United States Government Accountability Office

Washington, DC 20548 

February 26, 2007 

The Honorable Carl Levin 

Chairman 

The Honorable John McCain 

Ranking Minority Member 

Committee on Armed Services 

United States Senate 

The Honorable Ike Skelton 

Chairman 

The Honorable Duncan L. Hunter 

Ranking Minority Member 

Committee on Armed Services 

House of Representatives 

Subject: Defense Management: DLA Has Made Progress in Improving Prime 

Vendor Program, but Has Not Yet Completed All Corrective Actions 

The Department of Defense (DOD) operates a worldwide supply system, with the 

vast majority of the items being managed by the Defense Logistics Agency (DLA).1

Media reports in October 2005 raised concerns about the use of the prime vendor 

concept and the prices that DLA was paying for items acquired through a prime 

vendor, and the House Armed Services Committee held a hearing on the matter on 

November 9, 2005.2

 As a result of the hearing, DLA officials recognized the need to 

improve management oversight and internal controls over the program, and they 

proposed a series of corrective actions. 

Under the prime vendor concept, DOD relies on a distributor of a commercial 

product line, who provides that product line and incidental services to customers in 

an assigned region or area of responsibility. Products or services are to be delivered 

within a specified period of time after order placement. The prime vendor provides 

the product either at the cost paid to obtain it or at a price agreed upon in advance 

 1

DLA is DOD’s largest combat support agency, providing worldwide logistics support in both

peacetime and wartime to the military services as well as several civilian agencies and foreign 

countries. 

2

The prime vendor program uses a contractual arrangement with one or more commercial vendors to 

supply a wide range of commercial off-the-shelf material directly to military customers on a just-intime basis. 

GAO-07-396R Defense Management 
with DLA plus a handling fee. In fiscal year 2006, prime vendor sales accounted for 

approximately $7.25 billion, or 20 percent, of DLA’s total sales and service of 

$36 billion.

The use of prime vendor contracts is governed by the Federal Acquisition Regulation 

(FAR) and the Defense Federal Acquisition Regulation Supplement. DLA manages 

the program and the Director of DLA reports to the Under Secretary of Defense for 

Acquisition, Technology, and Logistics through the Deputy Under Secretary of 

Defense for Logistics and Materiel Readiness. The Defense Supply Center 

Philadelphia (DSCP), a field activity of DLA, is the lead center for managing prime 

vendor contracts for three major supply chains: medical materiel, 

subsistence/garrison feeding, and construction and equipment. Medical materiel 

includes pharmaceutical and medical/surgical items. Subsistence includes food for 

troop feeding. The construction and equipment supply chain comprises several 

commodities, including maintenance, repair, and operations (MRO),3

 lumber, and 

metals. DSCP is also the lead center for the clothing and textiles supply chain, which 

does not include any prime vendor contracts.

In June 2006, we summarized the main findings of DLA internal reviews, and an 

external review conducted by the Defense Contract Management Agency at DLA’s 

request, of DLA’s prime vendor programs.4

 The findings highlighted five deficiencies, 

as follows: 

• management metrics that were too narrowly focused on sales, 

• a prime vendor concept that was not suitable for all commodities, 

• a lack of management oversight, 

• inadequate pricing reviews,5

 and 

• a lack of knowledge or skills in the workforce. 

We also reported that DLA had experienced persistent problems in overseeing prime 

vendor contracts, despite the existence of oversight policies and procedures and the 

identification of corrective actions prior to November 2005. Those problems 

persisted because DLA and DSCP management had not provided the oversight 

needed to ensure that the policies, procedures, and corrective actions were 

implemented. We therefore recommended that the Secretary of Defense ensure that 

the Director of the DLA provide continual management oversight of the corrective 

actions DLA was taking to address the problems in its prime vendor program. 

 3

The MRO category is further broken out between supplies and services, with separate prime vendor 

contracts for each.

4

GAO, Defense Management: Attention Is Needed to Improve Oversight of DLA Prime Vendor 

Program, GAO-06-739R (Washington, D.C.: June 19, 2006).

