts shortages as part of a well developed overall 
strategy to improve logistics operations, DOD increases the likelihood 
there will be ineffective or duplicate efforts within the Defense 
Logistics Agency and the services to address this important problem 
that affects readiness. As a result, OSD will lack assurance that it is 
investing in those highest priority items, which would yield the 
greatest return on investment and effect on readiness.

The Future Logistics Enterprise plan identifies six departmentwide 
initiatives under three broad topical areas to improve weapon system 
availability, but none of the initiatives specifically address 
mitigating critical spare parts shortages. However, in a separate 
initiative, DOD directed the Defense Logistics Agency to improve the 
availability of critical aviation spare parts. Under the three topics 
of weapon system support, customer service, and enterprise integration, 
OSD's six agencywide initiatives focus on improving supply operations 
and readiness. In fact, two--Condition Based Maintenance Plus and Total 
Life Cycle System Management--specifically identify improving 
readiness as an objective. For example, the Condition Based Maintenance 
Plus initiative focuses on improving maintenance capabilities and 
business processes that could increase operational availability and 
readiness throughout the life cycle of the department's weapon systems. 
If successfully implemented, this initiative would improve maintenance 
operations and might affect spare parts shortages, but it does not have 
goals and performance measures related to mitigating spare parts 
shortages. As a result, DOD may not know if it is investing in those 
items that would give the greatest return on investment or effect on 
readiness, or may achieve readiness at a higher than necessary cost by 
simply buying more parts rather than addressing the cause of shortages. 
While not an agencywide initiative, DOD has directed the Defense 
Logistics Agency to implement a focused effort called the Aviation 
Investment Strategy to reduce specific critical spare parts shortages. 
Under this initiative, the Defense Logistics Agency has spent $500 
million to buy more of these parts, thereby increasing their 
availability.

Recent OSD efforts to link funding to readiness could enhance its 
ability to identify the effect of funding for critical spare parts on 
readiness. In an August 2002 study report, the DOD Comptroller 
identified the value of investing in critical parts that adversely 
affect readiness and recommended the Defense Logistics Agency and the 
services link budget requests to weapon system readiness rates. The 
Comptroller's recommendations stemmed from concern that the Defense 
Logistics Agency and the services' inventory systems tend to purchase 
low-cost/high-demand items and not those that would most improve 
readiness rates. Although he cited some improvement efforts, the 
Comptroller made eight recommendations, four of which specifically 
focused on improving efforts to increase investment in critical spare 
parts and link funding requests to individual weapon system readiness 
rates. In addition, the Comptroller changed the budget justification 
document (budget exhibit) to provide such information to Congress. 
However, his recommendations did not cite reporting deadlines or how 
OSD would measure Defense Logistics Agency and service progress in 
implementing the four recommendations.

Given the adverse effect of critical spare parts shortages on 
readiness, we are recommending that the Secretary of Defense 
incorporate clear goals, objectives, and performance measures 
pertaining to mitigating spare parts shortages in either the Future 
Logistics Enterprise or appropriate agencywide initiatives to include 
efforts recommended by the Under Secretary of Defense Comptroller in 
his August 2002 study report. In addition, we are recommending that OSD 
identify milestones and define how it will measure progress in 
implementing the August 2002 Inventory Management Study 
recommendations. DOD concurred with the intent of our first 
recommendation, but not all of the suggested actions. DOD stated that 
spare parts shortages are a symptom of imperfect supply chain processes 
and that components of the Future Logistics Enterprise would transform 
these processes. Furthermore, the August 2002 recommendation has been 
incorporated in the Financial Management Regulation and their 
implementation would be reviewed in annual budget conferences. 
Therefore, DOD does not need to incorporate additional goals, 
objectives and performance measures into the strategy or agencywide 
initiatives to address this issue. We recognize OSD's focus on 
transforming logistics processes and endorse the actions taken to 
monitor implementation of the August 2002 study report recommendations. 
However, we believe that process improvements alone do not meet the 
intent of our recommendation. Further, we continue to believe that 
including a focus on mitigating spare parts with clear goals, 
objectives and performance measures included in its logistics strategy 
or agencywide initiatives is needed to provide the framework for 
ensuring this issue is addressed as part of DOD's overall logistics 
effort. DOD partially concurred with the second recommendation in that 
it believes separate reporting milestones to measure the progress in 
implementing the Under Secretary of Defense, Comptroller's August 2002 
recommendations are not needed because progress would be measured as an 
integral part of the resource allocation process in its annual budget 
conferences. When implemented, these actions meet the intent of our 
recommendation provided goals, objectives, and performance measures 
pertaining to mitigating spare parts shortages are included in the 
scorecard. The department's comments and our evaluation are on page 14 
of this report.

