DOD Continues to Use Inefficient and Ineffective Management Techniques for Hardware Items

DOD continues to use outdated and inefficient business practices to manage its hardware inventory. For example, DOD buys inventory years in advance of when the items are actually used. Based on our analyses of DLA records, 62 percent of DLA’s hardware items did not have a demand from September 1995 to August 1996 (see fig. 1). We found an additional  21 percent of DLA’s hardware items had enough inventory on hand to last for more than 2 years based on demands during the same period. These items accounted for about $4.4 billion, or 77 percent, of DLA’s $5.7 billion hardware inventory. Despite this large investment in inventory, DOD’s supply system frequently does not meet the needs of its customers. When hardware items are not immediately available to mechanics, the repair of weapon systems and their components is delayed, which increases repair times. For example, the Navy calculates that the lack of parts increases the repair time for aviation parts by as much as 74 percent. In general, these concepts provide inventory users with a capability to order supplies as they are needed and then receive those items within hours after an order is placed. Ordering supplies only as they are needed, combined with quick logistics response times, enable companies to reduce or eliminate the possibility of inventory spoilage or obsolescence and reduce overall supply system costs. DOD Could Build on Efforts to Use Best Practices for Hardware Items

To its credit, DLA has tried new inventory practices for managing hardware items. To achieve greater inventory reductions, infrastructure savings, and improved customer service that we have seen in the private sector, we believe DOD needs to expand its use of private sector inventory practices, such as prime vendors and integrated suppliers, and use the full range of services offered under these programs. 5). DOD Has Applied a Limited Form of the Prime Vendor Concept to Hardware Items

In fiscal year 1997, DOD began using a prime vendor concept, called the Virtual Prime Vendor program, for hardware supplies on a limited basis. We estimate that DOD’s programs, when implemented, will apply to about 2 percent of DLA’s $3.1 billion annual sales of hardware items. DOD personnel still order, receive, store, and distribute material to the end users. Recommendations

To encourage DLA and the services to more aggressively apply best practices to its operations, we recommend that the Secretary of Defense: Identify a “Champion of Change” within the Office of the Secretary of Defense that would be responsible for coordinating and overseeing improvement initiatives throughout DOD’s operations and ensuring the prime vendor and integrated supplier concepts (1) encompass a broader part of DOD’s operations, (2) fully use the services offered in the private sector, and (3) are used by all military services whenever it is cost effective to do so. GAO Comment

1. Inventory Management: DOD Can Build on Progress in Using Best Practices to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug. 4, 1995).
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) progress in adopting inventory management practices for hardware items, focusing on: (1) DOD and private-sector practices for managing hardware items; (2) whether DOD has adopted best practices for these items; and (3) opportunities that DOD can take advantage of to improve its management of hardware items.

What GAO Found

GAO noted that: (1) while DOD has implemented some innovative management practices, more opportunities exist to better manage its reported $5.7-billion hardware inventory and achieve substantial savings; (2) DOD continues to manage its hardware inventory using outdated and inefficient business practices that create unnecessary inventory levels, provide poor customer service, generate excess and obsolete inventory, and cost approximately $1 billion per year to manage and distribute; (3) DOD buys hardware inventory years in advance of when the items are actually used; (4) for example, based on GAO's analysis of DOD records, 62 percent of DOD's hardware items did not have a demand from September 1995 to August 1996, and an additional 21 percent of the items had enough inventory to last for more than 2 years; (5) these items account for about $4.4 billion, or 77 percent, of DOD's $5.7-billion hardware inventory; (6) despite DOD's substantial investment in inventory, in many cases, hardware inventory is not available when needed by DOD customers; (7) when this happens, the repair of weapon systems and components is often delayed; (8) the Navy has estimated that the lack of parts increases the repair time for aviation parts by as much as 74 percent; (9) DOD's overall progress in adopting best management practices for hardware items has been limited; (10) in February 1997, DOD began testing, on a limited basis, the prime vendor concept for hardware items--one of the concepts GAO recommended; (11) these tests will potentially affect about 2 percent of DOD's $3.1-billion annual sales of these items; (12) these tests do not, however, fully optimize the services available in the private sector, such as ordering, storing, and distributing supplies to the customer; (13) the business practices GAO recommended in its past reports have, for the most part, been used in the private sector to provide customers with a capability to order supplies as they are needed; (14) ordering supplies as they are needed, combined with quick logistics response times, reduces overall supply system costs, eliminates large inventories, and enables companies to reduce or eliminate the possibility of ordering supplies that may not be needed or become obsolete; and (15) to achieve similar inventory reductions, infrastructure savings, and improved customer service, DOD could expand its prime vendor programs to include tasks such as ordering, storing, and distributing supplies to the customer, and fully use the services offered under these programs.