United States General Accounting Office

GAO Report to the Ranking Minority Member,

Committee on Armed Services, U.S.

Senate

January 1998 DEFENSE INVENTORY

MANAGEMENT

Expanding Use of Best

Practices for Hardware

Items Can Reduce

Logistics Costs

GAO/NSIAD-98-47

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-278395 

January 20, 1998

The Honorable Carl Levin

Ranking Minority Member

Committee on Armed Services

United States Senate

Dear Senator Levin:

This report is the 11th in a series of reports comparing the Department of

Defense’s (DOD) logistics practices with those of the private sector.1

 As you

requested, we are continuously examining DOD’s inventory management

practices to identify areas where costs can be reduced and problems can

be avoided by using leading private sector practices. This report focuses

on DOD’s progress in adopting best inventory management practices for

hardware items such as bearings, valves, and bolts. The objectives of this

review were to determine (1) DOD and private sector practices for

managing hardware items, (2) whether DOD has adopted best practices for

these items, and (3) opportunities that DOD can take advantage of to

improve its management of hardware items.

Results in Brief While DOD has implemented some innovative management practices, more

opportunities exist to better manage its reported $5.7-billion hardware

inventory and achieve substantial savings.2 DOD continues to manage its

hardware inventory using outdated and inefficient business practices that

create unnecessary inventory levels, provide poor customer service,

generate excess and obsolete inventory, and cost approximately $1 billion

per year to manage and distribute.

DOD buys hardware inventory years in advance of when the items are

actually used. For example, based on our analyses of DOD records, 

62 percent of DOD’s hardware items did not have a demand from

September 1995 to August 1996, and an additional 21 percent of the items

had enough inventory to last for more than 2 years. These items account

for about $4.4 billion, or 77 percent, of DOD’s $5.7 billion hardware

inventory. Despite DOD’s substantial investment in inventory, in many

cases, hardware inventory is not available when needed by DOD customers.

1

See related GAO products at end of report.

2

The $5.7 billion is calculated using DOD’s valuation methodology where excess inventory is at salvage

prices (3.2 percent of the item’s latest acquisition costs). If the excess hardware inventory is valued at

its latest acquisition cost, hardware inventory would be an estimated $7.2 billion.

Page 1 GAO/NSIAD-98-47 Inventory Management
B-278395 

When this happens, the repair of weapon systems and components is often

delayed. The Navy has estimated that the lack of parts increases the repair

time for aviation parts by as much as 74 percent.

DOD’s overall progress in adopting best management practices for

hardware items has been limited. In February 1997, DOD began testing, on a

limited basis, the prime vendor concept for hardware items—one of the

concepts we recommended.3

 These tests will potentially affect about 

2 percent of DOD’s $3.1 billion annual sales of these items. These tests do

not, however, fully optimize the services available in the private sector,

such as ordering, storing, and distributing supplies to the customer.

The business practices we recommended in our past reports have, for the

most part, been used in the private sector to provide customers with a

capability to order supplies as they are needed and then receive those

items within hours after the order is placed. Ordering supplies as they are

needed, combined with quick logistics response times, reduces overall

supply system costs, eliminates large inventories, and enables companies

to reduce or eliminate the possibility of ordering supplies that may not be

needed or become obsolete. To achieve similar inventory reductions,

infrastructure savings, and improved customer service, DOD could expand

its prime vendor programs to include tasks such as ordering, storing, and

distributing supplies to the customer, and fully use the services offered

under these programs.

Background The Defense Logistics Agency (DLA) is the primary manager of consumable

supplies, including hardware items, used by the military services.

Hardware items encompass a large part of DLA’s overall operations. As

shown in table 1, DLA manages about 4 million items of which 3.9 million,

or 97 percent, are classified as hardware items. As of September 30, 1996,

DLA’s hardware inventory, valued at $5.7 billion, accounted for 74 percent

of DLA’s total consumable inventory.

3

A prime vendor buys inventory from a variety of suppliers, stores the inventory in its own warehouse,

and delivers inventory to the customer within hours of receiving the order.

Page 2 GAO/NSIAD-98-47 Inventory Management
B-278395 

Table 1: Status of DLA Consumable

Item Inventory (fiscal year 1996) 

Category

DLA’s hardware

inventory

DLA’s total

inventorya

Percentage of hardware

inventory to

total inventory

Number of items

managedb 3.9 million 4.0 million 97

Value of inventory on

hand $5.7 billion $7.7 billion 74

Value of material

purchases $2.6 billion $5.5 billion 47

Operating costs $1.0 billion $1.4 billion 71

a Excludes fuels.

bData as of June 1997.

