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41–844 CC 1997

IMPROVING DEFENSE INVENTORY MANAGEMENT

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

INTERNATIONAL AFFAIRS, AND CRIMINAL JUSTICE

OF THE

COMMITTEE ON GOVERNMENT

REFORM AND OVERSIGHT

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

MARCH 20, 1997

Serial No. 105–20

Printed for the use of the Committee on Government Reform and Oversight

(

(II)

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

J. DENNIS HASTERT, Illinois

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

CHRISTOPHER COX, California

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

JOHN E. SUNUNU, New Hampshire

PETE SESSIONS, Texas

MICHAEL PAPPAS, New Jersey

VINCE SNOWBARGER, Kansas

BOB BARR, Georgia

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

TIM HOLDEN, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JUDITH MCCOY, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON NATIONAL SECURITY, INTERNATIONAL AFFAIRS, AND CRIMINAL

JUSTICE

J. DENNIS HASTERT, Chairman

MARK E. SOUDER, Indiana

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

JOHN B. SHADEGG, Arizona

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

THOMAS M. BARRETT, Wisconsin

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

GARY A. CONDIT, California

ROD R. BLAGOJEVICH, Illinois

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

JIM TURNER, Texas

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

ROBERT CHARLES, Staff Director and Chief Counsel

JIM WILON, Defense Counsel

ANDREW RICHARDSON, Professional Staff Member

IANTHE SAYLOR, Clerk

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 20, 1997 ............................................................................ 1

Statement of:

Emahiser, James B., Assistant Deputy Under Secretary of Defense for

Materiel and Distribution Management; and Jeffrey A. Jones, Executive Director for Logistics Management, Defense Logistics Agency ......... 3

Gansler, Jacques, vice chairman, Defense Science Board; and Admiral

Luther F. Schriefer (USN, retired), executive director, Business Executives for National Security ........................................................................... 108

Hinton, Henry L., Jr., Assistant Comptroller General, General Accounting

Office; Kenneth R. Knouse, Jr., Assistant Director, General Accounting

Office; and Robert L. Repasky, senior evaluator, General Accounting

Office .............................................................................................................. 48

Letters, statements, etc., submitted for the record by:

Emahiser, James B., Assistant Deputy Under Secretary of Defense for

Materiel and Distribution Management:

Information concerning dollar totals for maintenance performed ......... 32

Information concerning purchases made that result in a larger excess

inventory ................................................................................................. 31

Prepared statement of ............................................................................... 6

Gansler, Jacques, vice chairman, Defense Science Board, prepared statement of ........................................................................................................... 112

Hastert, Hon. J. Dennis, a Representative in Congress from the State

of Illinois, followup questions and responses .............................................. 100

Hinton, Henry L., Jr., Assistant Comptroller General, General Accounting

Office, prepared statement of ....................................................................... 52

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, prepared statement of ........................................................... 28

McInerney, Thomas G., Lieutenant General (USAF, Ret.), president and

CEO, Business Executives for National Security, prepared statement

of ..................................................................................................................... 121

Souder, Hon. Mark E., a Representative in Congress from the State

of Indiana, followup questions and responses ............................................ 33

(1)

IMPROVING DEFENSE INVENTORY

MANAGEMENT

THURSDAY, MARCH 20, 1997

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON NATIONAL SECURITY, INTERNATIONAL

AFFAIRS, AND CRIMINAL JUSTICE, COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT, Washington, DC.

The subcommittee met, pursuant to notice, at 9:40 a.m., in room

2154, Rayburn House Office Building, Hon. J. Dennis Hastert

(chairman of the subcommittee) presiding.

Present: Representatives Hastert, Souder, Shadegg, Barrett, and

Maloney.

Staff present: Robert Charles, staff director and chief counsel;

Jim Wilon, defense counsel; Andrew Richardson, professional staff

member; Ianthe Saylor; clerk; and Mark Stephenson, minority professional staff member.

Mr. HASTERT. Good morning. Thank you all for coming. The Subcommittee on National Security, International Affairs, and Criminal Justice will come to order.

Today, we have our first hearing on defense inventory management, a subject which will occupy our attention through the whole

105th Congress. Proper defense inventory management is crucial to

America, because it relates to two of the most important functions

of our Government: maintaining the strength as well as the readiness of the U.S. armed forces and ensuring that we spend the

American taxpayers’ money responsibly and effectively.

Our oversight of the Defense Department in general and defense

inventory management in particular will consist of regular public

hearings supported by a series of ongoing investigations. This sustained effort will be designed to identify more modern and efficient

inventory management practices and ensure that they are fully implemented by the Department of Defense.

By doing this, we will be able to free up defense dollars for procurement, research and development, combat training, and other

military readiness priorities. One thing is absolutely clear: There

is the potential for enormous savings here. GAO recently estimated

that DOD presently holds almost $70 billion worth of inventory, of

which they say roughly $35 billion worth of that inventory is not

needed.

According to GAO, this unneeded inventory results, at a minimum, in a bill to the American taxpayer of hundreds of millions

of dollars for unnecessary storage each year. Even now, DOD is

continuing to purchase more inventory than it really needs.

2

While DOD disagrees with some of the GAO’s conclusions, the

Department recognizes that it is holding billions of dollars worth

of excess inventory. This inventory is sometimes difficult to dispose

of properly, but doing so is absolutely necessary. More, the American taxpayer deserves that kind of action.

Speaking more broadly, we must remember that in recent years,

as the U.S. military has been severely downsized, the combat

forces, which you might call the military’s ‘‘tooth,’’ have suffered

much more than the supporting infrastructure, or what we might

call the ‘‘tail.’’ Both DOD and Congress are committed to improving

the ‘‘tooth-to-tail ratio,’’ and DOD knows that inventory management is one part of the tail where a great amount of money may

be saved.

One way to save money is to learn from private enterprise.

American businesses have developed many modern and sophisticated methods of inventory management which ensure quick delivery and also save money. Many of these methods, like just-in-time

delivery, supplier parts, and prime vendor contracts, can be applied

to DOD’s operations and tailored to the need for military readiness.

The Defense Department also can benefit from adopting more

modern accounting and information management systems, which

will increase visibility and accountability over all inventory and

purchases.

Finally, DOD can privatize or outsource more supply and maintenance needs. Functions which have historically been performed by

DOD personnel could often be done better and cheaper by private

companies. Reforming defense inventory management will almost

certainly result in a significant downsizing of DOD’s logistic infrastructure, and thousands of DOD personnel could be affected.

Even as we improve our readiness, or the military’s combat

tooth, we must move forward gradually.

I now recognize the ranking member, Mr. Barrett of Wisconsin,

for his opening statement.

Mr. BARRETT. Thank you, Mr. Chairman. I am glad that you

have called this hearing on inventory management at the Department of Defense. It is an area in which it appears considerable savings could be achieved. These savings are desperately needed in

this time of ever increasing budgetary pressures.

The Defense Department accounts for almost half of all discretionary spending, and if we are to make wise choices about the allocation of resources in other areas of discretionary spending, programs which protect the health and safety of our citizens, preserve

our social safety net for the most needy, and make investments in

our Nation’s infrastructure, it is vital that the Defense Department

be run in the most efficient manner possible.

I am distressed both by the magnitude of the inventory management problem at DOD and by the length of time it has existed.

DOD currently has a secondary inventory valued at $67 billion. Of

that amount, it is reported that a staggering $41.2 billion of inventory is not needed to support war reserves or operating requirements, and almost $15 billion of the unneeded inventory will likely

never be used.

3

This is a shocking and totally unacceptable waste of taxpayer

dollars, made all the worse by the fact that these problems have

existed for a long time.

So, Mr. Chairman, I am very glad that you have called this hearing today. I understand that you plan to hold a number of additional hearings on this issue, and I look forward to working with

you and the Department of Defense to eliminate this monumental

waste of precious resources. Thank you.

Mr. HASTERT. I thank the ranking member, and at this time I

would like to ask our first panel to come forward. Now, from the

Department of Defense we have the Honorable James Emahiser,

Assistant Deputy Under Secretary of Defense for Materiel and Distribution Management; and Mr. Jeffrey Jones, Executive Director

for Logistics Management in the Defense Logistics Agency.

Gentlemen, welcome, and if you would please rise and raise your

hand and take the oath.

[Witnesses sworn.]

Mr. HASTERT. Let the record show that the witnesses responded

in the affirmative, and, Secretary Emahiser, would you please

begin your testimony.