5

The term “pricing review” was used in our June 2006 report to refer to a review for price 

reasonableness. For purposes of this report and in light of newly revised and clarified DLA policies, 

we use the term “price reasonableness determination” to refer to the contracting function of

determining fair and reasonable pricing. We use the term “price review” to refer to the oversight 

function of auditing the contracting officer’s price reasonableness determination. 

Page 2 GAO-07-396R Defense Management 
A House Armed Services Committee report accompanying the fiscal year 2007 

Defense Authorization bill directed GAO to review DLA’s actions and submit a report 

to the defense committees no later than March 1, 2007. Our objective was to 

determine the extent to which DLA’s corrective actions have addressed the main 

deficiencies in the prime vendor program. To accomplish this objective, we reviewed 

the actions DLA and DSCP have taken. We also reviewed a new DLA policy that 

governs the use of prime vendor contracts and DSCP’s adherence to that policy and 

implementing procedures. In addition, we reviewed internal assessments of DLA’s 

and DSCP’s management of prime vendor contracts, as well as prior GAO reports. 

Further, we interviewed DLA and DSCP officials, as well as officials in the Office of 

the Deputy Under Secretary of Defense for Logistics and Materiel Readiness. We 

conducted our review between August 2006 and January 2007, in accordance with 

generally accepted government auditing standards. Our scope and methodology are 

discussed in further detail at the end of this report. 

Results in Brief

DLA has made progress in identifying and implementing a series of corrective actions 

to address the five main deficiencies we indicated earlier in the management of its 

prime vendor program, but it has not yet completed all the actions, and some 

deficiencies remain. Until DLA completes all the actions, we cannot fully assess 

whether they will be effective in correcting all the deficiencies and sustaining the 

improvements. DLA has effectively rectified two of the deficiencies by completing 

actions to broaden its management metrics and adjust its acquisition strategy for 

commodities that were not suitable for the prime vendor concept. However, it is still 

in the process of implementing corrective actions to remedy the three remaining 

deficiencies noted in our June 2006 report—those relating to management oversight, 

pricing reviews, and workforce knowledge and skills.6

 To address these three 

deficiencies, DLA has issued a new policy and DSCP has developed implementing 

procedures that prescribe oversight for prime vendor contractors; authorized 

additional positions to enhance oversight and developed training requirements for its 

staff; and introduced specific requirements for supply chains to conduct price 

reasonableness determinations and more price reviews. Nevertheless, these 

improvements are still a work in progress. For example, a new division at DSCP, 

established to ensure that supply chains are following procedures, is still in the 

process of hiring and training staff and has recently revised its procedures. Further, 

personnel responsible for one commodity within the construction and equipment 

supply chain had not conducted price reasonableness determinations as required by 

the new policy, resulting in a backlog of 11,260 items that needed review, 

representing an estimated value of $96 million. As of January 2007, DSCP personnel 

had reduced the backlog to 480 items that needed additional research. Finally, some 

supply chains have not yet been able to meet their staffing requirements. The 

shortage of personnel in the supply chains has led to heavier workloads for current 

 6

GAO-06-739R.

Page 3 GAO-07-396R Defense Management 
staff as well as to delays in completing contract actions. Until DLA completes all the 

corrective actions that are still in process, it remains at risk of being overcharged for 

the products it is purchasing. DLA faces further challenges in sustaining the 

improvements it has made because of impending leadership changes and by virtue of 

its history of not following through on correcting deficiencies. Our prior work has 

shown that one of the elements needed for sustaining management improvement 

initiatives is demonstrated leadership commitment.7

 While the current leadership at 

DLA and DSCP have demonstrated their commitment to implementing the corrective 

actions, personnel turnover can be expected in a large organization such as DLA—for 

example, the Commander of DSCP will reach the end of his 2-year term in mid-2007—

and future leaders may not necessarily complete the corrective actions. DLA’s 

history reflects the vulnerability of the prime vendor program to systemic pricing 

problems, because management has not always provided the oversight necessary to 

ensure that corrective actions were implemented. Because of these factors, and to 

mitigate its risk of being overcharged for its purchased products, DLA needs to 

ensure that the course of corrective actions is completed and the actions are working 

as intended and the improvements in oversight are sustained. 

