United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Oversight of

Government Management and the

District of Columbia, Committee on

Governmental Affairs, U.S. Senate

August 1995 INVENTORY

MANAGEMENT

DOD Can Build on

Progress in Using Best

Practices to Achieve

Substantial Savings

GAO/NSIAD-95-142

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-261155 

August 4, 1995

The Honorable Carl Levin

Ranking Minority Member,

Subcommittee on Oversight of

 Government Management and the

 District of Columbia

Committee on Governmental Affairs

United States Senate

Dear Senator Levin:

This report was prepared in response to your request that we continue to compare commercial

logistics practices with similar Department of Defense (DOD) operations. It summarizes DOD’s

progress in adopting the practices recommended in our prior reports in which we compared

DOD’s logistics practices with those of the private sector. These practices were discussed in five

reports that identified ways that DOD could incorporate modern logistics practices to better

manage its $22 billion inventory of consumable items such as medical, food, clothing, and

hardware supplies. This report addresses (1) the extent to which DOD has adopted the specific

practices we recommended for consumable items, (2) the savings and benefits being achieved

through the use of these practices, and (3) DOD’s overall progress in improving consumable item

management.

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

of Defense, the Air Force, the Army, and the Navy; the Director, Office of Management and

Budget; and other interested parties. We will also make copies available to others on request.

If you have any questions, please call me on (202) 512-8412. Major contributors are listed in

appendix II.

Sincerely yours,

David R. Warren

Director, Defense Management and

 NASA Issues
Executive Summary

Purpose In December 1993, the former Chairman (now ranking minority member),

Subcommittee on Oversight of Government Management and the District

of Columbia, Senate Committee on Governmental Affairs, asked GAO to

review the Department of Defense’s (DOD) efforts to adopt best inventory

management practices, specifically those practices highlighted in past GAO

reports on that subject. These practices were discussed in five reports that

have identified ways that DOD could incorporate modern logistics practices

to better manage its $22 billion inventory of consumable items such as

food, clothing, and industrial supplies. As of September 30, 1994,

consumable items accounted for only 29 percent of DOD’s $74 billion

secondary inventory value, but for 88 percent of the total items. This

report addresses (1) the extent to which DOD has adopted the specific

practices GAO recommended for consumable items, (2) the savings and

benefits being achieved through the use of these practices, and (3) DOD’s

overall progress in improving consumable item management.

Background DOD operates a worldwide logistics system to buy, store, and distribute

inventory items. Through this system, DOD manages over 4 million types of

consumable items, of which 3.6 million are managed by the Defense

Logistics Agency (DLA). Traditionally, DLA buys consumable items (such as

food, clothing, and hardware supplies) in large quantities, stores them in

wholesale distribution depots until they are requested by the military

services, and then ships them to the appropriate service facility where the

items are used. To accomplish this role, DLA uses over 1,400 warehouses at

27 distribution depots and other storage locations. The depots held DLA

consumable inventory valued at $10.2 billion as of June 1994. Like DOD, the

private sector uses similar consumable supplies in its day-to-day

operations. Faced with increasing costs associated with acquiring supplies

and increasing competitive pressure, some private sector companies have

developed new inventory management practices to eliminate the need to

buy, store, and distribute large quantities of supplies. For this reason, GAO

has focused this report on the consumable items managed and distributed

to the services by DLA.

Results in Brief While DLA has taken steps to improve its logistics practices and reduce

consumable inventories, it could do more to achieve substantial savings.

DLA can make the most improvements with hardware items because it

continues to store large amounts of items, such as bolts, valves, and fuses,

that cost millions of dollars to manage and store. DLA inventories of

hardware items existing in 1992 are expected to decrease only 20 percent

Page 2 GAO/NSIAD-95-142 Inventory Management
Executive Summary

by 1997. Even then, hardware inventories could last for more than 2 years.

In contrast, private sector companies, such as PPG Industries and

Bethlehem Steel, have reduced similar inventories by as much as 

80 percent and saved millions in associated costs by using “supplier parks”

and other techniques that give established commercial distribution

networks the responsibility to manage, store, and distribute inventory on a

frequent and regular basis directly to end-users. To date, DLA has not tested

the most innovative commercial practices GAO has seen used by companies

to reduce inventories and costs. If DLA were able to adopt these practices,

hardware inventories and related management costs could be significantly

reduced.

DLA’s use of best inventory practices is best exemplified for personnel

(medical, food, and clothing) items. Since 1993, DLA has taken steps that

use prime vendors to supply personnel items directly to military facilities.

By 1997, with the expanded use of prime vendors and by eliminating

obsolete and unnecessary items, DLA expects to reduce personnel item

inventories 53 percent from 1992 levels. DLA’s most successful program to

date uses prime vendors at approximately 150 military medical facilities,

which has reduced overall wholesale pharmaceutical inventories by

$48.6 million and has achieved inventory reductions and cost savings at

medical facilities. However, DOD has not achieved the same level of

reductions as some civilian hospitals. DOD hospitals still hold more layers

and larger inventories to meet patient needs than those civilian hospitals

that have reduced inventories through effective partnering arrangements

with prime vendors. For example, one civilian hospital established a close

partnership with its prime vendors who deliver supplies in very small

quantities directly to the end-users within hours of its need. This

partnership with the prime vendor allowed the hospital to reduce

inventories to only a minimal level while still providing quality patient care

at lower costs. If DOD took similar steps with its prime vendor program and

consistently applied it within each service, the current savings could be

significantly increased.

Page 3 GAO/NSIAD-95-142 Inventory Management
Executive Summary

Principal Findings

Opportunities for

Improvements

GAO previously reported that DOD’s large inventory levels reflected the

management practice of buying and storing supplies at both wholesale and

retail locations to ensure they were available to customers—sometimes

years in advance of when they were actually needed. DOD often stored

inventories in as many as four different layers between suppliers and

end-users, which resulted in inventory that turned over slowly, producing

large amounts of obsolete and excess items. As of September 1992, DLA

stored $11 billion worth of consumable items in distribution depots and

warehouses located throughout the United States. Distribution depots are

DOD facilities with several large warehouses that store a variety of supplies

until they are requisitioned by the military services. GAO estimated, on the

basis of past demand, that this inventory could last DOD for an average of 

2 years or more. The military services hold three different layers of

inventory near the locations where the items are used: base warehouses,

central storerooms, and end-user locations. Service facilities GAO visited

had retail stock on hand ranging from 1 month to over 5 years of supply.

The private sector provided a sharp contrast to DOD’s methods of managing

and distributing consumable items. GAO found that some private sector

companies avoided inventory management problems by using modern

business practices that shift responsibilities for storing and managing

inventory to suppliers. In fact, some companies no longer stored inventory

in intermediate locations at all; their suppliers deliver inventory to them

only when they need it. Some companies achieved large savings for

personnel items by standardizing items being used, eliminating bulk

storage locations, and most importantly, relying on prime vendors to

deliver small quantities when and where needed. For hardware items,

these practices included having suppliers located at a supplier park near

industrial centers, which allowed for the supplies to be delivered directly

to the end-users on a frequent and regular basis. In past reports, GAO

recommended DOD test the use of prime vendors and supplier parks to

streamline its logistics operations.