STATEMENTS OF JAMES B. EMAHISER, ASSISTANT DEPUTY

UNDER SECRETARY OF DEFENSE FOR MATERIEL AND DISTRIBUTION MANAGEMENT; AND JEFFREY A. JONES, EXECUTIVE DIRECTOR FOR LOGISTICS MANAGEMENT, DEFENSE

LOGISTICS AGENCY

Mr. EMAHISER. Mr. Chairman, members of the committee, and

staff, thank you for the opportunity to appear before you today to

discuss the Department of Defense’s inventory management program and the initiatives we have underway to increase efficiency

while maintaining support to the war fighter’s needs. I would like

to enter into the record my written statement responding to the

four questions in your letter of invitation and make a brief oral

statement.

Mr. HASTERT. Without objection, it is entered into the record.

Mr. EMAHISER. The DOD inventory management system affects

every soldier, sailor, airman, and Marine and is crucial to their

ability to perform their peacetime and wartime roles. Our inventory management system exists to support the war fighter and

maintain readiness. Our gaol is to continue to support war-fighter

requirements while executing our stewardship responsibility to the

taxpayers.

In keeping with our acknowledgement in the DOD Logistics Strategic Plan that DOD infrastructure must be reduced in parallel

with force structure, the Department has aggressively pursued inventory reduction since 1990. This first chart—and I draw your attention to the charts to your right—displayed shows that in con- stant 1995 dollars, the inventory has gone from $107 billion in

1989 to $67 billion in 1996, a 37 percent reduction over 7 years,

and is forecast to decrease to $48 billion in 2003, a reduction of 55

percent.

The second chart displayed shows that 73 percent of DOD inventory by dollar value is repairable items. These are relatively expensive items, such as engines and avionics, that are used, returned

4

for repair, and then reissued. Measured in dollar value, DOD inventory tends to be inventory that has been used. Only 27 percent

of the inventory is in consumable items, which are items expended

or used up beyond recovery in the use for which they were designed

or intended. This chart also shows that the bulk of DOD’s inventory characterized as ‘‘inactive,’’ that is, neither projected to be

used in the next 2 years nor authorized war reserves, is primarily

composed of repairable items.

The third chart shows one result of inventory reduction: actual

and projected decreases in the DOD distribution depots. From 30

depots in 1991 through a projected decrease to 19 by 2003.

Mr. HASTERT. Could I interrupt?

Mr. EMAHISER. Yes.

Mr. HASTERT. Would you place the mic a little bit closer? We are

missing some of your testimony.

Mr. EMAHISER. The final chart shows reductions in storage space.

We are reducing storage capacity from 788 million cubic feet in

1992 to 411 million cubic feet by 2003, a 52 percent projected reduction. We are also reducing our occupied storage area from 631

million cubic feet in 1992 to 368 million in 2003, a projected 58 percent reduction.

It is crucial to note that inventory reductions are actually exceeding force structure reductions. Between 1990 and 1996, force structure reductions were approximately 30 percent. By contrast, in the

same period, inventory reductions, as measured in constant 1995

dollars, were 35 percent. Planned force structure reductions continue through 2000, when the reduction for the 1990 base will exceed 32 percent but inventory during that same timeframe will

amount to 46 percent overall reduction.

To accomplish the inventory reductions thus far, the DOD has

implemented a series of aggressive initiatives. We are reducing

cycle times such as it takes to fill a requisition. We are making

greater use of existing inventory initiatives through such things as

Total Asset Visibility in order to reduce the need to buy new inventory. We are retaining less materiel and disposing of more materiel

that is no longer required.

Finally, we are significantly increasing our use of commercial logistics support capabilities, ranging from Prime Vendor for food

and medical supplies and Virtual Prime Vendor for hardware

items. We have also increased local purchase authority and are

making greater use of the Government purchase card in order to

meet our materiel requirements without bringing items into the

DOD inventory.

Virtual Prime Vendor represents our effort to enhance supply

support to depot maintenance activities by incorporating the best

commercial logistics practices as identified by the successful bidders. The pilot site at Warner-Robbins Air Logistics Center initiated Virtual Prime Vendor in January 1997. Contractor proposals

are being requested through a broad agency announcement for Air

Logistics Centers as well as Army and Navy maintenance activities.

In another initiative to modernize our processes, we have contracted with Caterpillar and Andersen Consulting to benchmark

our inventory management practice and performance against the

5

private sector. We intend to use the results of this study to further

increase responsiveness and efficiency.

The Department of Defense is both proud of the progress we

have made in reforming DOD inventory management and committed to further improvements. We are confident that management improvements, ambitious deployment of technology advances,

and our expanded use of commercial logistics support capabilities

will enable us to continue progress in this area.

We appreciate the interest of the subcommittee in defense inventory management and reform and look forward to working with you

in the future to ensure success in this crucial area.

Thank you for your interest and support, and I will be glad to

respond to any of your questions.

[The prepared statement of Mr. Emahiser follows:]

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Mr. HASTERT. Thank you. Mr. Jones.

Mr. JONES. Thank you, Mr. Chairman. I will make mine very

short.

I want to echo Mr. Emahiser’s thanks to the committee for the

opportunity to be here today. GAO will testify after we do, and as

they go through their report and their discussion, I would ask you

to bear in mind a few facts. Our role is combat support. It is not

to make sales. Lives are at stake in what we do.

The GAO has made some astute observations from time to time,

and some of those have led to changes in the way we do business

in the Department, and we understand their role and appreciate

their role very much. But it does not serve this discussion well to

have some of the facts presented this morning as facts, and I will

give you the example of the 100-year supply of parts, and I can explain that later if you would like to.

Billions of dollars could, in fact, be wasted by throwing away the

inventory that we have on hand. Even though we may not have

bought it for the right reasons, looking backward historically, we

certainly bought it for the right reasons at the time. For the 2

cents that we get on the dollar for throwing away inventory

through the disposal system, the cost of buy-back would be extremely expensive.

We have made mistakes. There is no doubt about it. We are sensitive to that, and we plan to take all kinds of corrective action, as

Jim has said, to make sure we minimize the number of mistakes

we make in the future.

DOD logisticians are on the front lines to support any contingency. We agree with using commercial sector practices, and we

agree with bringing the commercial sector into our business and

letting them do our business where they can, and we have several

examples that we can bring out today in more discussion about

how we have done that. But the parallels do end rather quickly in

some areas.

Our national strategy now is much more of a get-up-and-go than

it ever has been. We have to be prepared on day one to support

our forces. Leaner is better, but leaner has to be extremely capable;

it cannot just be smaller. We cannot restructure the logistics system without permission from others. We need BRAC; and as you

saw, the last chart on the depot drawdown, that has been accomplished through base realignment and closure, with the help of the

Congress.

That is how we do that, and reducing inventory is part of the

equation, but it is not the answer to reducing our facilities. The environment that we work in is not stable. Optempo changes. The

amount of engagement changes constantly. National policy changes

constantly. We make decisions with the best information we have

at the time, and we make every attempt to make the right decision,

but given the instability of the environment, some decisions can be

judged wrong in retrospect, and that is true.

I would like to have a productive discussion today. I think this

is a good opportunity to lay out some of the issues for the record,

but there is a high risk in assuming there is a large savings to be

made in inventory. There are no recommendations in this report.

GAO does not recommend that we dispose of the inventory that

22

they claim is unneeded. We will dispose of some of it, but we will

try to dispose of it responsibly, looking at the cost to dispose versus

the cost of repurchasing.

We will close more warehouses. We will probably come to the

Congress and ask for permission to do that, assuming that the Department decides that it wants another round of BRAC. That decision has not been made.

There is lots of data—and I will repeat that—lots of data saying

that disposing items, once bought, without considering the potential for their reuse in the future wastes money, and I cannot overemphasize that.

I will finish right now by saying that lives depend upon our

being right in the Department of Defense. We want to be efficient.

Believe me, inventory is not fun to manage. Improvements can be

made, and we are making them as quickly as we can, given the

broad responsibility and the shared responsibility across the Department and the various different missions of the services and

agencies.

We agree with the GAO on many items. We agree with a lot of

their instincts. We do not always agree with the way they do their

analysis, but we have to be careful that we do not get ourselves in

the position where we have to tell a sailor, or an airman in this

case, ‘‘Sorry, the C–135 wing spar is not a popular item. We do not

carry it anymore.’’

That is all I have. Thank you, Mr. Chairman.

Mr. HASTERT. Thank you.

Mr. Emahiser, in your explanation, could you walk through with

us one more time what is—you called ‘‘reused equipment’’? For example, let’s say you take an engine or components off an F–14 and

you rebuild that engine and you replace that engine with something that you had in inventory. Once that engine is rebuilt, then

it goes into inventory. Is that what you are saying?

Mr. EMAHISER. Basically, sir, you are correct. The what we would

call ‘‘repairable items,’’ engines, are——

Mr. HASTERT. Repairable.