We are recommending that the Secretary of Defense require the Director of the 

Defense Logistics Agency to determine whether all the corrective actions in DLA’s 

prime vendor program have been completed and are producing the intended results. 

The results of the determination should be communicated in writing to the Under 

Secretary of Defense, Acquisition, Technology, and Logistics within 6 months of the 

issuance of this report. In commenting on a draft of our report, DOD concurred with 

our recommendation. We discuss DOD’s comments later in this correspondence. 

Background

Under the prime vendor concept, DOD relies on a distributor who provides a 

commercial product line (such as electrical and plumbing equipment) and incidental 

services to customers in an assigned region or area of responsibility. Products or 

services are to be delivered within a specified period of time after order placement. 

Since 1991, we have identified the use of prime vendors as a best commercial practice 

for inventory management.8

 

In 1992, we identified DOD’s contract management as one of our high-risk areas, and 

it remains so today.9

 One of the key reasons why the area is high risk is that DOD 

 7

GAO, Management Reform: Elements of Successful Improvement Initiatives, GAO/T-GGD-00-26 

(Washington, D.C.: Oct. 15, 1999).

8

GAO, Defense Inventory: Opportunities Exist to Expand the Use of Defense Logistics Agency Best 

Practices, GAO/NSIAD-00-30 (Washington, D.C.: Jan. 26, 2000). A best commercial inventory practice

is defined in The National Defense Authorization Act for Fiscal Year 1998 as a practice that enables the 

agency to reduce inventory levels and holding costs while improving the responsiveness of the supply 

system to user needs. 

9

GAO, Defense Contract Pricing, GAO/HR-93-8 (Washington, D.C.: Dec. 1, 1992), and High-Risk Series: 

An Update, GAO-07-310 (Washington, D.C.: January 2007). 

Page 4 GAO-07-396R Defense Management 
does not provide adequate oversight of defense contracts. One aspect of oversight is 

to ensure that the government is obtaining fair and reasonable contract prices. 

Our prior work on federal management issues suggests that certain elements are 

particularly important in implementing and sustaining management improvement 

initiatives that genuinely take root and eventually resolve the problems they are 

intended to fix.10 These elements include: demonstrated leadership commitment; 

integration of improvement initiatives into the day-to-day activities of the 

organization; thoughtful and rigorous planning to guide decisions, particularly to 

address human capital (and technology) issues; and organizational realignment to 

streamline operations and clarify accountability. According to the Standards for 

Internal Control in the Federal Government, effective management of an 

organization’s workforce—its human capital—is essential to achieving results and is 

an important part of internal control.11 Management should ensure that skill needs 

are continually assessed and that the organization is able to obtain a workforce that 

has the required skills necessary to achieve organizational goals. As a part of its 

human capital planning, management should also consider how best to retain 

valuable employees, plan for their eventual succession, and ensure continuity of 

needed skills and abilities. 

Progress Has Been Made, but Some Deficiencies Remain in DLA’s Prime 

Vendor Program Because All Actions Have Not Been Completed

DLA has made progress in implementing the corrective actions to address the 

problems identified in our June 2006 report; however, it has not yet completed all the 

actions, and some program deficiencies remain. Until DLA completes all the actions, 

we cannot fully assess whether they will be effective in correcting all the deficiencies. 

DLA’s actions have corrected two of the main deficiencies identified in our June 2006 

report—management metrics that were too narrowly focused on sales, and a prime 

vendor concept that was not suitable for all commodities. DLA is now reviewing a 

broader range of prime vendor contracting metrics, and it has adjusted its acquisition 

strategy for commodities that were not suitable for the prime vendor concept. 

Deficiencies remain, however, in the areas of management oversight, the process of 

conducting price reasonableness determinations for one commodity, and the 

shortage of staff with required skills. DLA is continuing its work to address these 

three areas. However, DSCP’s Compliance Division had not, at the time of our 

review, been able to complete all the oversight reviews called for by current DSCP 

procedures. Contracting personnel responsible for one commodity, MRO Supplies, 

had not completed price reasonableness determinations, as required by DLA policy, 

which led to a backlog of around 11,260 items that needed to be reviewed. The 

estimated value of these items was around $96 million. Further, DSCP has had 

difficulty in finding qualified personnel to perform contracting and oversight 

 10GAO/T-GGD-00-26. 

