United States General Accounting Office

GAO Report to Congressional Committees

February 1998 INVENTORY

MANAGEMENT

DOD Can Build on

Progress by Using Best

Practices for Reparable

Parts

GAO/NSIAD-98-97

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-279179 

February 27, 1998

The Honorable Strom Thurmond

Chairman

The Honorable Carl Levin

Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Floyd Spence

Chairman

The Honorable Ike Skelton

Ranking Minority Member

Committee on National Security

House of Representatives

Section 395 of the National Defense Authorization Act for Fiscal Year 1998

requires the Director of the Defense Logistics Agency (DLA) to develop and

submit to Congress a schedule for implementing best practices for the

acquisition and distribution of categories of consumable-type supplies and

equipment listed in the section. Best practices were defined in the act as

techniques that the Director of DLA determines will reduce inventory levels

and costs and improve the responsiveness of the logistics system to user

needs. The act also requires the implementation of such practices no later

than November 2000. In addition, the act requires us to report on the

feasibility of adding reparable parts to the list of items covered by section

395. This report responds to that mandate.

As agreed with your offices, this report specifically addresses (1) private

sector practices that streamline logistics operations, (2) Department of

Defense (DOD) initiatives to improve its logistics systems, and (3) best

practices that can be used to improve the military services’ aircraft

reparable parts pipeline. Our analysis relates to work performed in public

repair facilities rather than contractor repair operations. Because aircraft

parts represent a large portion of DOD’s secondary inventory investment,

we focused our best practices analysis on DOD’s management of these

items. However, many of the logistics system improvements identified

through our analysis could be applied to DOD’s management of other

reparable parts.1

1

We have reported on the opportunities that exist for DOD to use best practices for consumable items

as well. See Related GAO Products at the end of this report for a listing of these and other reports that

discuss our best practices analyses of DOD logistics systems.

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Background As of September 30, 1996, DOD reported the value of its secondary

inventory—consumable items and reparable parts—at $68.5 billion.

Consumable items, such as clothing and medical supplies, are managed

primarily by DLA. Reparable parts are generally expensive items that can be

fixed and used again, such as hydraulic pumps, navigational computers,

wing sections, and landing gear. Each military service manages reparable

parts that are used for their operations. These management functions

include determining how many parts will be needed to support operations,

purchasing new parts, and deciding when broken parts need to be

repaired. As shown in figure 1, aircraft reparable parts represent an

estimated 59 percent of DOD’s secondary inventory.

Figure 1: Estimated Composition of

DOD’s Secondary Inventory (as of 

Sept. 30, 1996)

27.3% • DLA and service managed

consumable parts ($18.7 billion)

59.1%•

Service managed aircraft

reparable parts ($40.5 billion)

•13.6%

Service managed other reparable

parts ($9.3 billion)

To provide reparable parts for their aircraft, the military services use

extensive logistics systems that were based on management processes,

procedures, and concepts that have evolved over time but are largely

outdated. Each service’s logistics system, often referred to as a logistics

pipeline, consists of a number of activities that play a role in providing

aircraft parts where and when they are needed. These activities include

the purchase, storage, distribution, and repair of parts, which together

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require billions of dollars of investment in personnel, equipment, facilities,

and inventory. In our recent reports on the Army, the Navy, and the Air

Force logistics pipelines, we highlighted many of the problems and

inefficiencies associated with the services’ current logistics systems.

Findings from these reports are summarized in appendix I.

Legislative Framework DOD must operate its logistics activities within the framework of various

legislative provisions and regulatory requirements. Various legislative

provisions govern the size, composition, and allocation of depot repair

workloads between the public and private sectors. For example, the

allocation of the depot maintenance workload between the public and

private sectors is governed by 10 U.S.C. 2466. According to the statute, not

more than 50 percent of the funds made available for depot-level

maintenance and repair can be used to contract for performance by

nonfederal government personnel. Other statutes that affect the extent to

which depot-level workloads can be converted to private sector

performance include (1) 10 U.S.C. 2469, which provides that

DOD-performed depot maintenance and repair workloads valued at not less

than $3 million cannot be changed to contractor performance without a

public-private competition and (2) 10 U.S.C. 2464, which provides that DOD

activities should maintain a government-owned and operated logistics

capability sufficient to ensure technical competence and resources

necessary for an effective and timely response to a national defense

emergency.

Another provision that may affect future DOD logistics operations is 

10 U.S.C. 2474, added to the United States Code by section 361 of the

Fiscal Year 1998 National Defense Authorization Act. Section 2474 requires

the Secretary of Defense to designate each depot-level activity as a Center

of Industrial and Technical Excellence for certain functions. The act

further requires the Secretary to establish a policy to encourage the

military services to reengineer their depot repair processes and adopt best

business practices. According to section 2474, a military service may

conduct a pilot program, consistent with applicable requirements of law,

to test any practices that the military service determines could improve

the efficiency and effectiveness of depot-level operations, improve the

support provided by the depots for the end user, and enhance readiness by

reducing the time needed to repair equipment.

Further, efforts to outsource functions other than depot-level maintenance

and repair must be accomplished in accordance with the requirement of

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the Office of Management and Budget Circular A-76, various applicable

provisions of chapter 146 of title 10 of the United States Code, as well as

recurring provisions in the annual DOD Appropriations Act.

Defense Reform Initiative In November 1997, the Secretary of Defense announced the Defense

Reform Initiative, which seeks to reengineer DOD support activities and

business practices by incorporating many business practices that private

sector companies have used to become leaner, more agile, and highly

successful. The initiative calls for adopting modern business practices to

achieve world-class standards of performance in DOD operations. The

Secretary of Defense stated that reforming DOD support activities is

imperative to free up funds to help pay for high priorities, such as

weapons modernization.