Mr. EMAHISER [continuing]. Repairable. They can be repaired——

Mr. HASTERT. Repairable. All right, yes.

Mr. EMAHISER [continuing]. In the commercial system. When

they are brought into the inventory, the planning is such that that

is how we are going to maintain that engine or transmission. When

it is broken, we bring it into the depot system, or we put it into

a commercial contractor where it is repaired and then once repaired, brought back into the inventory for reuse again.

Many of our engines and transmissions go through that cycle

five, six, eight times over their life span, and so that is why they

are more expensive in general than consumable items, items like

spark plugs that are used up and thrown away once what they are

bought for, their useful life, expires. But you are correct. That is

what a repairable item is. It is used, broken, fixed, put back into

the inventory, and reissued.

Mr. HASTERT. So let’s take an F–15 or an F–14, whatever we are

using here, and saying that that piece of equipment has an engine

or several engines in it; it is part of the plane. There may be one

23

or two engines in inventory to back up every plane that we have.

Is that correct?

Mr. EMAHISER. I cannot tell you, in all honesty, how many engines there are in the inventory that would back up the F–15 or

the F–18, but there would be several engines in the inventory to

support the fleet of aircraft, and there would be a computation that

the Navy or the Air Force would go through to decide how many

engines need to be brought into the inventory to support the readiness of that aircraft fleet.

Mr. HASTERT. Well, I mean, let’s back up here a minute. If, in

fact, and I am just conjecturing, but if, in fact, that there are two

engines to back up every airplane and that is needed, or if there

are 1,000 engines to back up 1,500 airplanes or something, I think

that is something that you ought to have a handle on.

Mr. EMAHISER. I personally do not know—— Mr. HASTERT. Well, I would like some written answers—— Mr. EMAHISER. OK.

Mr. HASTERT [continuing]. To those types of questions, and we

will submit those to you.

Mr. EMAHISER. All right.

Mr. HASTERT. Mr. Jones, you cautioned us to go slow here and

make sure that what we are counting is what we are really counting. In my opening statement, I said that we need to use just-intime philosophy and some of these things that are being practiced

in the private sector. Just to preface what—so to set the stage for

what the GAO may say later, what is practical and what is not

practical in those types of situations, in your opinion? Again, pull

that mic up as close as possible.

Mr. JONES. Yes, I will do it. Is that good enough?

Mr. HASTERT. Yes.

Mr. JONES. Well, let me give you two examples, Mr. Chairman.

Let me give you the example of maintenance process in the Department versus manufacturing process. We hear that Toyota or Honda

or Chrysler or Ford has a just-in-time inventory process. As a matter of fact, when there is a strike in the parts business, they bring

their production line to a halt.

The difference between that process and what we do in repair is

that most of our repair, a lot of our repair is inspect and replace,

inspect and repair. Until we open up the item, we do not know

what is going to be needed.

Now, clearly, if you have a programmed overhaul, there are some

things you can predict, and there other things that you cannot predict until you open the boxes. So one of the examples that frequently gets miscarried is that the manufacturing example being

applied to the Department does not fit exactly because we do not

know exactly what the production is going to be. Am I making myself clear?

It is sort of like taking your television to the repair shop, and you

do not know what it is going to cost to fix it until they open it up

and look at it. So there are some limits there that are real limits

on how we can do just in time.

The other one is in the commodity areas that we manage in the

Defense Logistics Agency. When we went to the Prime Vendor Program, we looked at the market and said, where is the market in

24

managing various different commodities? We found that there was

a robust market out there delivering pharmaceuticals to hospitals,

and we were not taking advantage of that, and that made no sense,

and anybody that would have criticized us for not using that capability would have been correct.

So we went out, and we basically worked contracts with vendors

to allow pharmaceutical products to be delivered directly to our

customers on a just-in-time basis. Now, there is one twist in this,

and if I can just summarize quickly, and that is that we still have

storage requirements for wartime, so we had to work with our vendors to be able to exact from them an increased production volume

in order to meet the kinds of requirements that we would have if

we were suddenly to deploy or if we had to suddenly take twice the

volume to a ship that was about to sail from port.

So there were a lot of things we had to do even in that area of

highly commercial business in order to be able to make it work;

and the further you get away from commercial items, the harder

it is to apply those principles, but we are trying, and that is exactly

the challenge before us.

Mr. HASTERT. Mr. Emahiser, what is the value of DOD’s inventory at this time and how much of that, in your opinion, is excess?

Mr. EMAHISER. The current value of the DOD inventory is approximately $69.6 billion when GAO did their study. Currently, the

number is about $67 billion for this decrease from the 1995 base

to 1996.

In our view, the excess, or what we predict would be excess, is

about $300 million.

Mr. HASTERT. $300?

Mr. EMAHISER. $300 million.

Mr. HASTERT. Million?

Mr. EMAHISER. Yes, sir.

Mr. HASTERT. Out of $67 billion?

Mr. EMAHISER. Yes, sir.

Mr. HASTERT. Thank you. Mr. Barrett.

Mr. BARRETT. One of the criticisms in the GAO report is that

there continues to be a storage of a large amount of hardware

items, such as bolts, valves, and fuses, that cost millions of dollars

to manage and store, that these hardware inventories could last for

more than 2 years. To date, there has not been tested the most innovative commercial practices GAO has seen used by companies to

reduce inventories and costs, such as using supplier parts and

other techniques that could give established commercial distribution networks the responsibility to help with the inventory. Would

you respond to this, please?

Mr. EMAHISER. Well, first of all, I think that the Department is

trying to make steps to bring themselves what I would just call

into utilization of commercial best practices. In my opening statement, I mentioned the contract that we have got with Caterpillar

and Andersen benchmarking the Department with them to be able

to take in, pick up things from them that they are using in their

overall system. Jeff has mentioned earlier the movement to prime

vendor for medical and for subsistence. Those are extremely positive moves by the Department.

25

I mentioned the Virtual Prime Vendor, which is being tested now

at Warner-Robbins, where a contractor, in fact, comes in and runs

the supply side, the distribution side of the businesses that support

the actual maintenance production line. The contractor is, in fact,

responsible for assuring that parts are there just in time so that

the maintenance line can maintain its integrity and produce whatever equipment it is. In this case, it is part of the propeller system

for the C–130 aircraft.

There are other areas that we have looked at. Direct Vendor Delivery. The Army has a program utilizing Direct Vendor Delivery

for tires, commercial tires, to support the equipment, which has

been extremely successful.

So I would say that the Department is making positive progress,

and we are moving. It is not like it was 5 years ago, so I think that,

in fact, we are moving ahead.

Mr. HASTERT. What kind of defense functions do you think

should not be privatized, that you should not have that type of arrangement with?

Mr. EMAHISER. I think you need to go back and look at what are

basically the core functions of the Department—and I do not mean

core depot maintenance, so I am not talking depot maintenance

kinds of core; what are the core functions?—and then step back

from there to see what we need that could move into the private

sector.

Certainly, we are looking at things like the distribution system.

We are looking at things like the Defense Reutilization and Marketing Service—we are part of that—to move into the private sector. Other areas that are being looked at in the overall area are

things in the automation, which is outside my scope, but we are

looking at automation support, financial support, and those kinds

of things, which would have an impact on the overall inventory

management system.

Mr. HASTERT. I need to have a better understanding of why there

are these sharp differences between you and the GAO in terms of

the value of the unnecessary inventory. They peg the number at

$41 billion in their GAO report.

Mr. EMAHISER. Basically, part of it is semantics, and part of it,

in fact, is an evaluation issue. The nearly $12 billion of the difference is in valuation, as I mentioned——

Mr. HASTERT. $12 million or $12 billion?

Mr. EMAHISER. $12 billion is the number that we would say is

potential excess. Under the accounting practices that the Department must use, that is then valued at 21⁄2 to 3 percent scrap value,

and that is where my $300 million number came from earlier. So

there is a major difference there of what we would say versus the

needed and unneeded, which is the terminology we do not recognize.

Mr. HASTERT. But if they are saying $41.2 billion, and you are

saying that you disagree over $12 million——

Mr. EMAHISER. $12 billion.

Mr. HASTERT. Oh, $12 billion.

Mr. EMAHISER. $12 billion. I am sorry.

Mr. HASTERT. OK.

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Mr. EMAHISER. The other portion of that has to do, again, with

the definition of needed versus unneeded. What we categorize inventory as potential reutilization is valued at a salvage value, as

I have mentioned. The other area is that we have areas of things

like contingency and reutilization, which says that we have looked

at it, we need to hold that stock, bought into the inventory, and we

made a conscious decision that there will be a need for that inventory over a period of time, generally 5 to 6 years.