Background:

To support the warfighter, DOD maintains an extensive supply system to 
provide the spare parts necessary to keep weapons systems operational. 
The department currently maintains an inventory in excess of $60 
billion, with annual sales to operating forces of approximately $30 
billion. The operating forces rely on operations and maintenance 
appropriations to procure spare parts from this supply infrastructure. 
In recent years, Congress has fully funded the operation and 
maintenance budget request of the department and has provided 
supplemental funding targeted for spare parts. Traditionally, the 
department has measured the effectiveness of supply operations in terms 
of supply availability rate--the frequency with which a part is 
available for delivery upon a customer's first request. The current 
supply availability goal is 85 percent and the Army and Defense 
Logistics Agency report they are achieving this goal. Nevertheless, the 
Defense Logistics Agency and the services continue to experience 
critical spare parts shortages that affect the operational readiness of 
the warfighter.

The department, Congress, and GAO have long recognized the importance 
of a supply system that operates efficiently and effectively. The 
department has taken a number of actions to improve the logistics 
system. First, beginning in fiscal year 1994, the Under Secretary of 
Defense for Acquisition and Technology developed the department's 
initial strategic plan for guiding improvements to the logistics 
support systems. This planning effort continued with the development of 
the fiscal year 2000 Logistics Strategic Plan to direct the 
transformation of the logistics system. This plan required the services 
and defense commands to develop implementation plans that reflected the 
vision, objectives, and metrics of the departmentwide plan. Although 
GAO identified shortcomings in the departmentwide and subordinate 
plans, we acknowledge that this planning effort was a positive step 
toward improving the economy and efficiency of logistics support 
systems.[Footnote 5] In fiscal year 2002, this strategic plan was 
replaced with the current Future Logistics Enterprise, which focused on 
three key areas with the overall goal of operating DOD logistics as a 
single end-to-end enterprise. In achieving this end, the Future 
Logistics Enterprise is designed to support the national defense 
strategy, meet the requirements of the warfighter, support the ongoing 
initiatives within the services, and focus the objectives of corrective 
actions.

In section 362 of the National Defense Authorization Act for fiscal 
year 2000,[Footnote 6] Congress directed an independent study of DOD's 
secondary inventory and parts shortages to focus on any items that 
adversely affect readiness. This study, performed by the Logistics 
Management Institute and the Center for Naval Analysis, found that 
while overall supply availability met department goals, declining 
inventory levels had resulted in reduced aircraft readiness. DOD also 
recognized the need to improve supply performance in its August 2001 
Defense Planning Guidance which directed a review of inventory 
management practices and stockage levels during the fiscal year 2003 
program/budget review. The initial results of this study were included 
in the fiscal year 2002 Program Budget Decision 422, which recommended 
the department further study inventory management including developing 
a plan to streamline inventory management practices and improve supply 
chain management. More specifically, it suggested the department 
address the effect of inventory levels on weapons systems readiness. In 
August 2002, the DOD Comptroller published the results of these further 
efforts in the Inventory Management Study report, which outlined eight 
recommendations for improving inventory and supply readiness, four of 
which are directly aimed at improving efforts to increase investments 
in readiness related spares and link funding requests to readiness 
rates. In addition to these departmentwide plans and policies, 
according to Deputy Under Secretary of Defense for Logistics and 
Material Readiness, there are about 500 logistics improvement 
initiatives underway at various DOD activities.

Beginning in 1990, GAO identified the department's management of 
secondary inventories as a high-risk area because inventory levels were 
too high and management systems and procedures were ineffective and 
wasteful. In the most recent high-risk report,[Footnote 7] GAO 
identified the need to address seven key weaknesses, one of which is 
overcoming key spare parts shortages. More importantly, the report 
focused on the need for an overarching strategic plan to guide the 
department's logistics transformation efforts. GPRA provides guidance 
to executive agencies for establishing and monitoring strategic plans. 
GPRA specifies that virtually every agency is required to prepare 
multiyear strategic plans, annual performance plans, and annual 
performance reports. These strategic plans are to include an agency's 
mission statement, long-term general goals, and the strategies that the 
agency will use to achieve these goals. GPRA also requires executive 
agencies to prepare an annual performance plan including among other 
things, (1) the performance goals for agencies' major programs and 
activities; (2) the performance indicators or measures that will be 
used to gauge performance; (3) the processes, skills, technology and 
resources required to achieve the performance goals; and (4) the 
procedures that will be used to verify and validate performance 
information. Finally, GPRA requires each agency to prepare annual 
reports on program performance for the previous fiscal year.

DOD's Strategic Plan Is Aimed at Logistics Transformation, Not 
Specifically Spare Parts Shortages:

The Office of the Secretary of Defense's strategic logistics plan is 
focused on transforming the department's logistics operations through 
an emphasis on improving weapon system support, customer service, and 
enterprise integration. While this could improve weapon system 
readiness over time, it does not specifically focus on mitigating spare 
parts shortages. According to OSD officials, the plan's focus on the 
higher-level goal of improving weapon systems availability subsumes the 
issue of critical spare parts shortages. In addition, while that 
planning document--the Future Logistics Enterprise--includes some key 
elements of an effective strategic plan, others are not included.

