Report No.: GAO/HR-93-12 Date: December 1992
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Author: United States General Accounting Office
Addressee: High-Risk Series
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Overview
- The Problem
- The Causes
- GAO's Suggestions for Improvement
Managing DOD's Inventory Presents Challenges
- Cost of Unmet Inventory Challenge Is Enormous
Dod Does Not Use Effective Inventory Management and Control Techniques
- Oversight of Inventory Is Limited
- Requirements Are Often Overstated
- Improved Accountability Is Needed
- A Change in Organizational Culture Is Essential
- DOD Can Save Money by Adopting Commercial Practices
Outcome of DOD Initiatives Is Uncertain
Conclusions and Action Needed
Related GAO Products
High-Risk Series
- Lending and Insuring Issues
- Contracting Issues
- Accountability Issues
Office of the Comptroller General
Washington, DC 20548
December 1992
The President of the Senate
The Speaker of the House of Representatives
In January 1990, in the aftermath of scandals at the Departments of Defense
and Housing and Urban Development, the General Accounting Office began a
special effort to review and report on federal government program areas that
we considered "high risk."
After consulting with congressional leaders, GAO sought, first, to identify
areas that are especially vulnerable to waste, fraud, abuse, and
mismanagement. We then began work to see whether we could find the fundament
al
causes of problems in these high-risk areas and recommend solutions to the
Congress and executive branch administrators.
We identified 17 federal program areas as the focus of our project. These
program areas were selected because they had weaknesses in internal controls
(procedures necessary to guard against fraud and abuse) or in financial
management systems (which are essential to promoting good management,
preventing waste, and ensuring accountability). Correcting these problems is
essential to safeguarding scarce resources and ensuring their efficient and
effective use on behalf of the American taxpayer.
This report is one of the high-risk series reports, which summarize our
findings and recommendations. It describes our concerns over the Department
of
Defense's management of supplies that support the military services. It
focuses on the Department's continued maintenance of high levels of excess
inventory and inadequate systems for determining requirements for supplies.
Copies of this report are being sent to the President-elect, the Democratic
and Republican leadership of the Congress, congressional committee and
subcommittee chairs and ranking minority members, the Director-designate of
he Office of Management and Budget, and the Secretary-designate of Defense.
The Department of Defense (DOD) maintains inventories of spare and repair
parts, clothing, medical supplies, and other support ("secondary") items
costing about
100 billion. Not only has DOD bought more than it needs, but it has failed t
oapply standards of economy or efficiency to the purchase, maintenance, and
distribution of its inventories. Based on their cost, DOD's excess supplies
total about $40 billion.
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THE PROBLEM
DOD has wasted billions of dollars on excess supplies, burdened itself with
the need to maintain them, and failed to acquire the tools or expertise to
manage them effectively.
DOD frequently overestimates its supply requirements and ends up buying too
much. The reason is that DOD uses inadequate data, fails to use new techniqu
es
that would allow lower inventory levels, and believes that keeping large
inventories is the way to ensure always being able to fill orders. Using
nonstandard, redundant, and overlapping computer systems, the military
services and the Defense Logistics Agency independently buy and manage
supplies, leaving DOD to make inventory determinations based on faulty and
unintegrated data. In addition, maintenance of the supplies themselves is
inadequate. Weaknesses in DOD inventory records, in-transit controls, comput
er
systems, and physical security programs create rampant opportunities for
theft.
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THE CAUSES
DOD has traditionally failed to stress the importance of proper inventory
management or to provide its personnel with the needed tools and incentives
to
promote satisfactory performance.
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GAO'S SUGGESTIONS FOR IMPROVEMENT
The solution to these problems lies with a shifting of DOD's organizational
culture toward economical and efficient inventory practices. Recent reductio
ns
in the threats to national security, along with the ensuing decline in defen
se
budgets, demand that DOD reverse its traditional policy of acquiring supplie
s
with insufficient attention to the enormous expense of buying and storing
excess inventories.