The other portion of the inventory that we hold, once it is

bought, is where we take and see that it has—we looked at cost

to hold versus cost to procure, and that equates to a substantial

portion of the $41 billion which we say we still need that will be

consumed in more than 2 years, but certainly within a 5 to 6 year

period.

Mr. HASTERT. OK. I have no other questions at this time.

Mr. SOUDER [presiding]. I am sorry I missed your opening statements. Let me ask a couple of questions. The staff has put some

of this together. I sat through one of the hearings the last session

of Congress, one of the hearings on this, and I am trying to get up

to speed.

When there is excess inventory, how much roughly is spent, what

kind of salvage value in excess inventory is it?

Mr. EMAHISER. We would view excess inventory as being held at

scrap value, which would be 21⁄2 to 3 percent of its acquisition and

replacement cost. In the discussion with the GAO report, we would

say that we have about $12 billion in what we would call potential

excess materiel, and then because of accounting rules, we would

evaluate that at about 3 percent, which would drive us down to the

$300 million.

Mr. SOUDER. How long does it usually take to dispose of such inventory?

Mr. EMAHISER. Once that is identified, it is relooked at to see if

possibly there is a claimant that has been missed with the Department of Defense, and then it is opened up for possible reutilization

by other sectors of the Federal Government, State governments, police, and only after that has been exhausted that it is sold off

through the Defense Reutilization and Marketing Service.

So that would take some period of time, but generally I would

say less than a year. Jeff may have a better idea.

Mr. SOUDER. Do you have any further comment?

Mr. JONES. Yes. Mr. Souder, the times are prescribed in the regulations by GSA for screening, and Mr. Emahiser described them

in the right order. The public is entitled to get Government property after it is declared excess and surplus at that point, and when

that process, the screening process is done, which generally takes

90 to 120 days, then the Government and the Department of Defense in this case creates a sale for those items that do not require

demilitarization, and those are the particularly sensitive military

items.

Mr. SOUDER. Are we still purchasing excess inventory?

Mr. JONES. My opinion is that we are not purchasing excess inventory. That is not to say that a mistake does not get made every

now and then, but in general, I am 100 percent confident that no

one intentionally purchases excess inventory.

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Mr. SOUDER. In other words, you are saying that you believe the

excess inventory that is currently there was intentionally—you do

not believe that that was intentionally purchased, either?

Mr. JONES. I do not believe that it was intentionally procured.

That is correct.

Mr. SOUDER. Are you saying that—what would be some of the

key variables, and maybe we have already covered this, that would

cause these errors, and are we working to tighten that?

Mr. JONES. When we do what I would call a supply control study

or a study to decide what needs to be bought, it is a point in time,

and so things change once we move to contract because the contracting time takes, you know, takes a period of time.

So when an item manager runs a supply control study, they look

at the assets they have on hand, and the assets they have on hand

not only in their own inventory, but in the inventory of the other

service; they look at what is due in; they will look at their back

orders; and then make a conscious decision, if it is a consumable,

to go ahead and procure. If it is a repairable, repairable item, then

they will also look at the unserviceable inventory that is being held

in depot stocks and what can be repaired and then only by what

cannot be satisfied from the repair lines and make the decision to

buy.

They will look at things like what the current force structure is.

They will look at previous demands going back several years. All

those kinds of things enter into the equation before that buy decision is made.

Mr. SOUDER. Do you calculate what the salvage—in other words,

is part of the decision the balance of the potential likelihood that

you may have an emergency or need a rise versus the salvage

value? In other words, the market may go up and down on certain

products.

Mr. JONES. I am not sure that I understand your question, so let

me approach it this way. Once inventory is on hand, then the decision is made, even if it appears to be above the order point now,

we will look at a cost to hold that in inventory versus the cost to

dispose. Generally, the cost to hold inventory is about a third of a

percent of the value of the item. There is a cost to dispose of an

item, particularly if it has to be demilled, so we will look at that.

So that enters into the equation.

Mr. SOUDER. Thank you. I may have an additional question. Congresswoman Maloney.

Mrs. MALONEY. Thank you very much. In the interest of time, I

would like to ask the Chair if he would submit my opening statement, as read, in the record?

Mr. SOUDER. Without objection, so ordered.

[The prepared statement of Hon. Carolyn B. Maloney follows:]

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Mrs. MALONEY. I would just like to mention that last spring,

along with several of my colleagues, Congressman DeFazio, then

Congressman Durbin, and Senator Harkin, we had requested a

GAO investigation about this problem, and they have complied and

come forward with really, I think, a very excellent and timely report. I would like to compliment them on that report, entitled ‘‘Defense Logistics: Much of the Inventory Exceeds Current Needs.’’

The report really documents, I think, a national travesty—$41 billion in unneeded inventory, $14.6 billion in inventory that will

never be used, and over $1 billion for which the Department holds

more than 100 years of supply.

It also documents that it costs the American taxpayer over $90

million a year just to pay for the storage of this materiel, and I just

feel that this needs to be changed. Mr. Chairman, the Pentagon’s

budget was $243 billion, and the Department controls over $1 trillion in assets. We really do need to exercise very rigorous oversight

of this budget, and I am glad that the chairman has called up several hearings, several oversight hearings on this issue.

I would like to say that I would love to work with the chairman

and the ranking member on legislation that would require the Department of Defense to begin testing various new best business

practices as a step in addressing this problem.

I have great respect for the American armed services and for the

Pentagon. We have the best and the bravest men and women in

the military, and we have the best weapons, and we have the best

defense in the world. I find it unusual that an agency that is so

good at so many things has been so slow to respond to GAO recommendations that began in 1991, specifically recommending, and

then again in 1994, that DOD test the application of prime vendors

for personnel items.

Also, could you just describe some of the major areas where the

DOD has been successful in applying these practices and how much

has DOD saved? I would just like to know why is it taking so long.

I think the first report was in 1991.

Earlier this year, they gave a draft report to us that showed that

there was $36 billion in unneeded inventory. I thought that the

draft, which was circulated to you, would mean that you would sort

of start addressing this problem. Then the draft came back with a

final report, and instead of the inventory, excessive inventory going

down, it went up. I would just like to know what steps you are taking to address this problem.

Granted, you do have to have some inventory, but $41 billion is

quite a lot of money, and we could use that money in more constructive ways, both in the military and in the private sector and

in the fighting forces. So I would just like to know why is it taking

so long and specifically the response to my question. I would also

like to ask the chairman if I could submit, along with the ranking

member, a series of questions in writing to be responded to.

I am on another committee, the Joint Economic Committee, and

Alan Greenspan is testifying, and they have beeped me and asked

me to come over for a quorum.

Mr. SOUDER. Without objection, so ordered.

Mrs. MALONEY. Thank you.

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Mr. EMAHISER. OK. Let me, first of all, we do not agree with GAO, as I have said earlier, on the $41 billion dollar number, and

I have run through that reasoning already.

In fact, the Army has instituted a number of what we would call

commercial best practices into how we do our business. I mentioned

Prime Vendor. Prime Vendor, in fact, has been a fact of life now

for several years. It just did not start. The idea of the Virtual

Prime Vendor was kicked off in January 1997, with the Air Force

and is being embraced by the other services, the Army, and Navy.

Again, not an effort that can start overnight, but it has been embraced now by the Department.

Direct Vendor Delivery, in fact, has been embedded in the Department for a great number of years. I mentioned the Army’s expertise with using commercial tires for its vehicles. That program

has been around for over 3 years now.

So I think that, in fact, the Department has embraced the movement to best commercial practices.

Mrs. MALONEY. How much have we saved in the test for best

commercial practices that you have implemented? How much have

you saved by moving to these practices? Do you have any numbers

on that?

Mr. EMAHISER. I do not have any numbers off the top of my

head. Jeff.

Mr. JONES. I have numbers, Mrs. Maloney. In the areas that we

manage in pharmaceuticals, we have saved several hundred million

in inventory reductions, but let me make sure that we are clear on

the meaning of the word ‘‘save.’’ When we started off with Prime

Vendor in pharmaceuticals, we had a large inventory. We consumed that inventory, and to the extent that we were able to consume the inventory, through the use of the Prime Vendor, we

avoided future expenditures. We did not save money in the sense

of being able to turn that money into something else; we consumed

the inventory in place.

That is a very important thing to keep in mind when we talk

about these large values of inventory. They do not have much value

unless you can consume them. They have no value in disposal

whatever. So we have several hundred million dollars there, and I

can get exact figures.

