U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

46–284 CC 1998

REFORMING INVENTORY MANAGMENT THROUGH

INNOVATIVE BUSINESS PRACTICES

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY, 

INTERNATIONAL AFFAIRS, AND CRIMINAL JUSTICE

OF THE

COMMITTEE ON GOVERNMENT 

REFORM AND OVERSIGHT 

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

JULY 24, 1997

Serial No. 105–78

Printed for the use of the Committee on Government Reform and Oversight

(

(II)

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT 

DAN BURTON, Indiana, Chairman 

BENJAMIN A. GILMAN, New York 

J. DENNIS HASTERT, Illinois 

CONSTANCE A. MORELLA, Maryland 

CHRISTOPHER SHAYS, Connecticut 

STEVEN SCHIFF, New Mexico 

CHRISTOPHER COX, California 

ILEANA ROS-LEHTINEN, Florida 

JOHN M. MCHUGH, New York 

STEPHEN HORN, California 

JOHN L. MICA, Florida 

THOMAS M. DAVIS, Virginia 

DAVID M. MCINTOSH, Indiana 

MARK E. SOUDER, Indiana 

JOE SCARBOROUGH, Florida 

JOHN B. SHADEGG, Arizona 

STEVEN C. LATOURETTE, Ohio 

MARSHALL ‘‘MARK’’ SANFORD, South 

Carolina 

JOHN E. SUNUNU, New Hampshire 

PETE SESSIONS, Texas 

MICHAEL PAPPAS, New Jersey 

VINCE SNOWBARGER, Kansas 

BOB BARR, Georgia 

ROB PORTMAN, Ohio 

HENRY A. WAXMAN, California 

TOM LANTOS, California 

ROBERT E. WISE, JR., West Virginia 

MAJOR R. OWENS, New York 

EDOLPHUS TOWNS, New York 

PAUL E. KANJORSKI, Pennsylvania 

GARY A. CONDIT, California 

CAROLYN B. MALONEY, New York 

THOMAS M. BARRETT, Wisconsin 

ELEANOR HOLMES NORTON, Washington, 

DC 

CHAKA FATTAH, Pennsylvania 

ELIJAH E. CUMMINGS, Maryland 

DENNIS J. KUCINICH, Ohio 

ROD R. BLAGOJEVICH, Illinois 

DANNY K. DAVIS, Illinois 

JOHN F. TIERNEY, Massachusetts 

JIM TURNER, Texas 

THOMAS H. ALLEN, Maine 

HAROLD E. FORD, JR., Tennessee 

———

BERNARD SANDERS, Vermont 

(Independent) 

KEVIN BINGER, Staff Director 

DANIEL R. MOLL, Deputy Staff Director 

WILLIAM MOSCHELLA, Deputy Counsel and Parliamentarian 

JUDITH MCCOY, Chief Clerk 

PHIL SCHILIRO, Minority Staff Director 

SUBCOMMITTEE ON NATIONAL SECURITY, INTERNATIONAL AFFAIRS, AND CRIMINAL

JUSTICE

J. DENNIS HASTERT, Chairman 

MARK E. SOUDER, Indiana 

CHRISTOPHER SHAYS, Connecticut 

STEVEN SCHIFF, New Mexico 

ILEANA ROS-LEHTINEN, Florida 

JOHN M. MCHUGH, New York 

JOHN L. MICA, Florida 

JOHN B. SHADEGG, Arizona 

STEVEN C. LATOURETTE, Ohio 

BOB BARR, Georgia 

THOMAS M. BARRETT, Wisconsin 

TOM LANTOS, California 

ROBERT E. WISE, JR., West Virginia 

GARY A. CONDIT, California 

ROD R. BLAGOJEVICH, Illinois 

CAROLYN B. MALONEY, New York 

ELIJAH E. CUMMINGS, Maryland 

JIM TURNER, Texas 

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California 

ROBERT CHARLES, Staff Director 

ANDREW RICHARDSON, Professional Staff Member 

AMY DAVENPORT, Clerk 

MARK STEPHENSON, Minority Professional Staff Member 

(III)

C O N T E N T S 

Page 

Hearing held on July 24, 1997 ............................................................................... 1

Statement of: 

Emahiser, James B., Assistant Deputy Under Secretary of Defense for 

Materiel and Distribution Management; Edward D. Martin, Acting Assistant Secretary of Defense for Health Affairs; and Jeffrey A. Jones, 

Executive Director for Logistics Management, Defense Logistics Agency .................................................................................................................... 59

Warren, David R., Director, Defense Management Issues, General Accounting Office, accompanied by Kenneth R. Knouse, Jr., Assistant 

Director; Robert L. Repasky, senior evaluator; and Matthew Lea, senior 

evaluator ........................................................................................................ 20

Letters, statements, etc., submitted for the record by: 

Burton, Hon. Dan, a Representative in Congress from the State of Indiana, prepared statement of .......................................................................... 9

Emahiser, James B., Assistant Deputy Under Secretary of Defense for 

Materiel and Distribution Management, prepared statement of .............. 62

Hastert, Hon. J. Dennis, a Representative in Congress from the State 

of Illinois, prepared statement of ................................................................ 3

Jones, Jeffrey A., Executive Director for Logistics Management, Defense 

Logistics Agency, Navy Times article .......................................................... 87

Maloney, Hon. Carolyn B., a Representative in Congress from the State 

of New York, prepared statement of ........................................................... 17

Martin, Edward D., Acting Assistant Secretary of Defense for Health 

Affairs, prepared statement of ..................................................................... 81

Warren, David R., Director, Defense Management Issues, General Accounting Office, prepared statement of ....................................................... 23

(1)

REFORMING INVENTORY MANAGEMENT 

THROUGH INNOVATIVE BUSINESS PRACTICES 

THURSDAY, JULY 24, 1997 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON NATIONAL SECURITY, INTERNATIONAL

AFFAIRS, AND CRIMINAL JUSTICE, COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT, Washington, DC. 

The subcommittee met, pursuant to notice, at 12:10 p.m., in room 

2154, Rayburn House Office Building, Hon. J. Dennis Hastert 

(chairman of the subcommittee) presiding. 

Present: Representatives Hastert, Souder, Mica, Barrett, and 

Maloney. 

Ex officio present: Representative Burton. 

Also present: Representative Sessions. 

Staff present: Robert Charles, staff director; Andrew Richardson, 

professional staff member; Amy Davenport, clerk; Mark Stephenson, minority professional staff member; and Ellen Rayner, minority chief clerk. 

Mr. HASTERT. Good afternoon. The Subcommittee on National 

Security, International Affairs, and Criminal Justice will come to 

order. 

Today the subcommittee is holding its second hearing on defense 

inventory management. While seldom openly discussed, this is an 

issue of tremendous importance to the Nation, and one on which 

we will begin to focus more vigorously as a subcommittee. 

Our first hearing on defense inventory management served as a 

survey course, providing an overview of existing problems and options. The scope of our hearing today will be more narrow. We shall 

examine how the Department of Defense has used innovative best 

business practices, including virtual prime vendor and direct vendor delivery, to improve inventory management. We will also examine how the department can buildupon its successes and expand 

the number of items for which virtual prime vendor and direct vendor delivery are used. 

Joining us today are representatives from the General Accounting Office and the Department of Defense to discuss current and 

future reforms. 

As you know, the Defense Department has historically emphasized ‘‘just in case’’ practices, which necessarily involve the overbuying and stockpiling of excess inventory. This approach has offered availability for supply and repair, but only at the cost of efficiency and savings. Today, modern inventory management practices offer both availability and maximum efficiency. In fact, the 

2

American business community has pioneered in sophisticated 

methods of inventory management which allow both timely delivery and valuable cost savings. 

It is time that these methods were more widely adopted by the 

Federal Government. Methods like ‘‘just in time’’ delivery, supplier 

parts, and prime vendor contracts could easily be applied to the Defense Department. Obviously, where military readiness is at issue, 

we side with the need for total preparation, but there are countless 

opportunities today for increased cost savings. 

The department has been slow to adopt the cutting edge business 

practices, but they have achieved at least one notable success. This 

is in the area of virtual prime vendor and direct vendor delivery 

for medical and pharmaceutical supplies. Under steady pressure by 

Congress and GAO, the department has replaced a slow, costly system of managing medical supplies with one that is more like that 

used by private hospitals. Instead of numerous warehouses, the department now places orders electronically and receives medical 

supplies on an as-needed basis from commercial vendors. 

Adopting these practices has saved the department over $700 

million since 1991. The GAO has suggested similar techniques for 

other categories of defense inventory items, including commercially 

available industrial hardware. The estimated value of potential 

savings to America’s taxpayers by improved inventory management 

by the Defense Department is in the billions of dollars. Our message today is, let’s do it. 

One last point: The embryonic program at Warner Robbins Air 

Logistics Center is a step in the right direction, but the department 

must continue to apply new practices, particularly to acquisition of 

industrial items. Remarkably, the department has embraced this 

idea for only this facility, and only since January. If broadly applied, Americans could save billions, and we, as a Nation, would 

have a more efficient and highly ready military. 

In conclusion, I want to emphasize that we all understand the 

need to reduce infrastructure so our Defense Department can profitably devote greater resources to modernization. We also want 

maximum readiness. The department’s budget has been cut for 13 

consecutive years. But, by contrast, the department’s wide inventory management improvements could bring major rewards home 

to the average taxpayer. Today, we will together begin that effort. 

[The prepared statement of Hon. J. Dennis Hastert follows:]

3


g:\graphics\46284.001
4


g:\graphics\46284.002
5


g:\graphics\46284.003
6


g:\graphics\46284.004
7

Mr. HASTERT. With that, I would like to yield to the chairman 

of the full committee, Mr. Burton. 

Mr. BURTON. Thank you very much, Chairman Hastert. 

I want to thank you for holding this important hearing on Department of Defense inventory management. This area has been 

identified by the General Accounting Office as 1 of its 25 high-risk 

areas in the Federal Government because of its vulnerability to 

waste, fraud, abuse, and mismanagement, and it has been on that 

list for several years. 

As the principal oversight committee in the House of Representatives, it is our responsibility to oversee the efficiency and effectiveness of all aspects of Federal Government operations, including the 

Department of Defense. Congressman Hastert’s subcommittee has 

been vigilant and aggressive in pursuing Department of Defense 

oversight, especially defense inventory management. 

Unfortunately, the Department of Defense has not effectively and 

efficiently solved many of the long-term inventory management 

problems, and therefore it is necessary for Congress to hold stronger oversight and scrutiny of the department’s practices in inventory 

management, and we intend to do that. 

Today, the department currently holds an estimated $69 billion 

worth of inventory. Recognizing that a ‘‘one size fits all’’ solution 

will not work for inventory management and that the subcommittee cannot tackle the entire issue of inventory management 

in one hearing, today the subcommittee will be focusing solely on 

the consumable items within the inventory. 

These include items such as medical supplies, food, clothing, 

screws, lumber, and building supplies. This portion of the inventory 

is valued at $18.7 billion. This hearing, according to Representative 

Hastert, will focus on how the Department of Defense is managing 

the inventory of items within this category, with particular emphasis on the $7.2 billion worth of industrial hardware items, such as 

bolts, valves, and fasteners held by the department. 

Over the last several years, the department has successfully applied best business practices to medical, food, and clothing items. 

Today, we will be given more details about their latest efforts to 

apply these practices to hardware items. 

The subcommittee also wants to learn what the potential savings 

could be if the department more aggressively adopted modern business practices over the next few years, a goal that is shared by 

Chairman Hastert and myself. While I am encouraged by the reforms the department has made in this area, I am, frankly, concerned that the department is not moving fast enough, and I think 

the American taxpayer feels the same way. 

