	DOD Inventory Management Overview

The Defense Logistics Agency (DLA) is the primary manager of DOD’s consumable items and acts as the custodian of military aircraft, ship, and vehicle parts. Ordering supplies only as they are needed, combined with quick logistics response times, enable companies to reduce or eliminate inventory levels, buy only the items that are currently needed, reduce or eliminate the possibility of inventory spoilage or obsolescence, and reduce overall supply system costs. DOD Has Achieved Success With Medical and Food Prime Vendor Programs

Starting in 1993, DOD has successfully applied the prime vendor concept to its management of medical supplies. 1). Food and Clothing Prime Vendor Programs

As with medical supplies, DLA’s use of prime vendors for food has reduced DOD logistics costs and improved customer service. This test is expected to continue for 2 more years. DOD Uses Inefficient and Ineffective Management Techniques for Hardware Items

DOD’s use of best practices is least advanced for hardware items (such as bearings, valves, and bolts), which represent 97 percent of DLA’s inventory items. DOD continues to use outdated and inefficient business practices that require DOD to buy and store hardware items in DLA warehouses and base-level supply systems in an attempt to ensure that inventory will be available to customers. When hardware supplies and other parts are not immediately available to mechanics, it delays the timely repair of weapon systems and their components. DOD Could Build on Efforts to Adopt Best Practices for Hardware Items

To its credit, DLA has tried new inventory practices for managing hardware items. However, the efforts are limited in scope and represent only a small part of its logistics operations. To attain the same level of success that DOD has achieved with the medical prime vendor program and to realize the dramatic inventory reductions and infrastructure savings we have seen in the private sector, we believe DOD should expand the prime vendor concept and fully use the services offered by prime vendor and integrated supplier programs. This percentage has not varied much since 1992. We estimate these demonstration projects will account for about 2 percent of DLA’s $3.1 billion annual sales of hardware items. Figure 5 illustrates the potential impact an integrated supplier program could have on the traditional DOD supply system for hardware supplies. Objectives of Recently Introduced Legislation Can Be Met Through the Use of Best Practices

Several legislative proposals have been introduced this year in Congress relating to inventory management and the adoption of best commercial practices. If DOD were to aggressively pursue best practices in the form of an integrated supplier concept for consumable items, DOD could reduce its work force involved in procurement, storage, and distribution of consumable items. However, DOD has accomplished the goal for medical supplies through the use of the prime vendor program in that DLA reduced the rate for medical supplies from 21.7 in fiscal year 1992 to 7.9 percent in fiscal year 1997. Inventory Management: DOD Can Build on Progress in Using Best Practices to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug. 4, 1995). 13, 1994). Each day, GAO issues a list of newly available reports and testimony.
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed the Department of Defense's (DOD) use of innovative business practices to improve inventory management and the opportunities GAO sees for further application of best practices to DOD's operations, focusing on: (1) the success DOD has had in using prime-vendor-type programs for medical, food, and clothing items; (2) the feasibility of using prime vendor systems for hardware items (such as bearings, valves, and bolts); and (3) recently introduced legislation that pertains to improving DOD's inventory management practices.

What GAO Found

GAO noted that: (1) DOD has successfully applied best practices to improve the management of medical and food items, which account for 2 percent of the consumable items DOD manages; (2) DOD's prime vendor program for medical supplies, along with other DOD inventory reduction efforts, has resulted in savings that GAO estimates exceed $700 million; (3) more importantly, this program has moved DOD out of the inventory storage and distribution function for these supplies, emptying warehouses, eliminating unnecessary layers of inventory, and reducing the overall size of the DOD supply system; (4) also, DOD buys only the items that are currently needed because consumers can order and receive inventory within hours of the time the items are used; (5) despite the success of its prime vendor program for medical supplies and, to a lesser extent, food items, DOD has made little progress in adopting best practices for hardware supplies, which account for 97 percent of the consumable items; (6) DOD continues to manage hardware items using inefficient and outdated business practices, which have resulted in excessive inventory levels, poor customer service, and delays in the repair of expensive military equipment; (7) although the private sector has developed solutions to these problems, DOD's efforts to adopt such practices are limited in scope and represent only a small part of its logistics operations; (8) since 1991, GAO has issued a series of reports highlighting best practices GAO believes have direct application to DOD's operations; (9) however, DOD has not applied these best practices to the majority of DOD consumable items, and inefficiencies in DOD's logistics systems remain; (10) in this context, proposed legislative initiatives, if enacted, would encourage DOD to change its inventory management practices; (11) also, congressional oversight will continue to be a critical element as DOD establishes plans, goals, objectives, and milestones for addressing its inventory management processes; (12) GAO strongly supports the need to improve DOD's business practices and further reduce the logistics infrastructure; and (13) because of the potential impact improved business practices would have on DOD inventory levels, operating costs, and the repair of weapon systems and component parts, GAO believes DOD must be more aggressive in expanding the use of new management techniques for these items.