We are implementing the same methods in subsistence, and I did

not bring the figures with me right here, but, again, several hundred million dollars’ worth of inventories have been reduced at the

wholesale level and at the consumer level. In addition to that, I

think if you go to some of our customers, you will hear other things

as well, such as they are taking people who used to work at the

installation managing food and storage and using them for other

purposes or simply not needing them in general.

So we can document the savings in inventory pretty well for the

items that we are managing in the Defense Logistics Agency, and

I believe the services could do the same for those items that they

are managing.

Mrs. MALONEY. But, still, that is very, very important. Granted,

it is not dollars that we turn in to the Treasury, but it is dollars

that we do not have to turn out of the Treasury.

Mr. JONES. Oh, I agree with you completely.

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Mrs. MALONEY. Because several hundred million in inventory in

pharmaceuticals is quite impressive. I would like to get all of this

in writing. I think that it is important really to document your own

success that you have had so far, and I know that change is hard,

particularly in large bureaucracies.

I would also like—I see my time is up, but maybe I would like

to know what are some of your other plans for expanding these

concepts in other areas for savings.

Mr. JONES. Mr. Chairman, if you would like, we could respond

to some of those right now.

Mr. SOUDER. Go ahead.

Mr. EMAHISER. I would just like to go back to one of the initiatives that has really taken off in the Department, and that is the

use of purchase cards, credit cards. We now utilize purchase cards,

credit cards for procuring up to $2,500 per item. That saves going

through the entire procurement system, and, in fact, there has

been documented savings, with the Navy reducing its budget by

$20 million just through the use of purchase cards.

Also, documented by the Army Audit Agency has been a savings of $92 per purchase utilizing the purchase card, so that, in fact,

has major impacts on the overall utilization of reducing costs, reducing inventory brought into the system. You go down and buy it.

It is given to you over the counter, direct vendor-delivered to you,

and the utilization of that has grown from about $800 million per

year to $1.4 billion over the last year.

Mrs. MALONEY. Thank you, Mr. Chairman; and as I said, I have

to run to this other meeting, but I would like to submit, and maybe

the majority would like to join us in a series of questions really

documenting the successes of the Department in writing. Thank

you.

Mr. SOUDER. Are some of the purchases that are made that result in a larger excess inventory? Are they at all related to the

question of keeping certain of the suppliers in business because of

the nature of what they make, and if you lose the engineering capability or the backgrounds of the lines, you will not have the supply source if you have a need?

Mr. EMAHISER. That is a tough story for me to respond to from

a departmental point of view. I would rather do some research in

that to provide some kind of an answer for the record on that one.

[The information referred to follows:]

The DoD does purchase some inventory that will not be used right away in order

to maintain supplies of uniquely military materiel and repair parts. For example,

the Defense Supply Center Columbus purchased $5.4 million of inventory in FY

1996 that was designated as diminishing manufacturing source inventory (the last

manufacturer having alerted the DoD that item will no longer be produced after a

given date). This categorization of stock precludes automatic disposal.

The DoD currently holds $167.1 million in diminishing manufacturing source inventory.

Mr. SOUDER. I would appreciate that. The 60/40 rule that says

that 40 percent, I believe, of maintenance——

Mr. EMAHISER. No. The 60/40 rule has——

Mr. SOUDER. That is not related to the previous question; it was

another question.

Mr. EMAHISER. I understand, but I understand the 60/40 rule.

The 60/40 rule really pertains to depot maintenance, which is a

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supplier of inventory back to the Department of repairable items,

but the 60/40 rule basically says that no more than 40 percent of

depot maintenance should be contracted out, that is, given to the

private sector.

Mr. SOUDER. Are there security reasons for the 40 percent? In

other words, was it felt that that would make the Government—

what is the reason for capping at 40 percent? Are you at 40 percent?

Mr. EMAHISER. That is codified in law.

Mr. SOUDER. You do not know the history of that? Is that——

Mr. EMAHISER. Well, I think the history was, candidly—

Emahiser’s opinion, Emahiser’s opinion—let me say it that way—

was to assure that we maintain the depot base, the repair system

base in order to assure a supply of items and to have a surge capacity available if we went to war.

Mr. SOUDER. Are you currently at 40 percent outside?

Mr. EMAHISER. In the depot maintenance arena, I believe that we

are well below the 40 percent at the DOD level as well as the services, but I can get you a better number, if you like.

Mr. SOUDER. Have you been moving that number up? Are you

seeking to come closer to the 40 percent of outside which would

bring you more flexibility?

Mr. EMAHISER. You are really getting outside my area of expertise now. We can provide that for the record, if you would like.

[The information referred to follows:]

For FY 1996, the dollar totals for maintenance performed by each Military Department and the public/private breakout were:

Army—$1.241 billion with 68% public and 32% private

Navy—$5.345 billion with 65% public and 35% private

Air Force—$3.956 billion with 71% public and 29% private

Total—$10.542 billion with 67.6% public and 32.4% private

Mr. SOUDER. Do you have any further questions? All right.

I thank you very much for coming. What I think we are going

to do is go vote. We will come back for the second panel. So with

that, we will recess the hearing at this point.

[Recess.]

[The information referred to follows:]

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Mr. SOUDER. The hearing is back in session. The second panel

from GAO has already come forward. It is composed of Mr. Henry

Hinton, the Assistant Comptroller General; Mr. Kenneth Knouse—

is that correct——

Mr. KNOUSE. Yes, sir.

Mr. SOUDER [continuing]. An Assistant Director; and Mr. Robert

Repasky, a senior evaluator. If you will stand and raise your right

hand for our oath; we do this for all committee witnesses.

[Witnesses sworn.]

Mr. SOUDER. Let the record show that the witnesses responded

in the affirmative.

Mr. Hinton, will you go ahead and proceed.

STATEMENTS OF HENRY L. HINTON, JR., ASSISTANT COMPTROLLER GENERAL, GENERAL ACCOUNTING OFFICE; KENNETH R. KNOUSE, JR., ASSISTANT DIRECTOR, GENERAL ACCOUNTING OFFICE; AND ROBERT L. REPASKY, SENIOR

EVALUATOR, GENERAL ACCOUNTING OFFICE

Mr. HINTON. Thank you, Mr. Chairman. With your permission,

I would like to submit my printed statement for the record.

Mr. SOUDER. Without objection, so ordered.

Mr. HINTON. I am pleased to be here today to discuss defense

management issues, and as you recognize Mr. Knouse and Mr.

Repasky, two of my colleagues, and in the back of my printed statement are a host of reports that they have been heavily involved in

in the early 1990’s up to the present that have been looking into

the concept of best practices and its applicability to the Department of Defense.

In 1990, GAO began a special review to look at and report on the

Federal program areas. Its work is identified as high risk because

of the vulnerabilities to waste, fraud, and abuse and mismanagement. This effort, which was supported by the Senate Committee

on Governmental Affairs and the House Committee on Government

Reform and Oversight, brought a much needed focus on problems

that were costing the Government billions of dollars. We identified

DOD’s secondary inventory management as a high risk area at

that time because of the high levels of unneeded inventory and inadequate systems for determining inventory requirements.

Mr. Chairman, as requested, my testimony today will focus on,

one, a brief overview of the problems; two, measures taken by DOD

to improve inventory management; and, three, the actions we believe DOD needs to aggressively take to solve the longstanding

problems that you have heard some discussion already.

Let me briefly describe the type of inventory that we are discussing. DOD’s secondary inventory, which totals about $70 billion,

is comprised of two types of materiel: repairable parts and consumable items. As shown in the chart to my left and your right,

and for those in the audience, on page 27 of my printed statement,

DOD holds about $50 billion worth of repairable parts; $40 billion

of that is aircraft parts alone. These parts are generally the more

expensive and complex items that can be repaired when broken

and reused, such as landing gear on aircraft.

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Consumable items, on the other hand, are generally inexpensive,

common, and are not reusable, for example, medical supplies or

nuts and bolts. DOD holds about $20 billion of these types of items.

Inventory management problems have plagued DOD for decades.

A key indicator of these problems is that a significant portion of

DOD’s inventory is not needed to meet war reserve and current operating requirements. As shown in the second chart, we believe approximately $34 billion, or about half of DOD’s inventory, is not

needed to support war reserve or current operating requirements.

There has been a lot of discussion this morning on that, and we

can engage in a little Q&A, and I would like to explain that as we

go through the process here today.

Recently, we issued a report to describe this unneeded inventory. We reported that about $14.6 billion of it did not have projected demands and, therefore, is likely never to be used and calculated that

another $11.8 billion could last 2 to 10 years. Also, $1.1 billion

could last at least 100 years.