At a time when we are contemplating additional cuts in our combat forces, it is vital that the department’s infrastructure be as 

lean and as mean as possible. There is the potential to save billions 

of dollars over the next few years in inventory management, which 

could be reinvested in higher priority programs within the Defense 

Department or returned to the taxpayer. This is an issue that the 

committee will be working on for the duration of the 105th Congress. 

8

Mr. Chairman, once again, I want to thank you for your leadership on this issue, and I look forward to working with you in the 

future. 

I yield back. 

[The prepared statement of Hon. Dan Burton follows:]

9


g:\graphics\46284.005
10


g:\graphics\46284.006
11


g:\graphics\46284.007
12


g:\graphics\46284.008
13


g:\graphics\46284.009
14


g:\graphics\46284.010
15

Mr. HASTERT. Thank you, Mr. Chairman. I certainly appreciate 

your leadership in this area and many areas in the full committee. 

At this time, I would like to recognize the Member from New 

York, Mrs. Maloney. 

Mrs. MALONEY. Thank you very much, Chairman Hastert. 

I am very pleased that you are holding this hearing today on reforming defense inventory management through innovative best 

business practices. I applaud your efforts to keep this issue in the 

public spotlight, because I believe that we have a real opportunity 

here to eliminate substantial waste at the Department of Defense 

and save taxpayers billions of dollars. 

Very importantly, as both sides of the aisle work very hard to 

balance the budget, and we have suffered cutbacks in all areas of 

government, it is important that the limited dollars that we have 

are spent on keeping our armed services the best equipped and the 

best prepared in the world, and certainly not on unneeded inventory. 

Earlier this year, the General Accounting Office responded to a 

request from Congressman DeFazio, then Congressman Durbin, 

and Senator Harkin and myself to investigate the amount of 

unneeded inventory at the Department of Defense. The GAO reported to us that DOD has $41 billion in unneeded inventory, including $14.6 billion in inventory that will never be used, according 

to the GAO, and $1 billion in inventory that will last 100 years or 

more. 

I must say that since I have been on this committee, I have read 

the GAO reports that they have been issuing on this issue, and 

every time I read about the problem, I think, well, the next GAO 

report will show that the inventory is becoming less, that the great 

military Department of Defense that we have will address the 

problem that they are pointing out to them. 

I must tell you I am astonished that every time I read a GAO 

report, the number gets bigger; it grows. The inventory grows, and 

I don’t understand that, with the expertise that you have in the department, that a problem like this cannot be addressed. 

For more than a decade, GAO has documented mismanagement 

at the department, yet the Department of Defense has made little 

progress. In fact, the inventory continues to grow. The Department 

of Defense continues to use outmoded technology and inventory 

practices which waste money, and delays the timely repair of weapon systems and their components. 

For example, just this year, the Navy reported that it stopped repairing more than 12,000 broken aircraft components, valued at 

$500 million, simply because parts were not available. At the same 

time, the military services continued to order parts for which they 

already have 20 more years’ worth of supplies on the shelf. By 

using best business practices, a modern corporation would not only 

make sure that it needed the part before ordering more, but it 

would also receive parts as soon as they needed them. 

To bring DOD into the 1990’s, I have introduced legislation, H.R. 

1850, which Mr. Barrett, the ranking member of this committee, 

has cosponsored, that would require the Secretary of Defense to 

begin testing various best business practices to improve defense inventory management. 

16

I also drafted a version of this bill as an amendment to H.R. 119, 

the House Defense Authorization bill. Unfortunately, the Rules 

Committee did not accept my amendment. At the same time, I sent 

a copy to the Senate and urged them to accept my legislation as 

part of the Senate Defense Department Authorization bill. I am 

pleased to inform the subcommittee that a version of my legislation 

passed the Senate on July 11. 

I applaud the Senate’s actions and urge the House to adopt Senate language in conference that will implement best business practices at the Department of Defense. And I appeal, in a bipartisan 

way, to the chairman and other distinguished members of the 

panel to aid in keeping this language in the conference committee 

report. 

I designed my language to promote the use of best business practices, like cellular manufacturing techniques, which involve bringing all the resources needed to complete repairs to one location, the 

elimination of excess spare parts inventory, and the rapid initiative 

of repair actions, like the use of private entities for logistics services such as warehousing. 

I urge the Department of Defense to implement these techniques. 

Once implemented, I am confident that the department will discover that these techniques can improve the support to the military 

customer and enhance readiness, as well as save inventory and related management costs, and therefore allow us to spend more of 

our dollars on the defense of our country and on the support of our 

military men and women, and the inventory that they need, but 

not unneeded inventory. 

I yield back the balance of my time. Thank you. 

[The prepared statement of Hon. Carolyn B. Maloney follows:]

17


g:\graphics\46284.011
18


g:\graphics\46284.012
19

Mr. HASTERT. The gentlewoman’s time has expired. I would also like to note that Mr. Sessions, a member of the full 

committee, will be joining us today. Mr. Sessions is a member of 

the Results Caucus, and he will be addressing this issue throughout the 105th Congress. I yield to the gentleman from Texas for an opening statement.

Mr. SESSIONS. Thank you, Mr. Chairman. I appreciate your allowing me to serve with you today. As chairman of the Results Caucus, I am here to not only participate but 

to gather and gain information and insight into the testimony that 

is going to take place today. The Results Caucus is a caucus that was appointed by Majority 

Leader Dick Armey, a gentleman who has a distinguished career 

in looking not only at our military but also the efficiency of government. We are concerned about any government agency that remains on the high-risk series, as a result of GAO and any audits 

they perform. So my function here really, as chairman of the Results Caucus, is to gather information into what is being discussed 

today. From a perspective of purely trying to look at good management—I have heard said many times today, and heard many times 

today—the efficiency gained from reform in this area of the defense 

inventory management, I believe, can result in more money for the 

Department of Defense to support its ultimate target and mission 

statement, and that is of not only the defense of our country but 

also combat readiness.

I take a perspective that I believe that the best disinfectant is 

the light of day, and that oversight by this committee and the Results Caucus will be critical to the success of not only the military 

but any other area we get into. The Results Caucus and the work 

that we do should be considered positive, not only by the taxpayers 

of this country, but also those agencies. I hope that the Defense Department views our interaction with them as positive also. Mr. Chairman, thank you.

Mr. HASTERT. I welcome the gentleman from Texas’ comments 

and just want to say that we look forward to working with him. 

I know that both the chairman of the full committee and myself 

think this is an important issue. Just let me say for the record, our goal is not necessarily to cut 

defense spending. Our goal is to make sure that the dollars that 

are spent are spent to support the men and women who wear the 

uniforms and protect this country, that they have the wherewithal 

to do their jobs, and that we are in the most efficient support posture possible, to make sure that the dollars are spent for the things 

that are most important. At this time, I would like to introduce our first panel. Mr. David 

Warren is the Director of Defense Management Issues at the General Accounting Office. He is joined by Mr. Kenneth Knouse, an Assistant Director at GAO, and Mr. Robert Repasky, a senior evaluator at GAO, and Mr. Matthew Lea, also a senior evaluator at 

GAO.

I thank you, gentlemen, all for coming. In accordance with House 

rules, we will swear you in, so please stand and raise your right 

hands. 

[Witnesses sworn.]

20

Mr. HASTERT. Let the record show that the witnesses answered 

in the affirmative. 

Before you begin, Mr. Warren, I would like to extend my thanks 

to the GAO for your recent and good work with the subcommittee 

on this issue. I especially want to thank Mr. Repasky and Mr. Lea, 

both of whom worked out of your Dayton office, for the work that 

they have done, including travel with the subcommittee staff and 

investigative trips to military installations nationwide. 

Mr. Warren, please proceed. 

STATEMENT OF DAVID R. WARREN, DIRECTOR, DEFENSE MANAGEMENT ISSUES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY KENNETH R. KNOUSE, JR., ASSISTANT DIRECTOR, ROBERT L. REPASKY, SENIOR EVALUATOR, AND MATTHEW LEA, SENIOR EVALUATOR 

Mr. WARREN. Thank you, Mr. Chairman. We appreciate that. 

I would like to just briefly summarize my remarks, if I could, and 

have my full statement entered into the record, please. 

Mr. HASTERT. Without objection, the full statement will be entered into the record. 

Mr. WARREN. I would also, as an opening remark, mention that, 

as a result of the last hearing, Mr. Emahiser, who will be on the 

second panel and has major responsibilities in this area, he and I 

got together and thought it would be constructive to talk about the 

areas of, in essence, mutual disagreement that we had on certain 

issues. We have agreed to do that. 

We have also agreed to put together a team of folks to look at 

those items, so we can constructively start working toward solutions. I just wanted to mention that as a positive result of the work 

that has already come out of this particular set of oversight hearings. 

Mr. Chairman, members of the subcommittee, Mr. Burton, we 

are pleased to be here today to discuss DOD’s use of private sector 

business practices to improve inventory management processes. As 

you requested, we will look at consumable items. They represent 

about $18.7 billion. 

Our testimony addresses three points: First, DOD, in fact, has 

made some progress in reducing inventory cost and improving services to customers. 

Second, we still think significant opportunities exist to reduce 

those costs further, and we think they lie, as you have said, in the 

area of prime vendor and best commercial practices. 

Third, we do, in fact, think that legislation that has been introduced in this Congress represents a positive step forward and is 

consistent with many of the recommendations that GAO has put 

out over the past several years with regard to ways to address 

these problems. 

Let me give you a few more details on each of those areas. Regarding DOD’s progress, about 2 percent of the consumable items 

that DOD manages are through the prime vendor program. Simply 

defined, a prime vendor is a commercial activity that buys, stores, 

and then provides items to a military customer upon request. 

To its credit, DOD has achieved significant cost and service improvements through the medical supplies program, as mentioned in 

21

the opening statements. We estimate that savings in those areas 

are on the order of magnitude of $700 million over a 5-year period. 

This program is also helping to get DOD out the storage, distribution, and inventory holding business, which we think is important, 

as well, and I think the department would agree. 

Another important item with regard to that program is that it 

puts DOD in a position of not having or minimizing the amount of 

excess inventory that they have, because they are making a purchasing decision much closer to the point in time that the inventory 

can be used. So things that would intervene where the period is 

longer, natural changes in requirements, things of that nature, the 

likelihood of that happening is reduced. 

The first figure that we have here to my left provides an illustration of what was mentioned in the opening remarks regarding the 

success of this program. The key point to look at, the bars represent the total amount of inventory that was held starting in 

1991, about $600 million, and the amount of inventory that we 

have today in the medical area, and that’s about $200 million. 

That’s a significant reduction. 

Now, some of that, obviously, was occasioned by the force reduction. Other portions of it, clearly, we believe are attributable to the 

medical prime vendor. That program started in earnest in 1993. 

Prior to that, we had made recommendations to adopt the program. 

The department was in agreement with that and started some initiatives to buy down the excess inventory they had, in anticipation 

of beginning the medical prime vendor. 

To me, this is a true success story for the department. The dotted 

line shows that as the prime vendor program is implemented, you 

see a trend of the inventory being held moving down. From an 

overall context, this is the approach the private sector has been implementing, principally during the 1980’s and very aggressively 

during the 1990’s. 

In addition to reducing inventory costs, this purchasing approach 

also improves service to the military customer. For example, the 

use of this practice has reduced the time needed to supply an item 

from an average of 110 days to 8 days. In short, this means you 

have helped to improve readiness. 

DOD is also making similar progress in the food prime vendor 

program. They also have a program underway in the clothing area; 

however, that has not progressed far enough for us to make a full 

assessment, but the early indications are that the trends are similar to those that you see in the medical area. They moved out very 

aggressively in the food area. They have a ways to go in the clothing area. 

Let me turn to some of the things where we see there are opportunities for further improvement. An area where DOD has made 

little progress in adopting best practices is hardware supplies. This 

includes such things as bearing valves, bolts, things of that nature. 

