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

February 1996 BEST MANAGEMENT

PRACTICES

Reengineering the 

Air Force’s Logistics

System Can Yield

Substantial Savings

GAO/NSIAD-96-5

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-266259 

February 21, 1996

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. We compared the Air

Force’s management of its $33 billion reparable parts inventory with the operations of

leading-edge private sector firms to identify opportunities where costs could be reduced and

service improved. This report focuses on (1) best management practices used in the

commercial airline industry to streamline logistics operations and improve customer service,

(2) Air Force reengineering efforts to improve the responsiveness of its logistics system and

reduce costs, and (3) barriers that may stop the Air Force from achieving the full benefits of its

reengineering efforts.

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

of Defense and the Air Force; the Director, Office of Management and Budget; and other

interested parties. We will also make copies available to others on request.

If you or your staff have any questions concerning this report, please call me on (202) 512-8412.

Major contributors to this report are listed in appendix III.

Sincerely yours,

David R. Warren,

Director

Defense Management Issues
Executive Summary

Purpose As part of GAO’s continuing effort to review the Department of Defense’s

(DOD) inventory management practices, GAO compared the Air Force’s

management of its $33 billion reparable parts inventory with the

operations of leading-edge private sector firms to identify opportunities

where costs could be reduced and service improved. The review was done

at the request of the Ranking Minority Member, Subcommittee on

Oversight of Government Management and the District of Columbia,

Senate Committee on Governmental Affairs. This report focuses on

(1) best management practices used in the commercial airline industry to

streamline logistics operations and improve customer service, (2) Air

Force reengineering efforts to improve the responsiveness of its logistics

system and reduce costs, and (3) barriers that may stop the Air Force from

achieving the full benefits of its reengineering efforts.

Background The private sector, driven by today’s globally competitive business

environment, is faced with the challenge of maintaining and improving

quality service at lower costs. At the same time, new technology and

management concepts are being introduced that facilitate achieving those

goals. As a result, many firms have radically changed, or reengineered,

their ways of doing business to meet customer needs and retain

profitability. Since DOD is facing a similar challenge of providing better

service at a lower cost, DOD and the services must begin to reexamine their

business practices. With the end of the Cold War, DOD’s logistics system

must now support a smaller, highly mobile, high-technology force. Also,

due to the pressures of budgetary limits, DOD must seek ways to make

logistics processes as efficient as possible.

To provide reparable parts for its approximately 6,800 aircraft, the Air

Force uses an extensive logistics system that was based on management

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

largely outdated. Reparable parts are expensive items that can be fixed

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

sections, and landing gear. The Air Force’s logistics system, often referred

to as a logistics pipeline, consists of a number of activities that play a role

in providing aircraft parts where and when they are needed. These

activities include the purchase, storage, distribution, and repair of parts,

which together require billions of dollars of investments in personnel,

equipment, facilities, and inventory.

Although not as large as the Air Force, commercial airlines’ operations are

similar to the Air Force’s. They operate fleets of aircraft that also use

Page 2 GAO/NSIAD-96-5 Best Management Practices
Executive Summary

reparable parts and operate reparable parts pipelines that consist of the

same activities as the Air Force. For both the Air Force and commercial

airlines, time plays a crucial role in the responsiveness of logistics

operations and the amount of inventory needed. Condensing pipeline

times, therefore, simultaneously improves responsiveness and drives

down costs. Pipeline complexity also adds to logistics costs by increasing

overhead and contributing to lengthy pipeline times.

Results in Brief The commercial airline industry, including certain manufacturers,

suppliers, and airlines, are using leading-edge practices to improve

logistics operations and reduce costs. Some manufacturers are providing

aircraft parts to their customers on a just-in-time basis, and suppliers are

assuming inventory management responsibilities for airlines and

manufacturers. One airline GAO reviewed reengineered its entire logistics

system in an integrated fashion by examining all aspects of its logistics

operations to pinpoint and remove inefficient processes and functions.

In recognition of increasing budgetary pressures, the changing global

threat, and the need for radical improvements in its logistics system, the

Air Force has begun a reengineering program aimed at redesigning its

logistics operations. GAO has urged these changes and supports them, and

has identified additional private sector practices that may result in even

greater savings. However, there are several major barriers to bringing

about change that must be addressed and resolved if the Air Force is to

reengineer its logistics system and save billions of dollars.

The Air Force reengineering effort addresses inherent problems with its

logistics system, but additional steps can be taken to maximize potential

improvements. Under this effort, the Air Force is beginning to test certain

management practices found in the private sector, such as removing

unnecessary inventory layers, repairing parts as they break, and rapidly

transporting parts between the end user and the repair facility. Additional

steps GAO identified that could enhance this program include establishing a

top-level DOD champion of change to support the Air Force initiatives,

greater use of third-party logistics services, closer partnerships with

suppliers, encouraging suppliers to use local distribution centers,

centralizing repair functions, and modifying repair facilities to

accommodate these new practices.

The success of the Air Force in achieving a “quantum leap” in system

improvements hinges on its ability to address and overcome certain

Page 3 GAO/NSIAD-96-5 Best Management Practices
Executive Summary

barriers, such as inherent organizational resistance to change. Top-level

DOD officials must be supportive of and engaged in Air Force reengineering

efforts to remove these barriers and drive success. Also, information

systems do not always provide Air Force managers and employees with

accurate, real-time data on the cost, amount, location, condition, and

usage of inventory—elements that are required to successfully plan,

control, and measure inventory management operations. Without the

support of top-level DOD management and accurate, real-time inventory

information, the expansion of the Air Force’s reengineering efforts could

be seriously impaired.

Principal Findings

Private Sector Initiatives

Are Streamlining Logistics

Systems

The airline industry is developing leading-edge practices that are primarily

focused on reducing the time and complexity associated with logistics

pipelines. For example, British Airways, a leader in the airline industry,

has an efficient logistics system that has helped it achieve profitable

operations every year from 1983 to 1995. Starting in 1981, British Airways

began making radical changes to streamline its logistics system. It changed

the corporate focus, placing customer service as its number one priority;

obtained new information systems; reorganized its repair processes; and

streamlined the storage and distribution of spare parts. It approached this

system reengineering in an integrated fashion by setting a clear corporate

strategy, and then simultaneously examining and improving all aspects of

its operations.

The most dramatic and effective changes GAO observed were in British

Airways’ new repair facilities, which incorporated new management

philosophies, material management systems, repair processes, and

information systems with a mostly new workforce of flexible,

team-oriented employees. These facilities, built to embody the new

corporate vision, have actually magnified the success of British Airways’

reengineering efforts.

Through these efforts, British Airways has improved inventory data

accuracy to 95 percent; achieved 97 and 86 percent supply availability

rates for expendable and reparable parts, respectively; and maintained low

inventory levels. Moreover, these efforts have recently contributed to

millions of dollars in companywide savings during 1993 and 1994.

Page 4 GAO/NSIAD-96-5 Best Management Practices
Executive Summary

GAO also noted that other airlines have pursued initiatives similar to those

taken by British Airways and have likewise seen dramatic improvements.

In addition, GAO observed other practices that have enabled airlines to

minimize the inventory investments they must make and reduce the

inefficiencies in their logistics pipeline. For example, one airline achieved

substantial savings in reduced inventory investment by developing systems

to automatically redistribute inventory to different operating locations

when shortages arise. Another airline reduced shop repair times from 

90 days to 3 days in its wheel shop by rearranging its work stations to

allow for a more orderly flow of parts and by transferring other functions

to the flight line.

Needed Air Force

Improvements Face Major

Barriers

The Air Force currently operates an inefficient and costly logistics system.

Although it is difficult to precisely determine actual logistics costs, for

fiscal year 1996, the Air Force estimates it will cost about $4.6 billion for

maintenance of equipment and aircraft at the depot level. Also, as of

September 1994, the Air Force had invested about $37 billion in aircraft

parts. Of this amount, $20 billion, or 56 percent, was needed to support

daily operations and war reserves, and the remaining $16 billion was

divided among safety stock, other reserves, and excess inventory.

Under the current process, the Air Force can spend several months or

even years to contract for an item and have it delivered or it may take

several months to repair the parts and then distribute them to the end

user. The complexity of the repair and distribution process creates as

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

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

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

part GAO examined had an estimated repair cycle time of 117 days; it took

British Airways only 12 days to repair a similar part.

Recognizing the need for radical improvements to its logistics system, the

Air Force has started a reengineering effort, called “Lean Logistics,” that

reflects many of the concepts GAO observed in the private sector, such as

testing a consolidated inventory concept, providing rapid transportation

services, and repairing individual component parts soon after they break.

All of these actions address ways of reducing pipeline time, cost, and

complexity. There are, however, several initiatives not currently included

in the Air Force plan that have worked successfully in the private sector

and, if applied where feasible, could aid in reducing cost and improving

service. Some of these initiatives include (1) the benefits of transferring

Page 5 GAO/NSIAD-96-5 Best Management Practices
Executive Summary

inventory management responsibilities to third parties, (2) the use of

supplier distribution centers that enable suppliers to respond to customer

needs within a few hours, (3) the application of repair process

improvements that reduce the time to conduct repairs, and (4) the upgrade

of facilities that magnify the success of reengineered processes.

There are certain barriers to successful reengineering that stand in the Air

Force’s way of accomplishing major process improvements in its logistics

system. For example, (1) the “corporate culture” within DOD and the Air

Force has been traditionally resistant to change and must become

receptive to radical new concepts of operations; (2) the traditional role of

DLA as a supplier of expendable parts and as a storage and distribution

service will be significantly altered and, until DLA decides what new

approaches to implement, the Air Force’s ability to improve repair

processes may be limited; and (3) improvements to outdated and

unreliable inventory data systems require management actions and

funding decisions that must be made outside the responsibility of both

Lean Logistics managers and the entire Air Force. Issues like these must

be resolved before the Air Force achieves a fully reengineered logistics

system that substantially reduces cost and improves service.

Recommendations To build on existing Air Force reengineering efforts and achieve major

logistics system improvements, GAO recommends that the Secretary of

Defense commit and engage top-level DOD managers to support and lead

Air Force reengineering efforts to ensure its success. In addition, GAO

recommends that the Secretary of Defense direct the Secretary of the Air

Force to incorporate additional leading-edge logistics concepts into the

existing Lean Logistics program, where feasible, and prepare a report to

the Secretary of Defense detailing its strategy to adopt these leading

practices.

GAO further recommends that the Secretary of Defense use the Air Force

report to set forth the actions and milestones to alleviate any barriers or

obstacles, provide the appropriate resources, and ensure the collaboration

between the Air Force and other DOD components that would enable the

Air Force to achieve an integrated approach to reengineering its

processes. Once these steps are taken, GAO recommends that the Secretary

of Defense direct the Secretary of the Air Force to institutionalize its

reengineering effort.