11GAO, Standards for Internal Control in the Federal Government, AIMD-00-21.3.1 (Washington, D.C.: 

November 1999). 

Page 5 GAO-07-396R Defense Management 
functions. Finally, DSCP will experience changes in leadership, which could affect 

the implementation of the corrective actions. 

DLA Has Remedied Deficiencies Regarding Metrics and the Use of the Prime Vendor 

Concept

DLA’s management oversight has traditionally focused on performance metrics such 

as sales, fill rates, and customer satisfaction. Our June 2006 report12 noted that one 

factor that could have influenced the lack of pricing reviews in some commodities 

was the emphasis that DLA management had traditionally placed on increasing sales 

to customers, rather than on the prices prime vendors charge for items. In response 

to this finding, DLA and DSCP management are now reviewing a much broader range 

of metrics to assess the prime vendor programs. DLA has established a headquarterslevel quarterly acquisition integrity review process in order to provide more oversight 

for all its field activity centers. The quarterly acquisition integrity review assesses 

risk across all field activity centers (including DSCP), and it contains updates on 

specific DLA oversight programs, such as procurement management reviews, 

contract reviews, and integrated acquisition review boards. The quarterly assessment 

also includes data on field-specific oversight programs, such as price reviews and 

compliance reviews. In addition to metrics on sales data and fill rates, DSCP 

management, now on a monthly basis, reviews pricing and contracting metrics such 

as price reasonableness determinations, price changes, pricing history, and refund 

data. DLA has also developed automated tools to assist in gathering and tracking 

these metrics. Among other things, these tools track price change, price exception, 

and price history data that are reviewed by DSCP management. 

The prime vendor concept has also been reevaluated by DLA. Prime vendor 

arrangements generally are chosen for the purchase of commercial off-the-shelf 

items, not military-unique items. While the purpose of the prime vendor concept has 

not changed, its application over time has expanded to include more commodities. 

DLA has recognized that certain commodities are better suited than others for the 

prime vendor concept, and it has adjusted its acquisition strategy accordingly. For 

example, DLA did not renew the prime vendor contracts for food service equipment 

when they expired in June 2006, and will use long-term contracts to acquire that

commodity.13 DSCP management has conducted analyses of its prime vendor 

programs and concluded that multiple award, long-term contracts, which compete 

orders among vendors, are more suitable for some commodities than for others.14 As 

 12GAO-06-739R.

13According to DLA, a long-term contract is defined as an indefinite-delivery contract in excess of 1

year (including options). 

14Similar to the prime vendor program, DSCP will award multiple award long-term contracts on a

regional basis. DSCP will select several contractors within each region, and then compete orders 

among these contractors. According to DSCP officials, competing the orders will reduce the need to 

conduct price reasonableness determinations for each order, and the need to maintain price lists or 

catalogues, as in the prime vendor program. 

Page 6 GAO-07-396R Defense Management 
a result, the number of prime vendor programs has decreased from 15 to 7. Table 1 

lists the current acquisition strategies for the various commodities. 

Table 1: Acquisition Strategy for DLA Prime Vendor Programs

Commodities originally acquired 

through DLA prime vendor programs 

Current acquisition strategy 

1. MRO SuppliesaPrime vendor program 

2. MRO Services Prime vendor program 

3. Special Operations Prime vendor program 

4. Subsistence (Garrison Feeding) Prime vendor program 

5. Pharmaceutical Prime vendor program 

6. Medical/Surgical Prime vendor program 

7. Metals Prime vendor programb 

8. Food Service Equipment Will be long-term indefinite-delivery contracts 

9. Fire & Emergency Services Long-term indefinite-delivery contracts 

10. Lumber Long-term indefinite-delivery contracts 

11. Pallets Long-term indefinite-delivery contracts 

12. Ecclesiastical Long-term indefinite-delivery contracts 

13. Container Drums Long-term indefinite-delivery contracts 

14. Material Handling Equipment Will be long-term indefinite-delivery contracts 

15. Administrative Products Blanket Purchase Agreement canceled

Source: GAO analysis of DLA and DSCP data. a

This commodity has separate contracts for Central Command supplies and non-Central Command supplies. b

Currently prime vendor, but acquisition strategy being developed. 