The department's Future Logistics Enterprise published in June 2002 
replaced the 2000 strategic plan and is intended to accelerate the 
department's implementation of its integrated logistics systems and its 
commercial information system to meet warfighter needs. The ultimate 
objective of this plan is to ensure that the logistics system provides 
consistent, reliable support that meets the warfighters requirements. 
To accomplish this, the Future Logistics Enterprise concentrated on 
changing policy, processes, and systems within the logistics 
environment that could improve weapon system support, customer service, 
and enterprise integration.

The Future Logistics Enterprise contains some key elements necessary 
for a good strategic plan, but other key elements are missing. Because 
DOD considers this plan to be in its infancy, it has focused on 
initiating these efforts, setting policy for the new initiatives, and 
exploring potential approaches for evaluating progress toward achieving 
the objectives. The plan contains general goals such as meeting 
warfighter requirements and strategies to be employed such as 
implementing the agencywide initiatives. In addition, DOD is currently 
developing the performance measures to measure the effect of the plan. 
However, other essential elements are missing. For example, although, 
specific initiatives may require the Defense Logistics Agency and the 
services to develop an implementation plan for that initiative, there 
is no requirement for the development of Defense Logistics Agency and 
service plans or annual progress reports in support of the Future 
Logistics Enterprise. In addition, the plan is not all-inclusive and 
does not provide the overarching guidance necessary to integrate some 
500 ongoing initiatives at the service and defense agencies or 
recommendations from DOD studies such as those cited in the August 2002 
Inventory Management Study. For example, the 2002 study identified 
weaknesses in the models used by the Defense Logistics Agency and the 
services to determine which items they should buy to meet the 85 
percent supply availability goal. Specifically the study concluded that 
the models do not routinely account for factors such as intended use, 
cost, or criticality in terms of readiness when establishing inventory 
requirements. Consequently, the models favor procurement of low-cost/
high-demand items and do not provide sufficient weight to high-cost/
low-demand items that were found to be a problem for aviation 
platforms. In addition to recommending that the Defense Logistics 
Agency and the services apply higher supply targets for these items in 
the short-term, the study recommended that all new supply systems be 
capable of supporting readiness based sparing models. However, there is 
no apparent linkage of the study results and recommended actions to the 
Future Logistics Enterprise. Other key elements missing from the 
strategic plan include (1) how the department should be organized in 
the future to fulfill evolving logistics requirements and (2) the 
facilities and personnel needed to fulfill its future logistics 
requirements. GAO identified these same weaknesses in the department's 
fiscal year 2000 Logistics Strategic Plan.[Footnote 8] Without these 
elements of a good plan, the department can not ensure that efforts 
undertaken by the Defense Logistics Agency and the services will 
support and achieve the department's logistics transformation goals.

Initiatives Focus on Weapons System Availability, Not Critical Spare 
Parts Shortages:

The department's Future Logistics Enterprise concentrates on three key 
areas--weapon systems support, customer service and enterprise 
integration--to focus the six agencywide initiatives that have the 
potential to affect readiness, but none specifically address mitigating 
critical spare parts shortages. Under a separate initiative, however, 
DOD has directed the Defense Logistics Agency to increase inventories 
of critical aviation spare parts. The six initiatives aligned with 
these areas include (1) Depot Maintenance Partnerships, (2) Conditioned 
Based Maintenance Plus, (3) Total Life Cycle Systems Management, (4) 
End-to-End Distribution, (5) Executive Agents, and (6) Enterprise 
Integration (see app. I). Of these, the Conditioned Based Maintenance 
Plus and the Total Life Cycle Systems Management initiatives 
specifically address improving readiness. While not specifically 
focused on, each of the departmentwide initiative has the potential to 
help reduce spare parts shortages. Although not agencywide, DOD has 
directed specific efforts such as the Aviation Investment Strategy to 
address specific critical spare parts problems.

The Conditioned Based Maintenance Plus initiative is designed to 
increase operational availability and readiness throughout the weapon 
system life cycle using real time diagnostic and prognostic techniques 
to determine the current operating status and predict the future 
condition of equipment. Data from these techniques will be utilized to 
better anticipate the maintenance requirements of the weapon system and 
its components. Currently, four Condition Based Maintenance Plus 
programs are being piloted within the military services: (1) the Army 
Diagnostic Improvement Program, (2) the Integrated Condition Assessment 
System, (3) the Joint Strike Fighter Prognostic Health Management, and 
(4) the Integrated Mechanical Diagnostics-Health Usage Monitoring 
System. These pilots demonstrate the use of diagnostic and prognostic 
tools on both existing weapon systems and systems in the acquisition 
pipeline. For example, the Integrated Mechanical Diagnostics-Health 
Usage Monitoring System provides in-flight monitoring and collects 
engine and mechanical drive systems information on the H-53 and H-60 
helicopters, as well as accurate flight hour recording. Among the cited 
benefits of this program is a 10 percent reduction in total aviation 
depot level reparable/consumable costs due to vibration related 
maintenance actions. If successfully implemented, this initiative would 
improve maintenance operations and might affect spare parts shortages, 
but it does not have goals and performance measures related to 
mitigating spare parts shortages.