Page 6 GAO/NSIAD-96-5 Best Management Practices
Executive Summary

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

findings, conclusions, and recommendations, and stated that the Air

Force’s Lean Logistics program should receive top-level DOD support in

achieving its goals. DOD also stated that the Air Force should consider

incorporating additional leading-edge practices into its reengineering

effort. According to DOD, the Air Force will be asked to provide a report to

the Secretary of Defense by July 1996 that will discuss the feasibility of

including such additional practices in the Lean Logistics initiative and to

address other concerns raised in this report. By October 1996, the Office of

the Secretary of Defense will address how it plans to alleviate any barriers

and obstacles identified in the Air Force’s report. DOD indicated that the

Air Force plans to take steps to institutionalize its reengineering efforts by

December 1996.

Page 7 GAO/NSIAD-96-5 Best Management Practices
Contents

Executive Summary 2

Chapter 1 

Introduction

10

The Air Force’s Logistics System 10

Similarities Between Air Force and Commercial Airline Logistics

Operations

13

Objectives, Scope, and Methodology 13

Chapter 2 

Private Sector

Practices Increase

Efficiencies and

Reduce Costs

16

British Airways Illustrates the Benefits of Reengineering 16

Improvements Achieved by British Airways 22

Other Airlines’ Initiatives Also Illustrate Reengineering Benefits 23

Manufacturers, Suppliers, and Third Parties Can Help Streamline

Operations

25

Chapter 3 

Air Force

Reengineering Efforts

Can Be Expanded, but

Obstacles Must Be

Overcome

27

The Air Force Operates an Outdated Logistics System 27

The Air Force Recognizes the Need for Change 30

Significant Changes Envisioned Through Air Force Initiatives 31

The Air Force Can Test Additional Leading-Edge Practices 33

Obstacles May Prevent the Air Force From Making Necessary

Changes

34

Conclusions 37

Recommendations 37

Agency Comments 39

Appendixes Appendix I: Details on British Airways’ Reengineering Initiatives 40

Appendix II: Comments From the Department of Defense 50

Appendix III: Major Contributors to This Report 60

Related GAO Products 63

Tables Table 2.1: Key Characteristics of British Airways’ Reengineering

Efforts

18

Table 2.2: British Airways’ Key Performance Measures 23

Table 2.3: Summary of Other Airlines’ Initiatives 24

Table 2.4: Tri-Star Integrated Supplier Program Key

Characteristics

26

Table 3.1: Air Force Lean Logistics Projects—March 1995 32

Page 8 GAO/NSIAD-96-5 Best Management Practices
Contents

Figures Figure 1.1: Location of Air Force Reparable Parts 12

Figure 2.1: Comparison of Air Force’s and British Airways’

Pipeline Times for a Landing Gear Component

17

Figure 2.2: Boeing’s Local Distribution Center at Heathrow

Airport

20

Figure 2.3: A British Airways’ Repair Center Cell 21

Figure 2.4: British Airways Green Field Site for Avionics Repair 22

Figure 3.1: Air Force Repair Cycle 28

Figure 3.2: Allocation of Air Force Inventory as of

September 1994

30

Abbreviations

AFB Air Force Base

AFMC Air Force Materiel Command

ALC Air Logistics Center

DLA Defense Logistics Agency

DOD Department of Defense

FLS FedEx Logistics Service

GAO General Accounting Office

JLSC Joint Logistics Systems Center

TIME Total Inventory Management for Engineering

Page 9 GAO/NSIAD-96-5 Best Management Practices
Chapter 1 

Introduction

The private sector, driven by today’s globally competitive business

environment, is faced with the challenge of maintaining and improving

quality service at lower costs. As a result, many firms have radically

changed, or reengineered, their ways of doing business to meet customer

needs. Since the Department of Defense’s (DOD) environment is also

changing, it needs to do the same. With the end of the Cold War, DOD’s

logistics system must now support a smaller, highly mobile,

high-technology force. Also, due to the pressures of budgetary limits, DOD

must seek ways to make logistics processes as efficient as possible.

The Air Force’s

Logistics System

To provide reparable parts for its aircraft, the Air Force uses an extensive

logistics system that was based on management processes, procedures,

and concepts largely developed decades ago. As of September 1994, the

Air Force had invested $33 billion in reparable parts for its fleet of more

than 6,800 aircraft.1

 Reparable parts are items that can be fixed and used

again, such as hydraulic pumps, navigational computers, landing gear, and

wing sections. The Air Force’s logistics system, often referred to as a

logistics pipeline, consists of a number of activities, including the

purchase, storage, distribution, and repair of parts.

The Air Force’s reparable parts pipeline primarily exists to ensure that

aircraft stationed around the world at Air Force installations can get the

parts they need to keep them operational. It also exists to support aircraft

overhaul activities, when aircraft are periodically taken out of service for

structural repairs and parts replacements.

The Air Force Materiel Command (AFMC) is the organization that has

primary responsibility for carrying out pipeline operations. Its tasks

include determining how much inventory the Air Force needs to support

its fleet, purchasing parts when necessary, and operating the facilities

where major parts and aircraft repair are done. To carry out many of these

tasks, AFMC has five air logistics centers (ALC) that are located in different

regions throughout the United States.2

 Each center is responsible for

managing a portion of the reparable parts inventory, repairing certain

parts, and overhauling specific types of aircraft. For fiscal year 1996, the

Air Force estimates it will cost about $4.6 billion for maintenance of

equipment and aircraft at the depot level.

1

The Air Force has also invested an additional $3.7 billion in expendable parts.

2

In June 1995, the Defense Base Realignment and Closure Commission recommended that two of the

five ALCs—McClellan and Kelly Air Force Bases (AFB)—be closed.

Page 10 GAO/NSIAD-96-5 Best Management Practices
Chapter 1 

Introduction

Other organizations also play a role in pipeline operations, including Air

Force bases around the world, where Air Force aircraft are stationed.

Although base maintenance personnel handle minor repairs, they send

parts and aircraft to the ALCs for the heavier, more involved repairs. The

bases, in turn, order replacement parts through the ALCs, where the bulk of

Air Force inventory is stored.

Another of these organizations is the Defense Logistics Agency (DLA),

which handles the warehousing and distribution operations at each of the

five ALCs. In general, new and repaired parts are stored at each center in

DLA warehouses until they are needed. When an order is placed for a part,

DLA retrieves the part from warehouse shelves and ships it accordingly. DLA

also receives the broken items being shipped from the bases and stores

them until the ALC repair shops are ready to fix them.

Figure 1.1 shows how the Air Force’s inventory was distributed among Air

Force bases and the ALCs (including DLA warehouses) as of

September 1994. It also shows the amount of inventory in transit between

the various locations.

Page 11 GAO/NSIAD-96-5 Best Management Practices
Chapter 1 

Introduction

Figure 1.1: Location of Air Force

Reparable Parts

78.4% • ALCs

•17.8%

Bases

•

3.8%

In transit

DLA plays another important role in pipeline operations; it provides

expendable parts needed by the various Air Force repair activities.

Expendable parts—also known as consumables—include items such as

nuts, bolts, and rivets that are used extensively to fix reparable parts and

aircraft. If these items are not readily available, repair operations can stall

and lead to large quantities of unrepaired inventory. We have issued a

series of reports on private sector practices that could be applied to DOD’s

expendable inventories.3

 Each report recommended new techniques that

would minimize DLA’s role in storing and distributing expendable

inventory.

3

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

Savings (GAO/NSIAD-95-142, Aug. 4, 1995); Commercial Practices: DOD Could Reduce Electronics

Inventories by Using Private Sector Techniques (GAO/NSIAD-94-110, June 29, 1994); and Commercial

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

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

Page 12 GAO/NSIAD-96-5 Best Management Practices
Chapter 1 

Introduction

Similarities Between

Air Force and

Commercial Airline

Logistics Operations

Although not as large as the Air Force, commercial airlines’ operations

resemble the Air Force’s in several ways. First, airlines operate out of a

number of different airports, and they must provide the aircraft at these

locations with the parts they need. Second, airlines must periodically

overhaul their aircraft and ensure that repair activities get the necessary

parts. Third, the reparable parts pipeline that exists to fulfill these needs

involves the purchase, storage, distribution, and repair of parts.

In addition, for both the Air Force and commercial airlines, time plays a

crucial role in the reparable parts pipeline. The amount of time involved in

the various pipeline activities directly affects the responsiveness of

logistics operations. For example, the longer it takes to deliver parts to a

mechanic, the longer it will be before the aircraft can be repaired and

ready for takeoff. Time also has a significant impact on cost. For example,

the longer it takes to repair a part, the more inventory an organization

must carry to ensure coverage while that part is out of service. Condensing

pipeline times, therefore, simultaneously improves responsiveness and

drives down costs.

Complexity also plays an important role; it adds to costly overhead and

pipeline time. For example, if an organization holds multiple layers of

inventory at different locations, it must provide the space, equipment, and

personnel to accommodate this inventory at each location, all of which

contribute to overhead costs. Moreover, if a part must filter through each

of these levels before finally reaching the end user, such as a mechanic,

each stop along the way adds to pipeline time.

Objectives, Scope,

and Methodology

As part of our continuing effort to help improve DOD’s inventory

management practices, the Ranking Minority Member, Subcommittee on

Oversight of Government Management and the District of Columbia,

Senate Committee on Governmental Affairs, requested that we compare

the Air Force’s management of its $33 billion reparable parts inventory

with the operations of leading-edge private sector firms. This report

focuses on (1) best management practices used in the commercial airline

industry to streamline logistics operations and improve customer service,

(2) Air Force reengineering efforts to improve the responsiveness of its

logistics system and reduce costs, and (3) barriers that may stop the Air

Force from achieving the full benefits of its reengineering efforts.

To obtain DOD’s overall perspective on the Air Force’s logistics system and

the potential application of private sector practices to its operations, we

Page 13 GAO/NSIAD-96-5 Best Management Practices
Chapter 1 

Introduction

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

Logistics and Air Force Headquarters, Washington, D.C., and DLA

Headquarters, Alexandria, Virginia. We also discussed specific Air Force

logistics policies and operations and reviewed inventory records at AFMC,

Dayton, Ohio.

To examine Air Force repair facilities, other logistics operations, and the

new logistics practices being tested in the Air Force, we visited the

Sacramento ALC, McClellan AFB, California; San Antonio ALC, Kelly AFB,

Texas; Oklahoma City ALC, Tinker AFB, Oklahoma; and Dyess AFB, Texas. At

these locations, we discussed maintenance and repair activities and

processes, inventory management practices, “Lean Logistics” and

reengineering program initiatives, and the potential application of

additional private sector practices. We also contacted officials at the

Warner Robins and Ogden ALCs to discuss and document the new business

practices being tested and planned at those locations.