Traditionally, DLA buys hardware items in large quantities, stores them in

distribution depots until they are requested by the services, and then ships

them to the appropriate service facility. For example, the services operate

over 20 repair depots where large amounts of these items are used for

regularly scheduled maintenance of equipment and weapon systems. To

store and distribute hardware items, DLA uses storage structures at 24

distribution depots, which are DOD facilities with several large warehouses,

as well as 50 or more additional storage sites. In fiscal year 1996, DLA filled

about 12 million requests for hardware items.

DLA’s fiscal year 1996 material management costs for hardware items were

reported at about $3.6 billion. Of that amount, about $2.6 billion was spent

to purchase hardware items from commercial suppliers and $1 billion was

spent to manage and distribute inventory. To recover its operating costs,

DLA charges the military services the cost of the item plus a surcharge,

which covers supply center and distribution expenses, inflation, and

material-related expenses such as inventory losses. In fiscal year 1996, the

surcharge averaged about 39 percent for hardware items. In contrast, DLA

has lowered the surcharge for medical supplies from 21.7 percent to

7.9 percent using best management practices from the private sector.

Page 3 GAO/NSIAD-98-47 Inventory Management
B-278395 

DOD Continues to

Use Inefficient and

Ineffective

Management

Techniques for

Hardware Items

DOD continues to use outdated and inefficient business practices to

manage its hardware inventory. For example, DOD buys inventory years in

advance of when the items are actually used. Based on our analyses of DLA

records, 62 percent of DLA’s hardware items did not have a demand from

September 1995 to August 1996 (see fig. 1). We found an additional 

21 percent of DLA’s hardware items had enough inventory on hand to last

for more than 2 years based on demands during the same period. These

items accounted for about $4.4 billion, or 77 percent, of DLA’s $5.7 billion

hardware inventory.

Figure 1: Years of Supply on Hand for

Hardware Items Managed by DLA

62% • Items with no demand (Sept. 1995

to Aug. 1996)

21%•

Items with more than 2 years of

supply on hand

•17%

Items with less than 2 years of

supply on hand

DOD also uses a multilayered process to order and deliver hardware

supplies. When the services order hardware supplies from DLA, the

supplies are sent from the DLA warehouses to the military services.

According to DOD records, this order and delivery process took an average

of 25 days in 1996. The services then operate a base-level logistics system

to deliver the inventory to the end user. This system usually requires

inventory to be stored in three separate locations—bulk storage

warehouses, central distribution storerooms, and end-user locations. The

traditional multilayered logistics system, as highlighted in our April 1997

Page 4 GAO/NSIAD-98-47 Inventory Management
B-278395 

report on the Army’s logistics system, is shown in figure 2, using the

Corpus Christi Army Depot’s supply system as an illustration.

Figure 2: DOD’s Logistics System Used at Corpus Christi Army Depot

Depot Bulk 

Storage

Depot 

Automated

Distribution 

Warehouse

DLA 

Wholesale

Inventorya

$5.7 billion

on hand

$23 million

on hand

$23 million

on hand

Manufacturers

Maintenance

Shop Storage

(72 locations)

End users

Unknown amount 

on hand

DOD Wholesale Supply System Corpus Christi Depot Supply System

aDLA inventory is stored at multiple locations nationwide to support all DOD customers.

As of September 30, 1996, DLA reported it was storing $5.7 billion worth of

hardware items in distribution depots and warehouses. Based on

inventory levels and past demands for items, we estimate that this

inventory could satisfy DOD’s requirements, on average, for the next 

2 years. As shown in figure 2, a base-level logistics system can also hold

millions of dollars of hardware inventory. When DLA-owned and

service-owned inventories are combined, the total inventory levels could

meet current DOD requirements, in some cases, for many years.

Despite this large investment in inventory, DOD’s supply system frequently

does not meet the needs of its customers. As of September 1996, DLA

reported it had over 574,000 customer orders, valued at $843 million, that

it could not fill because it did not have the right stock on hand. Customers

had been waiting on parts for an average of over 3 months. Also, the

base-level supply system frequently could not fill orders placed by

mechanics and other customers. For example, according to Army records,

Page 5 GAO/NSIAD-98-47 Inventory Management
B-278395 

the base warehouse at one Army depot did not fully meet customer orders

76 percent of the time during fiscal year 1996. At four other locations we

examined, base-level systems did not meet customer needs between 

30 and 72 percent of the time.