The Total Life Cycle Systems Management initiative makes the program 
manager responsible for all activities associated with the acquisition, 
development, production, fielding, sustainment, and disposal of a 
weapon system across its life cycle. The goal is to create a 
procurement action where the sustainability and maintainability, as 
well as the operational needs of the warfighter, are incorporated into 
the acquisition decision. Performance Based Logistics is the preferred 
strategy to support Total Life Cycle System Management activities and 
enhance weapon system product support within the department. Under this 
concept, the program manager enters into contractual relationships for 
support of the weapon system or components that are based on the vendor 
meeting specific performance requirements for weapon system 
availability. In essence, the management risk for the spare parts 
support of the weapon system or component is transferred to the vendor 
through the performance requirements included in the contracts. By 
focusing on weapon system or component availability, OSD claims the 
effect of spare parts shortages on readiness could be mitigated to a 
level deemed acceptable to the warfighter.

Although not an agencywide initiative, in 1999 DOD directed the Defense 
Logistics Agency to focus on particular shortages of aircraft parts. 
The Aviation Investment Strategy specifically targeted critical 
aviation spare parts. In 1999-2000 the Office of the Secretary of 
Defense, Program Analysis and Evaluation, with support from the 
Logistics Management Institute, completed a study that concluded low 
stockage levels of high-cost/low-demand items were the predominant 
cause of supply related Not Mission Capable rates. As a result, the 
Office of the Secretary of Defense added $500 million in the 1999 
Program Review to increase inventory levels for high-cost/low-demand 
aviation parts managed by the Defense Logistics Agency. Since then, the 
Defense Logistics Agency has been buying more of these parts and 
increasing the amount of inventory on hand, but as discussed in our 
report on Defense Logistics Agency initiatives,[Footnote 9] over half 
of these parts still remain below the 85 percent supply availability 
goal.

Recent Efforts Could Strengthen Link between Funding and Readiness:

Although DOD has long been monitoring readiness, it has recently 
undertaken efforts to link funding to readiness by weapons system. The 
department's ability to link funding for critical spare parts to 
readiness should improve when the Defense Logistics Agency and the 
services implement four recent recommendations by the DOD comptroller. 
The Comptroller's recommendations stemmed from concern that the Defense 
Logistics Agency and the services' inventory systems tend to purchase 
low cost/high demand items and not those that would most improve 
readiness rates. Although the Comptroller cited some improvement 
efforts, he made four recommendations specifically aimed at improving 
their efforts to increase investment in critical spare parts and link 
funding requests to readiness rates. In addition, the Comptroller 
changed the budget justification material (budget exhibit) to provide 
such information to Congress. However, the report conveying these 
recommendations did not cite deadlines or how DOD would measure the 
Defense Logistics Agency and the services' progress in implementing the 
four recommendations.

In the August 2002 report, the DOD Comptroller issued the Inventory 
Management Study report in response to Program Budget Decision 422, in 
which the Comptroller cited problems with the supply models currently 
being used by the Defense Logistics Agency and the services. Foremost, 
the models tended to purchase low-cost/high demand items--not 
necessarily those that would most improve readiness rates. This 
occurred because the model forecasted inventory purchases based on 
historical demand for an item and aimed, as a goal, to have that part 
available for the customer 85 percent of the time. Although the report 
noted numerous commercial practices and supply management initiatives 
under way that need to be continued, it also stated that additional 
efforts are required to make better parts investment decisions based on 
readiness. For example, the report cited OSD's continuing efforts to 
help supply managers identify where to focus their resources for 
optimal readiness gains. He also modified the budget justification 
material (budget exhibit) to show the rates at which each major weapon 
system is not available due to supply problems so that funding requests 
submitted to the Congress could be evaluated based on their ability to 
improve readiness. More specifically, the Comptroller made eight 
recommendations for improving inventory and supply readiness, four of 
which are directly aimed at improving efforts to increase investments 
in readiness related spares and link funding requests to readiness 
rates. The four recommendations are as follows:

* The Under Secretary of Defense, Acquisition, Technology, and 
Logistics should ensure that the logistics systems are capable of 
supporting readiness based sparing models and readiness drivers. The 
systems should also support life-cycle cost and trade-off analyses. All 
requests for systems initiatives or Enterprise Resource Planning must 
have Office of the Under Secretary of Defense, Comptroller approval 
through the Financial Management Modernization Plan before investment 
of milestone decisions.

* The Defense Logistics Agency and the military services should 
continue efforts to ensure that high-cost/low-demand weapon system 
items are available when needed.

* Requests for funds to increase inventory investments should be 
justified by corresponding increases in weapon system readiness rates.

* OSD for Program Analysis and Evaluation should continue to 
investigate links between inventory funding levels and readiness to 
establish a readiness outcome metric for use in resource allocation and 
performance measurement processes.