Results in Brief Our work shows it is feasible for the list of items covered by section 395 to

be expanded to include reparable parts. In fact, all of the services and DLA

have initiatives underway designed to improve their logistics operations by

adopting best practices. Since 1996, we have issued a series of reports that

identify other best practices that present opportunities for DOD to build on

these improvement efforts. However, if section 395 were expanded to

include reparable parts, the responsibility for the development and

submission of a schedule to implement best practices would also have to

be expanded to include the military services, since responsibility for

service-managed reparable parts is beyond the purview of the Director of

DLA.

Private sector companies have developed new business strategies and

practices that have cut costs and improved customer service by

streamlining logistics operations. The most successful improvement

efforts included a combination of practices that are focused on improving

the entire logistics pipeline—an approach known as supply-chain

management. The combination of practices we have observed include the

use of highly accurate information systems, various methods to speed the

flow of parts through the pipeline, and the shifting of certain logistics

functions to suppliers and third parties.

DOD recognizes that it needs to make substantial improvements to its

logistics systems. The Army’s Velocity Management program, the Navy’s

regionalization and direct delivery programs, and the Air Force’s Lean

Logistics initiative are designed to improve logistics operations and make

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logistics processes faster and more flexible. Although these initiatives

have achieved some limited success, significant opportunities for

improvement remain.

Our work indicates that best practices developed by private sector

companies are compatible with DOD improvement initiatives. However, we

recognize the use of these best practices must be accomplished within the

existing legislative framework and regulatory requirements relating to

defense logistics activities, such as the Office of Management and Budget

Circular A-76 .

Private Sector

Practices Streamline

Logistics Operations

We previously reported that several commercial airlines have cut costs

and improved customer service by streamlining their logistics operations.

The most successful improvements include using highly accurate

information systems to track and control inventory; employing various

methods to speed the flow of parts through the pipeline; shifting certain

inventory tasks to suppliers; and having third parties handle parts repair,

storage, and distribution functions. One airline, British Airways, has

substantially improved its logistics operations over a 14-year period.

British Airways approached the process of change as a long-term effort

that requires steady vision and a focus on continual improvement.

Although the airline has reaped significant gains from improvements, it

continued to reexamine operations and make improvements to its logistics

system. Adopting practices similar to British Airways and other

commercial airlines could help DOD’s repair pipelines become faster and

more responsive to customer needs.

Commercial Airline

Reengineering Efforts

British Airways used a supply-chain management approach to reengineer

its logistics system. With this approach, the various activities

encompassed by the logistics pipeline were viewed as a series of

interrelated processes rather than isolated functional areas. For example,

when British Airways began changing the way parts were purchased from

suppliers, it considered how those changes would affect mechanics in

repair workshops.

British Airways officials described how a combination of supply-chain

improvements could lead to a continuous cycle of improvement. For

example, culture changes, improved data accuracy, and more efficient

processes all lead to a reduction in inventories and complexity of

operations. These reductions, in turn, improve an organization’s ability to

Page 5 GAO/NSIAD-98-97 Inventory Management
B-279179 

maintain accurate data. The reductions also stimulate continued change in

culture and processes, both of which fuel further reductions in inventory

and complexity.

Despite this integrated approach, British Airways’ transformation did not

follow a precise plan or occur in a rigid sequence of events. Rather,

according to one manager, airline officials took the position that doing

nothing was the worst option. After setting overall goals, airline officials

gave managers and employees the flexibility to continually test new ideas

to meet those goals.

Four specific practices used by British Airways and other airlines that

appear to be suited to DOD operations to the extent they can be

implemented within the existing legislative and regulatory framework

include the (1) prompt repair of items, (2) reorganization of the repair

process, (3) establishment of partnerships with key suppliers, and (4) use

of third-party logistics services. These initiatives are interrelated and,

when used together, can help maximize a company’s inventory investment,

decrease inventory levels, and provide a more flexible repair capability.

They appear to address many of the same problems DOD faces and

represent practices that could be applied to its operations. We

recommended in our reports that DOD test these concepts in an integrated

manner to maximize their potential benefits.

Repairing Items Promptly Certain airlines begin repairing items as quickly as possible, which

prevents the broken items from sitting idle for extended periods.

Minimizing idle time helps reduce inventories because it lessens the need

for extra “cushions” of inventory to cover operations while parts are out of

service. In addition, repairing items promptly promotes flexible scheduling

and production practices, enabling maintenance operations to respond

more quickly as repair needs arise.

Prompt repair involves inducting parts into maintenance shops soon after

broken items arrive at repair facilities. However, prompt repair does not

mean that all parts are fixed. The goal is to quickly fix only those parts that

are needed. One commercial airline routes broken items directly to

holding areas next to repair shops, rather than to stand-alone warehouses,

so that mechanics can quickly access these broken parts. The holding

areas also give mechanics better visibility of any backlog. It is difficult to

specifically quantify the benefits of repairing items promptly because that

practice is often used with other ones to speed up pipeline processes. One

Page 6 GAO/NSIAD-98-97 Inventory Management
B-279179 

airline official said, however, that the airline has kept inventory

investment down partly because it does not allow broken parts to remain

idle.

Reorganizing the Repair

Process

One approach to accelerate the repair process and promote flexibility in

the repair shop is the “cellular” concept. Under this concept, an airline

moved all of the resources that are needed to repair broken parts, such as

tooling and support equipment, personnel, and inventory, into one location

or repair center “cell.” This approach simplifies the repair of parts by

eliminating the time-consuming exercise of routing parts to workshops in

different locations. It also ensures that mechanics have the technical

support to ensure that operations run smoothly. In addition, because

inventory is placed near workshops, mechanics have quick access to the

parts they need to complete repairs more quickly. British Airways adopted

the cellular approach after determining that parts could be repaired as

much as 10 times faster using this concept. Figure 2 shows a repair cell

used in British Airways’ maintenance center at Heathrow Airport. Another

airline that adopted this approach in its engine-blade repair shop was able

to reduce repair time by 50 to 60 percent and decrease work-in-process

inventory by 60 percent.