In addition to adjusting the acquisition strategies for some prime vendor programs, in 

November 2006, DLA hired a contractor to conduct analyses to determine the cost 

savings, cost avoidance, and customer benefits from each of the prime vendor 

programs. The contractor is expected to complete the analyses by the end of March 

2007. 

Deficiencies Remain in Oversight, Price Reasonableness Determinations for One 

Commodity, and Staffing

DLA has taken actions to remedy deficiencies in the areas of management oversight, 

the process of conducting price reasonableness determinations for one commodity, 

and the shortage of staff with the required skills. Nevertheless, these improvements 

are still a work in progress. 

Page 7 GAO-07-396R Defense Management 
Management Oversight Guidance Has Not Been Fully Implemented

To improve its management oversight of the prime vendor program, DLA has issued a 

new policy that increased the level of oversight required for prime vendor contracts. 

DSCP, also, has updated its procedures to implement this new policy. However, a 

new division established at DSCP to ensure that supply chains are following 

procedures has not been able to conduct all the assessments required by the new 

policy and procedures. 

Among the management oversight problems we identified in 2006 was pricing, and 

one of the actions DLA took to address it was the promulgation of a new policy in 

June 2006 to implement regulatory guidance for prime vendor contracts. The key 

points of the June policy included 

• specific requirements for management oversight, such as pricing and compliance 

audits; 

• requiring all prime vendor contracts to comply with an established prime vendor 

pricing model; 

• annual local procurement management reviews for all prime vendor contracts; 

and 

• requiring approval by headquarters for all prime vendor contracts, regardless of 

dollar value. 

We found in our present review of the June 2006 policy that some of the examples of 

commodities used to illustrate various prime vendor arrangements were not 

associated with the correct pricing model. We discussed the apparent discrepancy 

with DLA officials, and subsequent to our discussions, DLA clarified the model and 

issued a revised policy in November 2006. The revised policy, among other things, 

also addressed management oversight, acquisition planning, and acquisition 

workforce training.15

 

DLA and DSCP management have taken a series of steps to improve oversight of

prime vendor programs. These include setting up a Compliance Division within the 

Procurement Directorate at DSCP to ensure that prime vendor contracts are being 

executed and administered in accordance with applicable rules and regulations; 

increasing the number of price reviews conducted by supply chains; and requiring 

that all prime vendor contracts be approved by DLA headquarters. In addition, the 

DLA Director provides updates on prime vendor program issues, as needed, to the 

Deputy Under Secretary of Defense for Logistics and Materiel Readiness, as part of 

their regularly scheduled meetings to discuss DLA matters. Further, DLA is 

establishing a new Acquisition Management Directorate at the headquarters level to 

emphasize the importance of the entire acquisition workforce, and to enhance 

oversight. Another step that DSCP management took to improve oversight was to 

require all supply chains to use a standardized mechanism to track repeat findings 

 15According to a DLA official, there is no specific requirement for annual local procurement 

management reviews in the revised policy because that requirement already exists in field activity

guidance; further, the reviews cover all procurement activities, not just those related to prime vendors. 

Page 8 GAO-07-396R Defense Management 
from procurement management reviews. This mechanism allows management to 

determine the cause of a repeat finding. 

Oversight guidance has not been fully implemented, however. According to the 

DSCP Guiding Principles for Acquisition, the Compliance Division’s quarterly reviews 

will include several assessments related to price reasonableness determinations. As 

of early December 2006, however, we found that the two reviews it had completed 

did not include all the assessments called for in the DSCP guidance. Procurement 

Directorate officials attributed the shortfall to the division’s heavy workload and the 

fact that it is not yet fully staffed. They further observed that even if the division

were fully staffed, conducting all the assessments listed in the guidance would not be 

possible because they are so extensive. The officials noted that the procedures were 

determined in a relatively short time frame by another organization and were not 

reviewed for practicability. The Compliance Division has revised its standard 

operating procedures for the quarterly reviews to more realistically reflect its current 

capabilities. A December 2006 DLA internal review of the corrective actions in the 

prime vendor program, requested by DLA management, expressed concern that the 

new procedures may weaken oversight.16 To address this concern, the Compliance 

Division now reviews a sample of contract documentation on a monthly basis to 

ensure that contracting officers are conducting price reasonableness determinations. 