Although these recommendations are aimed at significantly improving 
inventory management and the spare parts investment decision process, 
the Comptroller did not establish milestones for their implementation 
or their performance measures. Without deadlines and performance 
measures, it is uncertain when these recommendations will be 
implemented and what results should be expected. For example, while the 
DOD Comptroller specified how the Defense Logistics Agency and the 
services should report data linking funding to readiness in the 
Financial Management Regulation, the services ability to report this 
information is linked to the status of their efforts to develop 
logistics data systems capable of collecting and performing the 
necessary trade off analyses. As a result, in the February 2003 budget 
submission, the Air Force was able to fully implement this reporting 
recommendation while the Army and Navy did not provide all of the 
desired information (see app. II).

Conclusions:

Due to the significant funding DOD receives annually to provide spare 
parts, the long-standing problems concerning critical spare parts, and 
accountability issues pertaining to the effective tracking of 
investment of these funds, it is important that the department's 
strategic goals and objectives guide its effort to transform the 
logistics system and mitigate spare parts shortages that reduce 
readiness. Although the department has taken several significant steps 
to improve the economy and efficiency of the logistics support system 
and possibly provide valuable information for making future investment 
decisions that may result in better logistics support to the 
warfighter, its Future Logistics Enterprise lacks a specific focus on 
spare parts shortages and some of the elements needed for a strategic 
plan. Without a comprehensive strategic plan linked to subordinate 
plans, the results will likely be less effective or potentially 
duplicative efforts within the Defense Logistics Agency and the 
services. In addition, the lack of a departmentwide goal to address the 
issue of critical spare parts shortages could result in continued spare 
parts shortages that negatively affect readiness. Furthermore, without 
specific initiatives to address critical spare parts shortages that 
links to the strategic plan's goals, objectives, and performance 
measures, the department may be unable to significantly reduce the 
effect of spare parts shortages on readiness and there is no assurance 
that investments in spare parts will be based on the greatest return on 
investment or effect on readiness. Finally, because OSD did not 
establish deadlines or how it would measure progress in implementing 
its August 2002 recommendations to provide Congress with information 
linking increased investments in spare parts inventories to include 
weapon system readiness rates, there is no assurance when this 
information will be available to Congress for use in making future 
funding decisions.

Recommendations for Executive Action:

In order to improve the department's logistics strategic plan to 
achieve results for overcoming spare parts shortages, improving 
readiness, and address the long-standing weaknesses that are limiting 
the overall economy and efficiency of logistics operations, we 
recommend that the Secretary of Defense direct the Under Secretary for 
Acquisition, Technology and Logistics to:

* incorporate clear goals, objectives, and performance measures 
pertaining to mitigating spare parts shortages in the Future Logistics 
Enterprise or appropriate agencywide initiatives to include efforts 
recommended by the Under Secretary of Defense, Comptroller in his 
August 2002 study report;

We also recommend that the Secretary of Defense direct the Under 
Secretary of Defense, Comptroller to:

* establish reporting milestones and define how it will measure 
progress in implementing the August 2002 Inventory Management Study 
recommendations related to mitigating critical spare parts shortages.

Agency Comments and Our Evaluation:

In written comments on this report, DOD generally concurred with the 
intent of the recommendations, but not all of the specified actions we 
recommended. DOD's written comments are reprinted in their entirety in 
appendix III.

In concurring with the intent of our first recommendation, DOD 
expressed concern that because spare parts shortages are a symptom of 
imperfect supply management processes, its plans must focus on 
improving those processes, not the symptoms. According to DOD, the 
Future Logistics Enterprise focuses on achieving improvement through 
three threads: Weapon System Support, End-to-End Warfighter Support, 
and Enterprise Integration. Specifically, End-to-End Warfighter 
Support implements performance based agreements that include goals, 
objectives, and performance measures between the source of supply and 
the customer to eliminate potential gaps in support to ensure the 
readiness of weapons systems. Weapon system support focuses on a fully 
integrated life-cycle development process where weapon system managers 
procure performance of the weapon system including sustainment. 
According to DOD, this represents a major shift in the approach to 
weapon system support by emphasizing purchasing a predetermined level 
of availability to meet the warfighter's objectives rather than buying 
set levels of spares, repairs and data. In addition, DOD said that 
Enterprise Integration enables these transformed supply processes by 
allowing collaboration across the logistics domain and will enhance the 
ability to forecast supply and demand to ensure weapon system 
readiness. Furthermore, efforts recommended by the Under Secretary of 
Defense, Comptroller in his August 2002 study report have already been 
incorporated into the Financial Management Regulation. The 
implementation of the efforts by the Defense Logistic Agency and 
military services will be reviewed within the annual budget 
conferences. Therefore, DOD does not agree that additional goals, 
objectives, and performance measures or additional initiatives are 
needed to mitigate spare parts shortages.