DOD has begun to address its inventory management problems, but the services
continue to develop systems independently, and plans to link the systems are
at different stages of development. We believe that DOD must continue to wor
k
toward instilling the appropriate priorities, incentives, and attitudes amon
g
its supply managers and users and should consider adopting modern commercial
inventory practices that have found success in the private sector. In
addition, DOD should develop and implement improved performance measures tha
t
stress cost-effectiveness and inventory reduction.
DOD has taken several steps that should help improve inventory management. F
or
example, DOD established a Defense Business Operations Fund, which it plans
to
use to, among other things, charge customers for the full cost of inventory
management, and DOD initiated a Corporate Information Management project tha
t
aims to simplify and modernize the services' distribution systems and
standardize computer systems. Also, DOD has begun to carry out an inventory
reduction plan. However, more needs to be done. At our recommendation, the
Congress rescinded $1 billion in past appropriations for secondary items and
reduced the fiscal year 1993 budget request by $3 billion. Since DOD no long
er
has sufficient funds to support its long-standing business inefficiencies, i
t
is particularly important that DOD generate improved, accurate inventory dat
a;
develop and implement better inventory policies and procedures; train supply
staff in more effectively managing inventory operations; and bring sustained
,
high-level commitment to making DOD inventory management more efficient and
cost-effective.
In the 1980s, DOD had abundant funds available to procure secondary items. A
s
a result, DOD now has a huge, widely dispersed inventory that is unnecessari
ly
difficult to manage, expensive to maintain, and highly vulnerable to fraud,
waste, and mismanagement. Between 1980 and 1990, the value of DOD's inventor
y
of secondary items increased from $43 billion to about $100 billion, based o
n
cost. This inventory includes consumable and repairable items--such as spare
and repair parts; clothing; electronics; and medical, construction, and
industrial supplies.
Our work over a number of years shows that DOD continued to buy and store
items that greatly exceeded its operational and war reserve needs. During th
e
1980s, DOD's excess, or unrequired, inventory increased at a faster rate tha
n
its overall inventory. In 1991, over 40 percent of the inventory of secondar
y
items, or over $40 billion, [ Footnote 1: This figure includes $30 billion
worth of unrequired inventory based on cost and $10 billion worth of invento
ry
DOD categorized as required. Based on its own requirements formulas, however
,
this $10 billion in inventory is not needed. ] exceeded DOD's needs. In ma
ny
cases, DOD's calculations of operational and war reserve needs were flawed,
and as a result DOD purchased unnecessary secondary items.
DOD has experienced problems in obtaining accurate data about and controllin
g
its secondary items. In addition, after it identifies and buys spare and
repair parts needed to support principal items such as tanks, ships, or
aircraft (generally for 2 years), each military service and the Defense
Logistics Agency buy, manage, and oversee these types of supplies using thei
r
individual systems. Each military component independently determines the typ
e
and amount of items needed to support current and planned peacetime
operations, and each acquires and positions supplies to meet wartime needs.
Because of the large size of the inventory
$100 billion) and recurring problems, defense supplies are especially subjec
t
to fraud, waste, and mismanagement. Consequently, we and the Office of
Management and Budget identified defense inventory management as a high-risk
area. To address this concern, DOD created and has begun to implement an
inventory reduction plan. In addition, in response to our recommendation to
reduce funding for buying secondary items, the Congress rescinded $1 billion
in past appropriations for secondary items and reduced the fiscal year 1993
budget request by $3 billion. With the downsizing of the military and the
declining defense budget, it is particularly important that DOD generate
accurate reports, distribute and implement needed inventory policy and
procedures, actively manage inventory, and devote top management attention a
nd
commitment to better managing secondary items. DOD is taking steps to reduce
inventories, but more needs to be done.
