DLA’s Management of Supply, Storage, and Distribution Functions at DOD’s Industrial Sites

As a result of the 2005 BRAC round and a June 2005 administrative  decision by the Under Secretary of Defense for Acquisition, Technology,  and Logistics, the services were required to transfer to DLA all of their  supply, storage, and distribution functions at depot-level industrial sites. Specifically, over a five-year period  between January 2010 and April 2015, DLA data shows that the ALCs  experienced a 20 percent reduction in on-hand inventory while also  reducing backorders by 10 percent, and reducing the number of end  items awaiting parts by 20 percent. Officials also expressed concern  over losing visibility of retail inventory if DLA is allowed to manage retail  warehouses. Congress, in the  House Report accompanying a bill for the National Defense Authorization  Act for Fiscal Year 2014, mandated the Secretary of Defense conduct an  assessment of the roles and missions of DLA. DLA and the Services Have Adopted Metrics Assessing Customer Service, but Do Not Have Metrics Needed to More Effectively and Efficiently Manage Operations

DLA and the services have adopted and review customer service metrics  that measure the timely availability of spare parts for depot maintenance  operations, but do not have metrics that allow them to fully assess the  effectiveness and efficiency of supply operations. However, while DLA and the services have some internal efficiency  measures, they generally have not adopted metrics that measure the  accuracy of planning factors that are necessary to plan efficient and  effective support of depot maintenance. Additionally, the services and  DLA do not track the potentially significant costs created by a backorder  (i.e., disruption costs) to supply and depot maintenance operations, which  may prevent DLA and the services from optimizing supply and  maintenance operations and may improve the efficiency and  effectiveness of depot maintenance. Ultimately, the  costs of inaccurate planning factors are both excess inventory and  backorders. DOD actions in response to the 2005 BRAC recommendation to  transfer supply, storage, and distribution functions at these sites from the  services to DLA have had some positive effects at the Air Force ALCs  and the Navy FRCs, but the services could take additional steps to  ensure they realize the possible benefits of further transfers of retail  functions. Without conducting business case  analyses that, among other things, draw on lessons learned from the  experiences at the ALCs and FRCs—as well as the failed implementation  at Norfolk Naval Shipyard—the Army and Marine Corps depots and Navy  shipyards are not positioned to know what could be gained by further  transferring retail functions to DLA and the department is unable to  determine the degree to which the retail supply functions should be  transferred to DLA. Recommendations for Executive Action

To increase department-wide supply chain efficiencies and effectiveness  in support of maintenance at the Army and Marine Corps depots and  Navy shipyards, we recommend that the Secretary of Defense direct the  Assistant Secretary of Defense for Logistics and Materiel Readiness, in  conjunction with the Director, Defense Logistics Agency, and the  Secretaries of the Army and Navy and the Commandant of the Marine  Corps to take the following two actions: assess through a comprehensive business case analysis–drawing on  lessons learned from previous efforts–the costs and benefits of DLA  managing the retail supply, storage, and distribution functions at the  Army and Marine Corps depots and Navy shipyards; and use the analysis to make a decision on the degree to which DLA  should manage these functions at the Army and Marine Corps depots  and Navy shipyards. In written  comments, DOD concurred with our six recommendations. Appendix I: Scope and Methodology

To assess the extent to which the services transferred retail supply,  storage, and distribution functions at Department of Defense (DOD)  industrial sites to the Defense Logistics Agency (DLA), and whether the  results have been used to inform future efforts, we reviewed Office of the  Secretary of Defense (OSD), DLA, and service guidance, and  documentation related to retail inventory management at service  industrial sites; we conducted interviews with officials from OSD, DLA,  service materiel commands, and service industrial sites; and, visited 7 of  17 service industrial sites to observe maintenance operations and retail  inventory processes. This could reflect the  “growing pains” of transitioning to IMSP, as Air Force Air Logistics  Complex (ALC) officials noted that it took them more than 2 years to work  through the initial implementation challenges of fully transferring the retail  supply function to DLA’s information systems and processes. 2 requires the use of collaboration to improve the accuracy  of forecasts.
Why GAO Did This Study

DOD manages approximately $97 billion of inventory. To enhance efficiency and effectiveness, the 2005 base realignment and closure round and a June 2005 decision by the Under Secretary of Defense for Acquisition, Technology, and Logistics required the military services to transfer to DLA all of their retail inventory supply, storage, and distribution functions at most depot-level industrial sites.
Senate Report 114-49, accompanying a bill for the National Defense Authorization Act for Fiscal Year 2016, included a provision for GAO to examine DLA's supply support to DOD industrial sites.
This report evaluates the extent to which (1) the services have transferred retail supply, storage, and distribution functions at DOD industrial sites to DLA, and whether the results have been used to inform future efforts, and (2) DLA and the services have adopted metrics that allow them to effectively and efficiently manage supply and maintenance operations. GAO reviewed DOD, DLA, and service guidance and documentation; evaluated DLA and service processes; and interviewed officials.

What GAO Found

The military services have, to varying degrees, transferred retail supply, storage, and distribution functions at their depot-level industrial sites to the Defense Logistics Agency (DLA) and achieved some efficiencies, but have not fully assessed the costs and benefits of transferring more retail functions to DLA at Army and Marine Corps depots and Navy shipyards. Specifically, Air Force Air Logistics Complexes (ALC) and Navy Fleet Readiness Centers (FRC) transferred all retail supply, storage, and distribution functions to DLA over the course of several years. For example, according to officials and GAO's assessment, these changes have led to a number of benefits, including a 20 percent reduction in on-hand inventory and a 10 percent reduction in backorders at the Air Force ALCs over a 5-year period (see figure for examples of benefits).
By contrast, the Army and Marine Corps have retained most supply functions at their depots and DLA manages inventory at the Navy shipyards while still using Navy systems and processes, rather than those of DLA. The Navy and DLA began to transition to DLA business processes and systems at Norfolk Naval Shipyard in 2012, but the Navy reversed course after 7 months when it resulted in increased waits for inventory and work stoppages. Meanwhile, DLA is pursuing limited steps to improve retail supply, storage, and distribution functions at the industrial sites to improve supply support and overcome service concerns. However, the Department of Defense (DOD), DLA, Army, Navy shipyards, and the Marine Corps have not conducted business case analyses on the benefit of additional transfers of retail functions, though the Army is planning to conduct one. Without such analyses, decision makers will not be positioned to ensure that further transfers of retail functions, if warranted, are efficient and effective.
DOD, DLA and the services have some internal efficiency measures, but they generally do not have metrics that would allow for more effective and efficient management of supply and maintenance operations. Specifically, DOD, the services and DLA have not adopted metrics on the accuracy of planning factors, such as the accuracy of part lists, or the costs created by backorders. Officials noted that accurate planning factors improve demand forecasts needed to minimize backorders and excess inventory. Without relevant metrics on cost and planning factors, DOD, DLA and the services will be unable to optimize supply and maintenance operations and may miss opportunities to improve the efficiency and effectiveness of depot maintenance.

What GAO Recommends

GAO is making six recommendations including that DLA, the Army, Navy shipyards, and Marine Corps conduct business case analyses, drawing on lessons learned, to determine if further transfer of retail functions is warranted, and that DOD, DLA, and the services develop metrics to monitor costs and accuracy of demand planning factors. DOD concurs with GAO's recommendations.