We disagree that the actions taken are sufficient to address our 
recommendation. We believe that modification of the Financial 
Management Regulation reporting requirements along with actions taken 
in response to our second recommendation are sufficient to address the 
recommendations made by the Under Secretary of Defense, Comptroller. 
Furthermore, our report recognizes that the Future Logistics Enterprise 
focuses on transforming DOD's logistics operations and that improving 
logistics processes is part of the solution to mitigating spare parts 
shortages. However, we believe that process improvements alone do not 
meet our recommendation. The intent of our recommendation was for OSD 
to include a focus on mitigating spare parts shortages in either the 
Future Logistics Enterprise or agencywide initiatives. Without a focus 
on mitigating spare parts shortages that includes clear goals, 
objectives, and milestones included in the strategic plan or 
departmentwide initiatives, we believe DOD efforts will not establish 
the framework necessary to assess the department's progress in 
addressing this issue. In addition, without this framework, DOD's 
progress in mitigating spare parts shortages will be limited because it 
efforts may be ineffective or duplicative in mitigating spare parts 
shortages that are critical to equipment readiness. Therefore, we 
continue to believe implementation of our recommended actions is 
necessary for improving readiness of legacy and future weapon systems.

In partially concurring with our second recommendation, DOD stated that 
progress in implementing the Under Secretary of Defense, Comptroller 
recommendations would be measured as an integral component of its 
resource allocation process and that separate reporting milestones are 
not needed. DOD also stated that budget guidance for fiscal year 2005 
will include additional performance metrics that will be further 
refined as the logistics balanced scorecard[Footnote 10] is implemented 
under the Future Logistics Enterprise and Business Management and 
Modernization Program initiatives. Successful implementation of these 
actions and DOD's ongoing development of a balanced scorecard as a 
mechanism for measuring progress in implementing these recommendations 
will meet the intent of our recommendation provided goals, objectives, 
and performance measures pertaining to mitigating spare parts shortages 
are included in the scorecard.

Scope and Methodology:

To determine the adequacy of DOD's current strategic plans to address 
spare parts shortages, we obtained current DOD logistics and strategic 
planning documents that identified guidance on improving spare parts 
support for military readiness.

To determine how adequately the strategic plan addressed spare parts 
shortages, we reviewed the Future Logistics Enterprise and supporting 
documents to ascertain whether the plan addressed mitigating spare 
parts shortages as one of its objectives or goals. We also reviewed the 
Future Logistics Enterprise to determine whether it contained the 
elements necessary for a strategic plan as outlined in the Government 
Performance and Results Act of 1993 (GPRA).[Footnote 11] In addition, 
we interviewed key officials responsible for logistics and strategic 
planning efforts in the Office of the Secretary of Defense and the 
Joint Chiefs of Staff.

To determine how likely the initiatives in the Future Logistics 
Enterprise were to achieve the intended results and contribute to 
mitigating spare parts shortages to improve readiness, we reviewed the 
six initiatives to determine if any had goals and objectives related to 
readiness or mitigating spare parts shortages. We focused our analysis 
on whether the initiatives addressed spare parts shortages and the need 
for quantifiable and measurable performance targets as identified in 
GPRA. In addition, we interviewed officials responsible for each of the 
initiatives within the Office of the Secretary of Defense.

To determine the extent to which the department can identify the effect 
of increased funding for spare parts on readiness, we reviewed the 
Inventory Management Study completed in August 2002. In addition, we 
interviewed officials at the Office of the Secretary of Defense to 
determine the status of efforts to establish a link between funding for 
spare parts and readiness.

Further, we compared the Future Logistics Enterprise initiatives to 
GAO's High Risk Series and GPRA to determine if the initiatives 
contained (1) a clear mission and vision, (2) specific objectives and 
attributes linked to spare parts and readiness, (3) milestones, and (4) 
performance metrics and reporting requirements. We also coordinated our 
efforts with the four other GAO engagements evaluating strategic 
planning documents and initiatives for mitigating spare parts shortages 
within the Defense Logistics Agency, Army, Navy, and Air Force.

We performed our review from July 2002 through May 2003 in accordance 
with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Defense and 
other interested congressional committees and parties. We will also 
make copies available to others upon request. In addition, the report 
will be available at no charge on the GAO Web site at http://
www.gao.gov.

Please contact me on (202) 512-8365 if you or your staff have any 
questions concerning this report. Major contributors to this report are 
included in appendix III.

Sincerely yours,

William M. Solis, 
Director 
Defense Capabilities and Management:

Signed by William M. Solis: 

[End of section]

Appendix I: Initiatives Included in the Future Logistics Enterprise:

The following six initiatives represent the department's integrated 
approach to accelerate logistics improvement, enhance support to the 
warfighter, and align logistics processes with the operational demands 
of the 21st century.

Initiative: Weapon System Support:

Initiative: Depot Maintenance Partnership; Objective/goals: Increase 
the level of public-private partnerships resulting in; * greater 
private sector investment; * better facility utilization; * reduced 
ownership cost; * workforce integration; * more efficient business 
processes; * greater credibility, and; * more collegial working 
relationship with Congress.; Accomplishments/additional actions: 
Accomplishments: * Legislative changes included in the National 
Defense Act for fiscal year 2002; * Policy memorandum promulgated; * 
Three Legislative Proposals under consideration; * Service 
implementation plans; Additional Actions: * Develop reports and 
measures.