Most of the problems that contributed to the accumulation of this

unneeded inventory still exists, such as outdated and inefficient inventory management practices that frequently did not meet the

customers’ needs, inadequate inventory oversight, weak financial

accountability, and overstated requirements. For example, recently,

we reported that Navy managers did not have adequate visibility

over $5.7 billion in operating materials and supplies on board ships

and at 17 redistributionsites.

We estimated that because of the lack of oversight in the first

half of 1995 alone, item managers ordered or purchased in excess

of operating level needs. As a result, the Navy will incur unnecessary costs of about $27 million. That was a question you asked this

morning, Mr. Chairman, and the answer to that is, yes, we are continuing to purchase items that we already have stocks of and that

are in excess.

Because these problems and conditions persist in an area where DOD spends more than $15 billion a year in new inventory purchases, we continue to identify this as a high-risk area. To put this

$15 billion into perspective, Mr. Chairman, DOD spends more annually in buying inventory than NASA’s whole budget of $13 billion. If you follow the future years’ defense plan, if we stay on the

pace of spending $15 billion over the next 6 years, what we are

talking about spending, from DOD’s point of view, is about $90 billion to buy inventory. That is why this is a very important subject

that we are talking about.

DOD recognizes that it needs to make substantial improvements

to its logistics system. We continue to see pockets of improvement,

such as DLA’s re-engineering efforts where it has made significant

strides in adopting best management practices for personnel items,

which are medical, food, and clothing items. But these initiatives

impact less than 3 percent of DOD’s secondary items, or $3.5 billion of its $70 billion inventory.

In this area, DLA, to its credit, started with a strong, top-level

management endorsement of best practices and established Prime

Vendor programs that resulted in reduced inventory levels and associated operating costs. For medical supplies, this has meant inventory and other cost reductions of more than $700 million, anVerDate 11-MAY-2000 12:01 Jun 07, 2002 Jkt 010199 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 W:\DISC\41844 pfrm01 PsN: 41844
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other question that you raised this morning, which in turn has

freed up storage facilities for other uses. For example, at the Walter Reed Army Medical Center here in Washington, DC, DOD converted a medical supply warehouse into a national training center

for radiology students. We have a photograph of that facility to my

right.

DOD has made little overall progress, however, in correcting systemic problems that affect over $50 billion of DOD’s inventory. Unless new and innovative solutions are applied to the management

of these items, DOD will continue to buildup unnecessary inventory, provide slow service to the DOD customer, and require the

unnecessary expenditure of resources.

We believe the key to fixing these systemic problems is aggressively focusing on changing DOD’s management culture and adopting new, leading-edge business practices.

To effectively address these issues, DOD must adopt a strategy

that includes both short- and long-term actions. In the short term,

DOD must continue to emphasize the efficient operation of its existing logistics systems. In the long term, DOD must establish

goals, objectives, and milestones for changing its culture and adopting new management tools and practices.

A key part to changing its culture should be an aggressive approach to adopt best management practices from the private sector.

From our discussions with more than 50 private sector companies,

we identified best practices that address the entire logistics chain,

which if applied in an integrated manner—and I am going to put

emphasis on the word ‘‘integrated’’—could help streamline DOD’s

logistics operation, potentially save billions of dollars, and improve

support to the military customer.

Let me highlight the four best practices we have recently discussed in our reports on the Air Force, the Navy, and our soon to

be released report on Army’s logistics pipelines for aviation parts.

First, third-party logistics services can assume warehousing and

distribution functions, provide rapid delivery of parts, and state-ofthe-art information systems that would speed the shipment of parts

between the depots and field locations, another point that you

raised about this morning.

Second, eliminating excess inventory and quickly initiating repair actions can reduce the amount of time parts are stored, improve the visibility of production backlogs, and reduce the need for

large inventory to cover operations while parts are out of service.

Third, cellular manufacturing techniques can improve repair

shop efficiency by bringing all the resources, that is, tooling, support equipment, needed to complete repairs to one location, thereby

minimizing the current time-consuming exercise of routing parts to

different work shops located hundreds of yards apart.

Fourth, innovative supplier partnerships can increase the availability of consumable parts, minimize the time it takes to deliver

parts to mechanics, and delay the purchase of parts until they are

needed to complete repairs. Our fourth chart illustrates that applying this concept to the traditional DOD system for consumable

items could reduce or eliminate the need for wholesale and much

of the retail inventory layers currently maintained by DOD.

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Just in this one concept, DOD could significantly reduce the need

to purchase and store inventory worth hundreds of millions, if not

billions of dollars. You can see where the ‘‘X’s’’ are on the bottom

part. They are the levels that fall out when you are able to bring

some of the best practices techniques to DOD’s processes.

In our opinion, DOD has not been aggressive enough in pursuing

these practices. We strongly believe that if they were adopted, the

amount of time associated with the purchase, storage, repair, and

distribution of DOD’s inventory would be dramatically reduced,

lowering its inventory requirements and bringing the decision point

of what to buy—a very important point—bringing the decision

point of what to buy, when to buy it, and how much to buy closer

to the point at the time the item is needed. That is very key, and

it is part of the explanation that I will get into why DOD and we

disagree.

This in turn will enable DOD to make better purchasing decisions and would minimize the purchase of unnecessary inventory.

Mr. Chairman, that completes my statement. I and my colleagues would be more than happy to respond to anything you

would like to ask of us.

[The prepared statement of Mr. Hinton follows:]

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Mr. SOUDER. Why don’t we start with the first thing that you

correctly anticipated we were going to ask, which is, could you explain how you came up with half of their inventory being

unneeded—— Mr. HINTON. Sure.

Mr. SOUDER [continuing]. And how you define it differently than

they do?

Mr. HINTON. Sure. Matt, could you put that chart back up,

please, and I can deal with that because I think that this is very

important.

I emphasized right at the tail end of my statement what we are

really stressing here is moving the buy decision closer to the period

of time that you need inventory, and that is very key. Visualize two

baskets, if you would, please. One basket is needed. That is your

operating supplies, your war reserve requirements, your safety levels, your administrative lead times by which you place an order,

and it is the time that the part arrives. This is about 2 years’ plus

of inventory that is in the ‘‘needed’’ category.

In the second basket that you have there, what that is are other

levels that are built into DOD’s equation that go out an additional

2 years out there, so there is more being bought than is really

needed at that point.

Now, when you look at what is in there, and I made mention of a few things, there is $14.6 billion where there are no projected demands, and there are other parts of that that are in the 20-year

supply. They are also in the 100-year supply of that, and when that

does not happen and you do not have that demand that hits it, you

are left with a lot of inventory. The point that we have been making, is that the closer you can bring that buy decision to when you

would really need the parts would remove a lot of the unneeded

that we have been having a debate with DOD about.

The reason why it is important now that DOD work hard and ag- gressively to change its business processes is not about the $70 billion that we have. This is stuff we have already bought; it is there.

We have got it. It is looking at the $15 billion that we are going

to be spending over the next 6 years over the future year defense

program, and that is significant. Until we are able to change that

culture, get DOD to move out and test some of these best business

practices, what we are going to find out, we will be back here having another hearing along the same lines that GAO is going to be

saying there is a lot of unneeded inventory out there.

So that is what we are trying to work with, encourage, and recommend to DOD, the need to move forward; and the areas where

it needs to move forward, and as Mr. Emahiser this morning spoke

to, was in the personnel area, largely in the medical and the pharmaceuticals. We were very instrumental in working with DOD to

get them off on the right foot with that. We have had several reports back then that encouraged them to move forward to test that

concept, and as I mention in my statement, DOD got on board, top

down, and moved out, and it worked.

Where they have not moved forward is into the other parts of the

inventory, to the tune of about $50 billion, and here is what we are

talking about: hardware and repairable parts. What GAO is saying

is, test it. Let’s make sure it works. Let’s make sure it does not inVerDate 11-MAY-2000 12:01 Jun 07, 2002 Jkt 010199 PO 00000 Frm 00089 Fmt 6633 Sfmt 6602 W:\DISC\41844 pfrm01 PsN: 41844
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volve readiness, any readiness-related issues before we go because

we do think, from all the best practices that we have seen, it has

the potential to allow better response to the customer, potentially

save significant dollars, and at the same time improve the efficiency of the system.

Mr. SOUDER. Is the 2-year a peacetime requirement, or does that

have a wartime contingent?

Mr. HINTON. Pardon me?

Mr. SOUDER. Are the 2-year figures you are using, a peacetime

requirement estimate, or does that have wartime—— Mr. HINTON. Peacetime.

Mr. SOUDER [continuing]. A wartime contingency?

Mr. HINTON. Right, and the basket that has the needed, the requirements for war reserves are built into that.

Mr. SOUDER. So it is a peacetime war reserve.

Mr. HINTON. We are not challenging anything around war reserves.

