While DOD maintains military forces with unparalleled capabilities, timely  supply support is critical to sustaining these forces as they are trained and  deployed to protect our national security. For example, to support  Operation Iraqi Freedom (OIF), DOD moved more than 2 million tons of  cargo—including equipment, spare parts, supplies, and other items— thousands of miles to the Persian Gulf. For example, at the end of fiscal year 2004,  DOD had approximately $77.4 billion worth of items in its inventory, an  increase of over $15 billion since fiscal year 2001, when DOD had  approximately $62.3 billion worth. DOD estimates that the annual costs of  supplies and associated operations for fiscal year 2005 are expected to be  $51.4 billion, or about 12 percent of DOD’s $419 billion requested budget. Supply Chain Management Is a High-Risk Area Because of Long- Standing Weaknesses

For 15 years, DOD’s supply chain management processes have been on our  list of high-risk areas needing urgent attention because of long-standing  systemic weaknesses that we have identified in our reports. These problems included excess inventory levels, inadequate controls over  items, and cost overruns. Since  then, our work has shown that the problems adversely affecting supply  support to the warfighter— such as requirements forecasts, use of the  industrial base, funding, distribution, and asset visibility—were not  confined to the inventory management system, but also involved the entire  supply chain. DOD’s Plan Is a Good Start toward Resolving Supply Chain Management Weaknesses that Will Require Continued Diligence to Succeed

DOD’s plan to improve supply chain management provides a good start  and framework for addressing long-term systemic weaknesses in DOD’s  supply chain management and for focusing the multiyear effort that will be  needed to improve supply support to the warfighter. Our assessment of DOD’s plan to improve its supply chain management is  based on work we have performed, prior recommendations, and the  criteria cited in our November 2000 report on determining performance  and accountability challenges and high risks. We use these criteria to  assess an agency’s progress toward resolving a high-risk problem and  determine whether to remove the high-risk designation. Does DOD’s plan demonstrate a strong commitment and top leadership  support to improve supply chain management? Therefore, it is important for  the department to obtain the necessary resource commitments from the  military services; the Defense Logistics Agency; and other organizations,  such as U.S. Transportation Command, to ensure that the numerous  initiatives on which the multiyear plan depends are properly supported. DOD’s plan for improving supply chain management addresses some of  the root causes for problems in three key areas with potentially effective  solutions that it may be able to fully implement over the next few years. By  committing to improve requirements forecasting, material distribution,  and asset visibility in this plan, DOD has focused its efforts on three areas  we frequently identified as impeding effective supply chain management. DOD’s second step is to rely on independent groups,  such as contractors and the Department of Defense Office of Inspector  General, to validate the data, and GAO to monitor the department’s  progress in improving supply chain management as part of its planned  audits. GAO Has Plans to Follow Up on DOD’s Supply Chain Improvement Efforts

As part of our periodic reassessment of high-risk areas across the federal  government, we will be assessing DOD’s progress in resolving supply  chain management and its other high-risk areas. We plan to follow up on DOD’s supply chain  management improvement efforts in three ways. First, as a matter of  routine practice we will continue assessing DOD’s progress in  implementing the recommendations made in our prior reports. Second, we  also anticipate evaluating several of DOD’s supply management activities  as part of our planned engagements over the next 2 years. We expect to meet periodically with these representatives in the  future to coordinate audit coverage of the initiatives, performance metrics,  and data system validity while minimizing audit duplication.
Why GAO Did This Study

Since 1990 the Department of Defense's (DOD) supply chain management processes have been on GAO's list of high-risk areas needing urgent attention and fundamental transformation to ensure that they function in the most economical, efficient, and effective manner possible. Recently in collaboration with the Office of Management and Budget (OMB), DOD developed a plan to address some of the systemic weaknesses as a first step toward removing supply chain management from the list. DOD's plan focuses on three areas for improvement: accuracy of supply requirements forecasts, distribution of material, and asset visibility. GAO was asked to provide its views on (1) the importance of supply chain management in DOD, (2) why GAO listed it as a high-risk area, (3) GAO's assessment of DOD's plan to improve supply chain processes, and (4) GAO's plans to follow up on DOD's efforts. This testimony contains GAO's views on what remains to be done to improve DOD's supply chain management and bring about lasting solutions. Continued efforts to complete and implement DOD's plan as well as continued oversight by Congress are essential.

What GAO Found

It is important for DOD to have effective supply chain management because of (1) its impact on military readiness and operations and (2) the substantial investment in inventory. While DOD maintains military forces with unparalleled capabilities, timely supply support is critical to sustaining them. For example, to support Operation Iraqi Freedom, DOD moved more than 2 million tons of cargo, but shortages of items such as vehicle track shoes and tires hampered operations. In addition, DOD spends billions on supplies. For example, its supply inventory levels have grown in recent years from $62.3 billion in fiscal year 2001 to $77.4 billion in fiscal year 2004. DOD expects to spend approximately $50 billion in fiscal year 2005 for such items and associated operations. In 1990, we identified DOD's inventory management processes as "high risk" because of long-standing problems such as excess inventory levels, inadequate controls, and cost overruns. Since then, GAO's work has shown that the problems adversely affecting supply support to the warfighter involved the entire supply chain. As a first step toward removing supply chain management from GAO's high-risk list, DOD in cooperation with OMB prepared a plan to address weaknesses in three key areas: accuracy of supply requirements forecasts, distribution of material, and asset visibility. DOD's plan to improve supply chain management provides a good start and framework for addressing long-term systemic weaknesses and in focusing the multiyear effort to improve supply support to the warfighter. However, successful resolution of DOD's supply chain management problems will require continued efforts to complete and successfully implement the plan. Based on GAO's criteria for removing programs from the high-risk designation, it is important for DOD to sustain top leadership commitment and long-term institutional support for the plan; obtain necessary resource commitments from the military services, the Defense Logistics Agency, and other organizations; implement proposed improvement initiatives across the department to address root causes; identify performance metrics and valid data to use in monitoring the initiatives; and demonstrate progress toward meeting performance targets. As part of GAO's periodic reassessment of high-risk areas across the federal government, GAO will be assessing DOD's progress in resolving supply chain management and its other high-risk areas. GAO plans to follow up on DOD's actions to improve supply chain management in three ways. First, GAO will assess DOD's progress in implementing recommendations made in prior GAO reports. Second, GAO anticipates evaluating several of DOD's supply management activities as part of our planned engagements over the next 2 years. Third, GAO expects to work with other audit agencies,, as well as DOD and OMB, to coordinate audit coverage of the initiatives, metrics, and data system validity.