Figure 2: A British Airways Repair

Center Cell

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Establishing Partnerships

With Key Suppliers

Several airlines and manufacturers have worked with suppliers to improve

parts support and reduce overall inventory. Two approaches—the use of

local distribution centers and integrated supplier programs—specifically

seek to improve the management and distribution of consumable items,

such as nuts, bolts, and fuses. These approaches help ensure that the

consumable items for repair and manufacturing operations are readily

available, which prevents parts from stalling in the repair process and

helps speed up repair time. In addition, by improving management and

distribution methods, such as streamlined ordering and fast deliveries,

these approaches enable firms to delay the purchase of inventory until a

point that is closer to the time it is needed. Firms, therefore, can reduce

their stocks of “just-in-case” inventory.

Local distribution centers are supplier-operated facilities that are

established near a customer’s operations and provide deliveries of parts

within 24 hours. One airline that used this approach has worked with key

suppliers to establish more than 30 centers near its major repair

operations. These centers receive orders electronically and, in some cases,

handle up to eight deliveries a day. Airline officials said that the ability to

get parts quickly has contributed to repair time reductions. In addition, the

officials said that the centers have helped the airline cut its on-hand supply

of consumable items nearly in half. Figure 3 shows a local distribution

center, located at Heathrow Airport, that is operated by the Boeing

Company.

Figure 3: A Local Distribution Center at Heathrow Airport

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Integrated supplier programs involve shifting inventory management

functions to suppliers. Under this arrangement, a supplier is responsible

for monitoring parts usage and determining how much inventory is needed

to maintain a sufficient supply. The supplier’s services are tailored to the

customer’s requirements and can include placing a supplier representative

in customer facilities to monitor supply bins at end-user locations, place

orders, manage receipts, and restock bins. Other services can include

24-hour order-to-delivery times, quality inspection, parts kits,

establishment of data interchange links and inventory bar coding, and

vendor selection management. One manufacturer that used an integrated

supplier received parts 98 percent of the time within 24 hours of placing an

order, which enabled the manufacturer to reduce inventories for these

items by $7.4 million—an 84-percent reduction. Figure 4 illustrates how an

integrated supplier could reduce or eliminate the need for at least three

inventory storage locations in a typical DOD repair facility.

Figure 4: Potential Impact of an Integrated Supplier on DOD’s System

Depot 

bulk 

storage

Depot 

automated

distribution 

warehouse DLA 

wholesale

inventory

Manufacturers a

Traditional supply 

system

Manufacturers a

Maintenance

shop 

storage

locations

End-users

Key

Vendor

Integrated supplier 

concept

Maintenance

shop 

storage

End-users

X

X

X

X

Page 9 GAO/NSIAD-98-97 Inventory Management
B-279179 

Using Third-Party Logistics

Providers

Third-party logistics providers can be used to reduce costs and improve

performance. Third-party firms take on responsibility for managing and

carrying out certain logistics functions, such as storage and distribution.

As a result, companies can reduce overhead costs because they no longer

need to maintain personnel, facilities, and other resources that are

required to do these functions in house.

Third-party firms also help companies improve various aspects of their

operations because these providers can offer expertise that companies

often do not have the time or the resources to develop. For example, one

airline contracts with a third-party logistics provider to handle deliveries

and pickups from suppliers and repair vendors, which has improved the

reliability and speed of deliveries and reduced overall administrative costs.

The airline receives most items within 5 days, which includes

time-consuming customs delays, and is able to deliver most items to repair

vendors in 3 days. In the past, deliveries took as long as 3 weeks.

In addition, third-party providers can assume other functions. One

third-party firm that we visited, for example, can assume warehousing and

shipping responsibilities and provide rapid transportation to speed parts to

end users. The company can also pick up any broken parts from a

customer and deliver them to the source of repair within 48 hours. In

addition, this company maintains the data associated with warehousing

and in-transit activities, offering real-time visibility of assets.

Potential Impact of Best

Practices on DOD

Operations

If DOD were to adopt a combination of best practices, similar to those

employed by commercial airlines, the time items spend in the services’

repair pipelines could be substantially reduced. For example, the cellular

concept enables a repair shop to respond more quickly to different repair

needs. An integrated supplier can provide the consumable parts needed to

complete repairs faster and more reliably. Both of these concepts are

needed to establish an agile repair capability, which in turn enables a

company to repair items more promptly. A much faster and responsive

repair pipeline would allow DOD to buy, store, and distribute significantly

less inventory and improve customer service. For example, an

Army-sponsored RAND study noted that reducing the repair time for one

helicopter component from 90 to 15 days would reduce inventory

requirements for that component from $60 million to $10 million.2

2

Weapon System Sustainment Management: A Concept for Revolutionizing the Army Logistics System,

RAND Arroyo Center Documented Briefing, 1994.

Page 10 GAO/NSIAD-98-97 Inventory Management
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Figures 5 and 6 uses the Army’s pipeline for reparable parts to illustrate

the potential impact that the integrated use of best practices would have

on DOD’s logistics system. Figure 5 illustrates the current repair pipeline at

Corpus Christi Army Depot, including the average number of days it took

to move the parts we examined through this pipeline and the flow of

consumable parts into the repair depot. The consumable parts flow

includes hardware inventory stored in DLA warehouses and repair depot

inventory, which in 1996 totaled $5.7 billion and $46 million, respectively.

Despite this investment in inventory, the supply system was completely

filling customer orders only 25 percent of the time. Also, as of August 1996,

mechanics had more than $40 million in parts on backorder, 34 percent of

which was still unfilled after 3 months. In addition, reparable parts flowing

through this system took an average of 525 days to complete the process.

Page 11 GAO/NSIAD-98-97 Inventory Management
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Figure 5: Current Repair Pipeline at Corpus Christi Army Depot

Manufacturers

DLA

depot

storage

Repair 

depot 

storage

Operating 

base

Operating 

Base

Depot

repair

DLA

depot

storage

DLA

depot

storage

Consumable 

parts flow

75 days

158 days

147 days

145 days

Hardware items valued 

at $5.7 billion 

- Hardware items valued 

 at $46 million

- 25% fill rates

- $40 million backorders 

 to mechanics

Reparable

parts flow

Figure 6 illustrates a modified Army system, incorporating the use of an

integrated supplier for consumable items, third-party logistics services,

parts induction soon after they arrive at the depot, and cellular repair

shops. If the military services were to adopt these practices, they could

substantially reduce the number of days for a part to flow through the

repair pipeline and reduce or eliminate much of the inventory in DLA and

repair depot storage locations.

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Figure 6: Best Practices Applied to the Army’s Repair Pipeline for Aircraft Parts

Manufacturers

Consumable 

parts flow Integrated

supplier

Operating 

base

Operating 

base

Cellular 

depot

repair

Reparable

parts flow

2 days

30 Days

Third-party

provider

Third-party

provider

Storage + 

2 day 

delivery

- 24 hour delivery

- minimum DOD 

 inventory

- 95% or better fill rates

- in-plant representative

DOD’s application of concepts such as third-party logistics and integrated

suppliers, however, may require a cost comparison between government

and commercial providers in accordance with Office of Management and

Budget Circular A-76. This circular requires, in general, that a

public-private competition must be held before contracting out of

functions, activities, and services that were being accomplished by more

than 10 DOD employees. Our work has consistently shown 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.3

3

Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs

(GAO/T-NSIAD-97-110, Mar. 12, 1997).

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Current DOD

Initiatives Seek to

Improve Logistics

Systems

Each of the military services has programs underway to improve logistics

operations and make its processes faster and more flexible. The Army

established its Velocity Management program to eliminate unnecessary

steps in the logistics pipeline that delay the flow of parts through the

system. The Navy is using a regionalization concept to reduce redundant

capabilities in supply and maintenance and is testing a direct delivery

concept for a few component parts. The Air Force established its Lean

Logistics initiative to dramatically improve logistics processes. Although

these initiatives have been underway for several years, the results are

limited, and the overall success of these programs is uncertain.

Army Velocity

Management Program

In January 1995, the Army established its Velocity Management program to

develop a faster, more flexible, and more efficient logistics pipeline. The

program’s goals, concepts, and top management support parallel

improvement efforts found in private sector companies. The overall goal

of the program is to eliminate unnecessary steps in the logistics pipeline

that delay the flow of parts through the system. The Army plans to achieve

this goal in a similar manner as the private sector: by changing its

processes and not by refining the existing system. The Army’s Vice Chief

of Staff has strongly endorsed the program as a vehicle for making

dramatic improvements to the current logistics system. In anticipation of

these improvements, the Army has reduced its operating budgets for fiscal

years 1998 through 2003 by $156.5 million.

The Velocity Management program consists of Army-wide process

improvement teams for the following four areas: ordering and shipping of

parts, the repair cycle, inventory levels and locations (also known as

stockage determination), and financial management. For each of these

areas, the Army is examining its current processes and attempting to

identify ways to improve them. The Army’s implementation strategy for

these improvement areas includes three phases: defining the process,

measuring process performance, and improving the process. As shown in

table 1, the four improvement areas are in various implementation phases.

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Table 1: Status of the Army’s Velocity

Management Program Velocity Management improvement areas

Implementation phase

Order and

shipping

Stockage

determination Repair cycle

Financial

management

Phase 1: Define the

process

Completed Completed Completed Underway

Determine customer

needs

Understand process

Phase 2: Measure

process performance

Completed Underway Underway Not yet

started

Define metrics and

identify data

Determine baseline

performance

Develop progress

reports

Phase 3: Improve the

process

Underway Not yet

started

Not yet

started

Not yet

started

Establish goals

Develop improved

processes

Implement changes

The order and shipping improvement area is in phase 3 and the farthest

along in the implementation process. In this area, the Army has reduced

the time it takes to order and deliver parts to a customer located in the

United States from approximately 22 to 11 days, or by 50 percent.

According to Army officials, this improvement was achieved by

automating the ordering process and having delivery trucks dedicated to

servicing a single customer. The Army plans to continue work on other

functions in this area, such as the receiving process.

The stockage determination and repair cycle initiatives are both in 

phase 2. According to Army officials, these improvement areas have not

advanced as quickly as planned due to difficulties in obtaining reliable

data to measure the current processes. Also, Army officials have not

precisely determined what metrics to use for measuring future

improvements. The financial management area, the last initiative to be

started, is currently in phase 1.

Navy Regionalization and

Direct Delivery Programs

The Navy has three major improvement efforts underway that are aimed at

reducing infrastructure costs and streamlining operations. The first

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initiative, called regional supply, consolidates decentralized supply

management functions into seven regionally based activities. Under the

old system, naval bases, aviation repair depots, and shipyards each had

supply organizations to manage needed parts. These activities often used

different information systems and business practices and their own

personnel and facilities. This initiative does not consolidate inventories

into fewer storage locations. The consolidation is intended to provide

central management of spare parts for these individual operations,

improve parts visibility, and reduce the overhead expenses associated

with separate management functions. The Navy hopes that the centralized

management approach will lead to a better sharing among locations and

reductions in inventories. In fiscal year 1997, the Navy reported inventory

reductions of $4.9 million through its regional supply program, and it

expects to reduce inventories by an additional $24 million in fiscal 

year 1998. The Navy expects that 90 percent of the supply management

consolidations will be completed by the end of fiscal year 1998.

The second initiative, called regional maintenance, similarly identifies

redundant maintenance capabilities and consolidates these operations into

regionally based repair facilities. For example, in one region the Navy is

consolidating 32 locations used to calibrate maintenance test equipment

into 4 locations. The regional maintenance program is mainly focused on

reducing infrastructure costs, but its other objectives include improving

maintenance processes, integrating supply support and maintenance

functions, and providing compatible information systems. Through fiscal

year 1996, the Navy identified a total of 102 regional maintenance

initiatives: 55 were started in fiscal year 1997, and 47 are to be

implemented between fiscal years 1998 and 2001. The Navy estimates that

its regional maintenance efforts will save $944 million between fiscal

years 1994 and 2001.

We recently reported that, although the Navy has made progress in

achieving its infrastructure streamlining objective under regional

maintenance, the progress thus far has not been as great as anticipated

and challenges remain for accomplishing future plans.4

 Full

implementation, initially projected for fiscal year 1999, is now projected

for fiscal year 2000 and could take longer. Many of the initiatives identified

have not been completed, and projected savings are not being achieved.

For example, one initiative to consolidate planning and engineering

functions for certain repairs is not progressing as planned, delaying

4

Navy Regional Maintenance: Substantial Opportunities Exist to Build on Infrastructure Streamlining

Progress (GAO/NSIAD-98-4, Nov. 13, 1997).

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planned personnel reductions and affecting up to $92 million in savings

projected to occur between fiscal years 1998 and 2001. The Navy has

classified many of its initiatives as high risk because of barriers to

implementation, including institutional resistance to change, inadequate

information systems, and poor visibility over maintenance-related costs.

The Navy’s third initiative, called direct vendor delivery, is a logistics

support technique intended to reduce the costs of the inventory

management and distribution functions. Under this initiative, a contractor

(typically an original equipment manufacturer) will be responsible for

repairing, storing, and distributing weapon system components. The

contractor agrees to meet certain delivery timeframes and supply

availability rates for the components. When a component fails at an

operating location, it is sent directly to the contractor rather than to a

Navy repair facility. The contractor in turn ships a replacement part back

to the operating location. If a future demand for the item is anticipated,

then the contractor fixes the broken component so it can be used again.

According to the Navy, the direct vendor delivery concept will motivate

the contractor to increase the reliability of the component so it needs to be

repaired less frequently, which may reduce the component’s life-cycle

costs.

The direct vendor delivery concept is in the early stages of development.

As of January 1998, the Navy had placed only 3 subsystems, consisting of

96 components, under contract. The value of these three contracts

represent about 1 percent of the Navy’s fiscal year 1998 purchase and

repair budget. The Navy plans, however, to apply this concept to

additional weapon system components in the future.

Air Force Lean Logistics

Program

In 1994, the Air Force initiated a reengineering effort called Lean Logistics

to dramatically improve logistics processes. The Air Force describes Lean

Logistics as the cornerstone of all future logistics system improvements.

This effort, spearheaded by the Air Force Materiel Command, is aimed at

improving service to the end user while reducing pipeline time, excess

inventory, and other logistics costs. The Air Force expects to save

$948 million in supply costs between fiscal years 1997 and 1999 as a result

of Lean Logistics initiatives.

Under Lean Logistics, the Air Force developed a program to redesign the

current repair pipeline. In June 1996, the Air Force began testing certain

concepts at 10 repair shops, and the tests involve less than 1 percent of the

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Air Force’s inventory items. The concepts include repairing items quickly

after they break, using premium transportation to rapidly move parts,

organizing support (supply and repair) personnel into teams, and

deploying new information systems to better prioritize repair actions and

track parts. Each shop tested some of these concepts and identified

system improvements needed to adopt these practices on a broader scale.

As part of its demonstration projects, the Air Force tracked overall

performance in four general areas: customer impact, responsiveness to the

customer, repair depot efficiency, and operating costs. According to an

October 1997 cost-benefit analysis of these projects, the tests were not a

complete success. For example, 70 percent of the shops showed

improvement in depot repair efficiency, but only 10 percent of the shops

showed improvements in improving the responsiveness to the customer.

Also, three of the four performance areas showed mixed results for

50 percent or more of the shops. According to the Air Force analysis, full

implementation of the concepts may need to be re-evaluated and refined

to achieve desired improvements in customer service and operating costs.

Table 2 shows the impact of the demonstration projects on the four

performance areas.

Table 2: Results of the Air Force’s

Lean Logistics Demonstration Projects Figures in percents

Performance area

Shops with

improved

performance

Shops with

decreased

performance

Shops with

mixed

performance

Customer impact 20 30 50

Responsiveness to

the customer 10 20 70

Repair depot

efficiency 70 0 30

Operating costs 30 20 50

Notwithstanding the results of the demonstration projects, the Air Force

began expanding these concepts servicewide in April 1997 and plans to

complete this effort by the spring of 1998. According to the Air Force, the

concepts will be refined as implementation continues.

Best Practices Can Be

Applied to Reparable

Parts

The military service’s current improvement efforts could be expanded to

include a wider application of the best practices discussed in this report.

In addition, the services have not established specific locations where a

combination of several practices could be tested to achieve maximum

Page 18 GAO/NSIAD-98-97 Inventory Management
B-279179 

benefits. These expanded efforts would be consistent with recent

legislative provisions and the Defense Reform Initiative, which encourage

the adoption of best business practices. However, a wider application of

best practices by DOD must be accomplished within the current legislative

framework and regulatory requirements.

Our previous reports recommended the testing and implementation of best

practices, specifically, prompt repair of items, cellular repair, supplier

partnerships, third-party logistics, as well as an integrated test of these

practices. The Navy and the Air Force have initiated programs to adopt

certain forms of supplier partnerships, and the Air Force is pursuing the

prompt repair of items throughout its operations. Table 3 summarizes the

status of the services’ efforts in implementing best practices.

Table 3: Status of Recommended Best Practices for Aircraft Reparable Parts

Best practices

Service

Prompt repair

of items Cellular repair

Supplier

partnerships

Third-party

logistics

Integrated test

of practices

Air Force Yes No Limited use No No

Army No Limited use No No No

Navy No No Test planned No No

As part of its Lean Logistics program, the Air Force has adopted the

concept of prompt repair of items to help speed the flow of parts through

the repair process. In February 1997, the Air Force also began using a

prime vendor program to support the C-130 propeller repair shop at the

Warner Robins Air Logistics Center.5

 In fiscal year 1998, the Air Force

plans to expand the prime vendor program at Warner Robins and begin

programs at two other Air Force repair depots. The Navy plans to test the

prime vendor concept at two depots during 1998. As of April 1997, the

Army was using the cellular repair concept at two maintenance shops in

the Corpus Christi Army depot. The Army, however, has not initiated any

additional tests of the practices recommended in our reports at the Corpus

Christi depot. Finally, none of the services have developed a plan to

combine these new practices at one facility.

In commenting on a draft of this report, DOD highlighted additional

initiatives that it believes demonstrate the use of best commercial

practices. For example, the Army is pursuing an initiative to rapidly repair

5

The prime vendor concept is a form of a supplier partnership in which a 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 19 GAO/NSIAD-98-97 Inventory Management
B-279179 

20 different circuit cards at two Army depots and return the cards using

premium transportation. The Army plans to expand this concept later this

year to engine components. DOD also highlighted Navy efforts to reduce

the administrative lead times involved in repairing maritime parts and have

a third-party provider build repair kits for hydraulic parts. In addition, DOD

cited an Air Force initiative related to the contractor support for certain

C-17 aircraft parts. Under this arrangement, the contractor is responsible

for interim contractor support, depot repair, materiel and program

management, and system modifications.

Military Services and DLA

Responsibilities for

Adopting Best Practices

Section 395 of the National Defense Authorization Act for Fiscal Year 1998

requires the Director of DLA to develop and submit to Congress a schedule

for implementing best practices for the acquisition and distribution of

categories of consumable-type supplies and equipment listed in the

section. However, each military service manages reparable parts that are

used in its operations; DLA stores and distributes these parts and manages

consumable items. Each service and DLA, therefore, would be responsible

for developing and implementing a strategy to adopt best practices for the

items they manage if section 395 were broadened to include reparable

parts.

Conclusions Our work shows it is feasible for the list of items covered by section 395 to

be expanded to include reparable parts. For example, each of the services

and DLA have initiatives underway designed to improve their logistics

operations by adopting best practices. Our reports identify additional best

practices that present opportunities for DOD to build on these improvement

efforts. However, if section 395 were expanded, the responsibility for the

development and submission of a schedule to implement these practices

would go beyond the purview of the Director of DLA. Thus, expanding the

list of items covered by the provisions included in section 395 would also

appear to warrant broadening the responsibility for responding to the

legislation to include the military services.

Our previous reports recommended that DOD test and adopt best practices

where feasible; therefore, we are not repeating those recommendations in

this report. However, testing a combination of several key best practices is

an option that DOD has yet to explore as it considers the extent to which

successful techniques used in the private sector could be applied to its

logistics operations. This action would be consistent with recently enacted

Centers of Industrial and Technical Excellence legislation and the Defense

Page 20 GAO/NSIAD-98-97 Inventory Management
B-279179 

Reform Initiative. This wider application of best practices by DOD must be

accomplished within the framework of existing legislative and regulatory

requirements.

Matters for

Congressional

Consideration

If Congress decides it wants to expand the provisions of section 395 to

include reparable parts, it may wish to consider (1) broadening the

responsibility for responding to this legislation to include the military

services and (2) developing provisions, similar to those in section 395, to

encourage DOD to test combinations of best practices using a supply-chain

management approach.

Agency Comments

and Our Evaluation

In written comments on a draft of this report, DOD agreed that further

progress is possible in using best practices for reparable parts. However,

DOD has concerns in two areas. First, DOD believed that our draft report did

not include all ongoing initiatives by the military services to adopt best

business practices in the management of reparable parts. Second, DOD did

not agree with our Matters for Congressional Consideration that the

Congress may wish to consider developing statutory guidance related to

best practices for reparable parts. DOD believed that, because of its actions

underway, statutory guidance is not needed. DOD’s comments appear in

appendix II.

We incorporated several of the examples DOD provided into our report.

However, some of these initiatives, particularly the newly awarded

contract for C-17 aircraft support, involve integrated supplier support and

third-party logistics predominately on the part of the contractor. Our past

work and this report have been concerned with efforts to improve the

existing in-house repair pipeline through the use of proven best practices

adopted in the private sector, especially for aircraft parts, once the

decision has been made to keep the repair function at public facilities.

This C-17 contract represents a different arrangement and we are not in a

position to comment on the merits of that approach.

With regard to the Matters for Congressional Consideration, our intent is

to highlight two actions that we believe may be useful to Congress if it

decides to expand section 395 to include reparable parts. Therefore, we

modified this section to clarify our intent.

Page 21 GAO/NSIAD-98-97 Inventory Management
B-279179 

Scope and

Methodology

We used information from our three prior reports that compared Army,

Navy, and Air Force logistics practices to those of commercial airlines. For

these reports, we examined operations at 20 DOD locations involved in the

logistics pipeline. At these locations, we discussed with supply and

maintenance personnel the operations of DOD’s current logistics system,

customer satisfaction, planned improvements to the logistics system, and

the potential application of private sector practices to DOD operations. We

also reviewed and analyzed detailed information on inventory levels and

usage, repair times, supply effectiveness and response times, and other

related logistics performance measures. Unless otherwise noted, inventory

values reflect DOD’s standard valuation methodology, in which excess

inventory is reported at an estimated salvage value and reparable parts

requiring repair are reduced by an average estimate of repair costs.

We also used information from our reports to identify leading commercial

practices. This information, which was collected by making an extensive

literature search, and through detailed examinations and discussions of

logistics practices with officials from British Airways, United Airlines,

Southwest Airlines, American Airlines, Federal Express, Boeing,

Northrop-Grumman Corporation, and Tri-Star Aerospace. We also

participated in roundtable discussions and symposiums with recognized

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

applying integrated approaches to their logistics operations.

We reviewed documents and interviewed officials on DOD’s policies,

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

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

Logistics, Washington, D.C.; Army Headquarters, Washington, D.C.; Army

Materiel Command, Alexandria, Virginia; Naval Supply Systems Command,

Mechanicsburg, Pennsylvania; Naval Inventory Control Point,

Mechanicsburg, Pennsylvania; Air Force Headquarters, Washington, D.C.;

and Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio.

Also, officials at these locations provided us with detailed information on

their efforts to adopt the specific best practices we recommended in prior

reports.

We conducted our review from December 1997 to January 1998 in

accordance with generally accepted government auditing standards.

We are sending copies of this report to other congressional committees;

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

Page 22 GAO/NSIAD-98-97 Inventory Management
B-279179 

Directors of the Defense Logistics Agency and the Office of Management

and Budget; and other interested parties. We will also make copies

available to others on request.

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

questions concerning this report. Major contributors to this report are

listed in appendix III.

David R. Warren, Director

Defense Management Issues

Page 23 GAO/NSIAD-98-97 Inventory Management
Contents

Letter 1

Appendix I 

The Department of

Defense Logistics

Pipelines

26

Army Logistics Pipeline 26

Navy Logistics Pipeline 27

Air Force Logistics Pipeline 29

Appendix II 

Comments From the

Department of

Defense

30

Appendix III 

Major Contributors to

This Report

32

Related GAO Products 36

Tables Table 1: Status of the Army’s Velocity Management Program 15

Table 2: Results of the Air Force’s Lean Logistics Demonstration

Projects

18

Table 3: Status of Recommended Best Practices for Aircraft

Reparable Parts

19

Table I.1: Amount of Time Used by the Army Depot Repair

System for 24 Types of Aviation Parts

27

Table I.2: British Airways and Navy Logistics Performance

Measures

28

Figures Figure 1: Estimated Composition of DOD’s Secondary Inventory 2

Figure 2: A British Airways Repair Center Cell 7

Figure 3: A Local Distribution Center at Heathrow Airport 8

Figure 4: Potential Impact of an Integrated Supplier on DOD’s

System

9

Figure 5: Current Repair Pipeline at Corpus Christi Army Depot 12

Figure 6: Best Practices Applied to the Army’s Repair Pipeline for

Aircraft Parts

13

Page 24 GAO/NSIAD-98-97 Inventory Management
Contents

Figure I.1: Air Force’s and British Airways’ Pipeline Times for a

Landing Gear Component

29

Abbreviations

DLA Defense Logistics Agency

DOD Department of Defense

Page 25 GAO/NSIAD-98-97 Inventory Management
Appendix I 

The Department of Defense Logistics

Pipelines

The Department of Defense’s (DOD) depot repair pipelines for reparable

parts are slow and inefficient. Since February 1996, we have issued three

reports that compared commercial logistics practices with similar Army,

Navy, and Air Force operations for reparable aircraft parts. In these

reports, we highlighted four factors that contributed to the services’ slow

and inefficient repair pipelines. These factors are (1) broken reparable

parts move slowly between field units and a repair depot, (2) reparable

parts are stored in warehouses for several months before and after they

are repaired, (3) work processes at repair depots are inefficiently

organized, and (4) consumable parts are not frequently available to

mechanics when needed. As a result, the services can spend several

months or even years to repair and distribute repaired parts to the end

user. The amount of time it takes to repair parts is important because DOD

must invest in enough inventory to resupply units with serviceable parts

during the time it takes to move and repair broken parts.

Army Logistics

Pipeline

In April 1997, we reported that the Army’s current repair pipeline,

characterized by a $2.6-billion investment in aviation parts, is slow and

inefficient.1

 To calculate the amount of time the Army system takes to

repair and distribute parts using the current depot repair process, we

judgmentally selected 24 types of Army aviation parts and computed the

time the parts spent in four key segments of the repair process. The key

segments were (1) preparing and shipping the parts from the bases to the

depot, (2) storing the parts at the depot before induction into the repair

shop, (3) repairing the parts, and (4) storing the parts at the depot before

being shipped to a field unit. The parts we selected took an average of 

525 days to complete the repair process. The fastest time the Army took to

complete any of the four pipeline segments was less than 1 day, but the

slowest times ranged from 887 to more than 1,000 days. Table I.1 details

the fastest, slowest, and average times the Army needed to complete each

of the four pipeline segments.

1

Inventory Management: The Army Could Reduce Logistics Costs for Aviation Parts by Adopting Best

Practices (GAO/NSIAD-97-82, Apr. 15, 1997).

Page 26 GAO/NSIAD-98-97 Inventory Management
Appendix I 

The Department of Defense Logistics

Pipelines

Table I.1: Amount of Time Used by the

Army Depot Repair System for 24

Types of Aviation Parts

Figures in days

Pipeline segment Fastest time Slowest time Average time

Part preparation and shipment to

the depot

Less than 1 899 75

Depot storage before repair Less than 1 887 158

Depot repair time 1 1,067 147

Depot storage before issue Less than 1 1,196 145

Total depot repair pipeline timea Not applicable Not applicable 525

aIt is inappropriate to sum the pipeline segments for the fastest and slowest times because these

values represent the Army’s pipeline performance on one component in each segment. The

average time for each segment, however, is appropriate to sum because it represents the

average time for all components that passed through that pipeline segment.

A comparison of the Army’s engineering estimate of the repair time that

should be needed to complete repairs with the actual amount of time

taken is a measure of repair process efficiency. Of the 525-day average

pipeline time from our sample, the Army estimates that an average of 

18 days should be needed to repair items. The remaining 507 days, or

97 percent of the total time, was spent transporting or storing parts or was

due to unplanned repair delays.