Mr. SOUDER. Let me—I want to come back. I have got a series

of questions, but I have got some fundamental, entry-level questions here. The first is very explosive.

How much of the problem do you believe, and you are under oath

in front of the committee, and you can tactfully say it if you want

to tactfully say it—how much do you believe that this is being driven by jobs in Members’ districts in Congress, and how much of it

is actually resistance in the Defense Department, and and/or both?

Mr. HINTON. My answer to that would be both. You know, when

I showed the chart over there that had the ‘‘X’s’’ on it, what we are

talking about there, this affects jobs. Any time you go through this

process where you are going to change processes, you are going to

become more efficient, and to become efficient, you might have to

remove layers that are built into the current system. That affects

jobs.

Similarly, as you mention, there is a considerable amount of

service parochialism involved here that makes change very difficult

in the Department. It is why we believe that you need to move forward, and I think if there is a way that we need to move forward

might be to require, through legislation or some other part, that

DOD move forward to test some of these. You put forth a plan that

they will pick up these best practices, they will come up with a

strategy for testing them, and they would have very good goals and

measures to measure the results of the test pilots that they would

do.

You could also have a reporting requirement back to the Congress and have DOD respond how well that is going, and then have

us, third, come in as a check, and I think that goes a long way to

breaking down stovepipes, the service parochialism that is out

there, and that is what is needed.

That has been some of the frustrations that I think OSD has

found in trying to move forward, not only in this area, but the

same thing applies as it deals with infrastructure, base closures,

that we, GAO, have been reporting on. That is a very difficult

issue; it is a painful process.

Mr. SOUDER. I have a very unusual, uncomfortable, personal

background experience with this. When I started as a staffer with

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Congressman Coats and worked in the 4th District in basically trying to worry about us not just kind of shutting down and turning

out the lights after International Harvester and others had closed

down in the early 1980’s. A lot of our auto parts manufacturers,

who were clearly potential suppliers to the military, worked with

ECSC out of Columbus in an experimental program to try to get

more bidders on sole source and also for their supplies.

I remember they had several photographers who took pictures of

all the parts that they buy, put together this great presentation to

bring to Fort Wayne, and we held a conference where we brought

a lot of suppliers in to bid. I remember, having come from a business background, my first two questions, one which was, ‘‘Well,

how much do you usually pay for this part?’’ They said, ‘‘Well, we

cannot say that.’’ They said it depends. I said, ‘‘Well, can you put the last three

purchases’ prices?’’ ‘‘Well, that would really be misleading because

it might not be the same; it is a bid price.’’ Then I said, ‘‘Well, how

many do you buy?’’ They said, ‘‘Well, that depends. It depends on

a lot of different variables, and there are different-sized purchase

orders.’’ Then, they said, ‘‘You do not look very pleased,’’ and I said, ‘‘Well, we are bringing in 120 businesses, and the first question

they are going to ask is, how much do you pay, and how many are

you going to make, that there is no way you are going to turn over

a part of your factory to be devoted to this type of thing based on

this kind of erratic flow.’’ Now, my question comes, that is in addition to the parochialism

and the potential nobody likes to lose any jobs or any bases or any

depots in their districts. There are some real concerns here, one of

which is can they get their projections better and are they getting

better at projecting what they need and where; or, in fact, do you,

in effect, as a business have to have a certain committed supply

even if it is being wasted, or you are not going to investigate in

dealing with the Federal Government?

The corollary to that is, is that we are going to become dependent

on foreign parts suppliers, that if we have some kind of a switchover in one of these foreign nations and all of a sudden we were

buying our parts there, but our American manufacturers decided it

is not worth doing business with the Federal Government, we do

not have anybody supplying.

How much of those things are in this?

Mr. HINTON. Well, I think they are really relevant to this discussion in terms of how you think about buying things. When you go

back to the original pie chart and you talk about the unneeded,

when one predicts out and estimates out over a 2-year-or-more period as to what you want, things are going to change in that intervening period. Demands may not come about as you anticipated.

There could be extreme fluctuations in that; demands just do not

materialize. Sometimes when they went out, they had a quantity

of life buys where they bought all the parts that they needed and

then found out that they were not needed ultimately in that intervening period.

I think the point that we are trying to make here is that there

are better ways that we have seen in the commercial side, the priVerDate 11-MAY-2000 12:01 Jun 07, 2002 Jkt 010199 PO 00000 Frm 00091 Fmt 6633 Sfmt 6602 W:\DISC\41844 pfrm01 PsN: 41844
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vate sector side, of being able to go out and provide a means that

can get a better grip on what your true requirements are through

Prime Vendor programs to effect quick delivery and bring that customer and the end user, the supplier, closer together that can meet

the needs in a more timely way.

Mr. SOUDER. Clearly, in the more egregious cases, that is—do either of you have any comments on what has been said here? If you

want to join in, just—— Mr. REPASKY. I would just echo what was just said, that if you

shorten the amount of time that you need to place your orders and

receive those supplies, the chances of you being right increase and

will reduce the likelihood that you would make purchases of items

that you do not need.

I think that is really the bottom line, to shorten that process, and

that is really what our work has focused on, is how do you shorten

the repair cycle time, how do you shorten the pipeline time, and

how do you bring that decision point closer to the time that you

need the item? I think that is the key.

Mr. HINTON. Mr. Chairman, if I could ask Mr. Repasky, we have

an example as it relates to the Army, and when you look across the

Navy and the Air Force, it is akin to the same. But it is kind of

like a before and after, and if I could have him walk that through,

I think you could see a little bit of what we are trying to push and

suggest to DOD as to why this is a good idea to move forward. It

is in the repairable area that I am going to be talking about.

Mr. KNOUSE. Mr. Chairman, while they are setting that up, I

would just like to add that the DOD logistic system is predicated

on speed. How do you get what the military customer needs in as

quickly a time as possible? By their own admission, DOD will tell

you that time is the enemy of logistics. To the extent that you can

take some of these processes that Mr. Repasky is going to talk

about and condense them, you are not only increasing efficiency,

saving money, but you are actually, I believe, enhancing readiness,

peacetime readiness of the equipment that you have out there because you are getting it there much, much quicker than relying on

the infrastructure that is now in place that takes a very long time

at times to get this materiel to the end user.

Mr. REPASKY. OK. Let me just try to walk through. This is basically a before-and-after chart, and I know it is busy, and I will try

to just hit the high points. This chart shows the present Army repair pipeline for aircraft parts. On the right side of the chart, from

the top to the bottom, it depicts the process a part would go

through from an operating base into storage and into the repair

process, back into storage, and finally back to the end user at the

operating base.

We did an analysis of 24 different types of parts that the Army

uses for aviation parts and calculated, through a series of different

analyses, that it took on average 525 days to go through that process for the items that we looked at. Flowing from left to right into

that depot repair process is the flow of the nuts and the bolts and

the small items that are needed to fix aircraft component parts.

Basically what that highlights is you have the manufacturers

that produce the items that sell the materiel to the Defense Logistics Agency, who stores them in their depot system, and when the

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military service, in this case, the Army, requests those items, the

material is shipped into the retail, the Army’s retail supply system.

Some key points that we have on this chart, that DLA wholesale

system just for hardware items, currently we estimated they hold

about $5.7 billion worth of these small-piece parts that are needed

to satisfy the end user. That represents about 2 years’ worth of inventory flowing into the retail supply system at one particular location that we visited for this analysis.

The Army held about another $46 million worth of the same kind

of items, and eventually those items are shipped into the repair

shops, where they are used by the mechanics. So that is basically

the current system as it exists today and the time that is required

by the process. The 525 days is one of the key points that we are

talking about.

The next chart would show that if you applied the four best practices that we have highlighted today, how that would impact that

process. Again, I will start with the pipeline on the right, flowing

from the top to bottom. We have applied the potential application

here of a third-party logistics provider to ship the item from the operating base into the repair depot. Applying the cellular manufacturing technique at the repair depot itself would streamline the repair process, bringing the resources that are needed into one location.

We found, for example, at this one Army depot we visited that

a component part may travel up to over 2 miles through different

shops before the repair process is completed, which is a very inefficient process compared to what we have seen in the private sector.

So applying the cellular concept would streamline that particular

piece. Again, a third-party provider could serve the function of storing the repaired part and in finally distributing them back to the

end user. In the private sector, the third-party provider service can

be as quick as 1 or 2 days to move a part from one location to the

next.