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COST OF UNMET INVENTORY CHALLENGE IS ENORMOUS
According to DOD's own estimate, its unrequired inventory cost over $30
billion. Unrequired inventory is material that is not supported by
requirements. Requirements generally include war reserve stocks and operatin
g
stocks to last 2 years. Unrequired inventory is costly because it represents
expended taxpayer funds that cannot be fully recovered when these inventorie
s
are disposed of and amounts to billions of dollars each year. In addition, i
t
costs to store and handle these inventories.
Our reviews of each service's inventory have shown a larger rate of growth o
f
unrequired than required inventory during the 1980s. Also, much of the
inventory DOD had classified as required was actually unrequired. For exampl
e,
of the $39.6 billion in inventory the Navy and the Air Force identified in
September 1990 as required, we identified $10 billion in inventory that
exceeded the maximum amount needed on hand or on order, as defined by DOD
instructions.
The services had built up their stocks of unrequired secondary items for man
y
reasons. From 1980 to 1988, the Air Force increased its required inventory b
y
79 percent and its unrequired inventory by
95 percent (from $2 billion to $7.9 billion). The increase in unrequired
inventory resulted primarily because the Air Force overestimated the rate at
which inventory would be used. For example, in 1985 the Air Force used a
20-percent condemnation rate [ Footnote 2: The "condemnation rate" is the
proportion of items needing repair that it is uneconomical to repair. ] in
the requirements computation for a case assembly for the F-100 engine, which
powers the F-15 and F-16 aircraft. By 1987, the condemnation rate used in th
e
requirements computation was 1 percent based on actual historical data.
The Army's unrequired inventory increased by 168 percent between 1983 and
1988, whereas all inventories increased by
6 percent over the same period. The largest increase in the Army's unrequire
d
inventory, in terms of dollars, was at the Aviation Systems Command, one of
the Army's six commodity commands. Its unrequired inventory increased in val
ue
from
207 million in 1983 to $804 million in 1988. The Command's unrequired
inventory increased for three primary reasons: (1) the Army continued to sto
ck
items for systems being phased out, (2) forecasted demands for items often d
id
not materialize, and
(3) the data base for computing requirements contained erroneous data. Also,
the Army did not reduce or cancel planned procurements when it found it did
not need the items.
The Navy's total inventory of ship and submarine parts increased by 249
percent, from about $2.7 billion in 1980 to $9.3 billion in 1988. In 1988, 4
0
percent ($3.7 billion) of the Navy's inventory was unrequired. The major
causes for the unrequired inventory were that requirements for items did not
materialize, older ships were deactivated, and equipment was replaced and
phased out. We found that the Navy had no formal procedures to notify the
Ships Parts Control Center of items being replaced or phased out and
recommended that the Navy establish procedures to inform inventory control
points about systems being phased out or replaced.
We also looked at excess inventory held at naval aviation depots. For fiscal
years 1987 to 1991, the value of excess inventory ranged from $40.1 million
to
$53.6 million. These large balances remained, even though
138 million in excess material had been eliminated from depot records throug
h
write-offs during these years.
The cost of DOD's excess material should not be measured solely by the costs
of acquiring and storing the material. Material that is stored in warehouses
may become obsolete or may deteriorate to the point that it is unusable even
if it eventually becomes needed. Also, employees faced with materials that a
re
clearly overstocked are more likely to develop a casual attitude about the
security and safety of those supplies.
DOD DOES NOT USE EFFECTIVE INVENTORY MANAGEMENT AND CONTROL TECHNIQUES
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For decades, DOD has not effectively managed its inventory. It (1) lacks
oversight of all aspects of its inventory and the systems intended to contro
l
it, (2) frequently overstates requirements for secondary items and buys exce
ss
items, and (3) generally does not ensure that inventory data is accurate or
integrated throughout the system and that the inventory is physically
protected.
DOD has not kept pace with private industry in updating and streamlining its
inventory management practices. At the expense of economy and efficiency, it
has overbought secondary items to ensure that it has more than enough
supplies. A change in this organizational culture of overbuying and the use
of
more modern commercial techniques would help DOD to resolve some of its
long-standing difficulties in managing its inventory of secondary items.