The reason that we believe it is significant is that it represents 97 

percent of the items that DLA manages and represents a substantial financial investment. 

For example, DLA annually purchases $2.6 billion of these types 

of items and holds these items valued at about $7 billion. However, 

our work has shown, in many cases, customer needs can still not 

22

be met. For example, at one repair depot where we did some extensive work on the repair process, we found that mechanics ordering 

parts received the full order only 25 percent of the time. Obviously, 

that’s not the type of supply responsiveness that we are hoping to 

see. 

To improve hardware inventory management, DLA has implemented a commercial direct vendor delivery program in about 17 

percent of the sales in the hardware items. Also, it has started a 

limited program in the prime vendor area, and that represents 

about 2 percent of those sales. 

Our second illustration, to your far right, the comparison I wanted to make here, you have a very much less aggressive program in 

the prime vendor going on in the hardware area. You note there, 

for the amount of inventory being held, that there has been very 

little change since 1992. 

What we would hope and will talk a little bit about here as we 

go on, and I am sure we will discuss, is that we believe that there 

is an opportunity to get a similar trend in the hardware area. In 

other words, as prime vendor use goes up, we hope to see inventory 

cost go down and supply responsiveness improve. 

Last, I would like to make a few comments about the legislation. 

We think it is important to note that these represent, we think, important opportunities to improve not only inventory management 

but the use of best commercial practices in that process. As I said, 

they are consistent with many of the recommendations that we 

have made over the last several years. 

For example, the House Defense Authorization Act of 1989 calls 

for reductions in the overhead of inventory control points. We believe such reductions are certainly needed. A recent study that was 

done by LMI and that we evaluated showed that savings could be 

on the order of magnitude of $3 billion over, I believe, a 5-year period, if consolidation could be achieved. 

Also, we support several requirements in the Senate version of 

the 1998 Authorization Act. Particularly, we are encouraged by 

those provisions that relate to the application of best practices at 

depot-level repair activities and the expansion of the use of concepts such as prime vendor within the Defense Logistics Agency. 

We think, by doing these things, particularly in the hardware 

items, that you have high potential for improving DOD inventory 

management and, obviously, reducing costs without impacting on 

the war fighting, and we would hope perhaps improve that service 

and level of capability. 

Mr. Chairman, that concludes my summary. We would be happy 

to respond to questions. 

[The prepared statement of Mr. Warren follows:]

23


g:\graphics\46284.013
24


g:\graphics\46284.014
25


g:\graphics\46284.015
26


g:\graphics\46284.016
27


g:\graphics\46284.017
28


g:\graphics\46284.018
29


g:\graphics\46284.019
30


g:\graphics\46284.020
31


g:\graphics\46284.021
32


g:\graphics\46284.022
33


g:\graphics\46284.023
34


g:\graphics\46284.024
35


g:\graphics\46284.025
36


g:\graphics\46284.026
37


g:\graphics\46284.027
38


g:\graphics\46284.028
39


g:\graphics\46284.029
40


g:\graphics\46284.030
41


g:\graphics\46284.031
42


g:\graphics\46284.032
43


g:\graphics\46284.033
44


g:\graphics\46284.034
45

Mr. HASTERT. I thank the gentleman. 

Let me ask you a question. You talk about the great advances 

in health care inventory. One of the things that I’ve been doing 

around this Congress for the last couple years is health care. We’ve 

found that the increasing cost in health care, that was basically 15 

percent a year, both on the private side and the public side, has 

been reduced down to almost 2 or 3 percent, in some cases, in the 

private sector, and down around 5 to 10 percent even in the public 

sector, except in the cases of some issues in Medicare, where it was 

almost still at 12 percent. 

One of the ways that you squeeze down the price, of course, is 

to put caps on costs for procedures, but also in the inventory. Most 

hospitals that you walk in today, when a patient checks in, there 

is a computerized situation where the substance that goes at bedside is punched in. So the health care industry, because of managed care and other things, has been revolutionary in their management of hospital equipment and supplies. 

So let me ask you a question. In your opinion, is the military’s 

ability to control this a result of the trend in the industry, or is it 

real innovation inside DOD? 

Mr. WARREN. Specifically as it relates to? 

Mr. HASTERT. Health care. 

Mr. WARREN. Inventory management? 

Mr. HASTERT. Yes. 

Mr. WARREN. I guess, if I’m understanding correctly, I would 

have to say it’s a combination. In other words, the actions that the 

department has taken are very consistent with the innovative practices that were being implemented in the private sector. 

What they did was to take a look at what was happening there. 

They instituted pilot programs. They have a rather long schedule, 

or a longer schedule, for the implementation. They saw early on 

that that was working very well, and they said, ‘‘Hey, this is going 

to work for us. Let’s expand that out and get the full benefit.’’ I 

believe they are up to 200 hospitals now. 

So I think it would be a combination. In other words, the innovation—I think the practice came from the private sector, but the department was willing to accept that practice, embrace it, move out, 

and get the savings that were available, and improve services. 

Mr. HASTERT. So the technology was basically there in the private sector, and it was the willingness of DOD to accept it and go 

forward with that. 

Mr. WARREN. Yes, sir. What we’ve seen in this area, the logistics 

inventory area, improvement is heavily dependent on information 

technology advances that, again, principally have been made during the 1980’s and now are going even further during the 1990’s. 

That’s what they were able to latch on, along with business concepts and philosophies. 

Mr. HASTERT. Well, also in the private sector, when you say that 

this hasn’t been followed or hasn’t been the savings in the hardware and inventory levels, in that area, those types of things, 

valves and fasteners and all that stuff. 

Mr. WARREN. Yes, sir. 

Mr. HASTERT. Our private sector has gone to just-in-time philosophy or just-in-time procedures that were adapted from the JapaVerDate jul 14 2003 13:37 Dec 16, 2003 Jkt 010199 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 W:\DISC\46284.TXT 46284
46

nese, who adapted from American know-how philosophy. But, anyway, it’s come full circle. 

Is that tougher because the private sector is not willing to forward that? Is it because of the unique properties of those things 

that we have to have; it’s one of a kind? What’s the nature? 

Mr. WARREN. Our general assessment is that we do not think it 

would be tougher. In other words, we think it is feasible. However, 

as in the past, our recommendation has been to let’s pilot this to 

make sure, and just as you mentioned, that we’re not going to do 

anything here that’s going to harm readiness. 

One of the things in our studies, we can only do a hypothetical, 

in essence, assessment of feasibility, so we think we need those pilots to make sure they are directly transferable. The pilots have 

been the key to assure that that transfer feasibility is there and 

that readiness is not harmed. That’s been the vehicle. 

What we have encouraged the department—and, again, as they 

did in the medical area—is to establish a pilot schedule that you 

feel is reasonable, but that if you see the results are working very 

well, move forward as quickly as possible to expand that. 

Mr. HASTERT. Let me ask you a question: How long should it 

take the DOD to expand the practices highlighted in your testimony, especially to cover the majority of the consumable inventory 

items? 

Mr. WARREN. I cannot give a precise answer, but I can give some 

information around that. 

Mr. HASTERT. General. 

Mr. WARREN. It took 20 to 40 months, in the pharmaceutical and 

medical area, to accomplish this. So you’re talking 2 to 3 years 

plus. We have had information from private sector companies that 

they are able to do this in 1 year; however, I think it’s important 

to point out that many of those companies are not as large as the 

Department of Defense. There may be special problems. 

Also, the Senate bill recommends that this be done in about a 3-

year timeframe. So based on that information, I would say it’s not 

unreasonable to look at a 3-year pilot program. All we would ask 

is that there be a process where you can check as the program goes 

along. 

If it looks like you’ve got all the information to expand in an aggressive manner, go ahead and do that. If you feel you need the 

entire cycle to assure yourself that you’re going to be able, in fact, 

to meet all your requirements, and again, particularly toward readiness, then that would seem reasonable to me. 

Mr. HASTERT. Mr. Warren, to be clear on the numbers, the GAO 

asserts that there’s $7.2 billion worth of hardware items in DLA’s 

distribution depots and warehouses. Is it feasible for the department to try to employ virtual prime vendor and direct vendor delivery for all these items? 

Mr. WARREN. Yes, I certainly think it’s feasible to test. I think 

our indications are that there ought to be opportunities to go across 

the entire spectrum. Yes. 

Mr. HASTERT. Your statement discusses DOD’s progress in adopting best practices. What have been the keys to DOD’s successes, 

and in what areas does DOD need to make more progress? 

47

Mr. WARREN. Clearly—and it’s similar to what happens in the 

private sector—you need top-level management commitment. In 

other words, the senior leadership, for any major change in an organization, whether it’s Department of Defense or the private sector, the senior leaders have to be committed and say, ‘‘We’re going 

to stick with this and do it.’’

Then another key to success is that you need to have success stories that you can relate to your middle manager, your rank-and-file 

people, who are ultimately going to have to embrace this, to convince them that, in fact, these things will work. I mean, those two 

are critical to making that happen. 

Mr. HASTERT. Well, one of the things this subcommittee is intending to do is to get in the field and actually take its members 

to walk through the warehouses and the bone yards and places 

that we want to look and see actually what’s happening, and look 

at the successes, as well. 

What actions, other than that, either legislatively or regulatory, 

can this subcommittee take to encourage DOD, in your opinion, to 

become more aggressive in the adoption and implementation of the 

best practices you point out in your testimony? 

Mr. WARREN. I think, No. 1, holding oversight hearings of this 

nature is critical, not only to hear, obviously, the testimony of the 

General Accounting Office, but also to talk through with the department what they see as the true impediments or obstacles, or 

things that are going to take them a little bit longer. Then that 

would help to provide an agenda of things that perhaps can be 

taken care of to help facilitate. 

Second, I do believe the legislation that has been proposed on the 

Senate side is important, in terms of providing the department the 

authority, in the depot area, for example, to go in and do pilot programs to look at innovative ways in which to improve the economy 

and efficiency of their operations. 

I think it’s those types of things and, as well, setting milestones 

for DLA to lay out a plan to fully implement these programs. I 

think those types of things are critical. The department needs to 

be given the legislative authority and sometimes direction to get 

them going toward the full implementation. 

And again, I would say testing of these, and I can’t emphasize 

that enough. There may be some spots, because of the nature of the 

Department of Defense, the unique nature of the Department of 

Defense, contingency requirements and rapid response requirements, where some of this may not just fit, and we ought to know 

what that set of things is before we say ‘‘one size fits all.’’

Mr. HASTERT. I appreciate that, because that’s something, as you 

go through this, I’m thinking to myself. You know, there’s a lot of 

things that come off the shelf of a hardware store or other places, 

there are other things that are certainly unique needs. So what 

we’re talking about here is not the special equipment that can only 

fit in a military widget of some type. 

Mr. WARREN. I think, clearly, those items are the ones that best 

lend themselves to this practice, and particularly because, with the 

prime vendor, where you have a very hot bed of competition, they 

can work to drive down the cost, which then is passed on to the 

military. 

48

In the military-unique items, you have, typically, a less competitive situation. So my thought would be that you would likely not 

get significant reductions in cost. You still may have some opportunity to reduce warehouse space, things of that nature. But, 

again, those are the things that should be looked at in a pretty rigorous way as they go through the testing of this. 

Mr. HASTERT. There’s a lot of, quote, unquote, things, we can just 

say, without being descriptive, that some of them are outmoded, 

some of them are parts that the equipment they were intended for 

isn’t necessarily in prime use today, or it’s somewhat discarded or 

less used, some parts that people say we have a 100-year inventory. 

How, in your opinion, is the best way to start to work that inventory down or dispose of it, or is there a way to do that? 

Mr. WARREN. Yes, I think there is. 