When hardware items are not immediately available to mechanics, the

repair of weapon systems and their components is delayed, which

increases repair times. For example, the Navy calculates that the lack of

parts increases the repair time for aviation parts by as much as 74 percent.

As of January 1997, the Navy reported it had stopped repairing over 12,000

aircraft components, valued at $516 million, because parts were not

available to complete repairs. The partially repaired items were packaged

and moved to a warehouse next to the repair facility. At the time of our

review, these items had been in storage for an average of 230 days. Also,

according to Air Force records, at one Air Force depot location,

mechanics stopped repairs on 2,748 items, valued at $193 million, because

necessary parts were not available.

Best Practices Have

Reduced Private

Sector Logistics Costs

DOD recognizes that it cannot continue to use outdated and inefficient

business practices. Due to the pressures of budgetary constraints, DOD has

recognized that it must seek ways to make logistics processes as efficient

as possible. As a result, the Office of the Secretary of Defense has

encouraged DLA and the military services to use alternatives to DOD’s

traditional logistics systems, such as innovative logistics concepts used by

commercial firms to improve operations.

Some of the alternatives are new concepts that private sector companies

have successfully used during the past decade to improve their

management of consumable items. These items were targeted because

they are generally standard items with a low unit cost, are commonly

stocked by several suppliers, and are used in large quantities.4

 In general,

these concepts provide inventory users with a capability to order supplies

as they are needed and then receive those items within hours after an

order is placed. Ordering supplies only as they are needed, combined with

quick logistics response times, enable companies to reduce or eliminate

the possibility of inventory spoilage or obsolescence and reduce overall

supply system costs.

In prior reports, we highlighted three concepts, or best practices, that

reflect this new business philosophy in the management of consumable

4

Consumable items are discarded after use rather than repaired.

Page 6 GAO/NSIAD-98-47 Inventory Management
B-278395 

items (see table 2). Each of these practices has resulted in significant

savings for the companies that used them and improved their inventory

management systems. We recommended that DOD test these concepts and

expand them, where feasible, to more defense facilities. Of the three

concepts—prime vendor, supplier park, and integrated supplier—we

believe the integrated supplier offers DOD the greatest opportunity for

streamlining its logistics operations, reducing costs, and improving

customer service.5

Table 2: Best Practices Recommended

by GAO Concept Description

Prime vendor A single vendor (prime vendor) buys inventory from a variety of

suppliers and stores the inventory in its own warehouse. This

concept is characterized by a close partnership between the

prime vendor and the customer. The customer orders supplies

from the prime vendor, using electronic ordering systems that,

in some cases, are provided by the prime vendor. The prime

vendor delivers inventory to the customer within hours of

receiving the order.

Local distribution

centers/supplier parks

One or more suppliers locate a distribution center within close

proximity to their customers. From this location, the supplier

delivers items to the customer within 24 hours or less of

receiving an order. The supplier is linked electronically with the

customer. In some cases, the supplier can perform the

receiving function for the customer in the local distribution

center, before the inventory leaves the facility.

Integrated supplier An integrated supplier assumes almost total inventory

management responsibilities for a customer. This is the most

aggressive form of a supplier partnership where a supplier

representative works in the customer’s facility, ordering

supplies as they are needed and replenishing storage

locations. Inventory is stored in the supplier’s warehouse until

ordered, then delivered on a “just-in-time” basis. An integrated

supplier can also perform quality inspections, maintain data on

usage, test the quality of parts, prepare parts kits, establish

electronic data interchange links and bar coding, and provide

vendor selection management.

The companies that have adopted these best practices have significantly

reduced their logistics costs. For example, as we reported in

December 1991, Vanderbilt University Medical Center reduced inventory

levels by $1.7 million (38 percent) through the use of a prime vendor

program. In 1993, we reported PPG Industries eliminated $4.5 million 

(80 percent) in maintenance and repair supplies and saved about $600,000

in annual operating costs by locating 10 suppliers’ activities at a supplier

park about 600 yards from the PPG facility. In 1996, we found that a

5

The use of an integrated supplier is discussed in our testimony Inventory Management: Greater Use of

Best Practices Could Reduce DOD’s Logistics Costs (GAO/T-NSIAD-97-214, July 24, 1997).

Page 7 GAO/NSIAD-98-47 Inventory Management
B-278395 

leading distributor of aircraft supplies reported its integrated supplier

program reduced one customer’s inventory by $7.4 million (84 percent)

while filling 98 percent of the customer’s orders within 24 hours.

DOD has demonstrated that best practices can be applied to DOD

operations. Starting in 1993, DOD successfully applied the prime vendor

concept to its management of medical supplies. The prime vendor, which

delivers items to DOD hospitals when ordered, has enabled DOD to reduce

the need to store and distribute medical supplies. As the prime vendor

concept was established nationwide, inventory levels began to decline,

and warehouses once filled with medical items were emptied. DOD’s prime

vendor for medical supplies, along with other inventory reduction efforts,

has resulted in savings that we estimate exceed $700 million.

DOD Could Build on

Efforts to Use Best

Practices for

Hardware Items

To its credit, DLA has tried new inventory practices for managing hardware

items. However, despite DOD’s success with its prime vendor program for

medical supplies, its efforts for hardware items are limited in scope and

represent only a small part of DLA’s logistics operations. To achieve greater

inventory reductions, infrastructure savings, and improved customer

service that we have seen in the private sector, we believe DOD needs to

expand its use of private sector inventory practices, such as prime vendors

and integrated suppliers, and use the full range of services offered under

these programs.

DLA’s Initiatives Have Not

Progressed Much Beyond

Direct Vendor Delivery

Since 1992, one of DLA’s main initiatives has been a direct vendor delivery

program. Under this program, DLA uses long-term contracts and electronic

data systems to enable certain suppliers to deliver items directly to

military installations instead of delivering the items to DLA storage sites. In

fiscal year 1996, DLA reported that 17 percent of hardware sales were filled

using the direct vendor delivery program. As shown in figure 3, this

percentage has not varied much since 1992.

Page 8 GAO/NSIAD-98-47 Inventory Management
B-278395 

Figure 3: Direct Delivery Sales of

Hardware Items (fiscal year 1992 to

1996)

Percent of total sales

0

10

20

30

40

50

60

70

80

90

100

1992 1993 1994 1995 1996

Fiscal year

While DLA’s use of direct vendor delivery has remained fairly stable since

1992, so have DLA’s hardware inventory levels (see fig. 4).7

7

DLA’s reported value of hardware inventories includes inventory transferred from the military

departments as part of DOD’s consumable item transfer program, the majority of which were

transferred between fiscal year 1992 and 1994.

Page 9 GAO/NSIAD-98-47 Inventory Management
B-278395 

Figure 4: DLA Hardware Inventory

Levels (fiscal year 1992 to 1996) Dollars in billions

0

2

4

6

8

1992 1993 1994 1995 1996

Fiscal year

5.9

6.6 6.5

5.7 5.7

While the direct delivery program eliminates the need to store and

distribute inventory from DLA warehouses, lowering the cost to DOD

customers, it has not provided a quick response to customer orders

because the traditional DOD ordering process has not changed. With this

program, requisitions are still sent from the services to DLA, where the

orders are then relayed to a supplier. Upon receipt of an order, the

supplier ships the items to the appropriate military installation. According

to DLA records, with the direct delivery program, in 1996 it took an average

of 54 days for customers to receive ordered items, or twice as long as the

25-day delivery average for items stocked in DLA warehouses. Both of these

delivery times are significantly longer than the times prime vendors or

integrated suppliers have achieved—within 24 hours of receiving an order

(see fig. 5).

Page 10 GAO/NSIAD-98-47 Inventory Management
B-278395 

Figure 5: Delivery Time Comparison

Days

0

10

20

30

40

50

Traditional DOD system

DLA direct delivery programs

Best practices

25

54

1

DOD Has Applied a

Limited Form of the Prime

Vendor Concept to

Hardware Items

In fiscal year 1997, DOD began using a prime vendor concept, called the

Virtual Prime Vendor program, for hardware supplies on a limited basis.

One of the two testing areas was supply support of depot repair

operations. In February 1997, DOD began using a prime vendor program to

support the C-130 propeller repair shop at the Warner-Robins Air Logistics

Center (ALC). DLA established this program to determine the feasibility of

using prime vendors for hardware items instead of the traditional military

supply system and to improve service, reduce inventories, and lower costs.

Because the program was only recently initiated, DOD had not yet

evaluated the program’s results at the time of our review. By the second

quarter of fiscal year 1998, the Air Force plans to expand the prime vendor

program at Warner-Robins ALC and begin programs at two other Air Force

repair depots. The Navy plans to test the concept at one depot location

(see table 3). The Army has not yet developed a program to test the prime

vendor concept at a repair depot or at any operating base repair activities.

We estimate that DOD’s programs, when implemented, will apply to about 2

percent of DLA’s $3.1 billion annual sales of hardware items.

Page 11 GAO/NSIAD-98-47 Inventory Management
B-278395 

Table 3: DLA Prime Vendor Programs at Repair Depots

Dollars in millions

Location Types of items Contract award

Estimated

annual sales

Warner-Robins ALC C-130 aircraft parts October 1996 (actual) $22

Warner-Robins ALC Avionics items 1st quarter FY 1998

(estimated) $10

Warner-Robins ALC Industrial items 2nd quarter FY 1998

(estimated) $8

Oklahoma City ALC Industrial items 2nd quarter FY 1998

(estimated) $10

Ogden ALC Industrial items 2nd quarter FY 1998

(estimated) $4.5

North Island Naval Aviation Depot Industrial items 2nd quarter FY 1998

(estimated) $4.5

Also in February 1997, DLA began using the prime vendor concept for

facilities maintenance supplies such as plumbing, electrical, and lumber

items. Under this concept, a prime vendor serves a geographic region

where all military facilities within the region can elect to order

maintenance supplies from the vendor. As of July 1997, 9 of 73 military

facilities in the first region had elected to use the prime vendor program.

By June 1999, DLA plans to have a prime vendor under contract for 

10 geographic regions, covering the United States and overseas locations.

As of July 1997, facilities in only 4 of the 10 regions had committed to use

the program.

In June 1997, the Under Secretary of Defense (Comptroller)/Chief

Financial Officer endorsed this concept and asked the Director of DLA, in

conjunction with the military services, to develop a regional

implementation plan for the DLA prime vendor program for facilities

maintenance supplies. He asked that the plan identify the critical events

and site designations for regional implementation within 12 months and

provide for nationwide availability by the middle of fiscal year 1999. We

believe this plan is critical to the program’s success because it

demonstrates top-management support, and it will further encourage

military units to use the prime vendor services once they are established.

Page 12 GAO/NSIAD-98-47 Inventory Management
B-278395 

DOD Could Further

Expand Prime Vendor and

Integrated Supplier

Programs

DOD’s prime vendor programs for hardware items, which are similar to the

best practices we observed in the private sector, can be expanded to

achieve greater savings while improving service. For example, neither

DLA’s direct delivery nor prime vendor programs streamline the services’

base-level logistics systems to the extent we have seen in the private

sector. DOD personnel still order, receive, store, and distribute material to

the end users. If DOD transferred these functions to a prime vendor or to an

integrated supplier, it could achieve substantial reductions in resource

requirements and improve service to its customers. This action would also

allow items to be bought at the time when they are actually needed,

therefore minimizing the potential of inventory obsolescence.

As figure 6 shows, the DLA wholesale system, and at least two of three

primary storage points in the base-level supply system, could be bypassed

by applying the integrated supplier concept because the integrated

supplier would deliver inventory directly to maintenance shops or

end-user locations. The integrated supplier could also monitor storage

bins, order parts, and restock bins once parts are delivered. In the private

sector, having the supplier deliver inventory directly to these locations

improves the availability of inventory and actively involves the supplier as

a “partner” in the customer’s operations. The supplier also becomes

involved in testing parts for quality and monitoring part usage and

ordering supplies when needed.

Page 13 GAO/NSIAD-98-47 Inventory Management
B-278395 

Figure 6: Potential Impact of an Integrated Supplier on DOD’s System

Depot Bulk 

Storage

Depot Automated

Distribution 

Warehouse

DLA 

Wholesale

Inventorya Manufacturers

Traditional supply system

a Manufacturers

Maintenance

Shop Storage

Locations

End users

Key

Vendor

Integrated supplier concept

Maintenance

Shop Storage

End users

X

X

X

X

Key Factors in Further

Adopting Best Practices

According to DOD officials, there are no major impediments to adopting

best practices such as prime vendor, supplier park, and integrated supplier

concepts. However, DOD’s success in expanding these concepts to

encompass a larger part of its operations will depend on its ability to

address two key factors. Specifically, (1) DOD may need to prepare a cost

comparison between government and the commercial providers in

accordance with the Office of Management and Budget (OMB) Circular A-76

and (2) military customers will have to overcome their reluctance to trying

new business practices.

According to Air Force officials, a prime vendor program that would

replace the base-level supply system and would involve more than 

10 government personnel may not be contracted out without a cost

comparison in accordance with OMB Circular A-76. According to the Air

Force, the Warner-Robins ALC has about 219 government personnel

involved in supply operations. Air Force officials stated that if these

positions were eliminated through the prime vendor program, a cost

Page 14 GAO/NSIAD-98-47 Inventory Management
B-278395 

comparison would first be required, which may take 2 years to complete.

We agree that a cost comparison could be a significant issue in

implementing these programs. Our work has consistently shown, however,

that this process is cost-effective because competition generates

savings—usually through a reduction in personnel—whether the

competition is won by the government or the private sector.

Another factor is that military service customers have been reluctant to try

the new business practices. DOD has traditionally relied on its own internal

logistics system to support its logistics needs—a philosophy that private

companies have moved away from to lower the cost of doing business,

provide better service, and remain competitive. According to DLA, it has

been a challenge to get the services to agree to use the prime vendor

programs. For example, DLA has laid out an implementation schedule for

its facilities and maintenance prime vendor program, but, to date, the

services have committed to use this program for less than 20 percent of

the demands for these items. In another example, the Army has yet to

establish a test program to determine the feasibility of using prime

vendors or integrated suppliers at its repair facilities. Without the

commitment of the services to these programs, DOD’s success in improving

its operations will be limited.

The “corporate culture” within DOD has been traditionally resistant to

change. Organizations often find changes in operations threatening and

are unwilling to change current behavior until proposed ideas have been

proven. In June 1994, we convened a symposium on reengineering that

brought together executives from five Fortune 500 companies that have

been successful in reengineering activities.8

 Panel members at the

symposium expressed the view that committed and engaged top managers

must support and lead reengineering efforts to ensure success because top

management has the authority to encourage employees to accept

reengineered roles. Also, top management has the responsibility to set the

corporate agenda and define the organization’s culture and the ability to

remove barriers that block changes to the corporate mindset.

Conclusions There is a high potential for DOD to greatly expand the use of the private

sector best practices we have recommended to improve logistics

operations and lower costs. DOD has adopted the prime vendor concept to

improve the management of medical inventories, demonstrating that such

private sector practices can be applied to DOD operations. However, DOD

8

Reengineering Organizations: Results of a GAO Symposium (GAO-NSIAD-95-34, Dec. 13, 1994).

Page 15 GAO/NSIAD-98-47 Inventory Management
B-278395 

has adopted a prime vendor program for hardware items only in a limited

way and the other changes that have been introduced have not resulted in

significant improvements.

In addition, the services have been slow to adopt these initiatives into their

operations. For example, the Army has yet to establish a plan to test the

prime vendor concept at repair depots and the Navy plans to only begin

testing this concept in fiscal year 1998. To ensure the military services

pursue best practices to the maximum extent possible, DOD’s top

management needs to continue its commitment to changing its inventory

management culture and further motivate the services to use these

practices.

Recommendations To encourage DLA and the services to more aggressively apply best

practices to its operations, we recommend that the Secretary of Defense:

• Identify a “Champion of Change” within the Office of the Secretary of

Defense that would be responsible for coordinating and overseeing

improvement initiatives throughout DOD’s operations and ensuring the

prime vendor and integrated supplier concepts (1) encompass a broader

part of DOD’s operations, (2) fully use the services offered in the private

sector, and (3) are used by all military services whenever it is cost

effective to do so.

• Direct (1) the Secretary of the Army to identify at least one repair depot

location that will join the other services in testing the prime vendor

concept and (2) the secretaries of the military services to identify repair

activities at operating bases as test sites.