We believe that until the Compliance Division is fully operational, management may 

lack all the information needed to provide proper oversight. 

The two completed quarterly reviews examined contracting officers’ documentation 

for determining prices to be fair and reasonable, vendors’ compliance with pricing 

methodology, and contract terms specifying fill rates. These reviews found that 

contracting personnel and vendors for most commodities provided adequate price 

reasonableness documentation and complied with pricing methodology and contract 

terms. However, in a few cases, either contracting personnel or the vendor did not 

provide the price reasonableness documentation. The Compliance Division 

subsequently met with contracting personnel in the various commodities to clarify 

what documentation is needed to verify their price reasonableness determinations. 

Price Reasonableness Determinations for One Commodity Were Not Done as

Required 

To improve its pricing procedures for various commodities, DLA’s 2006 policy 

established pricing models to be used for different types of prime vendor contracts. 

The pricing models generally require price reasonableness determinations to be made 

for all items priced at $2,500 or greater. However, for one prime vendor program—

MRO Supplies commodity within the construction and equipment supply chain—

price reasonable determinations are to be done for at least 30 percent of items priced 

from $2,500 to $24,999 before the prime vendor can process the order. The price 

 16Defense Logistics Agency, Audit Report on Corrective Actions Taken as a Result of Identified 

Deficiencies in the Prime Vendor Program (Fort Belvoir, Va.: Dec. 21, 2006).

Page 9 GAO-07-396R Defense Management 
reasonableness determinations for the remaining 70 percent of such items are to be 

done no later than 60 days after an order is issued. DSCP officials implemented this 

procedure in February 2006—that is, prior to the June 2006 issuance of DLA’s policy. 

However, in September 2006, we found that none of the 70 percent of items priced 

from $2,500 to $24,999 had been reviewed. As a result, DSCP had accrued a backlog 

of price reasonableness determinations to conduct, extending to 11,260 lines, with an 

approximate value of $96 million. 

Management at DLA and DSCP had not developed a plan to address this backlog until 

we identified the issue. According to DSCP officials, several factors played into the 

development of the backlog. First, DSCP could not easily identify the 70 percent of 

the items that needed a price reasonableness determination. This problem has since 

been addressed with the advent of a new automated management information

system. Second, according to DSCP officials, they did not have enough personnel to 

address the backlog. DSCP officials told us that they are actively working to address 

this issue. Finally, they said, the volume of business also played a role in the growth 

of the backlog. 

After we called their attention to this issue, DSCP officials developed a plan to 

conduct the determinations and to prevent this magnitude of backlog from 

developing again. DSCP officials reported as of late January 2007 that they had 

completed an initial review of all 11,260 lines and price reasonable determinations 

had been made on 10,780 of these lines. However, 480 lines required additional 

research to make the price reasonableness determination. According to a DSCP 

official, there is a possibility that some refunds may be required. We believe that until 

DSCP completes the price reasonableness determinations for all the items, there 

remains a risk that it was overcharged for some items. 

DLA and DSCP officials acknowledged that there was a risk but said that they had 

taken action to mitigate it by modifying the prime vendor contracts to include a 

purchasing review clause. This clause allows DLA access to the contractor’s records 

and information pertaining to those items or services for which the government is 

relying on the contractor’s purchasing system to determine that competition was 

obtained, or to justify that prices are fair and reasonable. In addition, if a purchased 

product or service is determined to be unreasonably priced, the contractor shall 

refund the government the amount that is in excess of a reasonable price. DLA and 

DSCP officials told us that incorporating the purchasing review clause mitigated the 

risk of being overcharged. According to a DLA official, DSCP has completed audits 

of four prime vendors to ensure compliance with the clause, but the reports had not 

been finalized as of the end of January 2007. Because the clause is relatively new, it 

remains to be seen how effective it will be. 