DOD Is Taking Steps to

Adopt Best Inventory

Practices

DLA’s efforts to adopt private sector inventory practices are most advanced

for personnel (medical, food, and clothing and textile) items. At present,

DLA is in various stages of establishing prime vendor programs for the

personnel items it manages. DLA’s most successful program to date uses

Page 4 GAO/NSIAD-95-142 Inventory Management
Executive Summary

prime vendors in 21 geographic regions nationwide to buy, store, and

distribute medical inventory to approximately 150 military hospitals and

clinics. Since 1993, DLA, by using prime vendor programs, has reduced

overall wholesale pharmaceutical inventories by $48.6 million and has

achieved savings at DOD medical facilities. The Army, for example, reduced

inventories at the Walter Reed Medical Center by $3.8 million, and it saves

over $6 million, on an annual recurring basis, in related costs by using the

prime vendor system. By using prime vendor concepts and eliminating

obsolete and unnecessary items, DLA expects to reduce inventories of

personnel items from $3 billion in 1992 to $1.4 billion in 1997, or 

53 percent of its on-hand inventory. As of June 1994, DLA’s personnel item

inventories were valued at $2.3 billion.

Although DLA has initiated several programs to adopt commercial practices

for hardware items, DLA’s overall progress is slow and results are limited.

The central focus of DLA’s efforts has been to expand the use of

wholesale-level direct delivery programs. However, such programs do not

eliminate unnecessary layers of inventory management and storage and do

not provide the quick response achieved through innovative concepts such

as supplier parks. As a result, DLA estimates hardware inventory levels of

$8 billion in 1992 will decrease to only $6.4 billion, or approximately

20 percent, by 1997. Even then, this 1997 inventory level will be

unnecessarily large and could last, on average, between 795 days and 

1,381 days based on DLA’s projected demands. In comparison, private

sector firms that supply similar types of items often hold only 90 days of

supply to meet their customers needs.

In September 1994, DLA contracted for a study of the feasibility of using

supplier parks at three maintenance and repair facilities. In

December 1994, the contractor reported that the concept of a supplier

park was feasible and strongly recommended that DLA give serious

consideration to using this concept at these facilities. According to DLA, it

plans to continue studying the feasibility of using this concept.

More Aggressive Actions

Could Further Reduce

Inventories

DLA’s prime vendor programs for personnel items provide a basis for

inventory reductions and cost savings, but DOD has not optimized these

programs by adopting the most aggressive practices being used in

industry. Because each service has used the medical prime vendor

program differently, and some continue to retain unnecessary inventory

layers, DOD has not realized the same improvements that civilian hospitals

have achieved. For example, DOD hospitals GAO visited still held inventories

Page 5 GAO/NSIAD-95-142 Inventory Management
Executive Summary

that could last the hospitals an average of 42 to 82 days. In comparison,

one civilian hospital GAO visited, the Vanderbilt University Medical Center,

reduced or eliminated unnecessary inventory layers and decreased

hospital inventory levels to a 2- to 15-day supply by establishing a close

partnership with its prime vendors. By establishing this partnership,

Vanderbilt arranged with the prime vendors to have supplies delivered

several times a day, in many cases, directly to the point of use within the

medical center. If DOD medical facilities were to consistently and

aggressively apply the prime vendor program enhancing partnerships

between DOD medical facilities and the prime vendors, they could further

reduce their hospital inventories, in some cases, by as much as 75 percent.

Because DLA’s adoption of best inventory management practices is least

advanced for hardware items, which represent 77 percent of DLA’s total

inventory investment, it provides them the greatest source for inventory

reductions and cost savings. Private sector organizations GAO visited have

reduced their hardware inventories by as much as 80 percent using

aggressive inventory management techniques, such as supplier parks.

Although GAO recommended DOD test the supplier park concept in its

June 1993 report on maintenance and repair supplies, DOD is still studying

the feasibility of the concept.

Recommendations To ensure that the medical prime vendor programs are more consistently

and aggressively applied, GAO recommends that the Secretary of Defense

direct the Secretaries of each of the military services to use the prime

vendor program in enhancing the partnership between the DOD medical

facilities and the prime vendors. Actions that would enhance such an

arrangement include

• delivering supplies directly to the point of use in the hospital,

• integrating the vendor into the day-to-day supply operations,

• delivering supplies on a frequent basis (several times a day), and

• using the vendor’s expertise to improve inventory management operations.

These actions could further reduce inventory layers in the DOD system and

bring military medical facilities closer to the levels of success achieved by

progressive private sector hospitals.

To encourage DLA and the services to establish supplier parks for hardware

items, GAO recommends that the Secretary of Defense direct the

secretaries of each of the military services and the Director of DLA to

Page 6 GAO/NSIAD-95-142 Inventory Management
Executive Summary

initiate several actions that have been taken by private sector companies

when developing these concepts. Specifically, each service and DLA should

work together to

• identify an Army, Navy, and Air Force site that will test the supplier park

concept;

• identify specific items with high usage rates and low unit costs to use in a

test program;

• negotiate with prospective suppliers to perform these inventory

management functions during the test program;

• establish partnerships with the suppliers allowing them access to DOD

inventory information and facilities, which will enable the suppliers to

deliver items directly to the end-user;

• develop evaluation criteria that will measure the total costs of inventory

delivered under the test program in order to compare costs and benefits to

the total cost being incurred under the current system; and

• establish aggressive milestones for the initial phases of this test program

to achieve early results.

Agency Comments In commenting on a draft of this report, DOD generally agreed with the

findings, conclusions, and recommendations and stated that, while

significant gains have occurred, further progress can be made in adopting

best commercial practices in providing both personnel and hardware

items to the military services. DOD also stated that additional steps are

underway, specifically in regard to the application of the supplier park

approach to hardware items.

Page 7 GAO/NSIAD-95-142 Inventory Management
Contents

Executive Summary 2

Chapter 1 

Introduction

10

DOD’s Traditional Logistics System 10

Private Sector Initiatives 13

Objectives, Scope, and Methodology 13

Chapter 2 

Best Practices Can

Reduce Inventory

Management Costs

and Provide Quality

Service

16

DOD and Private Sector Manage and Distribute Inventory

Differently

16

Past Reports Highlight Problems and Identify Opportunities 18

Chapter 3 

DOD Has Adopted

Commercial Inventory

Practices, but Can

Build on Progress

26

DOD Guidance Encourages Adoption of Commercial Practices 26

DLA’s Use of Best Practices Are Most Advanced for Personnel

Items

27

DLA Is Pursuing Commercial Practices for Hardware Items, but

Progress Is Slow

33

Factors Affecting DOD’s Ability to Implement Best Practices 36

Chapter 4 

Conclusions and

Recommendations

38

Recommendations 39

Agency Comments 40

Appendixes Appendix I: Comments From the Department of Defense 42

Appendix II: Major Contributors to This Report 51

Figures Figure 1.1: DLA Distribution Depots 11

Figure 1.2: DLA’s Consumable Item Inventory as of June 30, 1994 12

Figure 2.1: Multilayered Inventory System Used by DOD and

Just-in-Time System Used by Some Private Sector Companies

17

Figure 2.2: How DOD and Prime Vendors Provide Clothing Stocks

to End-Users

18

Figure 2.3: Medical Supplies in DLA Warehouse at

Mechanicsburg, Pennsylvania

19

Page 8 GAO/NSIAD-95-142 Inventory Management
Contents

Figure 2.4: Combined Wholesale and Retail Inventory Available to

Three Industrial Centers

23

Figure 2.5: Bethlehem Steel Inventory Levels 25

Figure 3.1: DLA Inventory Levels of Personnel Items 28

Figure 3.2: Pharmaceutical Inventories at Selected Military

Medical Facilities

30

Figure 3.3: Medical Warehouse Converted Into a Training Facility 31

Figure 3.4: DLA’s Inventory of Hardware Items 35

Abbreviations

DLA Defense Logistics Agency

DOD Department of Defense

OSD Office of the Secretary of Defense

Page 9 GAO/NSIAD-95-142 Inventory Management
Chapter 1 

Introduction

The Department of Defense (DOD) operates a worldwide logistics system

to buy, store, and distribute inventory items. Traditionally, the Defense

Logistics Agency (DLA) buys and stores consumable items (such as food,

clothing, and hardware supplies) in large quantities until they are needed

by the military services. Faced with increasing costs associated with

acquiring supplies, and increasing competitive pressures, some private

sector companies have developed new inventory management practices to

reduce inventories and operating costs. Over the past 5 years, we have

compared DOD’s inventory practices for these items to the practices of a

number of progressive private sector firms with similar operations.