• Direct the Director of DLA and the secretaries of each military service to

establish a test of the integrated supplier concept at one or more repair

depots. DLA and the military services should (1) establish aggressive

milestones for testing and implementing the prime vendor and integrated

supplier programs so as not to delay implementing such programs if the

tests find them to be feasible and (2) develop the means to expeditiously

measure the total costs and benefits under the prime vendor and

integrated supplier programs to compare them to the total costs and

benefits incurred under the traditional system.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, DOD generally concurred with the

findings and recommendations. DOD stated that the Office of the Deputy

Under Secretary of Defense (Logistics) is responsible for coordinating and

Page 16 GAO/NSIAD-98-47 Inventory Management
B-278395 

overseeing material management improvement initiatives throughout DOD

and will be responsible for ensuring that private sector practices are used

by the military services to the maximum extent possible where it meets

readiness requirements and is cost-effective to do so. According to DOD, it

will direct the Army to identify a repair depot that will test the prime

vendor concept. It will also direct DLA and the military services to identify

one or more repair depots to test the integrated supplier concept. DOD also

agreed to identify repair activities at operating bases that would test the

prime vendor concept and DOD expects to have test sites designated by

June 30, 1998. We plan to closely monitor DOD’s progress in establishing

aggressive milestones for testing and implementing these concepts and in

developing the means for measuring the total costs and benefits incurred

from these tests. DOD’s comments are included in appendix I.

Scope and

Methodology

We reviewed documents and interviewed officials on DOD’s logistics

policies, practices, and efforts to improve its operations. We contacted

officials at the Office of the Deputy Under Secretary of Defense for

Logistics, Washington, D.C.; DLA Headquarters, Fort Belvoir, Virginia; Air

Force Materiel Command, Wright-Patterson Air Force Base, Ohio; Naval

Supply Systems Command, Mechanicsburg, Pennsylvania; Naval Air

Systems Command, Arlington, Virginia; and the Army Industrial

Operations Command, Rock Island, Illinois. Also, we discussed the

potential applications of private sector logistics practices to DOD’s

operations and any impediments to using these practices with these

officials.

To determine the nature and extent of DOD’s progress in adopting best

practices, we visited the following organizations:

• Defense Supply Center Richmond, Richmond Virginia;

• Defense Supply Center Columbus, Columbus, Ohio;

• Defense Industrial Supply Center, Philadelphia, Pennsylvania; and

• Warner-Robins ALC, Robins Air Force Base, Georgia.

These locations are involved in initiatives that are intended to improve

DOD’s logistics operations. At these locations, we discussed (1) inventory

management practices that DOD is using for hardware items; (2) best

practices, programs, and tests underway or planned to improve DOD

operations; and (3) DOD officials’ positions on the use of best practices as

alternatives to traditional DOD inventory practices. At Warner-Robins ALC,

the pilot location for several of DOD’s initiatives, we discussed with supply

Page 17 GAO/NSIAD-98-47 Inventory Management
B-278395 

and maintenance personnel the results of the initiatives and the impacts

on supply operations.

Also during our review, we obtained and analyzed detailed information on

inventory levels and usage, supply effectiveness and response times,

operating costs, and other related logistics performance measures. Except

where noted, our data reflected inventory valued by DOD using its standard

inventory valuation method—inventory valued at latest acquisition costs

and inventory classified as excess valued at salvage prices (3.2 percent of

its latest acquisition costs). We did not test or otherwise validate DOD’s

inventory data.

To identify leading business practices, we used information from our

series of 10 reports that have been issued since 1991. This information

included the results of an extensive literature search of leading inventory

management concepts and detailed examinations and discussions of

logistics practices used by companies such as PPG Industries, Bethlehem

Steel, British Airways, United Airlines, and Tri-Star Aerospace. We also

participated in roundtables, symposiums, and conferences with recognized

leaders in the logistics field to obtain information on how companies are

applying integrated approaches to their logistics operations and

establishing supplier partnerships to eliminate unnecessary functions and

reduce costs. We did not independently verify the accuracy of logistics

costs and performance measures provided by the private sector

organizations.

We conducted our review from January 1997 to October 1997 in

accordance with generally accepted government auditing standards.

We are sending copies of this report to the appropriate congressional

committees; the Secretaries of Defense, the Army, the Air Force, and the

Navy; the Directors of DLA and OMB; and other interested parties. We will

make copies available to others upon request.

Page 18 GAO/NSIAD-98-47 Inventory Management
B-278395 

Please contact me on (202) 512-8412 if you or your staff have any

questions concerning this report. The major contributors to this report are

listed in appendix II.