Initiative: Condition Based Maintenance Plus; Objective/goals: 
Increase operational availability and readiness throughout the weapon 
system life cycle at a reduced cost.; Accomplishments/additional 
actions: Additional Actions: * Draft policy completed; * Incorporated 
in DOD 5000 series; * Service implementation plans.

Initiative: Total Life Cycle System Management; Objective/goals: 
Improve weapon system sustainment through; * timely acquisition of 
weapon systems; * meeting warfighter performance requirements; * 
integration of sustainment and maintainability during the acquisition 
process, and; * weapon system sustainment to meet warfighter 
performance requirements at a best corporate value.; Accomplishments/
additional actions: Accomplishments: * Improved Defense Acquisition 
University curriculum; * Service Performance Based Logistics 
implementation schedules; * Revised DOD publications 5000.1.5000.2; * 
Additional Actions: * Develop financial mechanisms with Under 
Secretary of Defense.

Initiative: Customer Service:

Initiative: End-to-End Distribution; Objective/goals: Streamlining 
warfighter support by providing material from the source of supply or 
point of origin to the point of use or disposal on a worldwide basis. 
The intent is to influence acquisition, sourcing, positioning, and 
transportation to facilitate the flow of material and ensure that 
deployment and sustainment are synchronized.; Accomplishments/
additional actions: Accomplishments: * Identify additional 
improvements in the management of end-to-end distribution; * Additional 
Actions: * Synchronize policies and initiatives for end-to-end 
distribution; * Advocate greater consideration of distribution in 
acquisition decisions.

Initiative: Executive Agents; Objective/goals: Assess and align 
Executive Agent designations with warfighter requirements arising from 
the National Defense Strategy.; Accomplishments/additional actions: 
Additional Actions: * Prepare a schedule for assessing potential EA 
assignments for construction and medical material; * Prepare Concept of 
Operations and draft DOD directives for bulk petroleum and subsistence; 
* Complete initial analyses of emerging Executive Agents.

Initiative: Enterprise Integration:

Initiative: Enterprise Integration; Objective/goals: Create highly 
trained and skilled people within DOD logistics enterprise to have 
access to near real time, actionable information from modern, 
commercially based software produces that will enable reengineered 
logistics processes and business rules.; Accomplishments/additional 
actions: Additional Actions: * Incorporate Triangle Working Groups 
plans of action and milestones; * Implement phase two of fact finding 
review of Enterprise Initiatives; * Draft Policy Recommendations.

[End of table]

Source: GAO.

[End of section]

Appendix II: Inventory Investment Budget Submission Material:

February 2003 Working Capital Fund Budget submissions for the Air 
Force, Army, and Navy provide an example of the information reported by 
each service pertaining to inventory investment.

[See PDF for image]

[1] NMCSR - Not Mission Capable Supply Rate is the percentage of time a 
weapon system is down for parts. Assuming no other factors impact 
aircraft availability, then the aircraft availability is computed 1 
minus NMCSR. NMCSR is computed only for weapon systems. NMCSR is not 
computed for weapon system parts such as engines.

Legend:

SOF - Special Operating Forces:

Common EW - Common Electronic Warfare1:

NIMSC5 - Nonconsumable Item Material Support Code 5:

Legend:

MSE - Mobile Subscriber Equipment:

MLRS - Multiple Launch Rocket System:

HMMWV - High Mobility Multipurpose Wheeled Vehicle:

Legend:

SNT - Serial Number Tracking:

NIS PBL - Not In Stratification Performance Based Logistics:

PBL Savings - Performance Based Logistics Savings:

LECP - Logistics Engineering Change Proposal:

[End of figure]

[End of section]

Appendix III: Comments from the Department of Defense:

DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS 
3500 DEFENSE PENTAGON WASHINGTON, DC 20301-3500:

JUN 23 2003:

Mr. William Solis, Director:

Defense Capabilities and Management U.S. General Accounting Office:

441 G Street, N.W. Washington, DC 20548:

Dear Mr. Solis:

This is the Department of Defense (DoD) response to the GAO draft GAO-
03-707, "DEFENSE INVENTORY: The Department Needs a Focused Effort to 
Overcome Critical Spare! Parts Shortages," dated May 15, 2003 (GAO Code 
350252). The DoD generally concurs with 
the intent of the recommendations but does not concur with the approach 
recommended by the GAO.

Detailed comments on the draft report recommendations are included in 
the enclosure. The DoD appreciates the opportunity to comment on the 
draft report.