Another measure of repair process efficiency is a calculation of how often

an organization uses its inventory, called the turnover rate. The higher the

turnover rate, the more often a company is utilizing its inventory. At

British Airways, the inventory turnover rate for reparable parts was 

2.3 times each year. In comparison, we calculated that the Army’s turnover

rate for fiscal year 1995 repairs was 0.4 times, or about 6 times slower than

British Airways.

Navy Logistics

Pipeline

In July 1996, we reported that the Navy’s system, characterized by a

$10 billion inventory of reparable parts, is slow and complex and often

does not respond quickly to customer needs.2

 For example, customers

wait an average of 16 days at operating bases and 32 days on aircraft

carriers to receive parts from the wholesale system. If the wholesale

system does not have the item in stock, customers wait over 2-1/2 months.

Many factors contribute to this situation, but among the most prominent is

a slow and complex repair pipeline. Within this pipeline, broken parts can

2

Inventory Management: Adopting Best Practices Could Enhance Navy Efforts to Achieve Efficiencies

and Savings (GAO/NSIAD-96-156, July 12, 1996).

Page 27 GAO/NSIAD-98-97 Inventory Management
Appendix I 

The Department of Defense Logistics

Pipelines

pass through as many as 16 steps, taking as long as 4 months, before they

are repaired at a repair depot and are available again for use.

Specific problems that prevent parts from flowing quickly through the

pipeline include a lack of consumable parts needed to complete repairs,

slow distribution, and inefficient repair practices. For example, the Navy’s

practice of routing parts through several workshops at repair depots

increases the time needed to complete repairs. One item we examined had

a repair time of 232 hours, only 20 hours of which was spent actually

repairing the item. The remaining 212 hours, or 91 percent of the total

time, was spent handling and moving the part to different locations.

In contrast, leading firms in the airline industry, including British Airways,

hold minimum levels of inventory that can turn over four times as often as

the Navy’s. Parts are more readily available and delivered to the customer

within hours. The repair process is faster, taking an average of 11 days for

certain items at British Airways compared with the Navy’s 37-day process

for a similar type of part. Table I.2 compares several key logistics

performance measures of British Airways and the Navy.

Table I.2: British Airways and Navy

Logistics Performance Measures Key performance measure British Airways (1994) Navy (1995)

Consumer-level supply

availability rates

Reparable parts 86 percent 75 percent

Consumable parts 97 percent 57 percenta

Average order-ship time 1 to 5 days 16 to 32 daysb

Inventory turnover

Reparable parts 1 time every 5 months 1 time every 2 yearsc

Consumable parts 1 time every 8 months 1 time every 2 yearsc

Avionics repair times 11 days 37 daysd

aThis figure applies to Defense Logistics Agency-managed items only.

bThis range represents the time it takes to obtain an item through the wholesale system when it is

unavailable at the consumer level (including requisition submission, inventory control point

processing, stock point processing, transportation hold, and transportation times).

cThe Navy’s turnover rate includes retention stocks that are kept for future peacetime needs.

dThis figure does not include time awaiting parts.

Page 28 GAO/NSIAD-98-97 Inventory Management
Appendix I 

The Department of Defense Logistics

Pipelines

Air Force Logistics

Pipeline

In February 1996, we reported that Air Force had invested about

$36.7 billion in aircraft parts.3

 Of this amount, the Air Force estimated

$20.4 billion, or 56 percent, was needed to support daily operations and

war reserves, and the remaining $16.3 billion was divided among safety

stock, other reserves, and excess inventory.4

 These large inventory levels

were driven in part by the slow logistics pipeline process. For example,

one part we examined had an estimated repair cycle time of 117 days; it

took British Airways only 12 days to repair a similar part. We reported that

the complexity of the Air Force’s repair and distribution process creates as

many as 12 different stopping points and several layers of inventory as

parts move through the process. Parts can accumulate at each step in the

process, which increases the total number of parts in the pipeline. 

Figure I.1 compares the Air Force’s pipeline times with British Airways’

times for a landing gear component.

Figure I.1: Air Force’s and British Airways’ Pipeline Times for a Landing Gear Component

Part readied for 

transport from base

In-transit Part received at

repair center and

sent to storage or

maintenance shops

Storage time Shop flow Awaiting 

parts/

queue time

Repaired part

turned into 

warehouse

British Airways

Air Force

2 days 0 days Total = 

117 days +

unknown

time

1 day

10 days unknown 90 days

1 day 1 day combined 9 days combined Total =

12 Days

unknown 15 days

0 days

3

Best Management Practices: Reengineering the Air Force’s Logistics System Can Yield Substantial

Savings (GAO/NSIAD-96-5, Feb. 21, 1996).

4

These Air Force inventory values are based on an item’s last acquisition cost. With the use of DOD’s

standard valuation methodology, in which excess inventory is at salvage values and reparable parts

requiring repair are reduced by the estimated cost of repair, the Air Force’s $36.7 billion would be

valued at about $31 billion.

Page 29 GAO/NSIAD-98-97 Inventory Management
Appendix II 

Comments From the Department of Defense

Now on p. 21.

Page 30 GAO/NSIAD-98-97 Inventory Management
Appendix II 

Comments From the Department of Defense

Page 31 GAO/NSIAD-98-97 Inventory Management
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

C. I. (Bud) Patton, Jr.

Kenneth R. Knouse, Jr.

Chicago Field Office Robert Repasky

Matthew Lea

Frederick Naas

Dallas Field Office Vijaykumar Barnabas

Robert Malpass

Page 32 GAO/NSIAD-98-97 Inventory Management
Page 33 GAO/NSIAD-98-97 Inventory Management
Page 34 GAO/NSIAD-98-97 Inventory Management
Page 35 GAO/NSIAD-98-97 Inventory Management
Related GAO Products

Defense Inventory Management: Expanding Use of Best Practices for

Hardware Items Can Reduce Logistics Costs (GAO/NSIAD-98-47, Jan. 20, 1998).

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 Exists to Reduce Aircraft Engine

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

(709321) Page 36 GAO/NSIAD-98-97 Inventory Management
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