Sincerely yours,

David R. Warren, Director

Defense Management Issues

Page 19 GAO/NSIAD-98-47 Inventory Management
Contents

Letter 1

Appendix I 

Comments From the

Department of

Defense

22

Appendix II 

Major Contributors to

This Report

25

Related GAO Products 28

Tables Table 1: Status of DLA Consumable Item Inventory 3

Table 2: Best Practices Recommended By GAO 7

Table 3: DLA Prime Vendor Programs at Repair Depots 12

Figures Figure 1: Years of Supply on Hand for Hardware Items Managed

by DLA

4

Figure 2: DOD’s Logistics System Used at Corpus Christi Army

Depot

5

Figure 3: Direct Delivery Sales of Hardware Items 9

Figure 4: DLA Hardware Inventory Levels 10

Figure 5: Delivery Time Comparison 11

Figure 6: Potential Impact of an Integrated Supplier on DOD’s

System

14

Abbreviations

ALC Air Logistics Center

DLA Defense Logistics Agency

DOD Department of Defense

OMB Office of Management and Budget

Page 20 GAO/NSIAD-98-47 Inventory Management
Page 21 GAO/NSIAD-98-47 Inventory Management
Appendix I 

Comments From the Department of Defense

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 22 GAO/NSIAD-98-47 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on p. 16.

Now on p. 16.

Now on p. 16.

Page 23 GAO/NSIAD-98-47 Inventory Management
Appendix I 

Comments From the Department of Defense

The following is a GAO comment on the Department of Defense’s (DOD)

letter dated December 8, 1997.

GAO Comment 1. In commenting on a draft of this report, DOD stated that the reported

value of hardware inventories includes inventory transferred from the

military departments as part of DOD’s consumable item transfer program.

According to DOD, when those transferred items are excluded, the Defense

Logistics Agency’s (DLA) inventory of consumable items decreased

36 percent between fiscal year 1992 and 1996. We qualified our report to

address DOD’s concerns. However, since these items are now a part of DLA’s

total hardware inventories, we believe aggressive steps are needed to

reduce such inventories, which are currently large enough to meet DOD’s

requirements for the next 2 years. By expanding the use of best practices,

DLA could further reduce its hardware inventories and lower its operating

costs.

Page 24 GAO/NSIAD-98-47 Inventory Management
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Charles I. (Bud) Patton, Jr.

Kenneth R. Knouse, Jr.

Dayton Office Matthew B. Lea

Robert L. Repasky

Frederick J. Naas

Dallas Office Robert D. Malpass

St. Louis Office Robert C. Sommer

Page 25 GAO/NSIAD-98-47 Inventory Management
Page 26 GAO/NSIAD-98-47 Inventory Management
Page 27 GAO/NSIAD-98-47 Inventory Management
Related GAO Products

Inventory Management: Greater Use of Best Practices Could Reduce DOD’s

Logistics Costs (GAO/T-NSIAD-97-214, July 24, 1997).

Inventory Management: The Army Could Reduce Logistics Costs for

Aviation Parts by Adopting Best Practices (GAO/NSIAD-97-82, Apr. 15, 1997).

Defense Inventory Management: Problems, Progress, and Additional

Actions Needed (GAO/T-NSIAD-97-109 Mar. 20, 1997).

Inventory Management: Adopting Best Practices Could Enhance Navy

Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July 12, 1996).

Best Management Practices: Reengineering the Air Force’s Logistics

System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 21, 1996).

Inventory Management: DOD Can Build on Progress in Using Best Practices

to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug. 4, 1995).

Commercial Practices: DOD Could Reduce Electronics Inventories by Using

Private Sector Techniques (GAO/NSIAD-94-110, June 29, 1994).

Commercial Practices: Leading-Edge Practices Can Help DOD Better

Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, Apr. 13, 1994).

Commercial Practices: DOD Could Save Millions by Reducing Maintenance

and Repair Inventories (GAO/NSIAD-93-155, June 7, 1993).

DOD Food Inventory: Using Private Sector Practices Can Reduce Costs and

Eliminate Problems (GAO/NSIAD-93-110, June 4, 1993).

DOD Medical Inventory: Reductions Can Be Made Through the Use of

Commercial Practices (GAO/NSIAD-92-58, Dec. 5, 1991).

Commercial Practices: Opportunities Exist to Reduce Aircraft Engine

Support Costs (GAO/NSIAD-91-240, June 28, 1991).

(709231) Page 28 GAO/NSIAD-98-47 Inventory Management
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100