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OVERSIGHT OF INVENTORY IS LIMITED
As we have noted in our reports over the years, the Army, the Navy, and the
Air Force have not always given secondary item managers the information they
need to ensure that they do not buy duplicate supplies. Army policy, for
example, does not require approximately $900 million in inventory held by
divisions to be included in either Army-wide logistics or accounting systems
As a result, Army item managers responsible for procuring inventory do not
know these items are available. In January 1990, we reported that 13 Army
divisions were holding excess spare and repair parts worth $184 million. The
divisions had not reported this inventory to the buying commands, which were
procuring 1,669 of the same items for $66.9 million.
The Air Force and the Navy wholesale item managers also have limited
information about excess items at retail activities, such as at Air Force an
d
Navy bases. These managers have purchased millions of dollars worth of
unneeded items and have missed opportunities to redistribute assets on hand
because they were not aware the assets were available. The Air Force wholesa
le
item managers were aware of only $1.5 million, or about 5 percent, of the
$32.1 million in excess material at retail activities. In addition, three
naval aviation depots held over $3 million in usable items that could have
been used to fill supply system orders but were unrecorded on inventory
records.
The Office of the Secretary of Defense also has little oversight over
inventory as a whole because the military services and the Defense Logistics
Agency have developed and maintained separate data processing systems for
common supply management functions. These nonstandard, redundant, and
overlapping computer systems seriously impede efficient operations of
inventory managers and monitors alike.
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REQUIREMENTS ARE OFTEN OVERSTATED
For years, DOD has experienced problems in determining how much inventory it
needs to buy to meet its needs. In a May 1991 summary of 97 reports issued b
y
us and the defense audit agencies over the past 6 years, we cited several
reasons for DOD's failure to determine accurate requirements. The primary
reason is that DOD maintains inaccurate or unsupported data in its computer
systems. Relying on bad data, the services have often overstated requirement
s
by millions of dollars and purchased items they do not need. The lack of
accurate data stems from poor management control systems and a lack of
oversight.
The Army, for instance, does not exercise enough control over the initial
process to acquire spare parts for new systems to ensure that they are fully
supported at the least possible cost. According to the Army Audit Agency, th
e
buying commands frequently acquired and fielded more parts than they needed
to
support new systems. In addition, DOD has not adequately trained or provided
guidance to item managers. In one case, the Air Force did not emphasize the
importance of using accurate essentiality codes [ Footnote 1: The logistics
community has long recognized the importance of identifying and measuring th
e
relative merit of maintaining stock of a given item over stocking some other
item. Making this differentiation is ordinarily referred to as determining t
he
"essentiality" of an item, and an essentiality code is assigned to each item
based on this determination. ] when computing requirements and thus
overstated war reserve requirements by $19.7 million. Finally, when item
managers recognize that items on order are unnecessary, they often fail to
cancel the orders because they want to avoid the termination of contracts. A
s
of March 1991, DOD still had orders for excess material worth $2.5 billion.
Since our summary report in May 1991, DOD either has failed to use available
data or has used inaccurate demand rates to compute requirements. The Air
Force, for example, ignored forecasting factors submitted by the contractor
to
determine spare parts for the F-16 C/D aircraft. Consequently, the Air Force
prematurely spent $43 million for spare parts. In addition, the Air Force's
five air logistics centers used inaccurate demand rates to buy repairable
assets, spending
93.8 million unnecessarily. The Air Force Inspector General reported that
internal controls did not ensure that the air logistics centers did what the
y
needed to do to satisfy requirements.