DOD’s Traditional

Logistics System

The Secretary of Defense created DLA in 1962 to be the wholesale manager

of “consumable supplies” commonly used by the military services, other

DOD components, and federal agencies. Consumable supplies are items

discarded after use rather than repaired. Through its wholesale system,

DLA manages 3.6 million of DOD’s 4.4 million consumable items. For about

30 years, DLA has generally bought items in large quantities, stored the

items until the services requested them, and then shipped them to the

services’ retail facilities. To receive, store, and issue these items and other

inventories to the military services and other DOD organizations throughout

the world, DLA maintains over 1,400 warehouses at 27 distribution depots,

which are DOD facilities with several large warehouses that store a variety

of supplies, and also uses other storage locations. The locations of the 

27 distribution depots are shown in figure 1.1.

Page 10 GAO/NSIAD-95-142 Inventory Management
Chapter 1 

Introduction

Figure 1.1: DLA Distribution Depots

Oakland Hill

Memphis

Red River

San Antonio

Corpus Christi

Pensacola

Warner Robins

Albany

Charleston

Cherry Point

Norfolk

Richmond

Letterkenny

New Cumberland

Jacksonville

Columbus

Tobyhanna

Mechanicsburg

Anniston

Oklahoma City

Tooele

Ogden

Sharpe

Tracy

San Diego

Barstow

McClellan

Puget Sound

Note: Four of these depots (Charleston, Pensacola, Oakland, and Tooele) have been designated

for closure under the Base Closure and Realignment Act for 1993. The total of 27 depots includes

counting Tracy and Sharpe as one depot (San Joaquin) and New Cumberland and

Mechanicsburg as one depot (Susquehanna). This figure does not reflect decisions made under

the Base Closure and Realignment Act for 1995.

Source: DLA.

Consumable items are classified as hardware (construction, electronics,

general, and industrial) and personnel (clothing, food, and medical) items.

As of June 1994, hardware items accounted for 77 percent of DLA’s

wholesale inventory, and personnel items accounted for 23 percent (see

fig. 1.2). DLA reported that its June 1994 inventory of consumable items

was about $10.2 billion.

Page 11 GAO/NSIAD-95-142 Inventory Management
Chapter 1 

Introduction

Figure 1.2: DLA’s Consumable Item

Inventory as of June 30, 1994 (dollars in

billions)

20% • Construction ($2.0)

22% • Electronics ($2.2)

21%•

General ($2.2)

14%•

Industrial ($1.5)

•15%

Clothing and Textiles ($1.5)

•

5%

Food ($0.5)

•

3%

Medical ($0.3)

Hardware items

Personnel items

During fiscal year 1994, DLA sold $5.6 billion of consumable items to the

services and other federal agencies. The services use large amounts of

these items in their peacetime operations. For example, the services

operate about 25 industrial centers where large amounts of maintenance

and repair supplies are used for regularly scheduled maintenance of

equipment and weapon systems. The services operate 14 recruit induction

centers and over 300 military exchange stores that issue clothing items to

military personnel. In addition, large quantities of medical supplies and

food are consumed annually at U.S. military hospitals and troop dining

halls. The services at the retail facilities usually store these items at

Page 12 GAO/NSIAD-95-142 Inventory Management
Chapter 1 

Introduction

different locations until they are needed by service personnel, who are the

ultimate end-users.

Private Sector

Initiatives

Like DOD, private sector companies use similar consumable supplies in

their day-to-day operations. In addition, both DOD and the private sector

have a common requirement to control costs while meeting customer

needs. During the 1980s, competition and increasing inventory costs

forced many private sector companies to assess inventory management

practices and to adopt new methods that reduced inventories and

associated operating costs. Recognizing that inventories can be reduced

without affecting supply availability, private sector companies began to

change the way they buy, store, and distribute large quantities of supplies.

The private sector has tried new techniques on consumable items because

these items are generally standard and low unit cost, are commonly

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

Many private sector facilities are analogous to the services’ facilities in

DOD’s supply system. To identify ways for DOD to reduce inventory costs,

while maintaining quality service, over the past 5 years we have compared

DOD’s logistics practices involving DLA-managed consumable items with

those of companies that have adopted best practices for their logistics

operations. Best practices are often defined as implementation of the most

efficient means of inventory management to improve cost savings for the

organization and enhance levels of service for the customer.

Objectives, Scope,

and Methodology

On December 3, 1993, the former Chairman (now ranking minority

member), Subcommittee on Oversight of Government Management and

the District of Columbia, Senate Committee on Governmental Affairs,

asked us to review DOD’s efforts to adopt best practices for consumable

items managed and distributed by DLA. Specifically, the former Chairman

asked us to address DOD’s progress in adopting the practices

recommended in our prior five reports in which we compared DOD’s

logistics practices with those of the private sector. This report summarizes

our past reviews and addresses (1) the extent to which DOD has adopted

the specific practices we recommended, (2) the savings and benefits being

achieved through the use of these practices, and (3) DOD’s overall progress

in improving consumable item management.

To obtain information on DOD’s logistics practices, policies, and

procedures, we contacted officials from the following organizations:

Page 13 GAO/NSIAD-95-142 Inventory Management
Chapter 1 

Introduction

• Office of the Deputy Under Secretary of Defense, Logistics, Washington,

D.C.;

• Office of the Assistant Secretary of Defense, Health Affairs, Washington,

D.C.;

• Headquarters, Defense Logistics Agency, Alexandria, Virginia;

• Defense Construction Supply Center, Columbus, Ohio;

• Defense Industrial Supply Center, Philadelphia, Pennsylvania;

• Defense Personnel Supply Center, Philadelphia, Pennsylvania;

• Defense Electronics Supply Center, Dayton, Ohio; and

• Defense Distribution Depot Susquehanna, Pennsylvania.

Our discussions focused on (1) the inventory management practices that

DOD is using for consumable items; (2) commercial practices, programs,

and tests underway or planned to improve DOD operations and reduce

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

alternatives to traditional DOD inventory practices. We reviewed and

analyzed detailed information on past, present, and future annual usage

amounts; inventory levels; and other related inventory factors, such as

calculations of days of supply on hand. Days of supply is a measure of how

efficiently a business manages its inventory investment and is calculated

by dividing the aggregate inventory by the sales per day at cost.

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

practices, we visited the following military organizations:

• Walter Reed Army Medical Center, Washington, D.C.;

• Kenner Army Community Hospital, Fort Lee, Virginia;

• Blanchfield Army Community Hospital, Fort Campbell, Kentucky;

• Malcolm Grow Air Force Medical Center, Andrews Air Force Base,

Maryland;

• Langley Air Force Hospital, Langley Air Force Base, Virginia;

• Portsmouth Naval Hospital, Portsmouth, Virginia;

• Director of Logistics, Fort Lee, Virginia; and

• Air Force Services, Langley Air Force Base, Virginia.

These organizations are involved in initiatives that are to improve DOD’s

logistics operations. At these locations, we discussed with logistics

personnel and medical and food service end-users the results of the

initiatives and the impacts on supply operations and customer satisfaction.

