The OUSD Comptroller establishes the policies and procedures for  DOD’s financial management, including the Defense-wide Working  Capital Fund. As part of this role, the OUSD Comptroller provides  guidance in DOD’s Financial Management Regulation to operate the  Defense-wide Working Capital Fund and to set prices for commodities  and services that are to reimburse the fund. DLA Has Contributed to Reductions in Costs and Has Maintained Fairly Constant Prices for Commodities since 2009

Since fiscal year 2009, DLA has contributed to reductions in the costs to  provide its commodities and has maintained fairly constant prices for  them. When developing annual budgets, DLA has also  generally underestimated revenue for commodities, which has contributed  to gains that were subsequently applied as reductions to future prices. DOD has taken steps to address weaknesses  in this forecasting for commodities through the implementation of the  department’s Comprehensive Inventory Management Improvement  Plan. Such  revenue gains have contributed to the marginal increases in DLA’s annual  prices for commodities by offsetting inflationary increases in material  costs and the relatively smaller revenue losses of fiscal years 2013 and  2014, among other things. DLA Has Contributed to Overall Reductions in Costs but Has Often Significantly Increased Prices for Its Distribution Services

Between fiscal years 2011 and 2015, DLA has contributed to reductions  by about 25 percent in its overall operating costs for providing distribution  services, in part, through the use of existing authorities to reduce  infrastructure, while the indirect portion of these costs increased by 9.4  percent. However, DLA has  consistently overestimated revenue since fiscal year 2009 for distribution  services, which resulted in losses that DLA must eventually recover in  future year prices. In addition, according to DLA officials, they found  instances where the military departments had moved storage workload  from DLA’s distribution centers to their own storage facilities. DOD Could More Efficiently Use Its Distribution Centers, Including Those That DLA Operates

DOD has taken steps to increase the use of its U.S. distribution centers,  but additional opportunities exist to more efficiently use this network of  distribution centers, including those that DLA operates. In January 2017, the department  revised DOD Instruction 5000.02, Operation of the Defense Acquisition  System, to require that program managers who are responsible for  contracts with DOD maintenance depots store government-owned  inventory at DLA’s distribution centers when located in the same  geographic area as those depots. Specifically, DOD  previously identified inefficiencies, including overlapping and duplicative  distribution service functions, across its distribution network. In the context of distribution infrastructure, Strategic Network Optimization  program officials identified in 2011 that DLA and the military departments  provided distribution services—including storage and processing—at 256  distribution centers in the United States that often are in close proximity to  one another and, in some cases located on the same installations. In October 2014, DOD discontinued the Strategic Network Optimization  program. We found  that DOD had not assessed the extent to which it could use existing  authorities to minimize unnecessary overlap and duplication and more  efficiently use the department’s network of U.S. distribution centers,  beyond the actions DLA has already taken. However, other DOD  components could assess and implement similar actions as DLA using  existing authorities. Further, in discussing the current fiscal pressures  and budgetary constraints within the department and the need to reduce  lower priority programs to comply with the Bipartisan Budget Act, DOD’s  budget overview for fiscal year 2017 states that “the need to reduce  unneeded facilities is so critical that in the absence of authorization for a  new round of base realignment and closure, the department will explore  any and all authorities that Congress has provided to eliminate wasteful  infrastructure.” While these actions may not entirely address  inefficiencies in its network of U.S. distribution centers, they could achieve  efficiencies and potential cost savings. Without maximizing the use of its existing authorities in the absence of a  Base Realignment and Closure round, DOD’s network of distribution  centers will continue to result in inefficiencies and pose difficulties in  minimizing price increases for distribution services. Further, DOD has identified inefficiencies in how it provides  distribution services at its network of U.S. distribution centers. Recommendation for Executive Action

To minimize unnecessary overlap and duplication and more efficiently  use DOD’s U.S. distribution centers, we recommend that the Secretary of  Defense direct the Under Secretary of Defense for Acquisition,  Technology, and Logistics (or the subsequent Under Secretary for  Acquisition and Sustainment), in conjunction with the Director of DLA, and  the Secretaries of the Army, the Air Force, and the Navy, to assess and  direct the implementation of actions, as appropriate, that can be taken  using existing authorities to close, realign, or dispose of existing  infrastructure.
Why GAO Did This Study

In fiscal year 2015, DLA generated $23 billion in revenues from supply chain management sales to the military departments and other customers, such as federal agencies. These sales included commodities and distribution services provided through the Defense-wide Working Capital Fund, a revolving fund.
Senate Report 114-255 and House Report 114-537 included provisions for GAO to evaluate DLA's costs to provide commodities and services using the Defense-wide Working Capital Fund. This report identifies trends in the costs and annual prices that DLA has charged for commodities and distribution services; and evaluates the extent to which DOD has taken steps to more efficiently use its network of U.S. distribution centers. GAO analyzed the most currently available DLA cost data, estimated and actual revenue, and prices for commodities and distribution services since fiscal year 2009; reviewed DOD documentation; and interviewed knowledgeable DOD officials.

What GAO Found

GAO found that since fiscal year 2009, the Defense Logistics Agency (DLA)—the largest logistics combat support agency for the Department of Defense (DOD)—had reduced costs and maintained fairly constant prices for commodities, such as repair parts, clothing, and food. When developing annual budgets, DLA has generally underestimated revenue from the sales of commodities. The underestimated revenue contributed to gains that were applied to future year prices in the form of reductions, and helped offset inflationary increases in material costs.
GAO also found that since fiscal year 2011, DLA had reduced costs for distribution services (e.g., the processing and storing of inventory) by about 25 percent through the use of existing authorities to reduce infrastructure. However, DLA has often increased annual prices for distribution services by more than 10 percent due, in part, to a declining workload. DLA has generally overestimated revenue from the sales of distribution services. The overestimated revenue contributed to losses as well as to price increases in subsequent years as DLA sought to recover those losses.
DOD has taken steps to increase the use of DLA's 17 U.S. distribution centers to improve efficiency of DLA's operations, but additional opportunities for efficiencies exist across DOD's network of approximately 256 U.S. distribution centers. In January 2017, DOD revised guidance to require storage of government-owned inventory at DLA's distribution centers instead of at privately owned storage when both are located in the same geographic area to reduce costs. DOD has also identified inefficiencies in the provision of its distribution services. Specifically, the military departments, along with DLA, provided distribution services using U.S. distribution centers that often were in close proximity to or located on the same installation. To address inefficiencies, DOD established a program to, among other things, decrease the number of U.S. distribution centers. In October 2014, DOD discontinued the program without implementing its plan to reduce the number of distribution centers. Though DLA has been able to use existing authorities to realign functions and demolish some facilities to gain efficiencies at its distribution centers, DOD officials told us the department needs Base Realignment and Closure authority—a process whereby Congress authorizes an independent federal commission to review and determine whether to forward to the President for approval DOD's proposals to realign and close military installations—to address any additional inefficiencies. GAO found, however, that DOD had not assessed the extent to which the department could further use its existing authorities to minimize unnecessary overlap or duplication in its network of distribution centers. Without assessing the use of its existing authorities, inefficiencies in DOD's network of U.S. distribution centers that the department has previously identified may remain.

What GAO Recommends

GAO recommends that DOD assess and direct the implementation of actions, as appropriate, that can be taken using existing authorities to close, realign, or dispose of existing infrastructure to more efficiently use the department's network of U.S. distribution centers. DOD concurred with the recommendation.