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===
IMPROVED ACCOUNTABILITY IS NEEDED
DOD lacks financial accountability and control over its multibillion dollar
inventory because it (1) does not have accurate, reliable data to support th
e
quantity, condition, and value of items and (2) does not have integrated
systems to provide accurate data. Without accurate inventory data, DOD canno
t
ensure that it can meet readiness demands. If DOD does not know what it has
available, it cannot know what to order. Generally, the services' records ha
ve
not been reconciled with contractors' records or by physical inventories. Wh
en
we took a physical inventory of items at the Air Force Logistics Command, we
estimated that 18.3 percent of the records differed from the actual inventor
y
and that the inventory records for items worth $14.8 billion erred by about
$2.3 billion. In addition, the Army Materiel Command could not resolve
differences between its records and contractor records on items worth about
$11.3 billion. At one location, controls were so poor that instead of
attempting to reconcile Army and contractor differences in inventory records
,
Army officials assumed that any items over 15 months old had been used by th
e
contractor, and they deleted the items from their records. Of the $12.5
billion spare and repair parts inventory controlled by Army depots, about 35
percent of the recorded quantities were inaccurate by 10 percent or more.
Given the poor records on inventory, it is especially important that DOD
physically protect what it has. We, the Federal Bureau of Investigation, and
DOD recently reported that the weaknesses in DOD's inventory records,
in-transit controls, and physical security programs have created opportuniti
esfor theft. Recent criminal investigations documented organized thefts at a
defense depot in California, Army depots in Utah and Texas, an Air Force dep
ot
in Utah, and a Navy depot in Virginia.
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A CHANGE IN ORGANIZATIONAL CULTURE IS ESSENTIAL
To eliminate imbedded inventory management problems, DOD must change its
"organizational culture" [ Footnote 2: "Organizational culture" may be
defined as the underlying assumptions, beliefs, values, attitudes, and
expectations shared by an organization's members. ] to emphasize economy a
nd
efficiency. The reduced threat to national security and declining defense
budgets demand a reversal of DOD's past policy of filling orders with little
,
if any, emphasis on the enormous expense associated with buying and storing
excess items.
We obtained views from experts in the private sector on the techniques they
have used in changing or perpetuating an organizational culture. These exper
tsagree that an organization's beliefs and values affect the behavior of its
members. According to several of these experts, an organization's decision t
o
change its culture is generally triggered by a specific event or situation.
A
change in the world situation, international competition, or a severe budget
reduction are some events that could provide the impetus for an organization
al
culture change. For example, the oil shocks of the 1970s and the increase in
international, particularly Japanese, competition spurred Ford Motor Company
's
change in culture.
The experts generally agreed that a culture change is a long-term effort tha
t
takes at least 5 to 10 years to complete. Company officials believe that two
key techniques are of prime importance to a successful culture change:
-- Top management must be totally committed to the change in both words and
actions.
-- Organizations must provide training that promotes and develops skills
related to their desired values and beliefs.
The companies we visited indicated that effecting a successful culture chang
e
would require using a combination of many techniques--not just the two most
important. Other techniques, of varying importance, include distributing a
written statement of the desired values and beliefs to employees; creating a
specific management style that reinforces the desired values and beliefs;
offering rewards, incentives, and promotions to encourage behavior that
reinforces these beliefs; holding company gatherings to discuss these belief
s;
developing an organizational structure that is compatible with these beliefs
;
using systems, procedures, and processes to support organizational values; a
nd
using stories, legends, myths, and slogans to communicate these values and
beliefs.
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DOD CAN SAVE MONEY BY ADOPTING COMMERCIAL PRACTICES
In 1991, we issued two reports in which we identified opportunities for DOD
to
save millions of dollars by adopting commercial practices. In each case, we
compared private sector practices to specific segments of DOD logistics
operations.
For example, we noted that DOD could save millions of dollars by adopting
practices the private sector has used to minimize unnecessary expenses.
Commercial airlines, for example, are relying more heavily on manufacturers'
parts distribution systems to provide engines and spare parts when needed.
They also use either a manufacturer or an outside contractor for maintenance
services until the reliability of engines is proven through several years of
use. The Air Force, on the other hand, bought excess F-108 engines and spare
parts worth millions of dollars and acquired excess engine maintenance
facilities and equipment to support the F-108 engine, which is commercially
derived.