It would be a pretty straightforward management analysis of 

taking a look at those items; in other words, understanding what 

they are, understanding what requirements they are associated 

with, from a weapon system standpoint, and determining, first, the 

likelihood that those items might be needed at some point in time, 

then doing an analysis of what it’s costing you to hold those pieces 

of equipment, and move from there to, I think, a prudent decision 

about whether we should keep these items, in view of the fact that 

we may need them and we don’t want to run out and purchase 

them again, or sit down with a good management judgment and 

say, it really does look like the right thing for us to do is to dispose 

of those items. 

Mr. HASTERT. Is this activity in progress now or beginning? 

Mr. WARREN. The department has entered into a process similar, 

I believe, to what I’ve described, and that’s part of the reason the 

overall inventory, in fact, has come down, say over the last 5 years. 

And that’s part of the inventory reduction effort. 

I think it would be inappropriate to say the department has not 

been mindful of this. They have been working toward that issue. 

Could we go a little bit faster? I would say, maybe; perhaps we can. 

Mr. HASTERT. One of the bright spots that you and your staff 

have seen firsthand is the implementation of the practices at Warner Robbins Air Logistics Center. Can you describe both the positive and the negative aspects of the program as it’s currently being 

implemented? And what additional changes, from your perspective, 

are needed to improve the system further, or is it too early to make 

any recommendations at all? 

Mr. WARREN. I think it’s a little bit early for us to make recommendations, but I think we can make some general observations 

about what we’ve seen. No. 1, I would clearly say it’s very important that that program, in and of itself, that it’s underway, because 

that’s the type of thing that’s needed. 

I’d like to ask Mr. Repasky to expand a little bit on that, because 

he was actually down there recently and visited, and has some 

firsthand knowledge on discussions with the people working the 

program. 

Mr. REPASKY. First of all, the overall observations of the pilot 

program at the Waner-Robbins Air Logistics Center are, No. 1, the 

depot commander is very aggressive and very much a supporter of 

49

best practices and using best practices to improve logistics operations. 

In fact, he made some statements basically along the lines that 

he wanted to lead the Air Force in adopting these best practices for 

that organization. So, in that sense, it’s very similar to the top-level 

support we’ve seen in the private sector. 

Overall, the initiatives that he has underway there are limited, 

and they are limited in the sense that it represents only a small 

portion of the hardware sales to that organization. Mr. Warren 

mentioned earlier that it represents about 2 percent of DLA sales 

of hardware items. 

In addition, the initiatives that they have underway do not really 

address the entire logistics supply chain for those items. In particular, they don’t look to reduce the retail supply system as much 

as it does the wholesale supply system, or the need to store hardware inventory at the wholesale level. 

The depot commander also mentioned that he would like to take 

that prime vendor program further down into the organization and 

expand it. He highlighted during our visit that there were some requirements or potential requirements under OMB Circular A–76 

that would require cost comparison analysis of that operation. 

His main concern there was that it would take approximately 2 

years to complete that analysis. He would prefer to have the initiatives or the improvements under way before then. He was a little 

bit frustrated in that sense. 

I think, as far as additional changes, as Mr. Warren mentioned, 

it’s too early to really give a complete assessment of that program, 

but we did talk, I think, extensively with the depot commander 

about the need to expand the prime vendor services to their fullest 

extent, to maximize the savings that could be accomplished by having an integrated supplier concept in place there. I think, in general, he agreed with us on that point, but again recognized that 

there would be some time involved in the cost comparison, if that 

issue came up. 

Second, I think that it’s also important that Warner Robbins be 

held as an example to the Department of Defense, or for the Department of Defense, as a success story, if these initiatives prove 

to pan out the way we think they would. Along those lines, we suggested to the commander that a track of the cost savings be prepared, basically to baseline the system as it today and compare it 

to the cost savings or the more efficient process under a prime vendor or an integrated supplier program. 

So those were two areas that we discussed with the depot commander related to ways that the initiative could be expanded. 

Mr. HASTERT. Thank you. 

I would now like to turn, for questioning, to the chairman of the 

full committee, Mr. Burton. 

Mr. BURTON. Thank you, Mr. Chairman. I’ll just ask a couple of 

questions. 

Chairman Hastert and I have both been very interested in the 

war against drugs in Colombia and the support for the people in 

the police force down there who are fighting so diligently. With regard to our support efforts, I wonder about one of the problems 

50

that has occurred, that appears to be a procurement problem and 

a management problem. 

We requested that mini guns be sent down to the Colombian police so they could put them on the helicopters that we supplied. 

When the guns were delivered, they delivered the barrels, but they 

didn’t deliver the mechanism that makes the gun fire. 

You said earlier in your testimony, as I recall, that about 25 percent of the deliveries, there is a shipment malfunction of some 

kind. What I wanted to know is, in the case I just alluded to, was 

that caused by the mismanagement of the supplies that the military has? If so, how do we correct that? Because in a time where 

we might be in a conflict, this is something that would be intolerable. 

Mr. WARREN. The answer is that I think I would actually have 

to look at that individual situation in the same way that we looked 

at the activities of the repair depot, and I do not have any direct 

knowledge on that. It’s possible, but I would have to go in and see 

the circumstances. 

There are a variety of things that could have happened. In other 

words, the item could have very well been, in fact, in the inventory 

system. There could have been just simply a paperwork foul-up and 

a misunderstanding about what was actually to be shipped. It 

could have been, in fact, the item had not been purchased. There 

would be a myriad of things, and I would have to look at that one 

to give you a good answer. 

Mr. BURTON. Well, is the problem that you alluded to earlier endemic to the entire system? 

Mr. WARREN. Yes, I would say that is a systemic problem as it 

relates to the repair depots. In other words, many of the items that 

are needed to fully perform the repair function at the major depots 

in the department, our work is finding that oftentimes that full 

complement of items is not there when requested to accomplish the 

repair. 

Mr. BURTON. OK. One other question, Mr. Chairman. One of the 

problems that we’ve talked about for years in the Congress is the 

procurement process. We have the different branches of the service 

ordering supplies independent of one another that could have been 

ordered collectively and maybe saved the taxpayer a lot of money. 

Does that leach over into the management problem at depots 

you’re talking about? 

Mr. WARREN. Not so much, because these items that we’re talking about today, the consumable items, actually, in fact, are centrally procured through DLA, what they call inventory control 

points. So that is actually the system that’s occurring today for 

these consumable items. 

Mr. BURTON. OK. Thank you very much, Mr. Chairman. 

Mr. HASTERT. Thank you, Mr. Chairman. 

The gentleman from Florida, Mr. Mica. 

Mr. MICA. Thank you, Mr. Chairman. I’ve got a couple questions 

for, I believe, Mr. Warren. 

Is there any portion of the $7.2 billion worth of hardware that 

is excess to the current and future requirements, and how soon will 

that be disposed of? 

51

Mr. WARREN. My understanding is about $1.5 billion of that 

amount is currently excess, or is excess to needs, and the department is in the process of moving that through the disposal process. 

That process is defined through law, through the Property Act. 

Those items have to be made available first to the military services 

that might be able to use them, then to other users in the Federal 

Government, then to State and local communities, and finally, if 

there is not a need there, then they would go into the sales program and either be sold, depending on whether or not there are 

military technology implications, as is, or if, in fact, that’s the case, 

then they would be destroyed in certain ways and sold as scrap. 

Mr. MICA. Can you please discuss the impact that successful implementation of prime vendor for hardware items may have on repair times in our maintenance depots? 

Mr. WARREN. In general, the answer is that we think what this 

is going to result in is much quicker repair times. The availability 

of items is going to be more prevalent. And the overall result or 

the biggest effect is, obviously, improved readiness. In other words, 

equipment that’s needed for the troops is going to be available on 

a much quicker cycle than we experience now. 

Mr. MICA. Let me ask you about the application of the best practices approach that you advocate. How will it help DOD sustain its 

operations in peacetime and meet its readiness requirements in the 

event of a contingency? 

Mr. WARREN. Well, consistent with what we’ve seen in the medical area, and again, assuming that the pilots would be successful, 

we think this is going to be a win-win situation. In other words, 

the department will ultimately spend less dollars for the inventory 

that they need to do their job. It will be available in a more timely 

manner than it is today. Again, when you put those factors together, that should equal better readiness. 

Mr. MICA. Well, I was just going to ask you about readiness. How 

do you think this will impact readiness because of, again, a different approach here? 

Mr. WARREN. Our indications are that, again, if it works properly, it probably should be a readiness enhancer. But as I mentioned earlier, I think that’s why the pilots are important. There 

very well could be some set of items where this concept, for whatever reason, could be detrimental to readiness; in other words, it 

would be less effective. Again, that’s why we support taking a look 

at that. 

But, in general, we believe that that will be the case. I do not 

believe, and the next panel can speak better to this than I can, that 

in the medical area, for example, that has been an issue of concern. 

It seems to me everybody is pretty satisfied that the readiness 

needs are being met. 

Mr. MICA. From what I’ve been able to gather, your testimony 

and comments seem to indicate that the current model DOD uses 

to manage hardware items, compared to the private sector, is based 

on logistics systems, processes, and capabilities that really date 

back some years to the 1950’s. 

Given the amount of work GAO has done in this area, what 

should the so-called ‘‘new’’ model look like, in your opinion? 

52

Mr. WARREN. OK. If we could put up one more chart here that 

helps to describe that. In general, it would look like a system that 

relies much more heavily, obviously, on the private sector and reduces significantly existing components of the logistics supply system that exists today, from the standpoint of warehousing. 

Yes, the chart would indicate, basically, you would be able to 

make reductions in wholesale depots, military warehouses, and in 

storage location at bases or other facilities. In essence, the prime 

vendor would become the holder of your inventory. 

As I understand from dealing and talking with private sector and 

the Council on Logistics Management, that is the approach that 

many companies are going to. They refer to this as third-party logistics or outsourcing logistics functions. So, kind of a familiar 

phrase today, what you would have is a streamlined system that 

would depend heavily on technology, information data exchange between the end user and the prime vendor to accomplish the inventory function in a timely manner. 

Mr. MICA. Let me ask you another question on a more sensitive 

issue, and that’s relating to defense jobs, employment. At Walter 

Reed, you noted that 50 percent of the positions in materiel management were eliminated. Such reductions, applied departmentwide, would result in the elimination of thousands of jobs. 

Do you have an estimate as to how many jobs would be at stake, 

and can you discuss the challenge of getting workers to implement 

changes that could also lead to elimination of their jobs? 

Mr. WARREN. We do not have a precise estimate on the number 

of jobs that would be affected, but I think it is fair to say that they 

could be substantial. There are about 30,000 personnel working in 

this area, just in the Defense Logistics Agency. What portion of 

that might ultimately be affected, again, I can’t give you a good estimate, but it could be tens of thousands or more, if you go to a 

totally streamlined fashion. 

Typically, again, what private industry has done is to substitute 

technology for manpower. As a result, many of the streamlining 

savings that have occurred during the 1980’s and again during the 

1990’s have been a result of using that technology to replace personnel that were formerly performing some of these functions. 

So, clearly, there is the potential for a personnel impact, and I 

think it’s fair to say that it could be high. The department may 

have a better estimate on that, or perhaps even a different view. 

Mr. MICA. Do you expect some of these positions to be absorbed 

by private sector activity, or are they going to be permanently 

eliminated positions? 

Mr. WARREN. The work I’m most familiar with in that regard is 

in the depots, where some of the depot work has been privatized 

in place, a commercial contractor has taken over the work. Typically, what we’ve seen is, a portion of the work force is, in fact, retained. However, typically, along with that is some reduction. 

So while there would be an opportunity for some transfer, I don’t 

think it would be appropriate to assume that you’re going to have 

a one-for-one transfer. Again, the reason for that is the enabler for 

achieving these logistics reduction costs is the substitution of technology for manpower in performing these logistics functions. 

53

Mr. MICA. Now, in closing, I wanted to ask you: DLA, as primary 

manager of DOD’s consumable items, acts as custodian of all these 

military ship and vehicle parts. What is the total value of the inventory that they purchase and control? 