Except where noted, our analysis reflects inventory valued at the last

acquisition cost, as of September 1994. As highlighted in this report, the

accuracy of Air Force inventory information is questionable. We did not

test or otherwise validate the Air Force inventory data.

During this review, we selected and physically examined a sample of items

from the Air Force inventory that we believe highlighted the effect of the

current and past DOD inventory management practices. This judgmental

sample was drawn from E-3 and C-135 unique parts. Because we selected

these items based on high dollar value, high levels of inventory on hand,

and/or low demand rates, the results of our sample analysis cannot be

projected to the total Air Force inventory.

To identify best management practices being used by the private sector,

we reviewed over 200 articles from various management and distribution

publications, identified companies that were highlighted as developing

innovative management practices, and visited the following organizations

in the airline industry:

• American Airlines Maintenance Center, Tulsa, Oklahoma;

• British Airways Engineering, Heathrow Airport, United Kingdom;

• British Airways Avionics Engineering, Llantrissant, South Wales, United

Kingdom;

• British Airways Maintenance Cardiff, South Wales, United Kingdom;

• United Airlines, San Francisco, California;

Page 14 GAO/NSIAD-96-5 Best Management Practices
Chapter 1 

Introduction

• United Airlines Maintenance Center, Indianapolis, Indiana;

• Boeing Commercial Airplane Group, Seattle, Washington;

• Federal Express, Memphis, Tennessee; and

• Tri-Star Aerospace Corporation, Deerfield Beach, Florida.

At each company, we discussed and examined documentation related to

the company’s reengineering efforts associated with management,

employees, information technology, maintenance and repair processes,

and facilities. We also contacted Southwest Airlines to obtain information

on its maintenance and material management operations and visited the

Northrop-Grumman Corporation aircraft production facility in Stuart,

Florida, to examine its integrated supplier operations.

To obtain additional information on supplier partnerships and

implementation strategies, we participated in an International Quality and

Productivity Center symposium on supplier partnerships in Nashville,

Tennessee. Representatives from John Deere Waterloo Works; Bethlehem

Steel; Federal Express; BP Exploration (Alaska), Inc.; E.I. DuPont; Salem

Tools; Volvo GM-Heavy Trucks; Berry Bearing Company; The Torrington

Company; Procard, Inc.; Lone Star Gas Company; Coors Brewing

Company; Texas Instruments, Inc.; Allied Signal; Oryx Energy Company;

Timken; Sun Microsystem, Inc.; Dixie Industrial Supply; Darter, Inc.;

Mighty Mill Supply, Inc.; Alloy Sling Chain Industries; Columbia Pipe and

Supply Company; Strong Tool Company, Inc.; Id One, Inc.; and Magid

Glove and Safety Manufacturing Company, discussed their supplier

partnership concepts, implementation strategies, and results.

To gain a better understanding of how companies are applying integrated

approaches to their logistics operations, we attended an integrated supply

chain round table, hosted by Procter and Gamble. Attending this round

table were representatives from Chrysler Corporation, Digital Equipment

Corporation, E.I. Dupont Corporation, Levi Strauss, Massachusetts

Institute of Technology, Siemens Corporation, 3M Corporation, and Xerox

Corporation. To determine the ongoing problems of the current Air Force

logistics system, we reviewed related reports issued since 1990 by us, the

Air Force Audit Agency, and Air Force Logistics Management Agency.

We conducted our review from August 1993 to August 1995 in accordance

with generally accepted government auditing standards.

Page 15 GAO/NSIAD-96-5 Best Management Practices
Chapter 2 

Private Sector Practices Increase

Efficiencies and Reduce Costs

Commercial airlines have cut costs and improved customer service by

streamlining their logistics operations. The most successful improvements

include using highly accurate information systems to track and control

inventory, employing various methods to speed the flow of parts through

the pipeline, shifting certain inventory management tasks to suppliers, and

letting third parties handle parts repair and other functions.

British Airways

Illustrates the

Benefits of

Reengineering

One of the airlines we studied, British Airways, has substantially

reengineered its logistics operations over the last 14 years. These

improvements have helped transform British Airways from a financially

troubled, state-owned airline into a successful private sector enterprise.

British Airways today is considered among the most profitable airlines in

the world and has posted profits every year since 1983.

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

effort that requires a steady vision and a focus on continual improvement.

Although the airline has reaped significant gains from improvements to

date, it continues to reexamine operations and is making continuous

improvements to its logistics system.

British Airways has used an integrated approach to reengineer its logistics

system. It laid out a clear corporate strategy, determined how logistics

operations fit within that strategy, and tied organizationwide

improvements directly to those overarching goals. With this approach, the

various activities encompassed by the logistics pipeline were viewed as a

series of interrelated processes rather than isolated functional areas. For

example, when British Airways began changing the way parts were

purchased from suppliers, it considered how those changes would affect

mechanics in repair workshops.

British Airways takes a significantly shorter time than the Air Force to

move parts through the logistics pipeline. Figure 2.1 compares British

Airways’ condensed pipeline times with the Air Force’s current process by

showing how long it takes a landing gear component to move through

each organization’s system.

Page 16 GAO/NSIAD-96-5 Best Management Practices
Chapter 2 

Private Sector Practices Increase

Efficiencies and Reduce Costs

Figure 2.1: Comparison of Air Force’s and British Airways’ Pipeline Times for a Landing Gear Component

1 day 1 day 9 days combined 0 days Total =


12 days

Part readied for 


transport from base

In-transit Part received at


repair center and


sent to storage or


maintenance shops

Storage time Shop flow Awaiting 


parts/


queue time

Repaired part


turned into 


warehouse

2 days 10 days 0 days unknown 90 days unknown 15 days Total =


117 days + 


unknown


time 


British Airways

Air Force

1 day combined

British Airways officials described how an integrated approach could lead

to a continuous cycle of improvement. For example, culture changes,

improved data accuracy, and more efficient processes all lead to a

reduction in inventories and complexity of operations. These reductions,

in turn, improve an organization’s ability to maintain accurate data, and

they stimulate continued change in culture and processes, both of which

fuel further reductions in inventory and complexity.

Despite this integrated approach, British Airways’ transformation did not

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

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

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

gave managers and employees the flexibility to continually test new ideas

to meet those goals.

The five general areas in which British Airways has reengineered its

practices are corporate focus and culture, information technologies,

material management, repair processes, and facilities. These efforts are

summarized in table 2.1 and are discussed briefly after the table and in

more detail in appendix I.

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Table 2.1: Key Characteristics of

British Airways’ Reengineering Efforts

Corporate focus and culture

Top management champions of change with full authority to make changes

Integrated pipeline management

Performance measures aligned with corporate goals

Successful continuous improvement

Use of third parties to reduce complexity and cost of pipeline

Information technology

Accurate information on amount, location, condition, and usage of inventory

Real-time inventory data

Extensive use of data systems to track and manage flow of parts

Timely development of new systems

Material management

Supplier partnerships, reduced supplier base

Supplier-operated local distribution centers to delay purchase of inventory until needed

Fast, reliable deliveries

Reduction in layers of inventory

High fill rates

Reduction of just-in-case inventory

Repair process

Cellular process, fast turnaround times

Repair of individual parts as they break

Availability of parts when required for repairs

Facilities

Facilities reflect new business practices

Gree-field sites reflect most aggressive changes

Corporate Focus and

Culture

British Airways officials said changing the corporate mind-set was the

single most important aspect of change, as well as the most difficult.

Before reforms got underway in 1981, British Airways was an inefficient,

over-staffed government organization on the brink of bankruptcy. By 1987,

when privatization occurred, British Airways had substantially changed

the culture that gave rise to these problems. Converting this culture has

entailed

• appointing new top management from private industry to bring a better

business focus to the organization and serve as champions of change;

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• undertaking an initial round of drastic cost cuts, which included a

35-percent reduction in the workforce to eliminate redundant and

unnecessary positions;

• adopting a new corporate focus and strategy in which improving customer

service became the driving force behind all improvements;

• setting new performance measures that reflected customer service goals

and corporate financial targets;

• instituting ongoing training and education programs to familiarize

managers and employees with the new corporate philosophy;

• adopting total quality management principles to promote continual

improvement;

• replacing managers who were unwilling or unable to adapt to the new

focus; and

• negotiating agreements with employee unions to allow for a more flexible

workforce.

Information Technologies British Airways officials said the airline could not have successfully

reengineered its practices without having the right technological tools to

plan, control, and measure operations. As a result, the airline developed

three key systems, the most important of which was an inventory tracking

system that provides real-time, highly accurate visibility of parts and

processes. The three systems have enabled managers and workers to

know what parts are on hand, where they are, what condition they are in,

when they will be needed, and how well operations are meeting corporate

goals.

Material Management The airline did not delay initiatives to streamline specific processes until

changes in corporate culture and upgrades in data systems had been

made; it began reexamining its processes concurrently. Two of the areas

targeted were the way parts flow in from suppliers as well as how they are

stored and distributed internally. Initiatives to streamline these areas have

included

• shifting from in-house personnel to a third-party logistics company the

task of arranging, tracking, and ensuring delivery of parts from its

primarily North American suppliers and to third-party repair vendors;

• reducing the number of suppliers from 6,000 to 1,800 and working toward

more cooperative relationships with the remaining suppliers;

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• working with key expendable parts suppliers to establish more than 

30 local distribution centers near British Airways’ main repair depot, such

as the one shown in figure 2.2, to provide 24-hour delivery of such parts;

• establishing an integrated supplier program in which a key expendable

parts vendor has taken on responsibility for monitoring parts usage and

determining when to replenish inventory levels;

• consolidating internal stocking points into strategic locations to reduce

inventory layers and improve responsiveness to end users; and

• installing automated storage, retrieval, and delivery systems to help ensure

quick delivery of parts to end users.

Figure 2.2: Boeing’s Local Distribution

Center at Heathrow Airport

Repair Processes British Airways also targeted its component repair and aircraft overhaul

operations for change because it wanted to speed up the repair process. It

has converted a number of workshops to a “cellular” arrangement, which

involves bringing the resources needed to repair an item or range of items

into one location, or “cell” (see fig. 2.3). These resources include not only

the mechanics and the equipment directly involved in the repairs, but also

support personnel and inventory. In the past, all of these resources may

have been scattered among several different sites. The cellular approach

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has reduced repair times by simplifying the flow of parts through repair

workshops and ensuring that mechanics have the support they need to

complete work quickly.

Figure 2.3: A British Airways’ Repair

Center Cell

Facilities While reengineering its processes, British Airways decided to renovate

existing structures or build entirely new facilities to accommodate the new

practices. Converting to cellular operations, for example, required moving

widely scattered workshops under one roof and providing additional space

for inventory and support staff. The renovations occurred primarily at

British Airways’ main repair depot at London’s Heathrow Airport. Two

new facilities were constructed in South Wales to house avionics

component repair and Boeing 747 aircraft overhaul activities.