We also found that progressive civilian hospitals have obtained drastic
reductions in inventories through improved ordering systems, the use of prim
evendors, the standardization of supplies, and better communication with
vendors. Vanderbilt University Medical Center, for example, reduced inventor
y
levels by $1.7 million, or 38 percent. In contrast, DOD holds vast amounts o
f
medical supplies that are expensive to maintain and often become obsolete
before they can be used. DOD hopes to reduce its medical inventory levels by
0 percent in the next 5 years. However, DOD needs to explore the possibility
of developing "quick response," "just-in-time," and "stockless" delivery
systems in additional areas.
The following are examples of old medical inventory we found when looking at
the medical logistics system:
-- The Defense Logistics Agency depots were holding about 50,000 packages of
radiopaque sponges dated from 1973 to 1980. The Agency issues about 11
packages of these sponges daily, which equates to approximately 13 years
of
inventory on hand. The Army and the Navy owned approximately 1,500 of the
se
items for wartime purposes. For Operation Desert Storm, the Agency issued
580 packages of radiopaque sponges and almost
00,000 packages of a new sponge that is not radiopaque.
-- The same warehouse also held about
,100 robes packed in 1952 and 1967. A newer robe has been bought, but the
older robes, owned by the Army and the Navy, were being kept for wartime
purposes. However, Agency records indicated that none of these older robe
s
were issued for use during Operation Desert Storm.
-- The warehouse also stored many other items not commonly requested by the
services. In total, approximately 25 percent of the line items held in th
is
building were over 10 years old, and over 40 percent were at least 5 year
s
old. The oldest item we observed was a patient jacket from 1945. Defense
Logistics Agency depots were storing 29,474 of these jackets, which were
packed from 1945 to 1983. The depot at Mechanicsburg, Pennsylvania, store
d
approximately
,700 jackets, of which about 85 percent were dated from 1945 and 1969. Th
e depots issued about one of these jackets a week.
OUTCOME OF DOD INITIATIVES IS UNCERTAIN
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DOD recognizes that changes to its business processes are essential. In the
last few years, DOD has implemented a number of initiatives that appear to b
e
steps in the right direction for improving inventory management. DOD has muc
h
to gain and little to lose by making a major effort now to deal with the
long-standing deficiencies in its inventory management systems. Through the
Corporate Information Management project, DOD plans to modernize and simplif
y
the military services' distribution systems and standardize computer systems
in functional areas such as logistics. Of the $36 billion savings expected
from the project by 1997, approximately half is to be derived through
improvements to material management business processes. Also, the
establishment of the Defense Business Operations Fund has helped focus DOD o
n
the need to operate its inventory in a more businesslike manner.
Although the Corporate Information Management project is DOD's best hope for
attaining the modern computer systems needed to improve inventory management
,
in the 3 years since it began, the initiative has met with limited success.
The logistics portion of the project has been restructured because of proble
ms
in making it work. In fiscal year 1992, DOD established the Joint Logistics
Systems Center to integrate the services' logistics policies, procedures, an
d
systems and has recently begun to describe how it plans to streamline its
business methods.
DOD is also focusing on automating the existing transportation systems part
of
the supply chain. However, it is not determining the best, most cost-effecti
ve
means of resolving transportation problems. As a result, it has spent millio
ns
developing redundant transportation systems. DOD lacked accountability for
most of the supplies returned to the United States after Operation Desert
Storm and therefore jeopardized the safe delivery of supplies worth millions
of dollars. Furthermore, DOD does not know how much defense property has bee
n
lost or stolen while being transported throughout the continental United
States.
Many of the new automated systems will not be implemented for a number of
years, while other critical systems have yet to be selected. In the meantime
,
the services continue to develop separate computer systems. Unless DOD
carefully evaluates each of these systems, it runs the risk of wasting time
and money on old, inefficient business methods. More important, it will be
doing little to attain the computer systems needed to improve the management
and movement of its inventory. While the new automated systems are being
designed and developed, DOD will have to continue to rely on existing system
s
and information for decision-
aking. During this time it is important that DOD place greater emphasis on
improving the data accuracy and operations of the existing systems. This
undertaking will require dedicated leadership and cooperation at all levels
throughout DOD if savings and efficiencies are to be realized.