Some Supply Chains Have Not Been Able to Meet Their Staffing Requirements 

To improve the capability of its workforce, DLA has authorized additional staffing at 

DSCP to perform price reasonableness determinations, audits, and other oversight. 

DLA has also hired additional personnel at headquarters to monitor findings from 

Page 10 GAO-07-396R Defense Management 
procurement management reviews. One aspect of oversight is ensuring the presence 

of a workforce that has the skills and knowledge needed to oversee contracts. 

However, DSCP officials told us that they have been unable to fill all of the newly 

authorized positions because of difficulties in finding and hiring qualified personnel. 

These positions require highly specialized contracting skills, which are difficult to 

find. When a qualified acquisition person is found, the new staff member must be 

trained in the nuances of the particular commodity, as well as in the management of a 

prime vendor arrangement, in order to be fully effective. The shortage of personnel 

in the supply chains has led to heavier workloads for current staff as well as to 

backlogs of contract actions. 

Similarly, the Compliance Division does not yet have the skilled workforce that it 

needs to perform its oversight function. The division was authorized to have a 

staffing level of 17, yet as of December 2006, only 15 slots have been filled. The 

director of the division told us that the division was initially staffed by whoever was 

available. None of those staff had training in conducting compliance reviews. 

Currently, only about half of the personnel in this new division have the training or 

skills needed to perform their tasks. DSCP is aware of the inexperience of many 

Compliance Division personnel, and has recently developed a training plan for them. 

For their part, DLA and DSCP are exploring different methods of recruiting qualified 

acquisition personnel. For example, DSCP established a standing-register job 

opportunity announcement for acquisition personnel, initially open to federal 

employees in the Philadelphia area and subsequently broadened to include all federal 

activities nationwide. Further, DSCP issued a recruitment bulletin targeted toward 

separated, retired, or soon-to-retire military personnel, and it has also used an Office 

of Personnel Management announcement designed to recruit from the private sector. 

In addition to recruiting qualified acquisition personnel, DLA and DSCP have 

established a semiannual recruitment cycle to hire entry-level acquisition personnel. 

Until DLA and DSCP are able to fill all the positions, contract oversight may be 

inadequate. 

DLA May Face Challenges in Sustaining Improvements 

Our previous work has shown that demonstrated leadership commitment is an 

element of particular importance in implementing and sustaining management 

improvement initiatives.17 The current leadership at DLA and DSCP have 

demonstrated their commitment to correcting the oversight problems. For example, 

the DLA senior acquisition executive has briefed supply center staff on the 

importance of oversight, and the DSCP Commander has made personnel changes to 

enhance oversight. DLA management has also authorized more positions at DSCP 

and at headquarters to strengthen contracting and oversight staff. Further, DSCP 

management has requested approval for a new acquisition executive position to 

oversee all procurement activity for the center, and it has already received DLA 

approval for a Deputy Director position for the Procurement Directorate. However, 

 17GAO/T-GGD-00-26. 

Page 11 GAO-07-396R Defense Management 
as with most federal agencies, the leadership is continually changing. The current 

Director of DLA took over that position in August 2006. The DSCP Commander will 

complete his 2-year term as Commander in mid-2007. A new Deputy Commander will 

replace the current one, who is serving in a temporary capacity, in early 2007. 

Further, DSCP is continuing to hire acquisition personnel. In light of the personnel 

changes occurring at both the management and operational level, the significant 

changes in program operating procedures, and the establishment of new oversight 

mechanisms, DLA may face challenges in sustaining the improvements it is 

implementing in the prime vendor program. DLA’s history reflects the vulnerability 

of the prime vendor program to systemic pricing problems. Despite guidance and 

reforms to which the agency has committed over time, these issues have beset DLA 

for a long time, because management has not always provided the oversight 

necessary to ensure that corrective actions were implemented. 