We also discussed with private sector companies that act as prime vendors

to these organizations the initiatives, the impact on their operations, and

the feasibility of adopting these programs to encompass a greater part of

Page 14 GAO/NSIAD-95-142 Inventory Management
Chapter 1 

Introduction

DOD’s operations. These companies included (1) McKesson Drug Company,

Landover, Maryland; (2) Owens & Minor Corporation, Savage, Maryland;

(3) Bergen Brunswig Corporation, Norfolk, Virginia; and (4) Sandler

Foods, Virginia Beach, Virginia. In addition, we visited the Vanderbilt

University Medical Center, Nashville, Tennessee—highlighted in our 1991

report because of its leadership in hospital logistics management—to

discuss the steps it has taken to improve its logistics operations since 1991

and any planned changes to adopt new and best inventory management

practices.

We conducted our review from January 1994 to December 1994 in

accordance with generally accepted government auditing standards.

Page 15 GAO/NSIAD-95-142 Inventory Management
Chapter 2 

Best Practices Can Reduce Inventory

Management Costs and Provide Quality

Service

We previously reported that DOD’s large inventory levels reflect DOD’s

management practice of buying and storing supplies at both wholesale and

retail locations to ensure they are available to customers—sometimes

years in advance of when actually needed. Storing inventory at many

different locations results in inventory that often turns over slowly,

thereby producing large amounts of old, obsolete, and excess items. In the

private sector, many companies avoid these types of problems by using

inventory practices that shift responsibilities for storing and managing

inventory to suppliers. In fact, companies that are using the most

aggressive practices no longer store inventory in intermediate locations at

all; their suppliers deliver inventory only when needed. As a result, we

recommended that DOD test the applicability of using similar types of

private sector practices as an alternative to its current multilayered

system. DOD concurred with our recommendation, but implementation

progress and results have varied with the different commodities. Specific

details on DOD’s progress in adopting these best practices are described in

chapter 3.

DOD and Private

Sector Manage and

Distribute Inventory

Differently

At a time when many private sector companies were adopting practices

that reduced intermediate storage locations while improving service

levels, DOD continued to use a logistics system that stored duplicative

inventories between suppliers and end-users. DOD often stored inventories

in as many as four different layers. In 1992, at the wholesale level, DLA

stored $11 billion worth of consumable items in distribution depots and

warehouses located throughout the United States. Our analysis indicated

that this inventory could last DOD an average of over 2 years based on past

demand. At the retail level, the services hold inventory at three different

layers near the locations where the items are used—base warehouses,

central storerooms, and end-user locations. Service facilities we visited

had retail stock on hand sufficient to last from 1 month to over 5 years.

Several factors contribute to this multilayered system, including DOD’s

philosophy of relying on large stock levels at wholesale and retail

locations to readily meet customer needs and the long procurement lead

times that require DOD to hold inventory to ensure items are available until

ordered supplies are received from suppliers.

The private sector provides a sharp contrast to DOD’s methods of managing

and distributing consumable items. Private sector companies have

modified their inventory practices to reflect an increasingly competitive

business environment. Companies have reduced their number of suppliers

by establishing a close partnership with only a few key ones that are often

Page 16 GAO/NSIAD-95-142 Inventory Management
Chapter 2 

Best Practices Can Reduce Inventory

Management Costs and Provide Quality

Service

close to the end-users’ facilities.1 Typically, suppliers are contracted to

manage and distribute a company’s supplies for a particular commodity or

class of items. By using aggressive direct delivery arrangements with the

suppliers, companies bypass the need for intermediate storage and

handling locations. Once end-users order supplies, the suppliers deliver

the items directly to the end-users’ facilities close to the time the items are

needed, commonly called “just-in-time.” This technique allows companies

to eliminate unnecessary inventory layers and reduce on-hand inventories

and operating costs. Figure 2.1 compares DOD’s multilayered system with a

just-in-time inventory system.

Figure 2.1: Multilayered Inventory System Used by DOD and Just-in-Time System Used by Some Private Sector Companies

Manufacturers DLA Wholesale


Depots

Service Retail


Warehouses

Service Central


Storage Locations

Service End-user


Locations

DOD's Logistics System

Manufacturers Key


Vendor

 End-user


Locations

Just-in-Time System

Flow of supplies


Orders

Private sector companies that remain competitive in today’s marketplace

are able to hold less inventory, fill orders more quickly, turn stock over

more frequently, and obtain replenishment supplies significantly faster

than DOD. For example, figure 2.2 illustrates that for clothing stocks, DOD’s

multilayered system results in added procurement and distribution time

and increased inventories at all levels.

1

The benefits achieved from private sector partnerships and the potential for benefits in DOD are

discussed in our report Partnerships: Customer-Supplier Relationships Can Be Improved Through

Partnering (GAO/NSIAD-94-173, July 19, 1994).

Page 17 GAO/NSIAD-95-142 Inventory Management
Chapter 2 

Best Practices Can Reduce Inventory

Management Costs and Provide Quality

Service

Figure 2.2: How DOD and Prime Vendors Provide Clothing Stocks to End-Users

1.5-2 months


stock on-hand

2-10 years


stock on-hand

1.5-6 months


stock on-hand

1-3 days order fill time

24-28 days


order


fill time

0-7 days


internal


shipping time

400 days


lead time

2-60 days


lead time

Supplier/


manufacturer

Prime vendor

60-120 days


stock on-hand

0 days stock


on-hand

Retail point


firm (client)

Retail point


(Recruit


Induction Center)

Wholesale


depots

Issue point


depot

Past Reports Highlight

Problems and Identify

Opportunities

Since 1991, we have issued five reports that compared commercial

logistics practices with similar DOD operations for consumable items. In

these reports, we described various innovative private sector inventory

management practices and highlighted companies that had successfully

used the practices to streamline their operations. Some companies

indicated that they had achieved large savings for personnel items by

standardizing items, eliminating bulk storage locations, and most

importantly, relying on prime vendors that procured items from many

sources, and then warehoused and distributed these items to their clients

when and where needed. Other companies adopted practices that located

suppliers at a supplier park near industrial centers, which allowed

hardware items to be delivered directly to end-users frequently and

regularly. As a result, we recommended that DOD conduct tests to

demonstrate the applicability of using concepts such as prime vendors and

supplier parks to better manage inventories at DLA and military facilities.

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Summarized below are the key issues addressed in our reports on medical

items, food, clothing and textiles, maintenance and repair items, and

electronics items and the actions DOD has taken in response to our

recommendations.

Medical Inventory We reported that DOD’s health care system could save millions of dollars by

increased use of inventory management practices pioneered by leading

civilian hospitals.2

 Military medical facilities and warehouses we visited

held multiple layers of supplies to satisfy peacetime requirements and

initial supplies for wartime requirements. The hospital warehouses we

visited held inventory that would last for approximately 1 to 3 months. In

addition, DLA, through its depot system, stored another layer of supplies

that would last approximately 8 months. Some items in this system were

packed in the 1940s and 1950s. Figure 2.3 shows the medical inventory in

one warehouse at the DLA depot near Mechanicsburg, Pennsylvania.

Figure 2.3: Medical Supplies in DLA

Warehouse at Mechanicsburg,

Pennsylvania

2

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

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

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In contrast, very progressive civilian hospitals maintained much smaller

levels and fewer layers of supplies and had no depot system. These

hospitals, through improved ordering systems, standardization of supplies,

and better communication with vendors, greatly reduced inventories by

having prime vendors deliver supplies where and when needed. One

hospital, the Vanderbilt University Medical Center, reduced inventory

levels from $4.5 million to $2.8 million (38 percent) between 1986 and 1991

by taking an aggressive approach to inventory management, including

requiring its two prime vendors to deliver supplies within 4 hours of

ordering.

Due to the significant opportunities for DOD to save millions of dollars, we

recommended in our December 1991 report on medical supplies that DOD

test the use of inventory management practices pioneered by leading

civilian hospitals such as using prime vendors to deliver supplies directly

to medical facilities. DOD agreed with our recommendation and has

established prime vendor programs at about 150 military hospitals

nationwide.

Food Inventory We reported that, while making some limited use of prime vendors, DOD’s

food system was generally outmoded and inefficient.3 DOD routinely stored

large stocks of food throughout the military supply system. As of the end

of fiscal year 1992, for example, DLA had, on average, an 82-day supply of

food for peacetime operations, valued at more than $150 million. Military

base warehouses also held large food inventories, worth about

$200 million. As a result, food items often sat on shelves for months or

even years before reaching end-users. When this occurs, food items can

spoil and become unfit for human consumption. During visits to military

installations, we found numerous items that had an extended inspection

date—the date food producers stamp on their products to indicate when

the first signs of deteriorating food quality may be detected.

The private sector avoided many of the problems experienced by the

military food supply system by relying on prime vendors to move food

from suppliers to end-users. Because of heavy competition within the food

industry, prime vendors had a financial incentive to cut their costs, keep

their prices low, and provide quality service. Prime vendors deal with

end-users (such as hospitals, restaurants, and hotels) on a daily basis,

including taking orders and making direct deliveries. By relying on the

3

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

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

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prime vendors, end-users do not incur the direct costs of holding,

handling, and transporting food. As a result, we believed many of the costs

DOD incurred managing food inventories were unnecessary because the

commercial distribution network could supply food to DOD much more

efficiently.

Because of the possible inventory reductions and cost savings that could

be achieved by using private sector techniques, we recommended in our

June 1993 report that DOD conduct a demonstration project of an expanded

use of prime vendors delivering food directly to military dining facilities.

As we recommended, DOD is currently testing the expanded use of food

prime vendors to over 200 military dining facilities in the southeastern part

of the United States.

Clothing and Textile

Inventories

At a time when private sector companies were cutting costs by minimizing

inventories, DOD continued to store redundant levels of clothing and textile

inventories at both wholesale and retail locations and to hold such

inventories for longer periods of time than the private sector firms we

visited.4

 As previously shown in figure 2.2, private sector distributors

maintain low inventories because they depend on suppliers delivering

goods when they are needed.

These inventory differences reflect contrasting approaches to meeting

customers’ needs. DOD’s system attempts to satisfy customer needs by

having large clothing stocks readily available. Commercial firms, on the

other hand, rely on prime vendors to manage their clothing inventories.

Prime vendors use quick order and delivery systems to satisfy customer

demands, relieving the need for large inventories and helping to avoid

items deteriorating or becoming obsolete before they are used. One prime

vendor we visited managed an agency’s employee uniform program

through a central database, which enabled order information to be

transmitted directly to a distribution point and issued to a customer in a

few days. The agency estimated it had saved at least 15 percent of the

amount it had allocated for clothing items over the previous year.

Because DOD’s inventory practices for clothing items differed significantly

to best practices used in the private sector, we recommended in our April

1994 report on clothing and textiles that DOD conduct a pilot project to

demonstrate whether a prime vendor concept is beneficial in providing

4

Commercial Practices: Leading-Edge Practices Can Help DOD Better Manage Clothing and Textile

Stocks (GAO/NSIAD-94-64, Apr. 13, 1994).

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clothing items to military installations, particularly recruit induction

centers. DOD agreed with our recommendation to test the prime vendor

concept, and it expects to begin a demonstration project in January 1996.

Maintenance and Repair

Inventories

At both wholesale and retail locations, DOD stored duplicate maintenance

and repair inventories that could be reduced using commercial practices.5

For example, about $2 billion of DLA’s $6.4 billion inventory of

construction, general, and industrial supplies was invested in consumable

maintenance and repair items. Some of the items in this wholesale level

inventory were duplicated at the services’ retail inventories, which were at

or near each of their industrial centers. For three industrial centers, one

from each military service, we combined the number of days each center

would take to use the available DLA wholesale and service retail

inventories (see fig. 2.4).

5

Commercial Practices: DOD Could Save Millions by Reducing Maintenance and Repair Inventories

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

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Figure 2.4: Combined Wholesale and

Retail Inventory Available to Three

Industrial Centers

Days on hand

0

250

500

750

1000

1250

1500

1750

2000

2250

2500

2750

Letterkenny

Army Depot

Norfolk Shipyard and Supply Center

Oklahoma City Air Logistics Center

DOD industrial centers

Service retail

DLA wholesale

As figure 2.4 shows, the combined inventory could last as long as 

7-1/2 years (2,696 days) at the Oklahoma Air Logistics Center.

In contrast, two private sector companies we visited adopted unique

inventory management practices to reduce maintenance and repair

inventories and save operating expenses. These companies do not use a

wholesale system to store and distribute items, as DOD does, but instead

rely on suppliers to deliver items directly to the end-users’ facilities. One

company we visited—PPG Industries — established a “supplier park,”

where 10 of its suppliers provided maintenance and repair items as needed

throughout each day. This park is located in a central location 600 yards

from PPG’s industrial center where the items are used. With the supplier

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park concept, PPG eliminated $4.5 million, or 80 percent, of its

maintenance and repair inventory and saved $600,000 annually in

operating costs. Another company, The Timken Company, reduced

inventory levels at one location by $4 million, or 33 percent, by using

direct delivery programs and customized agreements with suppliers.

Timken has set a goal to reduce its inventory an additional 50 percent by

establishing a supplier park facility.

In our June 1993 report on maintenance and repair inventories, we

recommended DOD test best practices at its military industrial centers

where large quantities of these same items are used. Specifically, we

recommended that DOD test the use of supplier parks to reduce the need to

store supplies in the DLA depot system and eliminate unnecessary retail

inventories. DOD concurred with our recommendations and stated it

planned to expand, where appropriate, the use of commercial practices.

Also, DOD stated that it would investigate the applicability of using supplier

parks and would determine whether a test was feasible by the second

quarter of fiscal year 1994. As of July 1995, DLA had not completed its

investigation into the feasibility of testing this concept.

Electronics Inventories We reported that DLA stored over $2 billion of wholesale electronics

supplies at distribution depots and other storage locations.6

 This large

inventory turns over slowly, about once every 4 years on average,

whereas, private sector suppliers often turn their stock over 4 times a year.

The slow turnover of inventory costs DOD millions of dollars. Based on

DLA’s September 1993 electronics inventory, we estimated DOD’s annual

inventory cost to be as much as $330 million. In addition, a significant

amount of DLA inventory exceeded DOD’s needs. As of September 1993, DLA

categorized $231.4 million of its electronics, or 10.5 percent, as excess

inventory.

During the past decade, many private sector companies adopted modern

inventory management practices that significantly reduced electronics

inventories, decreased procurement lead times, and saved millions in

associated operating costs while improving the availability of stock. One

company we visited, Bethlehem Steel Corporation, reduced its

maintenance and repair inventory, including electronics, by about

$16 million, or 71 percent (see fig. 2.5), and estimated that it had avoided

over $47 million in inventory costs and related expenses since 1984. By

6

Commercial Practices: DOD Could Reduce Electronics Inventories by Using Private Sector

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

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establishing long-term agreements with 21 key suppliers and giving them

the responsibility to manage, deliver, and stock items at over 60 end-user

locations within its facility, Bethlehem Steel (1) eliminated the need to

store and distribute supplies from a central warehouse, (2) increased its

access to suppliers’ technical expertise, and (3) consolidated and

standardized the types of items used.

figure 2.5: Bethlehem Steel Inventory

Levels (1984-92) (in millions of constant

year 1992 dollars)

Inventory value

0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

1984 1985 1986 1987 1988 1989 1990 1991 1992

22.5

19.3

18.1

16.9

13.8

12.4

9.9

8.1

6.5

We believed that DOD could reduce electronics inventories by using private

sector techniques, but because DOD stated that it planned to determine the

feasibility of concepts like supplier parks for maintenance and repair

items, we did not make recommendations in our 1994 report on

electronics inventories. As discussed earlier, however, DLA has not tested

or implemented this concept.

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DOD Has Adopted Commercial Inventory

Practices, but Can Build on Progress

DOD has made progress in improving its logistics system by adopting best

practices, but further opportunities exist to achieve significant savings.

For the personnel items it manages, which account for 23 percent of DLA’s

inventory value, DLA has made the most progress to adopt best inventory

practices by establishing prime vendor programs that have reduced

inventories and improved service to the customer. As a result of its

improvement efforts, DLA expects to reduce its inventories and days of

supply of personnel items by over 50 percent between 1992 and 1997.

For the hardware items it manages, which account for 77 percent of DLA’s

inventory value, DLA has made the least amount of progress in using best

practices. To date, DLA has not tested the most innovative just-in-time

concepts we have seen used by private sector companies to reduce

inventories and costs. DLA has focused its efforts on direct delivery

programs at the wholesale level, which do not provide the same benefits

as concepts like supplier parks. As a result, DLA estimates it will achieve

about a 20-percent reduction in inventory levels and days of supply of

hardware items between 1992 and 1997. Even then, hardware inventory in

its depot system could last for more than 2 years.

DOD Guidance

Encourages Adoption

of Commercial

Practices

During the past 2 years, the Office of the Secretary of Defense (OSD) issued

guidance to DLA and the services that emphasized the use of alternatives to

DOD’s traditional logistics system to improve operations. In January 1993,

OSD issued a policy stating that all DOD components are to employ direct

delivery from vendors to end-users wherever it is cost-effective and

responsive to the end-users’ requirements. The policy also stated that the

use of existing commercial distribution systems shall be maximized, when

possible. In 1994, OSD issued its logistics strategic plan, which focused on

achieving improvements in logistics system performance while reducing

associated infrastructure costs. According to the plan, an important aspect

of achieving these improvements will involve the identification and

adoption of successful government and commercial practices. The plan,

for example, specifically states that DOD components should (1) implement

commercial distribution of food to DOD dining facilities by September 1996

and (2) use direct delivery methods for supplying all routine medical and

clothing needs by September 1997. The plan also states that DLA should

determine the feasibility of establishing supplier parks or other

commercial arrangements at one or more major defense installations by

July 1994.

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DOD Has Adopted Commercial Inventory

Practices, but Can Build on Progress

To further its adoption of commercial practices, DLA established a program

called “Buy Response Vice Inventory” in December 1992. This program,

intended to minimize operating and inventory costs, encourages inventory

managers to use commercial practices, such as long-term contracts,

electronic data interchange systems, direct vendor delivery, and prime

vendor programs. DLA also established the following goals for this

program: (1) 50 percent of sales will use direct delivery and prime vendor

programs by fiscal year 1997, (2) 80 percent of dollars obligated will be

under long-term contracts by fiscal year 1997, and (3) 70 percent of orders

with suppliers will be electronically transmitted by 1995.

DLA’s Use of Best

Practices Are Most

Advanced for

Personnel Items

DLA has made the most progress in adopting best practices for personnel

items. Since 1993, DLA has taken steps that use prime vendors to supply

personnel items directly to military facilities. At present, DLA is

establishing agreements with prime vendors to manage, store, and

distribute pharmaceutical products, medical supplies, food, and clothing

and textile items.

DLA plans to have prime vendor programs to encompass a large portion of

its total logistics operations for personnel items by 1997. As a result, DLA

expects the use of prime vendors and other inventory concepts that

eliminate obsolete and unnecessary items to significantly decrease its

wholesale personnel inventories. By 1997, DLA estimates its 1992 inventory

level of these items will have decreased from $3 billion to $1.4 billion, a

53-percent reduction. As of June 1994, DLA’s personnel inventories were

valued at $2.3 billion.

Based on DLA’s projected dollar-value sales for personnel items, we believe

this reduction in inventory will significantly decrease the number of days

of supplies on hand in DLA depots (see fig. 3.1).

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Figure 3.1: DLA Inventory Levels of Personnel Items

Days on Hand

0

100

200

300

400

500

600

700

Sept.

1992

June

1994

Sept.

1997

Sept.

1992

June

1994

Sept.

1997

Sept.

1992

June

1994

Sept.

1997

Medical Fooda Clothing and Textiles

Actual

Estimate

aWar reserves and rations not included.

As figure 3.1 illustrates, medical inventory levels are expected to decrease

from 176 days to 77 days of supply; food inventory levels are expected to

decrease from 82 days to 20 days of supply; and clothing and textile

inventories are expected to decrease from 725 to 365 days of supply.

Medical Prime Vendor

Program

In January 1993, DLA implemented a prime vendor program for

pharmaceutical products, followed in June 1993 by a program for medical

and surgical supplies. By the end of 1995, about 150 DOD medical facilities

will be using these prime vendor programs in 21 geographic regions across

the United States. A prime vendor is a distributor that has been awarded a

contract to store and distribute various medical products to individual

military hospitals, which reduces the need for DOD wholesale and retail

systems. Under this concept, DLA negotiates prices for medical products

directly with the manufacturers or suppliers. DLA then contracts with the

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prime vendor to buy the products at these prices and distribute the

products directly to the military hospital within 24 hours of receiving an

order. In most cases, the prime vendor charges a distribution fee for these

services. Once the products are delivered to the hospitals, DLA pays the

prime vendor within 15 days.

The use of this concept has allowed DOD to reduce stock levels at both

wholesale and retail locations. During fiscal year 1994, DLA reduced

wholesale pharmaceutical inventory $48.6 million (49 percent), and it

estimates it will reduce its total medical inventory (which includes

pharmaceutical, surgical, and dental supplies) by $97 million (37 percent)

over the next 3 years.

The prime vendor program also enables DOD hospitals to reduce retail

inventory levels and save millions in operating costs. For example, we

compared the pharmaceutical inventory levels of three military hospitals

before and after the prime vendor program was started and found that

these hospitals had reduced their total pharmaceutical inventory levels

(see fig. 3.2). Other DOD hospitals have achieved similar reductions.

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Figure 3.2: Pharmaceutical Inventories

at Selected Military Medical Facilities Days on Hand

0

25

50

75

100

125

150

Walter Reed Malcolm Grow Portsmouth

Before prime vendor-1993

After prime vendor-1994

In addition to a 48-percent reduction in pharmaceutical inventories

($3.8 million), Walter Reed officials estimate it saves over $6 million a year

in related inventory management expenses by using the prime vendor

system. This savings involve (1) $2.2 million through reduced paperwork

and administrative costs, (2) over $2.9 million because its products

generally cost less, (3) $504,000 through the reduction of 15 personnel

positions previously required for inventory management, and (4) $397,000

by reusing material handling equipment and warehouse space previously

needed for medical supplies. Figure 3.3 shows a medical warehouse that

has been converted into a training facility for medical personnel.

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Practices, but Can Build on Progress

Figure 3.3: Medical Warehouse

Converted Into a Training Facility

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DOD Has Adopted Commercial Inventory

Practices, but Can Build on Progress

While DOD has achieved inventory reductions and cost savings, further

opportunities exist to build on this progress by adopting the most

aggressive practices being used in industry. Because each service uses this

program differently, and some continue to retain unnecessary inventory

layers, DOD has not realized the same benefits that civilian hospitals have

achieved. Military hospitals we visited still held inventories that could last

the hospitals an average of 42 to 82 days. In comparison, the Vanderbilt

University Medical Center reduced or eliminated unnecessary inventory

layers and decreased hospital inventory levels to between 2 and 15 days of

supply by taking an aggressive approach to inventory management.

Vanderbilt, by establishing a close partnership with its prime vendors,

arranged for supplies to be delivered several times a day, in many cases,

directly to the point of use within the medical center. If DOD hospitals were

to use a similar system, they could reduce inventories, in some cases, by as

much as 75 percent.

Food Prime Vendor

Program

During 1994, DLA initiated a prime vendor program that it estimated would

reduce the amount of food supplies stored in DLA depots by $69 million, or

74 percent of peacetime stocks, by 1998. In March 1994, DLA awarded a

contract to a full-line food distributor to serve as a prime vendor for

delivering certain foods (semiperishable, chilled, and frozen) to dining

facilities at four military bases in the Norfolk, Virginia, area. DLA

established this pilot project to determine the feasibility of using prime

vendors instead of the traditional military supply system. The project’s

goals were to improve service and reduce costs and inventories. Four

months after the project was started, two service facilities we

visited—Fort Lee Army Base and Langley Air Force Base—had realized

inventory reductions of over $165,520 (84 percent) and $66,005

(81 percent), respectively, at their retail warehouses. At one of these

facilities, service officials were able to vacate two warehouses that

previously were required to store food items. Officials we spoke with were

more satisfied with the delivery service provided by the prime vendor than

that provided by the military food supply system. For example, the prime

vendor can deliver food to the dining facilities about 4 weeks faster than

DOD can under its traditional system.

In January 1995, DLA and the services began a test project to expand the

food prime vendor program to over 200 military dining facilities located in

the southeastern part of the United States. All four services are

participating in the 1-year project, which includes military facilities

located in metropolitan and rural areas as well as Navy ships. Through this

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project, military personnel electronically order food items from a

distributor who is required to deliver the items to the dining facility within

48 hours. As a part of this test, DOD will measure the monetary cost and

benefits, customer satisfaction, and distributor performance by comparing

the traditional military food supply system to the prime vendor method. If

this project is successful, DOD plans to expand the program to all dining

facilities in the continental United States and ships by the end of fiscal

year 1997.

Clothing and Textile Prime

Vendor Program

Under a demonstration project that is expected to start in January 1996, a

military service recruit induction center will test the prime vendor concept

for clothing items. The project is DOD’s first effort to use a prime vendor to

manage clothing and textile items. DLA plans to award a contract to a

prime vendor that will be responsible for the manufacture, quality, storage,

and delivery of all clothing items provided to the Air Force’s recruit

induction center at Lackland Air Force Base, San Antonio, Texas. Items

are expected to be delivered within 10 days after the orders are placed,

with a delivery goal of 3 days by the 10th month of the program. If the test

proves successful, DOD plans to apply it to other service locations.

DLA Is Pursuing

Commercial Practices

for Hardware Items,

but Progress Is Slow

DLA’s adoption of best practices is least advanced for hardware items.

Although DLA is examining the potential application of some commercial

practices for hardware items, DLA’s overall progress is slow and results are

limited.

The central focus of DLA’s efforts to improve management of hardware

items has been to expand the use of direct delivery programs at the

wholesale level. By using long-term contracting agreements and electronic

data interchange systems, DLA makes arrangements with manufacturers or

suppliers to deliver items directly to the services’ retail facilities. DLA

expects the use of direct vendor delivery to result in better service and

reduced inventory levels and to eliminate the cost of receiving, storing,

and issuing these items from wholesale depots. In fiscal year 1994, DLA

reported that 13 percent of its hardware dollar-value sales resulted from

direct delivery programs at this level. According to DLA, it expects to

increase the use of direct delivery programs so that they account for

30 percent of all hardware dollar-value sales by 1997.

These direct delivery programs, however, neither eliminate costs to

manage, store, and distribute items at a service’s retail location nor

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provide the same quick response achieved through best inventory

practices such as the supplier park concept. With direct delivery

programs, requisitions are sent from the services to DLA, where the orders

are then electronically relayed to the supplier or manufacturer. The length

of time from requisition to delivery of the item can take 30 days or longer.

In comparison, private sector companies using just-in-time techniques

often receive supplies from their key suppliers within hours after ordering.

The use of such techniques allows these companies to reduce or eliminate

the need to manage, store, and distribute these items from warehouse

locations at their facilities.

DLA’s direct delivery programs provide only incremental reductions from

hardware inventory levels held in 1992. DLA estimates that hardware

inventories of $8 billion in 1992 will decrease to $6.4 billion in 1997, or

approximately 20 percent.1

 As of June 1994, DLA’s hardware inventories

were valued at $7.8 billion. Much of this overall reduction will result from

the disposing of excess and obsolete items. Even then, based on DLA’s

projected inventory and demand for the four groups of hardware items

(construction, electronics, general, and industrial), it could have enough

inventory on hand to last for an average between 795 days and 1,381 days

(see fig. 3.4). In comparison, private sector suppliers of similar types of

items often hold only 90 days of supply to meet customer needs.

1

In commenting on a draft of this report, DOD stated that the $8 billion and $6.4 billion includes

inventory transferred from the military departments as part of DOD’s consumable item transfer

program. When those transferred items are excluded, DLA’s inventory of consumable items decreased

36 percent between fiscal years 1992 and 1994.

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Figure 3.4: DLA’s Inventory of Hardware Items

Days on Hand

0

250

500

750

1000

1250

1500

1750

Sept.

1992

June

1994

Sept.

1997

Sept.

1992

June

1994

Sept.

1997

Sept.

1992

June

1994

Sept.

1997

Sept.

1992

June

1994

Sept.

1997

Construction Electronics General Industrial

Actual

Estimate

Companies have applied innovative practices at industrial centers where

they use large quantities of consumable hardware items, such as bearings,

valves, and fasteners, to maintain and repair their equipment. According to

private sector officials, these items offer the greatest opportunity because

they are generally standard, used in large quantities, and commonly

stocked by several suppliers. Through concepts like supplier parks,

companies have reduced similar types of inventories and the costs to

manage and store them. For example, PPG Industries and Bethlehem Steel

Corporation have used supplier parks and similar just-in-time concepts to

eliminate as much as 80 percent of their consumable item inventories. In

addition, these companies estimate that they have saved millions in related

operating costs.

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In September 1994, DLA contracted for a study of the feasibility of using

supplier parks at three maintenance and repair facilities. In

December 1994, the contractor reported that the concept of a supplier

park was feasible and strongly recommended that DLA give serious

consideration to using this concept at these facilities. The study concluded

that a supplier park concept would provide enhanced customer support in

terms of quicker response times and improved material availability while

reducing both operating and inventory costs at DLA depots and

maintenance and repair facilities. The contractor estimated a first year

savings between $9.9 million and $16.8 million to DOD. According to DLA, it

plans to continue studying the feasibility of this concept.

Factors Affecting

DOD’s Ability to

Implement Best

Practices

The success of DOD’s initiatives to improve inventory management

practices will depend on DOD’s ability to change its traditional inventory

management philosophy. Private sector companies have moved away from

this philosophy in an attempt to lower the cost of doing business, provide

better service, and remain competitive. Private sector companies have

changed their philosophy by relying on established commercial

distribution networks where suppliers have a financial incentive to make

their operations efficient and achieve savings. In response to competition,

these suppliers must be extremely cost conscious and responsive to their

customers in order to stay in business. DOD can achieve similar results by

adopting a philosophy in which it relies more on the existing distribution

network that supports the private sector.

Another factor is that DOD will be continuously challenged to identify and

adopt the best practices being used to improve logistics operations.

Private sector companies that have achieved the greatest success

continually seek new and better practices to further improve operations.

For example, Vanderbilt University Medical Center officials told us that

they plan to take the next step with their inventory system by controlling

inventory consumption through closer supply arrangements with its prime

vendor. According to these officials, the latest concept involves a

risk-sharing strategy designed around the development of an agreed upon

cost per medical treatment. Under this arrangement, the doctors, nurses,

and the prime vendor agree on a standard medical supplies listing for each

type of medical treatment. When a patient is admitted to the hospital for

treatment, the prime vendor will be notified and a standard set of supplies

will be delivered to the patient’s floor. This concept is expected to

minimize the amount of supplies used by the hospital staff to that amount

necessary to perform the required treatment. The monetary risks and

Page 36 GAO/NSIAD-95-142 Inventory Management
Chapter 3 

DOD Has Adopted Commercial Inventory

Practices, but Can Build on Progress

benefits of this arrangement are shared by both the prime vendor and the

hospital.

Page 37 GAO/NSIAD-95-142 Inventory Management
Chapter 4 

Conclusions and Recommendations

DOD has made progress in adopting best inventory practices for

consumable items, but it could do more to further reduce inventories and

operating costs. Private sector companies that have successfully adopted

innovative just-in-time concepts for consumable items have taken several

key steps. First, they selected high usage, low unit cost items to test these

practices. Second, they arranged for suppliers to make small, frequent

deliveries of these items to a point close to where the items are used. As

they gained confidence in this new system and as suppliers refined the

distribution process, the companies expanded this service to include a

wider range of items. Finally, they established a close partnership between

the supplier and end-user, thereby enabling the supplier to use its

expertise and the pre-existing distribution network to maximize savings

for its customers. As discussed in chapter 2, these savings can result in as

much as an 80-percent reduction in inventory levels and in millions of

dollars in lower annual operating costs.

For personnel items, which represent 23 percent of DLA’s inventory, DLA is

beginning to take similar steps. The most successful program to date is the

pharmaceutical prime vendor program, which is now in place at DOD

hospitals nationwide. Thus far, DLA’s implementation of the prime vendor

concept has reduced wholesale pharmaceutical inventories by 49 percent.

At the retail level, one of the most aggressive DOD medical facilities

applying this concept is the Walter Reed Army Medical Center, which has

reported an inventory reduction of $3.8 million and a estimated savings of

over $6 million annually in related inventory management expenses. To

accomplish these savings, Walter Reed has turned over much of its

inventory management responsibilities to the prime vendor.

However, the aggressive steps taken by Walter Reed are not typical of

those throughout all of the DOD medical facilities we visited. Because each

service has used the prime vendor’s services differently, and some even

continue to retain unnecessary inventory layers, DOD has not realized the

same improvements that progressive civilian hospitals have achieved. In

fact, military hospitals we visited still held inventories that could last for

many weeks compared to just days for some leading civilian hospitals.

DOD’s approach neither eliminates unnecessary inventory storage locations

nor allows hospitals to fully use the inventory management expertise of

the prime vendor. Under this approach, a partnership environment may

not fully develop.

For hardware items, which represent 77 percent of its inventory and a

$7.8-billion investment, DLA has not taken the steps necessary to adopt

Page 38 GAO/NSIAD-95-142 Inventory Management
Chapter 4 

Conclusions and Recommendations

just-in-time concepts. DOD operates industrial facilities that use large

quantities of hardware items to repair and maintain aircraft, land vehicles,

and ships. At these facilities, DOD uses the same types of hardware items

for which private sector companies have established supplier parks and

other innovative concepts that transfer management responsibilities to

their suppliers and reduce inventory levels. Although we recommended a

DOD test of the supplier park concept in our June 1993 report, it is still

studying the feasibility of the concept 2 years later.

Recommendations To ensure that the medical prime vendor programs are more consistently

and aggressively applied, we recommend that the Secretary of Defense

direct the secretaries of each of the military services to use the prime

vendor program in enhancing the partnership between the DOD medical

facilities and the prime vendors. Actions that would enhance such an

arrangement include

• delivering supplies directly to the point of use in the hospital,

• integrating the vendor into the day-to-day supply operations,

• delivering supplies on a frequent basis (several times a day), and

• using the vendor’s expertise to improve inventory management operations.

These actions could further reduce inventory layers in the DOD system and

bring military medical facilities closer to the levels of success achieved by

progressive private sector hospitals.

To encourage DLA and the services to establish supplier parks for hardware

items, we recommend that the Secretary of Defense direct the secretaries

of each of the military services and the Director of DLA to initiate several

actions that have been taken by private sector companies when

developing these concepts. Specifically, each service and DLA should work

together to

• identify an Army, Navy, and Air Force site that will test the supplier park

concept;

• identify specific items with high usage rates and low unit costs to use in a

test program;

• negotiate with prospective suppliers to perform these inventory

management functions during the test program;

• establish partnerships with the suppliers allowing them access to DOD

inventory information and facilities, which will enable the suppliers to

deliver items directly to the end-user;

Page 39 GAO/NSIAD-95-142 Inventory Management
Chapter 4 

Conclusions and Recommendations

• develop evaluation criteria that will measure the total costs of inventory

delivered under the test program in order to compare costs and benefits to

the total cost being incurred under the current system; and

• establish aggressive milestones for the initial phases of this test program

to achieve early results.

Agency Comments In commenting on a draft of this report, DOD generally agreed with the

findings, conclusions, and recommendations and stated that, while

significant gains have occurred, further progress can be made in adopting

best commercial practices in providing both personnel and hardware

items to the military services. DOD stated that DLA, in its role as commodity

manager for medical supplies, is taking the lead in enhancing prime

vendor arrangements for medical items. DOD also stated that DLA is

aggressively pursuing the establishment of a supplier park at two military

service facilities in Texas.

According to DOD, DLA has contracted with a consultant to complete an

analysis of existing purchasing systems, compile an economic analysis,

and develop an implementation plan. The consultant is expected to

complete a report by August 31, 1995. DLA has not yet established specific

milestones to test the operation of the concept. An actual operational test

of the concept can help DLA (1) determine whether the concept can be

applied to its logistics operations and (2) evaluate the feasibility of

expanding the concept at other locations having similar inventory

requirements.

Page 40 GAO/NSIAD-95-142 Inventory Management
Page 41 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Page 42 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on pp. 3-5, 27-33,

and 38-39.

Page 43 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Page 44 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on pp. 5-6, 33-36,

and 38-39.

Page 45 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on pp. 4 and 36-37.

Page 46 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on pp. 6 and 39.

Now on pp. 6 and 39.

Page 47 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on pp. 7 and 39.

Now on pp. 7 and 39.

Page 48 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on pp. 7 and 39.

Now on pp. 7 and 40.

Page 49 GAO/NSIAD-95-142 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on pp. 7 and 40.

Page 50 GAO/NSIAD-95-142 Inventory Management
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Donna M. Heivilin

Kenneth R. Knouse, Jr.

Cincinnati Regional

Office

Matthew B. Lea

Robert L. Repasky

William E. Haines

(709055) Page 51 GAO/NSIAD-95-142 Inventory Management
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