British Airways was able to implement the most aggressive changes

through the new facilities, called “green field sites” (see fig. 2.4). British

Airways, which undertook this new construction after determining that it

needed additional capacity, used the new facilities as an opportunity to

start with a clean slate. It was able to fully implement state-of-the-art

practices in workforce management philosophies, information systems,

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material management, and repair processes without being hindered by

preexisting conditions. For example, one of the most valuable aspects of

the green field sites has been British Airways’ ability to establish an

entirely new corporate culture. Most employees are new hires, and all had

to pass through a rigorous screening process to ensure that they possessed

the skills and personal characteristics conducive to the flexible,

team-oriented environment envisioned.

Figure 2.4: British Airways Green Field

Site for Avionics Repair

Source: British Airways.

Improvements

Achieved by British

Airways

British Airways’ initiatives have helped improve the responsiveness of

logistics operations and reduced associated costs. Table 2.2 shows key

performance measures that illustrate the result of British Airways’ efforts.

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Table 2.2: British Airways’ Key

Performance Measures

Inventory data accuracy (percent) 95

Supply availability (fill) rate (percent)a

Reparable parts 86

Expendable parts 97

Inventory levels (months on hand)b

Reparable parts 5.12

Expendable parts 8.06

aThis rate is a measure of how often the supply system immediately fills the requests of a

mechanic. It is calculated by dividing the total number of parts issued by the total number of

requests for that part.

bInventory levels are expressed in months on hand, which is the total inventory divided by the

amount requested per month (expendable parts) or amount repaired per month (reparable parts).

Other Airlines’

Initiatives Also

Illustrate

Reengineering

Benefits

Other airlines have pursued improvements similar to the steps taken by

British Airways and have likewise seen dramatic results. For example,

United Airlines adopted cellular repair in its engine blade overhaul

workshop. As a result, United Airlines has reduced repair time by 50 to

60 percent and decreased work-in-process inventory by 60 percent. 

Table 2.3 highlights examples of some of the approaches other companies

have used.

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Table 2.3: Summary of Other Airlines’ Initiatives

Area addressed Company Detail Results

Information

technologies

American Airlines Developed systems to determine how to

allocate inventory across American’s

different operating locations, identify

potential shortages that could arise, and

automatically redistribute inventory to cover

these shortages.

Achieved substantial savings by minimizing

inventory investment while maintaining

parts availability, reducing the number of

flight delays, and averting costly flight

cancellations.

Material management United Airlines Developing program in which Boeing

provides kits of expendable parts needed

for aircraft overhaul; mechanics would use

the parts they needed then return the kit to

Boeing, which would bill United only for the

parts used.

Expected to reduce amount of expendable

inventory carried at overhaul docks.

Component repair United Airlines In wheel shop, rearranged the work

stations to make for a more logical flow of

parts and transferred certain functions to

the flight line.

In constant speed drive shop, pinpointed

the bottleneck that was slowing repairs and

contracted that function to an outside

vendor; also, assigned mechanics to

handle specialized, rather than a range of

tasks, after determining that mechanic

expertise speeded up repairs.

Reduced shop repair times from 90 days to

3 days.

Reduced shop repair time from between 45

and 50 days to 17 days; saved $38 million,

which includes reductions in inventory,

over the 8 years this approach has been in

place.

Component and

aircraft overhaul

Southwest Airlines Contracts out almost all maintenance, thus

avoiding costly investments in facilities,

personnel, and inventory.

Recognized as one of the most consistently

profitable airlines in the United States and

has often served as a benchmark for other

carriers.

Facilities United Airlines Established green field site for aircraft

overhaul and is using the cellular workshop

approach in overhaul bays; 90 percent of

items removed from the aircraft, such as

seats and doors, remain in the bay for

repair.

Facility is in start-up phases; final results

are not available.

Southwest Airlines differs from other airlines; it contracts out almost all

component repair and aircraft overhaul. In selecting repair vendors,

Southwest emphasizes the quality of repairs because fewer breakdowns

enable it to carry less inventory and keep repair costs down. Southwest

also emphasizes the speed of repairs. It stipulates specific repair

turnaround times, and it applies penalties whenever these times are

exceeded.

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Manufacturers,

Suppliers, and Third

Parties Can Help

Streamline Operations

Manufacturers, suppliers, and third-party logistics providers are also

playing a role in streamlining operations and improving the effectiveness

of logistics activities. In many cases, these vendors enter partnership-type

arrangements with customers that involve longer term relationships and

more open sharing of information. The following are examples of vendors

that are helping companies better meet logistics needs.

Boeing Commercial

Airplane Group

Boeing, one of the world’s leading aircraft manufacturers, has adopted a

policy in which it promises next-day shipment for all standard part orders

unless the customer specifies otherwise. Through its main distribution

center in Seattle, Washington, and a network of smaller distribution

centers worldwide, Boeing is providing quick order-to-delivery times and

making it possible for customers to move from just-in-case toward

just-in-time stocking policies.

Tri-Star Aerospace Tri-Star, a distributor of aerospace hardware and fittings, offers an

integrated supplier program in which it works closely with customers to

manage expendable parts inventories. Its services, which can be tailored

to customer requirements, include placing a Tri-Star representative in

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

orders, manage receipts, and restock bins. Tri-Star also maintains data on

usage, determines what to order and when, and provides replenishment on

a just-in-time basis. The integrated supplier programs entail other services

as well, such as 24-hour order-to-delivery times, quality inspection, parts

kits, establishment of electronic data interchange links and inventory bar

coding, and vendor selection management.

Tri-Star operates integrated supplier programs with nine aerospace

companies, including British Airways, the first airline to enter such an

arrangement with Tri-Star, and United Airlines, a recent addition. Table 2.4

shows the types of services, reductions, and improvements achieved by

Tri-Star for some of its customers (designated as A through E) under the

integrated supplier program.

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Table 2.4: Tri-Star Integrated Supplier Program Key Characteristics (data as of February 1995) 

Company ABCDE

Date 10/16/93 1/17/92 1/7/94 7/29/92 7/9/93

Length of contract (years) 5 5 3 3 3

Number of line items 8,858 8,000 4,500 1,888 1,900

Numbers of stocking points/bins 29,505 3,404 13,153 not available 4,311

Number of customer facilities 45 7 3 1 1

Amount of inventory reduction $7,350,000 $2,000,000 $1,800,000 $300,000 $200,000

Percent reduction 84 50 60 30 29

Fill rate (percent) 98.0 88.7 96.7 99.0 94.3

Order ship time (hours) 24 48 48 24 24

Frequency of deliveries Daily Daily Daily Daily Daily

Number of orders filled daily 300 200 150 15 75

Source: Tri-Star Aerospace.

FedEx Logistics Services FedEx Logistics Services (FLS), a division of express delivery pioneer

Federal Express, enables companies to shed certain logistics functions

while boosting their capabilities to respond to operational or customer

needs. Among its services is PartsBank, in which FLS stores a company’s

spare parts at FLS warehouses; takes orders; and retrieves, packs, and

ships needed parts. Once a replacement part is received, the customer can

place the broken item in the package, and Federal Express will pick up the

item and deliver it to the source of repair within 48 hours. FLS provides

coverage 24 hours a day, 365 days a year. It also maintains the data

associated with these activities and can provide real-time visibility of

assets in the warehouse or in transit. In addition to PartsBank, FLS will

develop customized services, which involves examining a client’s

distribution practices and finding ways to eliminate wasteful steps.

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In recognition of increasing budgetary pressures, the changing global

threat, and the need for radical improvements to its logistics system, the

Air Force has begun a reengineering program aimed at redesigning its

logistics operations. This program, called Lean Logistics, is testing many of

the same leading-edge concepts found in private sector that have worked

successfully in reducing cost and improving service. The Air Force,

however, could expand and improve Lean Logistics, where feasible, by

including closer “partnerships” with suppliers and third-party logistics

services, testing the cellular concept in the repair process, and modifying

its facilities. Incorporating some of these practices will require the

collaboration of DLA and other DOD components. Also, to adopt these

concepts Air Force-wide, the Air Force must improve its information

system capabilities.

Certain issues must be resolved before the Air Force achieves a fully

reengineered logistics system that substantially reduces cost and improves

service. For example, (1) the basic DOD culture must become receptive to

radical new concepts of operations, (2) the traditional role of DLA as a

supplier of expendable parts and as a storage and distribution service will

be significantly altered, and (3) improvements to outdated and unreliable

inventory data systems require management actions and funding decisions

that must be made outside the responsibility of both Lean Logistics

managers and the entire Air Force.

The Air Force

Operates an Outdated

Logistics System

The current Air Force logistics system is slow and cumbersome. Under the

current process, the Air Force can spend several months or even years to

contract for an item or piece parts and have it delivered or it may take

several months to repair the parts and then distribute them to the end

user. The complexity of the repair and distribution process creates many

different stopping points and layers of inventory as parts move through the

system. Parts can accumulate at each step in the process, which increases

the total number of parts in the pipeline.

The Air Force has developed both a three-level and a two-level

maintenance concept to repair component parts. Under the three-level

concept (organizational, intermediate, and depot), a broken part must pass

through a number of base-level and depot-level steps in the pipeline (see

fig. 3.1). After a broken part is removed from the aircraft by a mechanic, it

is routed through the base repair process. If the part cannot be repaired at

the base, it is sent to an ALC and enters the depot repair system. After it is

repaired, the part is either sent back to the base or returned to the DLA

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warehouse, where it is stored as serviceable inventory. When DLA receives

a request for a part, it ships the part to the base, where it is stored until

needed for installation on an aircraft.

Figure 3.1: Air Force Repair Cycle

Depot

shipping and

receiving Depot

storage

Depot

maintenance

Depot

shipping and

receiving

. .

...

...

. .

...

...

Fixed

Part

Broken

Part

Base shipping

and receiving

Base

supply

Base

maintenance

Base supply Base shipping

and receiving

In transit

In transit

Depot

storage

Currently, the Air Force estimates that this repair cycle takes an average

of 63 days to complete. This estimate, however, is largely based on

engineering estimates that do not provide an accurate measure of repair

cycle time. The actual repair time may be significantly longer because the

Air Force does not include in its estimate the time a part sits in the repair

shop or in storage awaiting repair.

Under the two-level maintenance concept (organizational and depot),

items that were previously repaired at the intermediate base maintenance

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level will be repaired at the depot level, thus significantly reducing the

logistics pipeline, inventory levels, and maintenance personnel and

equipment at the base level.

Billions Have Been

Invested in Parts That

Might Be Unnecessary

In part because of the length of its pipeline, the Air Force has invested

$33 billion in reparable aircraft parts and $3.7 billion in expendable parts,

totaling $36.7 billion as of September 1994.1

 The Air Force estimates that

$20.4 billion of its total inventory is needed to support daily operations and

war reserves. The Air Force allocates the remaining 44 percent to other

types of reserves to ensure that it will not run out of parts if they are

needed. The reserve inventory, valued at $16.3 billion, consists of the

following categories:

• $1.7 billion for safety stocks, which are stocks purchased to ensure the Air

Force will not run out of routinely needed parts;

• $2.8 billion for numeric stockage objective items, which are parts that are

not routinely needed but are considered critical to keep an aircraft in

operational status, so they are purchased and stored just in case an item

fails; and

• $11.8 billion for items considered in “long supply,” which is a term

denoting that more stock is on hand than what is needed to meet current

demands, safety, and numeric stockage objective levels, but this stock is

not currently being considered for disposal.

Figure 3.2 details the Air Force’s allocation of its inventory to daily

operations, war reserves, and other categories of stock.

1

DOD’s Supply System Inventory Report lists the Air Force as having $27.5 billion in reparable parts

and $3.5 billion in consumable parts. The difference between these values and the inventory values

presented in this report is caused by DOD’s use of its standard valuation methodology. For example,

DOD reports excess inventory at salvage value (2 percent of last acquisition cost). Also, DOD reduces

the value of reparable parts requiring repair by the estimated cost of repair.

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Figure 3.2: Allocation of Air Force

Inventory as of September 1994

45.5% • Daily operations

•

10.2%

War reserves

•

4.6%

Safety stock

•

7.7%

Numeric stock objective

•32.0%

Long supply

The Air Force

Recognizes the Need

for Change

Air Force officials have said the Air Force can no longer continue its

current logistics practices if it is to effectively carry out its mission in

today’s environment. Budgetary constraints in recent years have led to

substantial reductions in personnel, leaving the remaining workforce to

deal with a logistics operation that has traditionally relied on large

numbers of personnel to make it work. At AFMC, the organization primarily

responsible for supporting the Air Force fleet, the workforce was reduced

by 18.5 percent between 1990 and 1994. Moreover, in June 1995, the

Defense Base Realignment and Closure Commission recommended that

two of AFMC’s five ALCs be closed. As these ALCs are eventually closed, AFMC

will have to find ways to accommodate their workload with the resources

that remain.

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In addition, the end of the Cold War has led to an evolution of the military

services’ roles and missions. DOD’s emphasis today is on sustaining a

military force that can respond quickly to regional conflicts, humanitarian

efforts, and other nontraditional missions. These changing roles and

missions, combined with ongoing fiscal constraints, has resulted in DOD’s

call for a smaller, highly mobile, high-technology force and a leaner, more

responsive logistics system.

To address logistics needs, in 1994 DOD issued a strategic plan for logistics

that sets forth a series of improvements. This plan, which reflects many of

the philosophies found in the private sector, outlines improvements in

three areas. First, it calls for reducing logistics response times—the time

necessary to move personnel, inventory, and other assets—to better meet

customer needs. Second, it calls for a more “seamless” logistics system.

The different activities comprising logistics operations are to be viewed

and managed as a series of interdependent activities rather than isolated

functional areas. Third, the plan seeks a streamlined infrastructure to help

reduce overhead costs associated with facilities, personnel, and inventory.

Significant Changes

Envisioned Through

Air Force Initiatives

The Air Force has described its initiatives to improve its logistics system

as the cornerstone of all future improvements. These efforts, spearheaded

by AFMC, are aimed at dramatically improving service to the end user while

simultaneously reducing pipeline time, excess inventory, and other

logistics costs. The initiatives, called Lean Logistics, are still in the early

stages and therefore still evolving. Nonetheless, AFMC began testing certain

practices through small-scale demonstration projects in October 1994,

with promising results to date. In addition, AFMC plans to begin testing

additional, broader-based process improvements in fiscal year 1996.

The demonstration projects underway as of March 1995 involved less than

1 percent of Air Force inventory items and tested the following primary

concepts: (1) consolidated serviceable inventories, in which minimum

levels of required inventory were stored in centralized distribution points

in ALCs; (2) rapid transportation of parts between bases and ALCs; (3) repair

of broken parts at ALCs as they arrive from bases or as centralized

inventory levels drop;2

 and (4) improved tracking of parts through the

repair process. Each ALC tested some combination of these concepts and

was identifying the information system improvements needed to adopt

these practices on a wider scale.

2

ALC repair shops traditionally “batch” items for repair based on schedules developed almost 1 year in

advance. This approach causes items to sit idle awaiting repair, sometimes for extended periods, until

enough items accumulate to make a batch.

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The tests scheduled to begin in fiscal year 1996 are aimed at broadening

these efforts. Teams involving personnel from AFMC headquarters and each

ALC have been redesigning five underlying business processes to overhaul

the way parts are bought, distributed, and repaired. The teams are now

determining how the redesigned processes must fit together so that

reforms can be carried out in an integrated manner. Table 3.1 shows the

business areas being addressed and briefly describes how each process

will be changed.

Table 3.1: Air Force Lean Logistics

Projects—March 1995 Business area Current process Future process

Requirements

determination

Purchase or repair of items

based on forecasts

produced by three different

requirement computation

systems and manual

intervention.

Automated process to buy

or repair items based on

actual demands created

when items are taken from

the consolidated

serviceable inventory.

Stock control and

distribution

Complex distribution

process characterized by

multiple layers of inventory,

lack of asset visibility, and

manual intervention.

Automated process to ship

items where and when

needed.

Workload management Complex process to match

requirements with internal

Air Force sources of repair

and available funding.

Streamlined process to

channel Air Force repair

requirements to any source

of repair (Air Force,

contractor, and other

services).

Production Lengthy aircraft overhaul

and component repair

processes.

Increased throughput,

reduced operating

expenses, and reduced

inventories.

Depot maintenance business

area operations

Management information

and measures focused on

output efficiency.

Management information

and measures focused on

repair cost.

Results The test projects currently underway have demonstrated that the Air

Force could sustain operations with significantly fewer parts. For

example, at the Sacramento ALC, where all four concepts are being tested,

62 percent ($52.3 million) of the items involved in the project were

identified as potential excess. Similarly, at the Warner Robins ALC, 

52 percent ($56.3 million) of the items in its test program were identified

as potential excess.

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The Air Force Can

Test Additional

Leading-Edge

Practices

AFMC has recently developed a preliminary plan for implementing its Lean

Logistics concepts commandwide. Although these concepts could

substantially improve operations, Air Force efforts to date are not as

extensive as they could be. A number of leading-edge practices that have

worked successfully in the private sector in reducing cost and improving

service are not currently incorporated into the Lean Logistics program.

These include the following:

• Use of third parties: The current Lean Logistics program does not include

the use of third-party logistics services to store and distribute reparable

parts between the bases and depot repair centers. As discussed in chapter

2, these services not only provide delivery of parts within 48 hours, they

also alleviate information technology shortfalls by independently tracking

parts through the storage and distribution process.

• Fast information system capability improvements: The Air Force expects

the information technology improvements needed to expand Lean

Logistics initiatives to come from two sources—commercial software for

interim solutions to its current needs and DOD-wide system improvements

being managed by the Joint Logistics Systems Center (JLSC) for long-term

solutions. These long-term solutions may not be available for 5 to 10 years.

In contrast, British Airways fully implemented information system

improvements within 3 years.

• Supplier partnerships and reduced supplier base: The Air Force has not

incorporated the concept of an integrated supplier into the Lean Logistics

program. As discussed in chapter 2, British Airways and some aircraft

manufacturers have significantly improved their logistics systems using

this concept. Improved availability of expendable parts is critical to

reducing the amount of time it takes to repair component parts.

• Supplier distribution centers: Similar to the integrated supplier program,

the supplier distribution center is a technique used by British Airways to

minimize the amount of time it takes to receive parts from a suppler.

Currently, the Lean Logistics program is not testing this concept.

• Cellular concept for repair processes: To minimize the amount of time it

takes to repair parts, British Airways adopted the cellular concept that

centralizes the functions and resources needed to repair a part (e.g.,

testing, cleaning, machining, tooling, and supplies) in one location. British

Airways also applied this concept to the aircraft overhaul facilities. The

Lean Logistics program has not planned to test this concept.

• Modernize existing or build new facilities to reflect new business

practices: To adopt the cellular concept and improve the storage and

distribution of parts, British Airways modernized existing facilities. To

maximize the impact of their entire reengineered process and corporate

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culture, British Airways built green field site facilities and staffed them

with employees selected for their technical competence as well as their

flexibility for new processes and team orientation. Although new

construction and modernization of logistics facilities is a very difficult

aspect of reengineering for the Air Force because of base closures and

funding limitations, this aspect of reengineering could be a consideration

when future logistics decisions are made for supporting new weapon

systems.

A number of these additional initiatives would require new relationships

between the Air Force and commercial suppliers, distributors, and other

third parties. To develop these relationships, the Air Force and DLA must

work together because, under the current system, DLA is the primary

supplier to the Air Force for expendable items and provides a storage and

distribution service for Air Force reparable parts.

Obstacles May

Prevent the Air Force

From Making

Necessary Changes

Several major obstacles stand in the way of the Air Force’s efforts to

institutionalize its reengineered logistics system. These obstacles include

the following:

• The “corporate culture” within DOD and the Air Force has been

traditionally resistant to change. Organizations often find changes in

operations threatening and are unwilling to change current behavior until

proposed ideas have been proven. This kind of resistance must be

overcome if the Air Force is to expand its radical new concepts of

operations.

• One of the largest obstacles to speeding up repair times is the lack of

expendable parts needed to complete repairs. With a new approach to

better serve its military customers, the role of DLA as the traditional

supplier of consumable items and as a storage and distribution service is

changing. However, at this point, DLA is still considering alternative

approaches to manage expendable parts and is discussing these new

concepts with contractors and the services. Until these new approaches

are implemented, the Air Force’s ability to improve the repair process may

be limited.

• Some of the biggest gains available to the Air Force, such as improvements

to outdated and unreliable inventory data systems, require management

actions and funding decisions that must be made outside the responsibility

of both Lean Logistics managers and the entire Air Force. In addition,

some of these systems will not be fully deployed throughout the Air Force

for 5 to 10 years.

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Changes in corporate culture must accompany efforts to transform

operations if progress is to continue within the Air Force reengineering

program. According to a Lean Logistics official, the current mindset may

hinder Lean Logistics for several reasons. First, people find radical

changes in operations threatening and, as is common in many

organizations, resist efforts to change. Second, Lean Logistics is still a

relatively new concept, and personnel lack a thorough understanding of

what it is and how it will improve operations. As a result, they are

unwilling to change current behaviors until Lean Logistics concepts are

proven. Third, Lean Logistics does not yet have support from all of the

necessary functional groups within AFMC, the Air Force, and DOD. This

support will be needed if the full range of changes is to be carried out.

In June 1994, we convened a symposium on reengineering that brought

together executives from five Fortune 500 companies that have been

successful in reengineering activities.3

 The following principles for

effective reengineering, reflecting panel members’ views, emerged from

the symposium:

• Top management must be supportive of and engaged in reengineering

efforts to remove barriers and drive success.

• An organization’s culture must be receptive to reengineering goals and

principles.

• Major improvements and savings are realized by focusing on the business

from a process rather than functional perspective.

• Processes should be selected for reengineering based on a clear notion of

customer needs, anticipated benefits, and potential for success.

• Process owners should manage reengineering projects with teams that are

cross-functional, maintain a proper scope, focus on customer metrics, and

enforce implementation timelines.

Panel members at the symposium expressed the view that committed and

engaged top managers must support and lead reengineering efforts to

ensure success because top management has the authority to encourage

employees to accept reengineered roles. Also, top management has the

responsibility to set the corporate agenda and define the organization’s

culture and the ability to remove barriers that block changes to the

corporate mindset. For example, the Vice President of Reengineering at

Aetna Life and Casualty Insurance Company said, “Top management must

drive reengineering into the organization. Middle management won’t do it.”

3

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

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Air Force Reengineering Efforts Can Be

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The panelists agreed that a lack of top management commitment and

engagement is the cause of most reengineering failures.

According to the Corporate Headquarters Program Manager of Process

Management at IBM, “To be successful, reengineering [needs to be]

embedded in the fiber of our people until it becomes a way of life.” To

develop a corporate culture that is receptive to reengineering, the

panelists emphasized the importance of communicating reengineering

goals consistently on all levels of the organization, training in skills such as

negotiation and conflict resolution, and tailoring incentives and rewards to

encourage and reinforce desired behaviors.

One of the largest obstacles to speeding up repair times is the lack of

expendable parts needed to complete repairs. Supplier-operated local

distribution centers could help ensure quick availability of such parts.

Similarly, integrated supplier programs, in which certain inventory

management responsibilities are shifted to the supplier, are also aimed at

improving expendable item support. We have strongly urged DLA to

endorse the use of aggressive just-in-time concepts whose principal

objectives are to transfer inventory management responsibilities to key

distributors.

Existing information systems are also an obstacle because they do not

always provide the accurate, real-time information needed to expand

current efforts beyond their limited scope. According to AFMC’s deputy

chief of staff for logistics, AFMC is working with systems that have not been

significantly improved in 15 years. As a result, much of the data used to

run the Lean Logistics demonstration projects have been collected

manually, a task that project leaders said would be impossible under an

Air Force-wide program.

Improvements to material management and depot maintenance

information systems—key to success of the Lean Logistics initiatives—are

under the control of JLSC. JLSC is staffed with personnel from the military

services and DLA, and is trying to standardize data systems across DOD.

These systems, however, will not be fully deployed throughout the Air

Force for 5 to 10 years. Currently, AFMC officials are working with JLSC

officials to define Air Force requirements. They are also working to

develop short-term solutions to enable the Lean Logistics program to

move forward using commercial software. According to one Lean

Logistics official, however, AFMC may have trouble pursuing and later

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adopting many of these short-term solutions because funding for systems

outside of JLSC’s umbrella is severely limited.

Conclusions The current Air Force logistics system is inefficient and costly compared

with leading-edge business practices. AFMC has recognized the need for

radical change and is beginning to pursue some of these practices.

Because some of the results to date have been promising, these efforts

should be supported and expanded. The Air Force, however, could build

on its reengineering effort by including additional practices pursued and

successfully adopted by the private sector.

In addition, current and future AFMC initiatives will be seriously hindered

unless top-level DOD commitment and engagement is received, and all

affected Air Force organizations and other DOD components—specifically

DLA and JLSC—fully support AFMC’s efforts. DLA’s support will be critical for

developing local distribution centers and integrated supplier programs to

meet the Air Force requirements for expendable parts. JLSC officials may

have to find ways that will allow the Air Force the flexibility to use

existing commercial software to resolve existing information technology

weaknesses and expand its reengineering initiatives.

Without these logistics system improvements, the Air Force will continue

to operate a logistics system that results in billions of dollars of wasted

resources. Given the budget reductions it has already absorbed, the Air

Force might not be able to provide effective logistics support to future DOD

operations.

Recommendations To build on the existing Air Force reengineering efforts and achieve major

logistics system improvements, we recommend that the Secretary of

Defense commit and engage top-level DOD managers to support and lead

Air Force reengineering efforts to ensure its success. We also recommend

that the Secretary of Defense direct the Secretary of the Air Force to

incorporate additional leading-edge logistics concepts into the existing

Lean Logistics program, where feasible. Specific concepts that have been

proven to be successful and should be considered, but have not been

incorporated in the current Air Force program include

• installing information systems that are commercially available to track

inventory amounts, location, condition, and requirements;

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• counting existing inventory once new systems are in place to ensure

accuracy of the data;

• establishing closer relationships with suppliers;

• encouraging suppliers to establish local distribution centers near major

repair depots for quick shipment of parts;

• using integrated supplier programs to shift to suppliers the responsibility

for managing certain types of inventory;

• using third-party logistics services to manage the storage and distribution

of reparable parts and minimize DOD information technology requirements;

• reorganizing workshops, using the cellular concept where appropriate, to

reduce the time it takes to repair parts; and

• integrating successful reengineered processes and flexible, team-oriented

employees in new facilities (like the green field sites) to maximize

productivity improvements, as new facilities are warranted to meet

changes in the types and quantities of aircraft.

In addition, we recommend that the Secretary of the Air Force (1) prepare

a report to the Secretary of Defense that defines its strategy to adopt these

leading practices and expand the reengineering program Air Force-wide

and (2) establish milestones for the report’s preparation and issuance and

identify at a minimum

• the barriers or obstacles that would hinder the Air Force from adopting

these concepts;

• the investments (people, skills, and funding) required to begin testing

these new concepts and the projected total costs to implement them Air

Force-wide;

• the potential savings that could be realized; and

• the Air Force and other DOD components whose support will be needed to

fully test these new concepts.

We further recommend that the Secretary of Defense use the Air Force’s

report to set forth the actions and milestones to alleviate any barriers or

obstacles (such as overcoming resistance to organizational change and

improving outdated inventory information systems), provide the

appropriate resources, and ensure the collaboration between the Air Force

and other DOD components that would enable the Air Force to achieve an

integrated approach to reengineering its processes. Once these steps are

taken, we recommend that the Secretary of Defense direct the Secretary of

the Air Force to institutionalize a reengineering effort that is consistent

with successful private sector reengineering efforts. These efforts include

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Expanded, but Obstacles Must Be Overcome

• communicating reengineering goals and explaining them to all levels of the

organization,

• training in skills to enable employees to work across functions and

modifying this training as necessary to support the reengineering process,

and

• tailoring rewards and incentives to encourage and reinforce desired

behaviors.

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

findings, conclusions, and recommendations, and stated that the Air

Force’s Lean Logistics program should receive top-level DOD support in

achieving its goals. DOD also stated that the Air Force should consider

incorporating additional leading-edge practices into its reengineering

effort. According to DOD, the Air Force will be asked to provide a report to

the Secretary of Defense by July 1996 that will discuss the feasibility of

including such additional practices in the Lean Logistics initiative and to

address other concerns raised in this report. By October 1996, the Office of

the Secretary of Defense will address how it plans to alleviate any barriers

and obstacles identified in the Air Force’s report. DOD indicated that the

Air Force plans to take steps to institutionalize its reengineering efforts by

December 1996.

Page 39 GAO/NSIAD-96-5 Best Management Practices
Appendix I 

Details on British Airways’ Reengineering

Initiatives

This appendix details how British Airways reengineered its logistics

practices in five general categories—corporate focus and culture,

information technology, material management, repair processes, and

facilities—to reduce the time and complexity associated with operations.

Corporate Focus and

Culture

British Airways could not have made such significant changes in

operations without transforming the corporate mind-set, airline officials

said. British Airways’ corporate focus emphasizes serving customer needs

while continually finding ways to keep costs down. The customer is

defined not only as the passenger on the aircraft but also as the person on

the receiving end of any activity. This focus has been the driving force

behind all operational improvements, and bringing managers and

employees around to this way of thinking has involved a number of

different efforts over time.

The changes began with new top management. In 1981, the British

government appointed a new chairman, who in turn brought in other

executives, after deciding to convert the state-owned airline into a private

sector enterprise.1

 These executives were recruited from private industry

to bring a better business focus to the organization, and their mission was

to make the airline fit for privatization. Accomplishing this mission

entailed first saving British Airways from bankruptcy and then setting the

airline on a course to ensure long-term success.

The organization that the new management inherited suffered from several

problems. An industrywide recession had pushed the airline to the brink of

bankruptcy after years of increasing debt and meager profits. Moreover,

according to one top official, British Airways was grossly overstaffed,

managers’ time was spent addressing one crisis after another, and

employee morale had collapsed. Forty different industrial disputes were

going on at one time. As a result, “horror stories” about customer service

abounded, said the chief executive officer in a 1987 speech. The official

said a high proportion of British Airways’ customers chose the airline

because they had to, not because they wanted to.

Changing the culture that allowed these problems to arise was one of the

most important but difficult aspects of British Airways’ turnaround, said

one manager. To begin the transformation, the new management took two

key steps. First, it launched a series of cost-cutting measures aimed at

1

Privatization occurred in 1987, when the British government sold British Airways shares in a public

offering.

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averting bankruptcy. These measures included reducing the workforce

from 55,000 to 36,000 between 1981 and 1983 to eliminate redundant

positions and other positions that added no value to the operation.

Second, it set forth a long-term strategy for success. This strategy placed

top priority on serving the customer better, and it emphasized the

importance of continually finding ways to reduce costs.

To carry out this strategy, management took a number of steps to reorient

the workforce to the new corporate philosophy. One of the first steps was

to institute ongoing training and education programs. The first course,

entitled “Putting People First,” was offered in 1983 and introduced the

workforce to the customer service concepts British Airways wanted to

promote. Subsequent courses have included training in total quality

management principles, trends in the airline industry, and the ways

different areas within British Airways contribute to the overall operation.

In addition, British Airways targeted managers for intensive training. Over

time, managers have been schooled in measuring customer service

performance, implementing new production methods, and benchmarking

against other companies, among other things. In addition, British Airways

Engineering, the division responsible for logistics operations, has helped

its top managers attain master’s degrees in business.

Another key step in the reorientation of the workforce was the

development of new performance measures. Early on, management began

setting stringent financial and customer service targets, a departure from

past practices in which the few measures that did exist carried little

meaning for employees. In addition, management changed the type of

measures used to better reflect corporate goals. For example,

maintenance shops previously focused on their own isolated goals, such as

the number of hours worked or the number of parts produced each week.

Under current measures, the shops are assessed on how well repair

operations are supporting the British Airways fleet, such as through

reduced repair turnaround time. British Airways also bolstered these

measures by adopting “rallying cries” for improvements. For example, the

expression “Times Two” called for halving costs or doubling productivity

in a number of important areas, and it became the standard under which

all improvements were to be measured.

Finally, British Airways sought to create an environment that promoted

change. Toward that end, it instituted total quality management principles

to enable employees at all levels to identify and carry out improvements. It

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also negotiated agreements with employee unions to allow managers to

assign workers to different jobs whenever necessary. It has also tried to

alleviate employee fears that efficiencies gained through improvements

would lead to job losses. In the late 1980s, British Airways made the

strategic decision to aggressively market its repair services to other

airlines. As a result, additional capacity resulting from improvements

could be used for this additional work.

Despite the long-term success of these efforts, one manager said the

process of change has sometimes been painful. For example, managers

who were unwilling or unable to adapt to the new philosophy were let go.

Even British Airways’ chief executive officer, who had been brought in as

part of the new management team, replaced two-thirds of his staff because

they hindered reforms.

Information

Technologies

British Airways’ success in reengineering logistics practices has hinged on

giving managers adequate technological tools to plan, control, and

measure operations. British Airways has developed a number of systems

to aid improvements, but three key systems have been credited with being

the most valuable. The first is an inventory tracking and control system

that provides accurate, real-time data on the amount of inventory on hand

and its location, condition, and usage. The second is a material

requirements planning system that determines what parts British Airways

will need to support operations. The third is a decision support system

that quickly gives managers the data needed to assess performance.

The most crucial of the three systems has been the inventory tracking and

control system, called Total Inventory Management for Engineering (TIME).

One manager said that British Airways developed TIME because it believed

that without accurate inventory data, any improvements would be “built

on sand.” TIME maintains data accuracy of more than 95 percent and

enables British Airways to track inventory and associated processes.

Bar-coded tags are attached to each item or package of items, and

employees use laser scanners to update TIME on the items’ status each time

the items change hands. Employees also scan in their bar-coded

identification cards to establish clear ownership of the items. Moreover,

TIME works with other systems to direct the flow of parts. For example,

when a part is scanned in, TIME shows whether the part is to go to storage,

a particular repair shop, or a customer. It also enables British Airways to

place orders electronically with suppliers.

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British Airways began developing TIME in 1984 after internal audits showed

that data accuracy in some areas was as low as 55 percent. British Airways

used a systematic approach to determine what data was needed to manage

operations, and then it designed in capabilities, such as the bar-coding

features, to ensure the system maintained its accuracy. Moreover, when

bringing the system on line in 1987, British Airways counted all inventory

to establish an accurate baseline. This exercise resulted in savings

substantial enough to pay for the system’s implementation because it

revealed items that previously had not been recorded in inventory.

According to one manager, the switch to TIME was so dramatic, but so

important, that British Airways was willing to risk a disruption in service

or even a total grounding of aircraft to bring the system on line.

Soon after TIME was on line, British Airways developed the material

requirements planning system to gain even greater control over inventory.

This system taps into TIME and other systems to forecast what reparable

parts will be needed to support operations. On the basis of those forecasts,

it determines which items need to be repaired when, how many reparable

and expendable components are needed to accomplish those repairs, and

whether purchases are necessary. This capability has helped British

Airways avoid critical shortages, identify excess inventory, avoid

unnecessary expense, and ensure that parts do not stall in workshops for

lack of the components needed to complete repairs.

British Airways used a flexible, pilot program approach to bring the

material requirements planning system on line. After selecting

commercially available software, British Airways installed the software in

one shop and then went through several iterations of identifying and

removing bugs from the system and updating employees on the upgrades.

Through this approach, British Airways was able to have the software

ready for widespread application within 1 year despite substantial

modification. Implementation was nearly complete 1 year later. According

to British Airways, typical implementation times for material requirements

planning systems in the industry is 4 years. Therefore, using the pilot

program approach shortened the implementation time by 2 years.

The third system, called FOCUS, is a decision support system that can

extract data from numerous systems and provide customized reports for

managers. It has enabled British Airways to base decisions on actual data

rather than estimates by providing almost instant access to information

such as inventory levels, fill rates, and inventory turnover. Because of the

system’s speed and flexibility, managers can assess numerous aspects of

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operations. For example, FOCUS can provide information on an individual

part; a functional group, such as avionics; or overall inventory. FOCUS

was developed from commercially available software in 1983. Although

FOCUS was developed before TIME and the material requirements planning

system, its use grew significantly as the quality of data improved.

Material Management With culture change and information system improvements underway,

British Airways began targeting specific processes in the reparable parts

pipeline. Among these processes were the methods used to order, store,

and distribute inventory. The goal has been to improve the availability of

parts without substantially increasing inventory and other costs. To

accomplish this goal, British Airways has concentrated on relationships

with outside vendors as well as on the way inventory is handled internally.

British Airways has changed the way parts are transported to and from

suppliers and third-party repair vendors, who are primarily in North

America. It contracts with a freight forwarder to gather the items to be

shipped, arrange transportation, track the items while they are in transit,

ensure that the items get through customs, and deliver the items to British

Airways’ or the vendors’ receiving areas.

This setup has enabled British Airways to improve the reliability of

deliveries. It receives most items within 5 days, including customs delays,

and is able to deliver most items to third-party repair vendors within 

3 days. In the past, deliveries ranged anywhere from 3 days to 3 weeks. In

addition, British Airways has reduced its administrative burden and

associated costs. The freight forwarder has also helped British Airways

identify where items are stalling and the cost of those delays.

British Airways has also changed the nature of its relationships with

suppliers. First, it has decreased the number of suppliers from 6,000 to

1,800, with further reductions planned as part of an overall move toward

more cooperative relationships with fewer suppliers. Second, it has

worked with key expendable parts suppliers to establish local distribution

centers. These centers, located near British Airways’ main repair depot,

receive orders electronically and then deliver items within 24 hours.

Twenty-five suppliers have opened these centers, and seven more are

planned.

The local distribution centers have contributed to reductions in reparable

parts repair times because they help ensure the availability of the

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Initiatives

expendable items needed to complete repairs. The centers’ quick response

times have also enabled British Airways to carry less expendable

inventory. British Airways hopes to eventually purchase 80 percent of all

of its parts, which includes reparable items, through the centers.

Currently, about 20 percent of purchases are through the centers.

British Airways is also moving toward giving suppliers a more active role

in managing its inventory of expendable parts. In a pilot program, one

local distribution center supplier, Tri-Star Aerospace, is responsible for

monitoring parts usage and determining how much inventory is needed to

maintain a 60-day supply in inventory bins. Tri-Star also inspects the items

to ensure that they meet quality standards and maintains data so that any

item can be traced back to individual manufacturing lots.

Moreover, before the items are shipped from the center, Tri-Star records

on British Airways’ inventory system that the items have been received,

which enables Tri-Star items to circumvent British Airways receiving

docks and go directly to storage areas. Under this program, British

Airways can receive up to eight deliveries a day, with British Airways staff

handling transport from the center to storage areas.

British Airways has also used several methods to streamline the way

inventory is handled internally. It has consolidated inventory storage

locations into four main stores at its major repair facilities, and these

stores are supplemented by a pattern of substores throughout repair

workshops. This setup replaces the 60 to 70 storage locations previously

used. Although British Airways considered consolidating inventories

further, it determined that it needed a certain number of substores to

provide adequate support to repair operations.

In addition, British Airways has installed automated storage and retrieval

systems and uses pneumatic tubes, similar to those found at bank drive-in

windows, to deliver parts within minutes to mechanics. When possible, it

also provides mechanics with preestablished kits of parts needed to

accomplish specific repairs. When repairs are complete, the kit is returned

to the stores and replenished.

Repair Processes British Airways targeted its repair processes for improvement because it

wanted to speed up repair time. It has converted to cellular workshops,

which involves bringing the resources needed to repair an item or a range

of items into one location, or one “cell.” These resources include not only

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the mechanics and the equipment directly involved in the repairs, but also

support personnel and inventory. This approach, which British Airways

has applied to component and aircraft overhaul operations, has helped

eliminate obstacles that slow repairs or stop them altogether. British

Airways adopted the cellular concept after determining that items could

be repaired as much as 10 times faster if these obstacles were removed.

The cellular approach simplifies the repair process in a number of ways.

First, it eliminates the need to route items to several different locations to

complete repairs, thereby eliminating travel time and the time required to

pack and unpack items whenever they change locations. In the past,

functions such as testing, inspection, painting, and machining could each

have been handled at different sites. Second, the approach places the

inventory needed to complete repairs near the workshops so that

mechanics can get quick access to parts. In fact, British Airways began

converting to consolidated inventory points and pattern of substores with

the cellular approach in mind. Moreover, broken parts awaiting repair are

also stored near workshops so that employees can easily track any

backlog and have parts readily at hand when it comes time for repair.

Third, each cell has its own planners, schedulers, and other support staff

to ensure that operations run smoothly.

The process of redesigning repair operations gave both managers and

employees the opportunity to rethink British Airways’ approaches to

repair. When searching for new approaches, managers benchmarked

British Airways’ operations against those of other companies to see what

has worked well in other industries, and used links with education

resources such as Warwick University. After settling on the cellular

concept, managers sought employees’ suggestions on how to design the

new workshops. Moreover, close examination of existing operations led

British Airways to determine that outside vendors could handle certain

tasks more economically. For example, British Airways sold its engine

repair facility to General Electric, and the airline now contracts with

General Electric for engine repair. British Airways was also able to make

informed decisions on processes that did not lend themselves to cells. For

example, some high capital cost activities, such as metal plating, remain

centralized.

The cellular approach has helped reduce repair time and provided other

benefits. British Airways has found that repair cells can now handle the

same or increased volume with fewer staff. It has also facilitated the use of

performance measures. For example, because repairs are concentrated in

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Initiatives

one area rather than spread out among several, British Airways can more

accurately assess the time and resources needed for repair. It can also

better assess how managers and mechanics are performing and reward top

performers accordingly.

Facilities British Airways has renovated existing structures or built entirely new

facilities to accommodate many of the reengineered practices. These

improvements have enabled British Airways to carry out the new storage

and distribution practices, cellular operations, and various management

philosophies. The new facilities have allowed for the most aggressive

changes in these areas because they gave British Airways the freedom to

start with a clean slate.

British Airways has focused renovation efforts on its primary maintenance

and storage base at London’s Heathrow Airport. Existing structures were

refurbished to provide space for the consolidated inventories, cellular

workshops, storage points for broken parts, and support staff work areas.

They were also equipped with automated storage and retrieval systems

and the pneumatic tube inventory delivery system. Previously, many of the

inventory storage points, repair workshops, and staff offices were

scattered among several locations. Inventory storage, retrieval, and

delivery had also been largely manual.

British Airways constructed the new facilities away from existing

operations. These green field sites, located 2 hours away in Wales, consist

of separate avionics component overhaul and Boeing 747 aircraft overhaul

facilities. The new facilities were built specifically to allow British Airways

to incorporate state-of-the-art practices without being hindered by

preexisting conditions. The airline undertook these projects after

determining that it needed the additional capacity to accommodate

continued fleet expansion and anticipated growth in its repair work for

other airlines.

British Airways has set forth one overriding objective for each facility. For

avionics, the goal is to achieve a 3-day repair turnaround time, measured

from the time a broken item enters the facility until the time it leaves fully

repaired. For the 747 facility, the goal is to repair the greatest number of

aircraft possible, which also requires quick turnaround time. Moreover,

each facility is a stand-alone business that must compete with outside

repair vendors for British Airways work. All costs incurred by the facilities

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are directly attributable to their operations, and their long-term survival

depends on their ability to generate profits.

With these issues in mind, British Airways scrutinized every potential

activity to be housed at the facilities and eliminated those that did not

contribute each facility’s primary objective. For example, both facilities

have kept layers of inventory to a minimum. The avionics facility holds no

bench stock,2

 and it eliminated selected work benches and other

workshop furniture so that mechanics would have no place to stockpile

inventory. All inventory must be requested through the facility’s central

automated storage, retrieval, and delivery system. The 747 facility also

requires mechanics to request inventory through its central storage area,

although it allows for a minimal amount of bench stock.

In addition, British Airways recruited a mostly new workforce to staff the

facilities. This approach has provided for perhaps the most dramatic

difference from existing operations because it enabled British Airways to

build each facility’s culture from the ground up. For example, each facility

has only one labor union compared with several at existing operations,

which has made for a more flexible workforce. Employees can be easily

reassigned to other jobs as workload demand dictates. Moreover, to help

create a labor-management partnership, each facility has established a

council comprised of management and staff to oversee operations and

address workplace issues. In addition, the facilities have stressed the

importance of teamwork. At each facility, all employees, including

managers, wear white coveralls, use the same entrance, and eat at the

same cafeteria. The number of managers has also been kept to a minimum.

The 747 facility, for example, has 18 managers out of a total workforce of

500.

When recruiting the new workforce, British Airways put applicants

through a rigorous screening process. British Airways first developed a set

of criteria defining the technical skills and personal characteristics

required for the flexible, team-oriented environment envisioned.

Applicants then passed through a series of steps, including a 2-hour test

and interview, before finally being selected.

The results of these efforts show that these new approaches have had an

effect on British Airways’ operations. At the avionics facility, more than

23 percent of the items met the 3-day standard within the first 9 months of

2

Bench stock typically consists of frequently used expendable items, and it is generally kept near work

areas to allow for quick access by mechanics.

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Initiatives

operations, and more are expected to do so as the facility matures. Shops

began being moved from existing operations at Heathrow in December

1993, with the last shop transferred in October 1994. In addition, the

avionics facility has been able to handle a greater volume of repairs than

Heathrow with fewer staff. At the 747 facility, aircraft turnaround time as

of November 1994 was 20 percent faster than similar operations at

Heathrow. Planners originally thought the facility, which opened in

June 1993, would take 2 years to overtake Heathrow’s turnaround times.

Page 49 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 50 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

Page 51 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

Now on pp. 5 and 27-30.

See comment 1.

Now on pp. 2 and 30-31.

Page 52 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

Now on pp. 31-32.

Now on pp. 5-6 and

33-34.

See comment 2.

Page 53 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

Now on pp. 6 and 34-37.

See comment 3.

Page 54 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

Now on pp. 6 and 37.

Now on pp. 6 and 37.

Page 55 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

Now on pp. 6 and 38.

Now on pp. 6 and 38.

Page 56 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

Now on pp. 6 and 38-39.

Page 57 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

The following are GAO’s comments on the Department of Defense’s (DOD)

letter dated January 2, 1996.

GAO Comments 1. DOD noted that the Supply System Inventory Report as of September 30,

1994, lists the Air Force as having $27.5 billion in reparable parts and

$3.5 billion in consumable parts. DOD also notes that $23.5 billion 

(76 percent) of this inventory is active inventory and $7.5 billion 

(24 percent) is inactive. In contrast, we reported inventory values of

$33 billion for reparable parts, $3.7 billion for consumable items, and

provide a more detailed breakout of this inventory, illustrating that

66 percent is allocated by the Air Force for daily operations and war

reserves, with the remaining 44 percent allocated to other categories.

We now explain in this report that our inventory values differ because DOD

reduces the value of excess inventory to 2 percent of its acquisition cost

and reparable inventory is reduced by the cost to repair an item. The

values we use are calculated by the Air Force to reflect the full value of the

inventory computed at the last acquisition cost for each item. The

allocation of inventory to “active” and “inactive” stock differs because DOD

considers safety and numeric stock objective items as active inventory,

while we have reported it as reserves designed to ensure the Air Force will

not run out of parts if they are needed.

2. DOD noted that the initiatives cited in this report are being considered to

aid in the reduction of pipeline and lead times, such as privatization

efforts, direct vendor delivery programs, prime vendors, flexible

manufacturing, and aggressive use of commercial transportation. We agree

that DOD is taking steps to reduce pipeline and lead times and have

highlighted the most promising initiatives being pursued by the Air Force

as of March 1995. We also recognize that DOD is constantly evaluating new

initiatives.

We believe, however, that DOD can be more aggressive in using these new

techniques and apply them over a wider range of items that it manages.

For example, direct vendor delivery programs still involve DOD in the

management of inventory. Some of the more aggressive techniques

highlighted in this report, such as the integrated supplier concept, have the

potential to minimize DOD’s inventory management responsibilities for

these items, while simultaneously reducing repair cycle times and

inventory levels.

Page 58 GAO/NSIAD-96-5 Best Management Practices
Appendix II 

Comments From the Department of Defense

3. DOD noted that the Defense Logistics Agency (DLA) is not an obstacle to

Air Force efforts to institutionalize its reengineering efforts, and that DLA is

aggressively working with the Air Force to develop creative, tailored

methods of support for expendable parts. We agree that DLA is not an

obstacle to Air Force reengineering efforts and have revised the report to

reflect that position. Since June 1993, when we recommended the

Secretary of Defense direct the services and DLA to develop test programs

that will determine the applicability of commercial practices to the

military industrial centers, including the use of supplier parks, DLA has

studied the supplier park and other concepts. As DOD notes, DLA is about to

issue a broad area announcement that will seek creative industry

approaches to support industrial maintenance centers. DLA is discussing

with the Air Force a contractor demonstration program at the Warner

Robins Air Logistics Center, and expects to enter into similar discussions

with the other services.

Page 59 GAO/NSIAD-96-5 Best Management Practices
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Donna M. Heivilin

Kenneth R. Knouse, Jr.

Cincinnati Regional

Office

Robert L. Repasky

Cheryl K. Andrew

Kimberly A. Gugino

Frederick J. Naas

Jeanne M. Willke

Dallas Regional Office Hilary C. Sullivan

Rebecca L. Pierce

European Office B. Patrick Hickey

Page 60 GAO/NSIAD-96-5 Best Management Practices
Appendix III 

Major Contributors to This Report

Page 61 GAO/NSIAD-96-5 Best Management Practices
Appendix III 

Major Contributors to This Report

Page 62 GAO/NSIAD-96-5 Best Management Practices
Related GAO Products

High Risk Series: Defense Inventory Management (GAO/HR-95-5, Feb. 1995).

Defense Supply: Acquisition Leadtime Requirements Can Be Significantly

Reduced (GAO/NSIAD-95-2, Dec. 20, 1994).

Defense Management: Impediments Jeopardize Logistics Corporate

Information Management (GAO/NSIAD-95-28, Oct. 21, 1994).

Organizational Culture: Use of Training to Help Change DOD Inventory

Management Culture (GAO/NSIAD-94-193, Aug. 30, 1994).

Air Force Logistics: Improved Backorder Procedures Will Save Millions

(GAO/NSIAD-94-103, Apr. 20, 1994).

Defense Management Initiatives: Limited Progress in Implementing

Management Improvement Initiatives (GAO/T-AIMD-94-105, Apr. 14, 1994).

Defense Management: Stronger Support Needed for Corporate

Information Management Initiative to Succeed (GAO/AIMD/NSIAD-94-101,

Apr. 12, 1994).

Air Force Logistics: Base Maintenance Inventories Can Be Reduced

(GAO/NSIAD-94-8, Dec. 15, 1993).

Air Force Logistics: Some Progress, But Further Efforts Needed to

Terminate Excess Orders (GAO/NSIAD-94-3, Oct. 13, 1993).

Defense Inventory: More Accurate Reporting Categories Are Needed

(GAO/NSIAD-93-31, Aug. 12, 1993).

Depot Maintenance: Issues in Management and Restructuring to Support a

Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993).

Financial Systems: Weaknesses Impede Initiatives to Reduce Air Force

Operations and Support Costs (GAO/NSIAD-93-70, Dec. 1, 1992).

Air Force Requirements: Cost of Buying Aircraft Consumable Items Can

Be Reduced by Millions (GAO/NSIAD-93-38, Nov. 18, 1992).

Defense Logistics Agency: Why Retention of Unneeded Supplies Persists

(GAO/NSIAD-93-29, Nov. 4, 1992).

Page 63 GAO/NSIAD-96-5 Best Management Practices
Related GAO Products

Financial Management: Internal Control Weaknesses Impede Air Force’s

Budgeting for Repairable Items (GAO/AFMD-92-47, Aug. 26, 1992).

Air Force Logistics: Improved Redistribution of Retail Inventories Needed

(GAO/NSIAD-91-165, July 10, 1991).

Financial Audit: Air Force’s Base-Level Financial Systems Do Not Provide

Reliable Information (GAO/AFMD-91-26, Jan. 31, 1991).

Strategic Missiles: Logistics Support for Advanced Cruise Missile Based on

Outdated Plans (GAO/NSIAD-90-178, Sept. 13, 1990).

Air Force Logistics: Increased Costs for Spare Parts Safety Levels Are Not

Justified (GAO/NSIAD-90-148, Aug. 23, 1990).

Defense Inventory: Growth in Air Force and Navy Unrequired Aircraft

Parts (GAO/NSIAD-90-100, Mar. 6, 1990).

Financial Audit: Air Force Does Not Effectively Account for Billions of

Dollars of Resources (GAO/T-AFMD-90-10, Feb. 23, 1990).

(709002) Page 64 GAO/NSIAD-96-5 Best Management Practices
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