Mr. WARREN. The total value of inventory that they control is $11.1 billion. 

Mr. MICA. You have 30,000 people in materiel management operations in 1996. 

Mr. WARREN. Yes, sir. 

Mr. MICA. And then this report says the materiel management costs, excluding the management of fuels, was reported at $8.3 billion. Of that amount, $5.5 billion was spent to purchase consumable items, and $2.8 billion was spent to manage and distribute 

inventory. 

Is that almost—I mean, it’s not a one-to-one; it’s a 0.8 to 1 ratio. 

Is that what we’re looking at? 

Mr. WARREN. In terms of personnel to purchases? 

Mr. MICA. It costs us $8.3 billion for materiel management costs, to purchase and to oversee an inventory of $11.1 billion, or is there 

more? 

Mr. REPASKY. Let me just clarify that a little bit. The $8.3 bil- lion, as you mentioned earlier, is comprised—$5.5 billion of that 

were obligations to buy new materiel. The supply management 

costs and depot operations costs amounted to the $2.8 billion. And 

that’s to manage consumable items. 

Mr. MICA [presiding]. What’s the total figure of the consumable 

items? 

Mr. REPASKY. The total figure for consumable items, DOD-wide, is $18.6 billion. 

Mr. MICA. What I’m trying to get just a handle on is how much 

it’s costing us to manage acquisition and this whole activity, compared to, you know, the management cost. 

Mr. REPASKY. I understand. The details that I can provide today relate primarily to DLA’s costs. And that, again, is the $8.3 billion, 

including the $5.5 billion to buy new materiel. Again, DLA stores 

and distributes all of DOD’s inventory, including the reparable 

parts. 

Mr. MICA. That’s part of the cost in here? 

Mr. REPASKY. And that total inventory is the $68.4 billion. 

Mr. MICA. It still seems awfully high overhead cost. If you were 

in the private sector, you would be out of business. 

Mr. WARREN. If I could mention, as I mentioned earlier in the 

statement, part of that is high overhead cost at the inventory control points where the purchasing function actually occurs. Again, in 

an LMI study, and we went in and took a look at that, and we 

think it’s a pretty solid number, talked about the opportunity for 

$3 billion in savings through consolidation of that. 

So I think that’s very consistent with your point, Mr. Mica. 

Mr. MICA. The other thing, in closing, I chair Civil Service and 

have dealt with downsizing. I must say that DOD has taken its 

licks and picked itself up and moved forward without a lot of whining and coming to Congress, like some of these agencies. Also, you 

have had to bear the brunt of downsizing. About 80 percent of any 

downsizing in government is actually in DOD, in the last 4 years. 

54

If we’re going to eliminate these positions, the other thing I am 

asked is, do we have in place adequate protections, soft landing 

transition? DOD has been pretty good at this, but this is something 

that we are preparing for or anticipating and can handle? 

Mr. WARREN. Again, I’m most familiar with the depot situation 

where, as you say, there have been a number of reductions. From 

the work that we did, we believe that the department does, in fact, 

have one of the best programs to try to address what is a very difficult problem, in terms of people’s separation. 

They have a priority placement program. They have an excellent 

program for assisting personnel that want to move from one location to another when an activity is closing, and have done several 

other things to avoid the number of persons that they have to RIF. 

So from where I sit and the work that I’ve seen, I would give the 

department high marks on that. But I would also share your concern that it’s still not easy. 

Mr. MICA. I thank you. 

I will yield to the gentleman from Texas. 

Mr. Sessions, you are recognized. 

Mr. SESSIONS. Thank you, Mr. Chairman. 

Mr. Warren, if I could, I’d like to take just a few minutes. You 

and I have met before, and I have somewhat of an idea of what 

we’re talking about. We have always dealt with and all the reports 

deal with numbers and the things that are out there. 

Can you take just a minute with me, knowing, as you know 

about me, I’m process oriented, and I’m not asking for you to do 

a flow chart or a food chain type of a flow chart, but I’m interested 

in knowing how decisions are made. From the world that I came 

from, we had decisionmakers, we had logistics, we have the customer. We have all these people that are involved in this, kind of 

like this schematic you’ve got. 

What I’m interested in knowing is, how is the decision made, for 

instance—and you can pick any item that you choose, whether it’s 

raincoats, whether it’s jet fuel, whatever it is, whether logistics is 

the person that does the ordering, or is it the person who’s responsible for inventory, where they all of a sudden look, and they have 

a little marker there that says, when we get to here, we order Z 

number more. 

Kind of go through it with me, if you can, in several different 

areas, that let me understand who is the responsible party for ordering these items that we’re talking about, and how that process 

works. 

Mr. WARREN. In a general sense, the process works the same for 

all the items. The department sets up acquisition objectives. Those 

objectives, in general, are based on demands and requirements that 

they have for inventory. An item manager is the responsible person 

for making the buy decision, but that demand information is coming in to him or her from the user. So it is, in fact, an integrated—

it’s kind of a partnership. 

Mr. SESSIONS. Probably, what I call for my business, a forecaster, 

inventory forecaster? 

Mr. WARREN. Yes, they are forecasting what the demands are. 

Their job is to make sure that, when the phone rings, they can provide that item, in a very simplistic way. 

55

They built into that process—and Mr. Emahiser can give you 

more detail on this—but there are safety levels. There’s an economic order quantity quotient. Necessary war reserves are in there. 

I think, typically, a 30-day supply of war reserves. If a surge has 

to occur, we’ve got those in. You have lead times built into the computation. 

So there’s a whole series of factors that are built in, that reflect 

all of those things that need to go into consideration about how far 

in advance of the need for an item do I actually, as an item manager or a forecaster, go out and purchase that. 

Mr. SESSIONS. Now, what you have described would seem and 

appear to be normal and regular, to me. Is it that these inventories 

that we have may never be used, as we’ve heard from testimony 

that has been given here today, is that because there was a change 

in equipment, because of update in technology, or what would precipitate us having, not only buying, but keeping around these types 

of items? So that’s a two-part question. 

Mr. WARREN. OK. Let me go to the second part of the logistics 

process. We just talked about how items are bought. Part of what 

we’ve been discussing and in our reports is that the logistics system, once you’ve purchased an item, looks a lot different in the 

military system than it does in the private sector system. 

The military system—and, again, it was built largely in the 

1950’s and 1960’s—was built on a multilayered system, to avoid 

shortages of items, very well intended, and had multiple layers of 

warehousing, prime warehouses, main warehouses at bases, then 

shop stocks, and then some level of items at the user. And that was 

the way a lot of companies operated during the 1960’s, during the 

1970’s, and into the 1980’s. 

The change that has occurred, and it’s principally on this chart 

to your far right, is that, in the private sector, many of those types 

of things have gone away because technology now allows the inventory manager to have total visibility over the items and be more 

responsive to buys. So the concept of having to layer items in order 

to assure that they are available—again, it was a good concept, and 

that was what was needed—is the piece of the process that’s becoming outdated through technology. 

But you also raised, are some of these items a result of the 

downsizing of the force? Clearly, that is the case. We’ve had a substantial reduction in military force, from about 2.1 million military 

members, in around 1991, down to 1.4 million, I think, will be by 

the year 2000. And then there have been corresponding force reductions with that. The inventory managers were buying in good 

faith up until the point that decision was made, so some of that, 

obviously, is a result of those circumstances. 

What we’re advocating and would like to see tested is, let’s try 

to get that buy decision closer to the point in time we’re really 

going to use the item, so that some of these unforeseen things that 

are going to happen—I can’t tell you what the next one will be, but 

they are going to happen—will have less impact on the amount of 

inventory that we actually end up holding after that event. 

Mr. SESSIONS. I do understand that difference, and thank you. In 

other words, we’ve got to make sure the system works. I’m just trying to make sure, also, that the decisionmaker in this process is 

56

aware of, has information at his fingertips, his or her fingertips, 

that tells them, before they think they are going to order something, the reason why they are ordering it, what’s available, and 

then what those timeframes would be. 

Mr. WARREN. Yes, clearly, that system is in place. We do have 

some questions about how well it operates. We think it could be 

tweaked and run a little better. There’s no question about that. 

But, clearly, there’s a very elaborate system for doing that. 

One area where we think there would be—and, again, I think the 

department would agree with this—is a concept called ‘‘total asset 

visibility.’’ The department has been working on that very diligently here over the last several years. 

Those item managers or forecasters are in a case of sometimes 

not being able to have total visibility of all the items that, in essence, DOD owns, that they are responsible for. Our work has 

shown, from time to time, that then that causes unnecessary buys. 

But, again, the department is working toward getting a total asset 

visibility system in that fully meets their needs. 

Mr. SESSIONS. Last, let me say this, Mr. Warren. It’s probably 

really to anybody that’s from DOD that’s in the room. You’ve expressed to me, not only confidence but appreciation, at least what 

you’ve said to me in my office, privately to me, that you feel like 

the Department of Defense is very professional and that they deal 

with you on an up-front basis, not only sharing of information, but 

availability of the things that they have. 

So I would like to publicly thank you and the Department of Defense, because I feel like what you’re doing is an attempt to get 

closer to making sure the readiness of our men and women is 

there. And I want to pat you on the back and congratulate you 

also, because you’re part of that participatory team, and the other 

men and women who work with you. 

Mr. Chairman, thank you. 

Mr. MICA. Thank you. 

I thank the gentleman from Texas, who indeed has been a leader 

on bird-dogging some of these issues and making certain that the 

interests of the taxpayer and also the best interests of the Congress 

are served in overseeing, again, this area for some of the leadership. I thank the gentleman from Texas again in his pursuit. 

We all get off on different activities, but your role is very important, Mr. Sessions. We thank you. 

I have just a couple of final questions, either for Mr. Warren or 

anyone else. Do you see any problems with inner service or interagency conflicts within DOD that could be obstacles to reforming 

defense inventory management? 

Mr. Warren. 

Mr. WARREN. The general answer is yes, and hopefully they can 

be solved. 

Mr. MICA. Can you tell me, just real briefly, what they are? 

Mr. WARREN. Well, it’s just by the nature of the organization of 

the department. Army, Navy, Air Force, each of them own certain 

processes in the logistics system. They manage some of their own 

inventory. DLA manages a portion of that inventory. 

Mr. MICA. Jurisdictional disputes? 

57

Mr. WARREN. Absolutely. If you think about it in terms of the 

way the private sector talks about it, they talk about supply chain 

management, and they talk about managing an item from the time 

that it comes into the door till the time it goes out the door. And 

they are trying to think of that as an integrated, seamless process. 

The department is attempting to move in that direction. 

Mr. MICA. So the nature of the beast, the disjointed structure, et 

cetera, is a problem. 

Mr. WARREN. It requires a high premium on cooperation. 

Mr. MICA. Any other interagency conflicts or problems? The other 

question that I would ask, are there any legislative impediments, 

anything that we need to do legislatively to move this process forward? Or do you have the tools and authority and legislative flexibility to move? 

Mr. WARREN. Again, I think, particularly in the Senate bill—the 

department—and they would be better positioned than me—they 

need the opportunity where they have an innovative practice that 

they want to attempt to do, they need to be given the authority to 

do that in such a way that they can make a good faith analysis of 

that. 

Mr. MICA. And they don’t have that? 

Mr. WARREN. In some cases, that’s not there. Partnering comes 

to mind, and that’s included in the Senate bill. I think part of the 

discussion will have to be, well, what do we mean by ‘‘partnerships’’ between public sector depots and private sector entities? 

What does that mean, and how do we, in fact, operationalize that? 

That would be the only area I’m aware of. 

Mr. MICA. OK. Did anyone else want to comment? 

Mr. KNOUSE. Mr. Mica, as the department goes through implementing some of these legislative proposals, in terms of accountability and oversight, there may be a need, if the committee so 

deems it appropriate, for our organization to act in maybe an evaluative mode to see just exactly how well those proposals are being 

achieved and whether there are any additional impediments that 

we’re not aware of that are surfacing as they try to implement 

these best business practices. 

Mr. MICA. This question may have been touched on before about 

excess inventory being purchased. It’s about $1.3 billion, according 

to this report; is that correct? 

Mr. WARREN. $1.6 billion was the estimate that we provided to 

the committee at the end of the last hearing. 

Mr. MICA. $1.6 billion? 

Mr. WARREN. Yes, sir. 

Mr. MICA. Do we have sufficient actions being taken to reduce 

the amount of excess inventory, in your opinion? 

Mr. WARREN. We provided that information to the department. 

The answer to that, I firmly believe, is really in what we’ve been 

talking about this morning. The true key to reducing excess inventory to kind of its most reasonable level is to implement best practices that allow people to succeed in what they are doing. That’s 

the key. 

Mr. MICA. The other question was disposing, and that’s $1.1 billion of excess consumable materiel, in 1996. And you feel we have 

58

adequate plans and there will be an attempt to bring that figure 

down, too, Mr. Warren? 

Mr. WARREN. Yes, I believe those plans are there. Over time, 

there have always been, because of the volume of materiel that’s 

moving through the disposal process, there have been concerns 

here and there. But the department has put in a fairly aggressive 

program to move the disposal process along. 

Their concern, and it’s very legitimate, is that they do not want 

to be sending things out the door that, 2 weeks later, all of a sudden, they have to buy. Obviously, that’s not a good situation for the 

taxpayer; it’s not a good situation for the department. 

Mr. MICA. It says $1.1 billion in consumable materiel. Is that 

based on the cost of purchase or depreciated? 

Mr. WARREN. $1.1 billion is in the acquisition cost. 

Mr. MICA. Acquisition cost? 

Mr. WARREN. That’s what it cost to buy those items. 

Mr. MICA. It’s not coming in at $2.2 billion, then, and going out at $1.1 billion. Right. 

Finally, many of the defense inventory problems that have been 

discussed here today have been with us for at least three decades. 

Why has change been so difficult, Mr. Warren? 

Mr. WARREN. I guess, first of all, change is difficult for any institution. I think, first of all, the department had in place, during the 

1960’s and 1970’s, a system that worked pretty well for them. They 

felt it was responsive; they felt it looked pretty close to what was 

being done in other places. 

As time moved on, I really believe that cultural resistance to 

change—in other words, the system was working OK, we were 

being funded sufficiently to operate it, and it’s kind of—you ask the 

question: Why change? 

You could take it back, the same thing, to the U.S. private sector. 

It was really not until the 1980’s, when we felt we got into a very 

noncompetitive situation in a world market, that we had to decide, 

boy, we’ve got to do something different, and then that spurred 

change. 

DOD now is at that point where they are getting that incentive 

to say, ‘‘We need to look carefully at how we’re going to change. 

Our budgets are being severely squeezed. We need money for modernization. We think this is an area to do it.’’ So you’ve kind of had 

this action-forcing event that was not there previously. 

Mr. MICA. I want to thank all of our panelists for their participation today, and also for their examination of this issue for the General Accounting Office. It’s important that we move forward with 

trying to reform our inventory management through innovative 

best practices, and you can help us make it happen. 

We may have additional questions to submit to you in writing. 

At this time, we will thank you again for your participation and 

good work. 

We will excuse this panel, and I will call our second panel. 

Thank you, gentlemen. 

Mr. WARREN. Thank you. 

Mr. MICA. Our second panel consists of representatives of the Department of Defense. Dr. Edward Martin is the Acting Assistant 

Secretary of Defense for Health Affairs; James Emahiser, Assistant 

59

Deputy Under Secretary of Defense for Materiel and Distribution 

Management; and Mr. Jeff Jones, Executive Director for Logistics 

Management, the Defense Logistics Agency. 

Mr. Emahiser and Mr. Jones have testified before this subcommittee last March, and I appreciate your coming to update our 

subcommittee today. 

In accordance with our House rules and, as you know, this is an 

investigation and oversight subcommittee, gentlemen, if you will 

stand, I will swear you in. 

[Witnesses sworn.] 

Mr. MICA. Thank you. 

As you know, we welcome your condensed opening oral statements, and lengthy statements will be made part of the record. I 

will recognize each of you for 5 minutes. 

You are welcome. To our panel, again, several of you have been 

here before. I will recognize first Dr. Edward Martin, Acting Assistant Secretary of Defense for Health Affairs. 

Welcome, and you are recognized, sir. 

Mr. MARTIN. Mr. Chairman, if it would be all right, I would like, 

actually, Mr. Emahiser to be the lead witness, and then I will followup. 

Mr. MICA. All right. That’s fine. Then I will, in fact, recognize 

James B. Emahiser, Assistant Deputy Under Secretary of Defense 

for Materiel and Distribution Management. 

You are recognized, sir, for 5 minutes. 

STATEMENTS OF JAMES B. EMAHISER, ASSISTANT DEPUTY 

UNDER SECRETARY OF DEFENSE FOR MATERIEL AND DISTRIBUTION MANAGEMENT; EDWARD D. MARTIN, ACTING ASSISTANT SECRETARY OF DEFENSE FOR HEALTH AFFAIRS; 

AND JEFFREY A. JONES, EXECUTIVE DIRECTOR FOR LOGISTICS MANAGEMENT, DEFENSE LOGISTICS AGENCY 

Mr. EMAHISER. Thank you, Mr. Chairman, members of the committee, and staff. 

Thank you for the opportunity to appear before you today to discuss the Department of Defense’s use of innovative business practices to reform our inventory management and the program and 

the initiatives we have underway to increase efficiency while maintaining support to the war fighters’ needs. 

I would like to enter into the record my written statement responding to the issues raised in your letter of invitation and make 

a brief oral statement. 

Mr. MICA. Without objection, your entire statement will be made 

a part of the record. 

Mr. EMAHISER. You have already introduced the gentlemen who 

are with me here today. The Department of Defense is implementing a series of wide-ranging initiatives to adopt best business 

practices. As I testified in March 1997, our inventories have, in 

fact, decreased from $107 billion in 1989 to currently $67 billion, 

with a target of $48 billion in the year 2003; overall, a reduction 

of 55 percent. 

The initiatives that we have are enabling us to move toward buying many commercially available items at the local bases, using the 

Internet and the government purchase card to obtain delivery diVerDate jul 14 2003 13:37 Dec 16, 2003 Jkt 010199 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 W:\DISC\46284.TXT 46284
60

rectly from a vendor to a user in a few days, rather than maintaining multiple levels in inventory of such items within the department. 

A key indicator of our success in this area is the rapid expansion 

of DOD usage of the government purchase card, the GSA International Merchants Purchase Authorization Card [IMPAC] card. I 

testified in March that DOD use of the card increased by nearly 80 

percent from fiscal year 1995 to fiscal year 1996, from just under 

$800 million to more than $1.4 billion. I can now report to you that 

DOD use of the purchase card is projected to exceed $2.3 billion in 

fiscal year 1997, an increase of more than 60 percent. 

The purchase card and Internet ordering are two key elements 

of the menu of innovative practices the department is using, along 

with prime vendor, virtual prime vendor, and direct vendor delivery. The goal of this menu of practices is to improve services while 

lowering costs. 

Customers of the Defense Logistics Agency can already use online Internet ordering to obtain commodities as varied as clothing 

and textile items, maintenance and repair items such as electrical, 

plumbing, and refrigeration supplies, through a hardware prime 

vendor in the Southeastern United States. 

The success of these various initiatives can be seen in the bottom 

line numbers for the portion of DLA sales provided directly from 

a vendor to a customer without going through a DOD warehouse. 

That portion was 24.5 percent in fiscal year 1992. It increased to 

33.2 percent in fiscal year 1996. 

In the medical prime vendor program, 98 percent of the orders 

are delivered by prime vendors within 24 hours, as opposed to the 

30 days it used to take from government stocks. The response time 

and fill rate of this program enabled DLA and the military hospitals to drastically reduce their inventories, resulting in significant savings in their cost of operations. 

Walter Reed Medical Center reduced its medical on-hand inventories by 83 percent and closed six warehouses in this process. 

They also reported over $7 million recurring annual savings by converting to prime vendor. We anticipate further increases as we use 

lessons learned from this successful application of innovative practices in the medical and food commodities to the more complex area 

of hardware items. 

The Department of Defense is proud both of the progress we 

have made in adopting innovative business practices to improve 

our inventory management processes and committed to further improvements. We are confident that management improvements and 

ambitious deployment of technological advances will continue to enable us to expand our use of innovative business practices. 

I would also like to confirm what Mr. Warren said earlier, that 

he and I have agreed that our folks will try and work the inventory 

issues together, and we should be meeting over the next several 

weeks. 

We appreciate the interest of the subcommittee in defense inventory management reform and look forward to working with you in

61

the future to ensure success in this crucial area. Thank you for 

your interest and support. I will be glad to answer any questions 

that you may have. 

Thank you. 

[The prepared statement of Mr. Emahiser follows:]

62


g:\graphics\46284.035
63


g:\graphics\46284.036
64


g:\graphics\46284.037
65


g:\graphics\46284.038
66


g:\graphics\46284.039
67


g:\graphics\46284.040
68


g:\graphics\46284.041
69


g:\graphics\46284.042
70


g:\graphics\46284.043
71


g:\graphics\46284.044
72


g:\graphics\46284.045
73


g:\graphics\46284.046
74


g:\graphics\46284.047
75


g:\graphics\46284.048
76


g:\graphics\46284.049
77


g:\graphics\46284.050
78


g:\graphics\46284.051
79

Mr. MICA. Thank you, Mr. Emahiser. 

Dr. Martin. 

Mr. MARTIN. Thank you, Mr. Chairman. 

I would like to submit my written statement for the record. 

Mr. MICA. Without objection, so ordered. 

Mr. MARTIN. Thank you, sir. 

My comments, I think, are from the perspective of running that 

integrated business, Mr. Sessions, you were alluding to. I mean, 

we’ve basically got a $15 billion health care delivery system. We 

take care of about 7 million people, 150,000 employees, 130 hospitals. 

So when we look at what these questions you’re asking have 

done for us, from the business point of view, there have been any 

number of changes, in addition to the efficiencies that have been 

well articulated in the written testimony submitted. It fundamentally changes how we are able to do business within our facilities. 

When you have one warehouse instead of seven, and when you 

are able to free up staff, and you have 95 percent of your orders 

there within 48 hours, the way your system runs is dramatically 

impacted, particularly in regard to the providers. This has been an 

extremely popular effort on the part of us in the Defense health 

program, with DLA and DPSC. 

A couple questions that came up before that I’d just sort of like 

to proffer my thoughts on: First of all, the difficulty within DOD 

or any department—I spent the bulk of my career in Health and 

Human Services—doing things that are different or making 

changes is well known, both to this committee and particularly to 

Mr. Mica. 

The fact of the matter is, we would not have been able to do this, 

the success story that is, in fact, part of the testimony, if it had 

not been for DLA and DPSC. Without their help, pushing through 

a fairly complicated bureaucracy with many, many rules, we simply 

could not have done something that I think we jointly believe is 

one of the great success stories in this area. 

The second which needs to really be pointed out, and I think we 

touched on it in a couple of questions, is that it takes the business 

area manager’s commitment to make it happen, and not just DLA 

and DPSC. The example was given, which is a good example, of the 

depot commander or the base commander, when they really want 

to do these kinds of things, or a hospital commander, like they did 

at Walter Reed, it’s much, much easier for DLA and DPSC to make 

it work. 

The flip side would have been, if we had this example at Walter 

Reed, and the commander at Walter Reed didn’t want to make it 

work and wanted to continue the old business practices, little that 

prime vendor could have done could have made it work. I think 

that’s important to put into perspective since you’ve got a lot of 

business areas that are going to need to take the leadership, like 

I believe my predecessor did in health. 

A very important point in the differences between health and 

some of the other business areas, we were very lucky to have universal product numbers in pharmaceuticals, of course, because of 

the regulation by the Food and Drug Administration, and also for 

many of the other areas like food, where that’s also regulated by 

80

Agriculture and FDA. So we already started out with an enormous 

advantage, as did the private sector. 

In the area of medical-surgical where our statistics are less, we 

have actually been in the position of being the industry leader trying to get medical-surgical universal product numbers used by the 

industry so we can implement prime vendor. Without that consistent approach to identification, it becomes very difficult in those 

kinds of markets. 

The fact is, the industry has been very receptive, and we are 

moving aggressively with the private sector and industry. In fact, 

many of the real savings of our efforts now in med-surg will be in 

places like Medicare, Medicaid, and in the private sector. Because, 

indeed, they have problems with the ability to use prime vendor effectively. 

The last thing I think I would like to point out was made a couple times during the testimony. In order to effectively implement 

these programs, you fundamentally have to redo your current automation. I think it is very clear, in the hospital industry, automation was changed most of the hospitals to the AIS systems in the 

mid- and late 1980’s. 

The government, unfortunately, takes a little longer to get 

changes made, but we had advantages in that we would rapidly be 

able to develop the automation and to get products that helped us 

move this aggressively forward. Without an automated infrastructure, this particular approach simply does not work, especially in 

regard to the electronic commerce part. 

So the success that we feel that we have had I think has been 

more to us been amply repaid in the impact, positively, on our business. Again, the point that I don’t think that we could have done 

it without DLA and DPSC assistance, because it’s not an easy job 

at all. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Martin follows:]

81


g:\graphics\46284.052
82


g:\graphics\46284.053
83


g:\graphics\46284.054
84


g:\graphics\46284.055
85

Mr. MICA. Thank you. 

Mr. Jones, you are recognized. 

Mr. JONES. Thank you, Mr. Chairman. 

If there is no objection, I would like to enter into the record an 

article from the Navy Times which came out this week, called ‘‘Believe It or Not, Food in the Navy is Getting Better.’’

Mr. MICA. Without objection, we will make that part of the 

record. 

Mr. JONES. Thank you, Mr. Chairman. 

The reason is, we’ve been able to expand our prime vendor experience and what we’ve learned in the process of doing it to the 

point now where we’re able to put commercial items directly from 

vendors onto ships. We have awarded a contract to do that for the 

Norfolk, VA, area and we’re going to do that in other places, as 

well. 

We have talked a lot about specific techniques today. I want to 

add to the list of things we are doing, so the committee isn’t left 

with the impression that we are sitting on our hands. 

No one is more impatient to implement best commercial practices 

than we are at DLA. I say that because the devil is in the details 

in implementing these programs. As hard as we try to push a program, as Dr. Martin said, you have to have a customer that’s ready 

to move with you. When customers have not seen evidence of success in areas that have been traditionally hard to penetrate, such 

as aircraft spares, their confidence isn’t there with you. So you 

have to work as a partner over a fairly long period of time. 

I would also agree with Dave Warren’s assessment that pilots 

are very important, pilot programs, to build confidence in areas 

where there hasn’t been demonstrated success in the past. 

I want to point out that while GAO does say that only 2 percent 

of our items are covered, it is a third of our sales. The reason that 

we bring up the difference is that the maturity of the industry, the 

ability of the industry to participate in something like a prime vendor type arrangement, is key to being able to do it. The last thing 

the Department of Defense wants to do, or the Defense Logistics 

Agency, is impose another new, unique defense business practice 

on the industry. 

So in the case of medical-surgical, the industry wasn’t exactly 

where pharmaceuticals have been, for the reasons Dr. Martin mentioned. The universal product numbering system wasn’t there. 

Other things weren’t there. So we had a more difficult time, but 

we are making progress and we will get there. 

We have, in fact, awarded contracts now, as Mr. Emahiser said, 

for facility maintenance and repair type items: civil engineering 

supplies, 8,000 stock numbers are being supported by prime vendors at southeastern bases in the United States. The comptroller 

of the Department of Defense has directed that we roll that program out as quickly as possible, and we are in the process of working out a schedule, once again, with our customers, for doing that. 

That takes us out of the business of stock-store-issue of all items 

that are used in the process of maintaining facilities. So we will be 

completely out of that business within a couple of years. 

But we had some false starts, because first we looked at individual commodities. We looked at plumbing, we looked at electrical, 

86

and then we found that there was no industry practice there to 

meet us. Finally, the industry had matured. We found that there 

was an industry practice that dealt with the entire range of items 

that we were looking at, and that’s the industry that we went to. 

The procurement process is very difficult. I have to caution the 

committee on one point, that although we are, as I said, impatient 

to roll out these practices, we have to be very mindful that, as we 

do, we observe all of the rules and the regulations which uniquely 

apply to the government. We cannot and will not walk away from 

small business. We cannot and will not walk away from disadvantaged businesses. On top of that, we have to make sure that what 

we do in pricing is what the committees in the Congress would expect us to do, and rightfully so. 

I would point out very briefly that the commercial practice in 

aviation sparing and in automobile sparing, and in a lot of other 

commodity areas that have been discussed today, is basically to 

provide a full-service product at a price which the market will bear. 

That’s the American way. That’s competition, and that’s exactly 

what the industry is about, and there’s nothing wrong with that. 

But when it comes to the Defense Department, when we buy 

spares, all the market will bear is not good enough. 

So I would remind the committee that, as we progress down this 

path of looking at prime vendor and other types of direct vendor 

delivery processes, we have to be very cautious, because the oversight functions that are rightfully performed here will catch up 

with us if we aren’t as careful as we need to be. So we can’t move 

quite as fast as we would like to for a number of those reasons. 

I will say one last thing, that it has been a pleasure working in 

this environment. The GAO, I think, has made a substantial contribution to a change in our relationship. Dialog is much more productive, and I want to thank the gentleman on my right for exerting leadership in that area. We look forward to continuing to work 

with the committee on this and other related subjects. 

That concludes my oral remarks. 

[The Navy Times article referred to follows:]

87


g:\graphics\46284.056
88


g:\graphics\46284.057
89


g:\graphics\46284.058
90

Mr. MICA. Thank you, Mr. Jones. 

I yield now to the gentleman from Texas for questions. 

Mr. SESSIONS. Thank you. 

My questions would be for any of the three of you that wish. Just 

a couple observations. I heard the words, ‘‘The devil is in the details,’’ and I heard the words that you’re dealing with a bureaucracy with many, many, many rules. Let me tell you, I have not 

walked a mile in your sandals. 

I know this is difficult, but please tell me, have any group of you, 

meaning even individually, been out to a depot in the last 2 years? 

And if you could, please tell me where you’ve been and what your 

observations were. A depot, as opposed to a military operation—

Walter Reed wouldn’t count—but a depot. 

Mr. EMAHISER. Let me go ahead and respond first. 

Mr. SESSIONS. Please. 

Mr. EMAHISER. I’ve been to Jacksonville and to Warner Robbins. 

Mr. SESSIONS. What were your observations when you were 

there? 

Mr. EMAHISER. The observations were that, first of all, the folks 

were extremely energetic and extremely proud of the products that 

they were producing at those depots, were proud to be employees 

of the services responsible for the depot, and thought they were 

doing a quality job, producing a quality product. 

Mr. SESSIONS. Did they provide any feedback to you, or are there 

any observations that you made that—and I don’t know which 

depot—I don’t know what Jacksonville handles. I don’t know what 

they did, but was there any feedback. You were there to look and 

hear people, and you’ve heard they were proud of the job, felt like 

they were part of the mission, were pleased to be there. 

Mr. EMAHISER. I would just follow that on by saying that at Warner Robbins they were excited about the virtual prime vendor, that 

is the thing that was going to be put in to help support the propellers and hubs and rotors, and that kind of thing. 

They recognize that they are under the watchful eye of not only 

the department but of the Congress, in all honesty, to assure that 

they are producing quality products. They recognize they’ve got to 

have a handle on costs, particularly at those two depots, they are 

very cognizant of that. And that permeates from the commander on 

down for both those installations. 

Mr. SESSIONS. Are these depots run by the military with the assistance of civilian employees, or what was the nature? 

Mr. EMAHISER. Those both are military depots. They are not run 

by contractors. They are both military depots with, I would say, 95 

percent, 98 percent being DOD civilian employees. There are some 

contractors there that may be on board that do provide some support, but they are primarily DOD civilians. 

Mr. SESSIONS. Mr. Jones, could you please discuss with me, have 

you been to any depots at all? 

Mr. JONES. Yes, Mr. Sessions, I have, although, in my current capacity, most of the depots that I visit are distribution facilities that 

are co-located with maintenance facilities. That’s my primary responsibility now. I have been to Warner Robbins, Kelly Air Force 

Base, McClellan, Sacramento, numbers of places. Of course, our 

91

primary distribution depots are in San Joaquin, CA, and Susquehanna, PA. 

So I have seen quite a bit of change in all of those locations and 

an eagerness on the part of our customers for us to bring new solutions to them; again, a combination of some frustration in how long 

it takes, and some caution that they want to see demonstrated results before they jump in all the way with this. 

Mr. SESSIONS. Can you tell me, in this case or in any case that 

you choose, in your testimony, who is a customer? Who are they 

expressing this concern to, and how do you find out about it? 

Mr. JONES. Yes, I would be pleased. In the case of Warner Robbins, we have a number of channels. No. 1, we work directly with 

the commander, in some cases. A gentleman who used to work for 

me in uniform is now one of the change advocates down there. We 

have a direct line. 

We have an interchange of people, basically, that know what’s 

going on, who are also facing new pressures from their commander 

at Wright Patterson to reduce costs, control and manage costs. 

They know what we have tried to do and want us to partner with 

them, and we’re just itching to do it. So it’s a communication that 

works that way. 

We also have customer representatives on the ground, permanent employees of the Defense Logistics Agency who are there, field 

a lot of the direct input, attend the commanders’ staff meetings, so 

we have a third direct channel that way. 

Mr. SESSIONS. Would you describe, in your capacity as the executive director for logistics management, the people who are in your 

organization? Can you describe how they are appraised? In other 

words, what part of their performance evaluation would deal with 

effective use of resources, these sorts of things? Is that included 

within their appraisals? 

Mr. JONES. Yes, it is, Mr. Sessions. By law, it’s in mine, and it’s 

also in theirs. There are, as a matter of fact, several elements that 

they are rated on. We are also moving toward giving higher marks 

to those that spend more time solving customer problems. We have 

both an emphasis on solving customer problems and accountability, 

which is a requirement of FNFEA. 

Mr. SESSIONS. Would you say that this is—and I know we’ve 

heard it’s just a matter of time till we get to zero, it may be the 

year 2050, but at some point we’re working that number down—

would you say that you are well on the road or that there are a 

good number of bureaucratic rules that are getting in the way of 

you performing it better? 

Mr. JONES. Well, if you mean inventory being zero. 

Mr. SESSIONS. I do mean inventory and proper management. I’m 

not trying to get to zero; I’m trying to get to where you feel better 

about what that level is, proper management. 

Mr. JONES. I think we’re within a very short time. The main 

problem that we have is something that will never go away, and 

I think the GAO would agree with this, is that there is a pattern 

of demand in a lot of our materiel which is highly irregular. 

It’s not like manufacturing. Inspect and replace causes demand 

to fluctuate wildly. When you have equipment that’s 50 years old, 

there are problems in trying to maintain low balances and anticiVerDate jul 14 2003 13:37 Dec 16, 2003 Jkt 010199 PO 00000 Frm 00095 Fmt 6633 Sfmt 6602 W:\DISC\46284.TXT 46284
92

pate and forecast correctly. Those will always be with us as long 

as we’re in the environment we are. 

If you talk about the vast bulk of our items, our dollar sales, I’m 

comfortable that within 3 to 4 years we’ll have a much better handle on having the right stuff at the right place at the right time. 

Mr. SESSIONS. Really, what I’m in reference to is management. 

Are you making good judgments about what is there, that’s on an 

appraisal; you feel like you’re cutting through rules and regulations, and that your management structure and decisionmaking is 

good? 

Mr. JONES. Yes. 

Mr. SESSIONS. I hear you say you feel good about it. 

Mr. JONES. Absolutely. We’ve overhauled the whole agency, reorganized it, reshaped it from the bottom up, changed the incentive 

process, changed the management structure. We’ve done an awful 

lot in the last 3 years to change the culture. I’m not going to say 

it’s done. It’s never done. We have to change it every day. 

Mr. SESSIONS. Good. Well, hopefully as a promise, not as a 

threat, I’d like to join any of you someday out at a depot and go 

learn more about it, and see those kinds of things that you walk 

through. So if either one of you three, as you have those opportunities that are coming up this year or early next year, I would welcome that opportunity when you do that same evaluation yourself. 

Mr. EMAHISER. Sir, we would be glad to do that for you. 

Mr. SESSIONS. Good. Thank you. 

Mr. MICA. I yield to the ranking member, Mr. Barrett. 

Did you have any questions? 

Mr. BARRETT. Thank you, Mr. Chairman. No, I unfortunately 

have been in other hearings all day. I may submit some written 

questions to the panel, but at this time I have no questions. 

Mr. MICA. I thank the gentleman. 

Mr. Emahiser, in your testimony, you say that in 1996 DLA sold 

about $3 billion worth of hardware. What is your estimate of the 

total value of hardware inventory? Do you agree with the GAO that 

DLA has a $7.2 billion inventory of hardware items in its distribution warehouses and depots? Is that correct? 

Mr. EMAHISER. Yes, sir. 

Mr. MICA. It is? 

Mr. JONES. With one exception, Mr. Chairman, that’s the way 

GAO is computing the value of inventory we have declared to be 

potential excess. They value it at full acquisition cost, and the government’s own Federal Accounting Standards Advisory Board rule 

says that we have to value that at recovery cost, which is essentially scrap value. That takes about $1.1 billion to $1.2 billion off 

of that total. So we’re closer to $6 billion in assets. 

Mr. EMAHISER. That’s an ongoing discussion that we’ve had with 

the GAO, how to, in fact, value that inventory once it appears that 

it’s going to be excess. 

Mr. MICA. The GAO, again, asserts this $7.2 billion worth of 

hardware items in DLA’s distribution depots and warehouses that 

you have agreed to. Is it feasible for the department to try to employ virtual prime vendor and direct vendor delivery for all of these 

items? 

93

Mr. JONES. Let me break that answer, if I can, Mr. Chairman, 

into two parts. One, the first answer is no, not all items. But the 

more important answer to the question is, we’re going to try. We 

have plans in place now to try avionics components. As I said, we 

have a potential breakthrough in bench stock prime vendor that’s 

in a very sensitive procurement stage now. I can’t really talk about 

it, but that’s a huge potential change in our business practices if 

we’re able to get that to work. 

We are working in the hardware areas intensively, but the way 

we’re doing it is, we’re looking at how the industry does business. 

I have to say again that if the industry does business one way, and 

Defense tries to direct them another way, we’re not going to make 

it work. We have to go find what’s working and capitalize on that. 

That’s why we did so well with pharmaceuticals, and that’s kind 

of a pacing factor in some cases. 

Mr. MARTIN. Mr. Chairman. 

Mr. MICA. Yes, Dr. Martin. 

Mr. MARTIN. Just let me add, because this is important, there 

are, given the industry practices, some important exceptions. Even 

in medical, where our organizational philosophy is to reach toward 

100 percent, there are clearly hundreds of items that, no matter 

what happens, we will not be able to use prime vendor for. 

Second, we have to always be concerned—and I think Mr. Warren touched on this very, very clearly—for surg requirements. To 

the extent that our prime vendors can’t meet our surg requirements, all of a sudden we need very large numbers of things when 

we deploy, we have to work a different arrangement than prime 

vendor. 

Prime vendor works very well for those consumables where there 

is a through-put within our facilities that’s very predictable. It does 

not work very well when the item is not an industrial standard 

andor we have unique needs that are substantially different than 

the industry. I can think of one immunization right now where we 

constitute 95 percent of the requirement for the industry. Those 

kinds of things are very, very difficult to fit into the prime vendor 

system, and sometimes they are fairly sizable in number. 

I think that is consistent with what Mr. Warren alluded to in regard to the process of going through and figuring out which are 

those things. We want all, of course, in medical, but we are very 

cognizant of the fact that there would be another oversight hearing 

if, all of a sudden, we needed 150,000 of something and we didn’t 

have it and couldn’t get it, and we went to war and we only had 

40,000. So we have to worry about that in those cases, particularly 

with surg. 

Mr. MICA. Mr. Emahiser, you had indicated in your testimony 

that one of the problems in obtaining inventory and maintaining 

inventory is some of the materiel, et cetera, is, I think you said, 

40, 50 years old, that you’re storing parts and acquiring materials 

for. How much of a problem is this with outdated military equipment? Is this a small part, or is this major? I don’t know if you 

could give me a percentage or some estimate. Are we dealing with 

this as the major problem or just one of the problems? 

Mr. EMAHISER. There’s no doubt that the age of our inventory, 

that is the age when we procured equipment, whether it be tanks, 

94

personnel carriers, helicopters, or airplanes, is a problem, because 

as the age of the inventory grows, we still have to maintain parts. 

Conversely, as we do technology insertion to upgrade that equipment, we find that we have parts on the shelf that are no longer 

applicable to that equipment. 

That, in fact, causes us some problems. I believe the example 

that GAO used in the 100 years of supply is, in fact, an item like 

that, that was caught up in a technology upgrade, and therefore 

there was not basically a requirement for that after that was done. 

I can’t give you a number. It has an impact. Rather than to 

quantify that off the top of my head, I just would prefer not to do 

that. 

Mr. MICA. Well, the department has implemented prime vendor 

practices at Warner Robbins Air Logistics Center. Did you say you 

visited there? 

Mr. EMAHISER. Yes. 

Mr. MICA. If this pilot program proves successful, will it be implemented nationwide or on a broader scale? 

Mr. EMAHISER. Well, when we see that the pilot program proves 

out, and the program really has just started, it certainly provides 

a basis for further implementation, not only in the aviation commodities like at Warner Robbins, but in other commodities to support the depot maintenance program. Mr. Jones alluded to the avionics expansion that was being looked at now. That certainly would 

be a case that could be made for that. 

Mr. MICA. Where do you anticipate that these practices would be 

implemented in the future? 

Mr. EMAHISER. I could see where programs like this could be 

issued across the entire depot community; again, either under a 

pilot or on a case-by-case basis. Certainly, Corpus Christi Army 

Depot, where we’re doing helicopters, is a prime case where something like that could be put into place. Anniston Army Depot, 

where primarily we do tanks and heavy combat vehicles, would be 

another place that we could take a look. 

So I think that the time would be ripe, as this case down at Warner Robbins proves out, to expand that. 

Mr. MICA. Does the department have any estimate, based on the 

experience with medical supplies of how much money could be 

saved by adopting prime vendor for all hardware items currently 

held by the department? Is there any indication from that experience? 

Mr. EMAHISER. Sir, I don’t know of any number that’s been projected out. 

Mr. MICA. Mr. Emahiser, it’s my understanding that you made 

this point in the subcommittee, in our hearing in March, that the 

department could not aggressively adopt these practices without 

conducing thorough testing first to ensure that changing practices 

would not affect readiness. What effect do you think the prime vendor practices, like those employed—the example we’ve used here is 

Warner Robbins—is having on readiness, and can you make such 

a determination or evaluation yet? 

Mr. EMAHISER. Based on the limited test that’s going on at Warner Robbins, I would say that it’s had a positive impact on readiness, and it’s had a positive impact on throughput for the depot for 

95

those items. I think my comments, which I don’t really remember 

from the last time, in that area would have been caution in that 

there may be some commodities or some areas that it just would 

not fit. Again, the idea would be not to create a new business entity, but rather be able to follow on what industry would currently 

be doing, to make sure that that fits. 

Mr. MICA. So, so far, also, you are not able to provide the subcommittee with any estimate of saving from implementation of the 

virtual prime vendor at Warner Robbins? You’re still in that position? 

Mr. EMAHISER. I couldn’t provide those now. We could go back 

and look and provide that for the record, if it’s available. 

Mr. JONES. Mr. Chairman, if I could just add one thing. 

Mr. MICA. Yes, Mr. Jones. 

Mr. JONES. Thank you. The virtual prime vendor at Warner Robbins is different from prime vendor that we practice in other commodities. The virtual prime vendor is essentially an integrator, providing a service, and has access to our contracts for parts or his 

own parts chain and parts supply. 

What we are attempting to do there is to demonstrate the capability to provide an integrated logistics support service for a particular weapon system. There are 1,400 weapon systems that we 

manage parts for in DLA. I don’t think that the method we’re going 

to use is going to be to go system by system. What we’re probably 

going to do is to go commodity by commodity, and in certain cases 

where the customer wants us to take on a particular problem involving an air frame or something like that, we will then look for 

an integrated service. 

So one of the reasons it’s hard to answer your question is, we’re 

not sure what service our customers will want us to provide. When 

they do, then we can make the estimates on the point cases for the 

materials that will be involved in those cases. 

Mr. MICA. Real quickly, it’s my understanding that at Walter 

Reed the prime vendor for medical supplies procedure has resulted 

in the reduction of about 50 percent of the materiel management 

personnel, somewhere in the 70’s to 30’s. Is that correct? 

Mr. MARTIN. It’s about a 50 percent reduction from the mid-70’s 

to about half of that. 

Mr. MICA. It’s my understanding that this prime vendor for medical supplies has been extended to over 200 DOD medical facilities. 

Are there similar results in reductions of personnel anticipated or 

underway? 

Mr. MARTIN. I think it’s fair to say that within the health care 

delivery system that the results at Walter Reed are being seen 

pretty consistently throughout. And it’s not only the savings in the 

personnel, particularly for us, which was warehousing and managing the inventory, that is a large responsibility that has changed, 

but also, it’s freed up a great deal of space. 

I mean, when you visit the Brooks Army Hospital, the new hospital in San Antonio, for example, there is a vast amount of space 

that we used to have to dedicate, within the hospital, for storage, 

that this new approach has essentially freed up for other uses, 

which has been also a big factor in its popularity at the hospital 

level. Again, there was the point I made before, this is very popular 

96

with our hospital commanders and doctors and administrators, because it makes life a lot easier in the hospitals. 

Mr. MICA. Well, gentlemen, we’re getting into the meat of some 

of the issues I wanted to discuss with you, and look at, again, savings and how we can best pursue practices that, again, will aid us. 

We’re all up against a budget crunch. We’re trying to do more with 

less and also transition folks who may lose positions as a result of 

our actions. 

I won’t be able to get into all of those questions. We have a vote 

and a series of votes coming up. However, I am going to submit to 

you additional questions, and I’d like a response. I’m going to leave 

the record open for 2 additional weeks. They will be submitting 

them to you, and if you could respond to the subcommittee. 

We appreciate your cooperation in this endeavor and our oversight obligations. I would like to thank each of you for being with 

us. The record will remain open, as I said, for 2 weeks. 

There being no further business to come before the subcommittee 

this afternoon, this meeting is adjourned. Thank you. 

[Whereupon, at 2:15 p.m., the subcommittee was adjourned.]

Æ