Aside from the Corporate Information Management project, DOD has various oth
er
initiatives aimed at cost awareness in its business practices. These
initiatives, including the financing of repairable inventory items in the
stock fund and the establishment of the Defense Business Operations Fund, ar
e
aimed at charging the military units the full cost of all inventory items an
dservices provided to them. Previously, when military units needed inventory
items, they received the items without paying for them or they did not pay t
he
full cost of the items. The practice of charging the military units full
inventory costs should help provide financial discipline because the units
will budget and pay for the items and be accountable for the management and
control of the items. Also, this practice should save money by providing the
military units incentives to replace items only when necessary. Under anothe
r
of DOD's initiatives, each service will pay the full cost of storing,
handling, and transporting inventory it orders.
DOD also has a plan to reduce inventory, including an aggressive program for
disposing of excess inventory. In addition, for 1992, the Congress limited t
he
replacement of inventory to $0.80 for each $1.00 in sales. For fiscal year
1993, the Congress has set the limit at 65 percent of sales. Finally, the
financial statement audits required by the Chief Financial Officers' Act
encourage fundamental improvements.
CONCLUSIONS AND ACTION NEEDED
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Although DOD is taking steps to manage its inventory effectively and
economically, major changes are needed at all levels of the inventory system
These changes will translate into significant savings. To achieve these
savings, however, DOD's top management will need to (1) change its
organizational culture to eliminate the overstocking of items, (2) rapidly
increase the use of commercial practices where commercial supply and
distribution systems are well established, (3) put in place and monitor
improved performance measures that stress cost-effectiveness and inventory
reduction, and (4) improve its computer systems to accurately reflect
inventory and requirements information. Item managers will need to stop buyi
ng
items too far in advance, terminate orders for unneeded materials, and clear
the warehouses of old, obsolete, and unneeded items.
DOD no longer has sufficient funds to support its long-standing business
inefficiencies. Now is the time to make a major effort to improve its supply
chain management practices. Although the Corporate Information Management
project and establishment of the Defense Business Operations Fund are steps
in
the right direction, even under the best of circumstances, they will not
achieve their intended objectives for several years. In the meantime, to
realize savings now, DOD must take the following steps:
-- Continue its commitment to improving its inventory management operations
by
1) developing and using inventory performance indicators that stress
cost-effectiveness, such as the inventory turnover rate and the time it
takes to deliver an item to a customer once an order has been placed; (2)
incorporating these indicators in monthly reports to top management; and
(3) providing training to staff on the use of these performance indicator
s.
-- Improve the accuracy of the data used in determining the amount and type
of
inventory to buy from contractors so that cost-effective decisions are
made. This would include improving the accuracy of the data on (1) the
amount of inventory on hand and (2) the amount of inventory used by
military activities and units.
-- Direct the military activities and units to comply with existing policies
and procedures, for example, to perform periodic physical inventories,
employ adequate physical safeguards over inventory, and document
adjustments made to the logistical and financial records.
-- Improve the accuracy of the data on the quantity, condition, and value of
inventory in the existing inventory management systems.
DOD can also realize savings through the closure of supply depots under the
1993 base closure and realignment process. In previous reports, we have
suggested actions that will prepare DOD to select depots for closure or
consolidation and to create a modern supply system that takes advantage of t
he
latest logistics concepts.
Reductions in force structure and associated operating tempos are translatin
g
into reduced demands on the inventory system. Some supplies are being return
ed
to the system as bases are closed. These supplies take longer to process tha
nnew supplies, present unique problems, and could impede DOD's inventory
reduction efforts. Close congressional oversight is needed to sustain the
momentum for reducing inventories and to require DOD's top management to
continue its focus on this issue.