Sincerely,

Allen W. Beckett 
Principal Assistant:

Signed by Allen W. Beckett: 

Enclosure:

GAO DRAFT REPORT - DATED MAY 15, 2003 GAO CODE 350252/GAO-03-707:

"DEFENSE INVENTORY: The Department Needs a Focused Effort to Overcome 
Critical Spare Parts Shortages":

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:

RECOMMENDATION 1: In order to improve the Department's logistics 
strategic plan to achieve results for overcoming spare parts shortages, 
improving readiness, and address the long-standing weaknesses that are 
limiting the overall economy and efficiency of logistics operations, 
GAO recommended that the Secretary of Defense direct the Under 
Secretary of Defense for Acquisition, Technology and Logistics 
incorporate clear goals, objectives, and performance measures 
pertaining to mitigating spare parts shortages in the Future Logistics 
Enterprise or appropriate agency wide initiatives to include efforts 
recommended by the Under Secretary of Defense (Comptroller) in his 
August 2002 study report. (p. 16/GAO Draft Report):

DoD RESPONSE: Concur with intent. Spare parts shortages are a symptom 
of imperfect supply chain processes. In order to eliminate the problem 
causing the symptom, improvement plans must focus on improving the 
processes rather than on the symptoms. The Future Logistics Enterprise 
correctly focuses on three threads: Weapon Systems Support; End-to-End 
Warfighter Support; Enterprise Integration. The Future Logistics 
Enterprise transforms the overall logistics processes. End-to-End 
Warfighter Support is implementing performance based agreements between 
the source of supply and the customer to eliminate potential gaps in 
support to ensure the readiness of weapon systems. Goals, objectives, 
and performance measures are included in performance based agreements 
as they are established. Weapon system support focuses on a fully 
integrated life-cycle development process where weapon system managers 
procure performance of the weapon system including sustainment. This 
major shift from the traditional approach to performance based 
logistics and weapon system support emphasizes purchasing a 
predetermined level of weapon system availability to meet the 
warfighter's objectives rather than buying set levels of spares, 
repair, and data. Enterprise Integration enables these transformed 
supply chain processes through the use of modern Commercial Off-The-
Shelf systems now being; implemented across the DoD logistics domain. 
These collaboration tools enhance the capability to forecast supply and 
demand to ensure weapon system readiness. The recommendation by the 
OUSD(C) in his August 2002 study report has already been incorporated 
into the Financial Management Regulation (FMR) and Military Service and 
Defense Logistics Agency implementation of that recommendation will be 
reviewed within the annual budget conferences. Therefore, we do not 
agree that additional goals, objectives, and performance measures or 
additional initiatives are needed to mitigate spare parts shortages. No 
further direction is required and action consistent with this 
recommendation is complete.

RECOMMENDATION 2: The GAO recommended the Under Secretary of Defense, 
Comptroller, establish reporting milestones and define how it will 
measure progress in 
implementing the August 2002 Inventory Management Study recommendations 
related to mitigating critical spare parts shortages. (p. 16/GAO Draft 
Report):

DoD RESPONSE: Partially concur. Progress will be measured as an 
integral component of the Department's resource allocation process. The 
budget guidance for the FY 2005 updated estimates will include 
additional performance metrics that will be further refined as the 
Under Secretary of Defense (Acquisition, Technology and Logistics) 
implements the logistics balanced scorecard under the Future Logistics 
Enterprise and Business Management and Modernization Program 
initiatives. Given the ongoing initiatives for performance metrics 
across the Department, separate reporting milestones are not necessary 
for this initiative and action consistent with this recommendation is 
complete.

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Richard G. Payne (757) 552-8119 John Wren (757) 552-8235:

Acknowledgments:

In addition to those named above, Latrealle Lee, Margaret Giammarco, 
Marjorie Jane Hunt, and Barry L. Shillito also made significant 
contributions to this report.

FOOTNOTES

[1] Critical spare parts shortages refer to supply items that cause a 
degradation of the readiness status of the associated weapon system or 
equipment.

[2] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: 
January 2003).

[3] U.S. General Accounting Office, Defense Inventory: Air Force Item 
Manager View of Repair Parts Issues Consistent With Issues Reported in 
the Past, GAO-03-684R (Washington, D.C.: May 21, 2003); Defense 
Inventory: The Army Needs a Plan to Overcome Critical Spare Parts 
Shortages, GAO-03-705 (Washington, D.C.: June 27, 2003); Defense 
Inventory: Air Force Plans and Initiatives to Mitigate Spare Parts 
Shortages Need Better Implementation, GAO-03-706 (Washington, D.C.: 
June 27, 2003); Defense Inventory: Navy Logistics Strategy and 
Initiatives Need to Address Spare Parts Shortages, GAO-03-708 
(Washington, D.C.: June 27, 2003); and Defense Inventory: Several 
Actions Are Needed to Further DLA's Efforts to Mitigate Shortages of 
Critical Parts, GAO-03-709 (forthcoming).

[4] Pub.L. 103-62, Aug. 3, 1993. 

[5] U.S. General Accounting Office, Defense Logistics: Strategic 
Planning Weaknesses Leave Economy, Efficiency and Effectiveness of 
Future Support Systems at Risk, GAO-02-106 (Washington, D.C.: October 
11, 2001).

[6] Pub.L. 106-65, Oct. 5, 1999.

[7] GAO-03-98.

[8] GAO-02-106.

[9] GAO-03-709.

[10] The balanced scorecard links strategic goals, strategies, 
objectives and performance measures to an organization's strategic 
plan.. 

[11] Pub.L. 103-62, Aug. 3, 1993. 

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