Conclusions 

DLA’s recent progress in implementing actions to improve oversight of the prime 

vendor program to date has been promising. However, systemic pricing problems 

remain an area of risk for this program. Critical to DLA’s ability to realize substantial 

improvements in the oversight of the prime vendor program will be rectifying the 

program’s long-standing problems described in this report. DLA’s ability to address 

these remaining problems is dependent on completing procedural improvements and 

filling contract oversight positions with qualified staff. Whether this will occur as 

intended is not a certainty. DLA’s history of problems in overseeing prime vendor 

contracts, the expected turnover in leadership and operating personnel, and the 

significant changes made to program operating procedures could pose significant 

risks to sustaining the improvements made to program oversight. It is important that 

DLA and DSCP management fully implement all the corrective actions and sustain 

the improvements over the long term so the intended results are achieved. 

Recommendation

We recommend that the Secretary of Defense direct the Under Secretary of Defense, 

Acquisition, Technology, and Logistics to require the Director of DLA to determine 

whether all the corrective actions in DLA’s prime vendor program have been 

completed and are producing the intended results. This determination should 

identify any remaining or additional actions necessary to remedy the deficiencies in 

the prime vendor program. This determination should also specify a time frame for 

the completion of these actions. The results of the determination should be 

communicated in writing to the Under Secretary of Defense, Acquisition, Technology, 

and Logistics within 6 months of the issuance of this report. 

Agency Comments 

In written comments on a draft of this report, the Deputy Under Secretary of Defense 

for Logistics and Materiel Readiness, which is responsible for DLA oversight, 

concurred with our recommendation and noted that DLA has made progress in

Page 12 GAO-07-396R Defense Management 
implementing the corrective actions, and is committed to ensuring that the remaining 

actions are completed and are producing the intended results. The written comments 

from the Deputy Under Secretary of Defense for Logistics and Materiel Readiness are 

included in the enclosure following this report. 

Scope and Methodology

To determine the extent to which DLA’s corrective actions have addressed the major 

deficiencies in the prime vendor program, we discussed the status of actions taken 

and results of these actions with DLA and DSCP officials. Specifically, we discussed 

the changes to management oversight, new procedures for price reviews, metrics 

used to assess the prime vendor programs, acquisition strategies for commodities 

originally classified as prime vendor programs, and efforts to train and recruit 

personnel. In addition, we discussed with representatives from the Office of the 

Deputy Under Secretary of Defense for Logistics and Materiel Readiness their role in 

overseeing the implementation of DLA’s corrective actions and reviewed prime 

vendor program briefings provided these officials by DLA. We also reviewed and 

analyzed a new DLA policy governing the use of prime vendor contracts, DSCP 

procedures for implementing the policy, DSCP’s adherence to the policy and 

procedures, internal assessments of DLA’s and DSCP’s management of prime vendor 

contracts, and prior GAO reports. Further, we reviewed a judgmental sample of

documentation supporting contracting officers’ price reasonableness determinations 

for two commodities within the construction and equipment supply chain. Finally, we 

interviewed officials from the Deputy Under Secretary of Defense for Acquisition and 

Technology, Defense Procurement and Acquisition Policy organization to discuss 

their role in assisting DLA with acquisition workforce planning. We conducted our 

review from August 2006 through January 2007 in accordance with generally 

accepted government auditing standards.

We are sending copies of this report to appropriate congressional committees; the 

Secretary of Defense; the Under Secretary of Defense, Acquisition, Technology and 

Logistics; the Deputy Under Secretary of Defense for Logistics and Materiel 

Readiness; and the Director, Defense Logistics Agency. We will also make copies 

available to others upon request. In addition, the report will be available at no charge 

on the GAO Web site at http://www.gao.gov. 

Page 13 GAO-07-396R Defense Management 
Please contact me at (202) 512-5274 or needhamjk1@gao.gov if you or your staff have 

any questions concerning this report. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. Key 

contributors to this report were Marilyn Wasleski, Assistant Director; Vijay J.

Barnabas; John Clary; Janay Sam; Karen Thornton; and Cheryl Weissman. 

John K. Needham, Acting Director

Defense Capabilities and Management 

Enclosure 

Page 14 GAO-07-396R Defense Management 
Enclosure: Comments from the Department of Defense 

Page 15 GAO-07-396R Defense Management 
Enclosure: Comments from the Department of Defense 

(350893) 

Page 16 GAO-07-396R Defense Management 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER