United States General Accounting Office

GAO Report to the Secretary of Defense

April 1995 DEFENSE

INVENTORY

Extent of Diminishing

Manufacturing Sources

Problems Still

Unknown

GAO/NSIAD-95-85

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-260177 

April 21, 1995

The Honorable William J. Perry

The Secretary of Defense

Dear Mr. Secretary:

We have completed our survey of the Department of Defense’s (DOD)

Diminishing Manufacturing Sources and Material Shortages (DMSMS)

program. Our objectives were to determine (1) what progress DOD had

made since our 1990 report1

 toward implementing a DMSMS program and

(2) whether DOD had determined the cost-effectiveness of the actions

taken to resolve DMSMS situations.

DOD has indicated that diminishing manufacturing sources is a major

potential problem, particularly in the electronics and microcircuit areas.

According to industry sources and DOD officials, because of rapidly

changing technology in the electronics and microcircuit industry,

decreasing demands due to the downsizing of DOD, and the emphasis on

DOD using commercial off-the-shelf items, the private sector is increasingly

more sensitive to its commercial customers rather than DOD. As a result,

DOD expects the availability of DOD specification items to decrease and the

number of DMSMS situations to increase. DOD officials have also asserted

that DMSMS situations may affect the availability of parts to DOD in areas

other than electronics and microcircuits.

Background The DMSMS program is intended as a management tool for the early

identification and resolution of situations when there is a loss or an

impending loss of manufacturers of items or suppliers of raw materials.

Such situations can occur when manufacturers and suppliers cease

production, discontinue distribution, or move to a foreign country.

Additionally, DMSMS situations can be caused by rapidly changing

technology and low demand for the items or materials. The loss of item

manufacturers and material suppliers can affect weapon systems and

equipment during initial design, development, production, and life-cycle

support.

When the services are notified that a manufacturer or supplier plans to

discontinue production or distribution, they can (1) try to encourage the

1

Defense Inventory: DOD Could Better Manage Parts With Limited Manufacturing Sources

(GAO/NSIAD-90-126, Aug. 16, 1990).

Page 1 GAO/NSIAD-95-85 Defense Inventory
B-260177 

existing source to continue production, (2) try to find another

manufacturer or supplier, (3) attempt to identify a substitute item,

(4) redesign the system so it does not require the problem part,

(5) redefine the military specifications and consider buying the item from

commercial sources, or (6) make life-of-type buys.2

 Because the services

are often not aware of the discontinuance of an item until the

manufacturer has made the decision, the services may be in a reactive

mode with limited options for addressing the problem.

An alternative to the reactive mode of operation is a predictive analysis in

which the services try to predict which items are likely to be discontinued

due to changing technology, declining demands, and other causes. To the

extent that the services can anticipate which items may be discontinued,

they have more flexibility in designing a course of action to address DMSMS

situations.

In our 1990 report, we pointed out that the services had not fully

implemented the DMSMS program. At that time, the services were

developing program policies and plans, had not developed adequate

guidance for computing life-of-type buys, and did not have the data

necessary to monitor and measure the effects of DMSMS.

Results in Brief Data is not collected on a DOD-wide basis concerning what the total

number of DMSMS situations were, how the situations were resolved,

whether the most cost-effective solutions were selected, or how DMSMS

affects the capability of the forces. As a result, the services do not have

oversight and monitoring systems that provide quantitative information on

the magnitude and extent of the DMSMS problem. According to DOD officials,

these systems are still in the planning stage and will not be available for at

least a year.

To date, most of the services’ DMSMS efforts have been reactive. However,

the Navy and, to a lesser extent, the Army have made some progress

toward developing predictive analysis systems. These systems, however,

do not provide a servicewide approach, and analyses have not been

performed to evaluate the cost-effectiveness of the actions taken in

response to DMSMS situations. Consequently, DOD does not know whether

and under what circumstances a reactive or predictive approach is the

preferred course of action for dealing with DMSMS problem parts.

2

A life-of-type buy is the procurement of sufficient items to meet anticipated demands throughout the

system’s life or until another solution can be found to resolve the DMSMS situation.

Page 2 GAO/NSIAD-95-85 Defense Inventory
B-260177 

Oversight on DMSMS

Is Inadequate

DOD issued regulations in January 1993 requiring each service and the

Defense Logistics Agency to designate a focal point for planning and

coordinating DMSMS actions. Part of the focal point’s responsibility is to

ensure a continuous source of supply for parts used in the design,

redesign, or production of weapon systems by screening the parts for

current and near-term obsolescence (1 year to 5 years). Another key

aspect of the regulations is to ensure effective communication and

exchange of DMSMS information between industry and the government.

DOD directed the services to use the Government/Industry Data Exchange

Program (GIDEP) as the central repository for discontinuance notices so

that all affected parties can have access to the information. DOD believed

that the new GIDEP database would provide the information needed for

oversight and effectively manage the DMSMS program. DOD also directed the

establishment of DMSMS management information systems that would show

(1) the dollar value of the DMSMS inventory, (2) the number of managed

DMSMS items, and (3) the dollar value of life-of-type buys.

In June 1993, the DOD Inspector General, however, issued a memorandum

that pointed out that the services continued to have inadequate oversight

of the program and had not established mechanisms or developed

databases to monitor program effectiveness.

DMSMS Program

Development Is

Sporadic

The Defense Electronics Supply Center (DESC) has had a management

focus on DMSMS since the mid-1970s, and it continues to play a major role

in the piece part management of DMSMS. The reason for this is that

electronic parts have been most affected by manufacturers’ production

discontinuances. However, DESC’s efforts are primarily reactive in nature in

that it notifies the services when it receives a discontinuance notice. DESC

then identifies the best alternative for addressing the DMSMS problem to

include emulation, flexible computer integrated manufacturing,

aftermarket manufacturing, and/or life-of-type buys.

The Air Force, in April 1994, issued draft DMSMS policy guidance and in

August 1994 established an Integrated Process Team to determine the

magnitude of DMSMS problems in the Air Force. Another objective of the

team was to develop requirements for an efficient and cost-effective DMSMS

program. The Air Force views this as a necessary first step before

committing resources to a program where the seriousness and magnitude

of the problem are not known. Air Force officials told us that they expect

to receive the team’s report about August 1995.

Page 3 GAO/NSIAD-95-85 Defense Inventory
B-260177 

Cost-Effectiveness of

a Predictive Analysis

Is Not Known

The Navy and the Army have established entities to provide predictive

analyses to other service entities to minimize the impact of DMSMS in

designing, redesigning, and supporting systems. However, these entities do

not provide servicewide coverage for all affected parts. Furthermore, the

Navy and the Army do not routinely track the cost-benefit effectiveness of

their predictive analyses to demonstrate whether they are more

cost-effective than the routine reactive actions being taken in cases where

discontinuance notices are received.

The Naval Air Warfare Center and the Surface Warfare Center have a

Diminishing Manufacturing Source Technology Center that attempts to

predict future obsolescence problems for electronics. According to Navy

officials, the Center’s predictive analyses cover many of the Navy’s major

weapon systems but still account for about 70 percent of the total

electronic parts used in Navy systems. The Navy provides such analyses to

Navy program offices that are willing to fund them.

The Army’s Missile Command also performs predictive obsolescence

analyses for a limited number of Army program offices. The Command’s

predictive analyses involve about 8 percent of the electronic parts that are

used in Army missile weapon systems.

DOD officials told us that they are studying the feasibility of developing a

predictive analysis model that would be owned by DOD and would be

available to the services and the Defense Logistics Agency. At the time of

our review, the research phase of the feasibility study had just been

completed. According to DOD officials, if DOD had its own model, it would

not have to depend on private sector contractors for much of the

information that the Army and the Navy currently use in performing their

predictive analyses. The main reason for the limited predictive analysis

efforts in both the Army and the Navy is that the program offices have to

pay for the predictive analyses and that many program offices rely on the

manufacturers to advise them of emerging material shortages or plans to

diminish manufacturing efforts, rather than spend their funds on

predictive analyses.

From a theoretical perspective, predictive analyses should aid DOD and the

services in minimizing the impact of DMSMS situations. However, the

service entities engaged in predictive analyses have not clearly

demonstrated on a wide-ranging basis that predictive analyses are a

cost-effective way of dealing with DMSMS problems.

Page 4 GAO/NSIAD-95-85 Defense Inventory
B-260177 

We held discussions with service entities who do predictive analyses and

several manufacturers about the cost-effectiveness of such analyses. The

Navy’s Technology Center has tracked the cost avoidances achieved by

predictive analyses, and it could only identify 10 such examples. In total,

these examples accounted for about $8 million in cost avoidances over an

18-month period. In addition, GIDEP identified cost avoidances of about

$7.2 million in 1993. These cost avoidances, however, were not related to

predictive analyses but rather to savings as a result of GIDEP notifying users

of the discontinuance of certain electronic and microcircuit items.

Recommendations Because DOD does not have information on the extent of DMSMS problems

in DOD and does not know whether predictive analyses are a cost-effective

means to address DMSMS problems, DOD cannot make an accurate

assessment of the current DMSMS actions being taken or planned. Before

DOD makes any decisions concerning the future scope of the DMSMS

program or the need for additional program funds, we recommend that the

Secretary of Defense ensure that, at a minimum, DOD has

• quantitative data on the extent of the DMSMS problem,

• information to determine the effectiveness of ongoing and planned actions

for minimizing the impact of DMSMS, and

• supporting analyses for the cost-effectiveness of DMSMS predictive analyses

versus other alternatives for dealing with DMSMS problems.

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

report and its recommendations. DOD said that it recognized the need to

improve service oversight of DMSMS and indicated that in conjunction with

GIDEP, it and the services were working to develop a database that will

collect information on the number of stock numbers and manufacturer

part numbers that are being discontinued. Information will also be

collected on which alternative was used to address the discontinuance

problem.

DOD said that, by April 30, 1995, it will prepare a memorandum to the

services and the Defense Logistics Agency that emphasizes the need to

collect cost data associated with handling DMSMS problems and to report

the data to GIDEP. DOD also said that it recognizes the need to identify and

retain data on the cost-effectiveness of predictive analyses. As such, it will

prepare a memorandum to the services, by April 30, 1995, emphasizing the

need to routinely track the cost-effectiveness of their predictive analyses

Page 5 GAO/NSIAD-95-85 Defense Inventory
B-260177 

to demonstrate whether they are more cost-effective than the routine

reactive approaches that are now being taken. DOD comments are

presented in their entirety in appendix I.

Scope and

Methodology

We reviewed DOD and the services’ policies and procedures for managing

DMSMS and met with DOD and service officials to understand how the

policies and procedures are implemented. We obtained and reviewed

studies, reports, and documentation that addressed the DMSMS problem and

various actions being taken and planned by government and industry to

deal with the problem.

To determine how DMSMS was being managed, we visited the Defense

Electronic Supply Center, the Navy’s DMSMS Technology Center, the Air

Force Materiel Command, the U.S. Army Tank-Automotive and

Armaments Command, and the U.S. Army Missile Command. We also

interviewed officials from Army, Navy, and Air Force inventory control

points, engineering activities, and Army and Navy program offices. We also

held telephone interviews with representatives from GIDEP and private

sector companies who sell electronic components and/or build weapon

systems and components for DOD and the services.

At these organizations, we discussed the pros and cons of using a

predictive analysis versus reacting to the problem after it happens. We also

asked for examples that showed the cost-effectiveness of the DMSMS

actions being taken or planned.

Our review was conducted from August 1994 to January 1995 in

accordance with generally accepted government auditing standards.

As you know, the head of a federal agency is required by 31 U.S.C. 720 to

submit a written statement on actions taken on our recommendations to

the House Committee on Government Reform and Oversight and the

Senate Committee on Governmental Affairs not later than 60 days after the

date of this report. A written statement must also be submitted to the

House and Senate Committees on Appropriations with the agency’s first

request for appropriations made more than 60 days after the date of the

report.

We are also sending copies of this report to the Chairmen and Ranking

Minority Members, House and Senate Committees on Appropriations,

Page 6 GAO/NSIAD-95-85 Defense Inventory
B-260177 

House Committee on National Security, Senate Committee on Armed

Services, Senate Committee on Governmental Affairs, House Committee

on Government Reform and Oversight; the Secretaries of the Army, Navy,

and Air Force; and the Directors, Defense Logistics Agency and Office of

Management and Budget.

If you or members of your staff have any questions or would like to

discuss the matters in this report in further detail, please call me at

(202)512-5140. Other major contributors to this report are Robert J. Lane,

Gilbert W. Kruper, and Michael J. Jones.

Sincerely yours,

Mark E. Gebicke

Director, Military Operations

 and Capabilities Issues

Page 7 GAO/NSIAD-95-85 Defense Inventory
Appendix I 

Comments From the Department of Defense

Page 8 GAO/NSIAD-95-85 Defense Inventory
Appendix I 

Comments From the Department of Defense

Page 9 GAO/NSIAD-95-85 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on p. 5.

Page 10 GAO/NSIAD-95-85 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on p. 5.

Now on p. 5.

Page 11 GAO/NSIAD-95-85 Defense Inventory
Appendix I 

Comments From the Department of Defense

(703076) Page 12 GAO/NSIAD-95-85 Defense Inventory
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