So, theoretically, applying those concepts to that repair pipeline,

the 525 days could be reduced to maybe 35 days, a significant reduction in time. Likewise, applying the integrated-supplier concept

which we have recommended in our recent reports, to the consumable flow would essentially, as we mentioned earlier, reduce or

eliminate the need for the wholesale system and two of the three

layers of the retail inventory system that moves that part of those

piece parts from the manufacturer into the repair center, which

minimizes the inventory investment DOD must make until the

time that it is required, which again enables them to make better

judgments as to what they need, how much they need, and when

they need it.

So this is the ‘‘To-Be’’ model, if you will, of how those practices

could apply to this entire pipeline.

One other point related to that is that these concepts should be

applied in an integrated manner, as we mentioned earlier. For example, if you increase or improve the piece part support but do not

improve the reputation of the repairable part from the operating

base to the repair center or improve the flow of the parts into the

repair center itself, you will have all of the parts that you need,

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but the repairable items will be slow to get to the repair point and

then slow to get back to the end user.

So these concepts have to be applied throughout the entire supply chain or in an integrated fashion to be most effective.

Mr. SOUDER. I have some other questions that I want to move

to, but let me make one comment. This is to help think it through.

One is to hold up an ideal system that is real logical that the private sector, under proper pressures, would do. Another is to say,

and I realize you are not to give political advice, but you seem to— I heard quite a few things that this would be closed and that would

be closed and this would be closed.

Any practical suggestions of a transition point or how the transportation systems could be used within existing resources would

probably be helpful if the ideal is ever going to become a reality.

Partly the budget squeeze is going to force some of this.

Mr. HINTON. Yes, sir, and I think where we have been coming

from here, we have been suggesting to DOD that they need to test

some of these and look at—precisely what you are raising to me

right now, is what are the barriers out there, what are the things

we need to worry about, what are the costs going to be, are there

any potential readiness implications of changing the way we are

doing it? What are the efficiencies, and what value can we achieve,

savings in the system, by moving forward with some of these?

We are not suggesting that they go right out and just change everything. I think it is the point that what they proved by themselves, working in the personnel and the pharmaceutical area, if it

is done right, thought through, implemented with a good strategy,

it works. What we are trying to raise with DOD is you have only

dealt with a small part of the inventory items, and there is a lot

more that we think offers a lot of potential.

Until you go through the drill to lay out that strategy, test

against it, and demonstrate it and look at the merits of it as well

as the impediments to it, we are going to be saddled with the same

system. You think back, in the private sector in the 1980’s and the

early 1990’s they recognized a crisis was coming when they started

thinking about the globalization of business and those types of

things and how it may affect its profitability and also the question

of survivability. They started re-engineering a lot of their processes, and with DOD, that has not occurred yet.

What has happened over the years is that we have been able to

have sufficient moneys to keep an inefficient system going, which

gets us to why we are here today, and unless we see some movement, the system is not going to change. I do agree with you. I

think resources are getting tight, and maybe that crisis is looming

within the Department and there is reception to the suggestions

that we have been raising with DOD.

Mr. SOUDER. We see it often at the tail end of that, like in my

district, the ITT Aerospace is there—they do the SINGARS radio—

and finally all of the services are looking at the same kind of radio,

but if you have different radios here or there—I remember when

I worked for Sen. Coats, just even things like MREs, these meals,

when the different services even have different meals, and you are

customizing for different branches and different places they are

going, not to mention just piling up the meals, is another question.

91

But clearly, there need to be changes, and hopefully—let me ask

you a series of questions related to—you advocate they dispose of

all the inventory that you classified as unneeded, and discuss a little bit how you would propose—right now it is handled by the Defense Reutilization and Marketing Service, which is—they had

management problems. So if you can talk a little bit about how

much of it would you dispose, who would you dispose it through,

and why don’t we start with those?

Mr. HINTON. Sure. We are not advocating disposal of all of it

right now. We think DOD needs to go through and analyze what

we are saying is unneeded inventory and look at for those items

that are in that second basket that I was describing to you a while

ago how much is it costing us to hold these that are unneeded, and

does the cost, the holding cost, and at what point over a period of

time does that exceed the price of the item? I think they need to

go through that analysis and figure out which ones do they need

to keep and which ones will be the low-hanging fruit that you

would jettison or dispose of right away.

That analysis has not been done, and we think that is a prudent

way to go about that, and we are not suggesting in any way, Mr.

Souder, that they go and dispose of everything. You heard Mr.

Emahiser this morning saying that 21⁄2 percent on disposal, and we

need to think this through, and the Department needs to think it

through very well, is that while we might only get 21⁄2 percent back, we really spent about $12 billion buying that in the beginning, which argues for a reason to really think through the efficiency of the current system.

Mr. SOUDER. What about who sells it?

Mr. HINTON. Pardon?

Mr. SOUDER. What about who sells it and how they are—— Mr. HINTON. Well, I think that would go through the general system that you just mentioned, through DR—what is it, DRMU, Defense Reutilization—— Mr. KNOUSE. Yes. Surplus and excess property goes through,

after the services declare it as excess to their needs, then that

property goes through the disposal process, which is managed by

the Defense Reutilization and Marketing Service out of Battle

Creek, MI.

Mr. SOUDER. In their reduced inventory, how much of that is due

to the downsizing of the military and how much to their management practices?

Mr. HINTON. I think a large part of the reduced inventory has

been because of downsizing. We are just buying less. The initiatives

that Secretary Emahiser was talking about this morning are relatively new. Not enough time has elapsed that we can see the benefits of them, but as he described them, there was one in the Army,

one in the Navy, one in the Air Force, one in the Marine Corps,

and the point that we would raise is that while they are steps in

the right direction, we think there are some more fundamental

movements that need to take place to adopt some of the best practices that I have discussed and also have in the statement there.

Mr. SOUDER. One of the biggest problems and is helpful with

what you are doing here, that Members of Congress have, particularly pro-defense, conservative Members of Congress, who also unVerDate 11-MAY-2000 12:01 Jun 07, 2002 Jkt 010199 PO 00000 Frm 00095 Fmt 6633 Sfmt 6602 W:\DISC\41844 pfrm01 PsN: 41844
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derstand that if we do not manage the defense budget as a whole,

we are going to lose our readiness component of it, is that many

of the groups that are critical of expenditures are so hostile to the

military that we do not know who to believe and who is not about

what is waste and what is not.

When we read a report in the media or see some group saying

such-and-such is waste, we do not know whether they are targeting

somebody because they are from a certain party, and they want to

embarrass them, and we do not know whether it is actually needed

or not needed, and it becomes very hard. Because we have less

money, the pressure is incredible in the defense portion of the

budget.

We do not want to become foreign dependent; we want to be

flexible to maintain our freedoms and at the same time manage the

budget. So that has been helpful, too.

You mentioned about the pharmaceutical compared to the other

parts. Could you compare and contrast the consumable, hardware,

and repairable parts, just kind of recapsulate that and how they

handle those?

Mr. REPASKY. The DOD has responded in different ways to each

of those commodity groups. I think that, first, in the area of

consumables they have been most aggressive in the medical supplies, and there was some discussion about that earlier today.

As a matter of fact, we estimate that as a result of their adoption of best practices, that there has been about a $700 million savings

as a result of those new practices and reduced inventories. For

clothing and textiles, they have also adopted similar, prime vendor

programs, and I think Ken can provide some more details on that.

For hardware items, they have not moved out, and hardware is the

bulk of the consumable item inventory. That represents somewhere

in the neighborhood of $6 billion.

DLA is one of the primary managers of those inventories for

DOD, and their key initiative there that we think closely resembles

what we have seen in the private sector is the Virtual Prime Vendor program. As Mr. Emahiser pointed out this morning, that initiative was kicked off in January of this year. We think there is

a lot of promise to that one, but the jury is still out. They are still

in the initial test phases for that program.

For the $50 billion worth of repairable parts that are currently

in DOD’s inventory, we have not seen an aggressive approach to

using the best practices that we have outlined in our reports. We

have issued those reports recently. I would say 1996 was our first

report on the Air Force, February 1996. We followed that with a

report on the Navy’s repairable parts pipeline in the summer of

1996, and we are going to issue our report on the Navy’s process

within the next few months.

We think, though, that there is a significant opportunity there

because of the long times that we saw in the repairable parts pipeline. Time is money; time is inventory, and as I outlined on my

charts, that we think there is a lot of opportunity to reduce those

times from hundreds of days to maybe months.

So, in general, that is the overall response by DOD at this point.

Mr. KNOUSE. The prime vendor project for food has just been

completed. They did a test in the Southeastern United States. That

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has just been completed. Our initial analysis indicated that they

reduced their inventories just at a few test locations by about $24

million. DOD has believed that since that area of the United States

was so successful, they are going to branch that out nationwide, so

they are moving out on a nationwide basis, as they have with

prime vendor medical. They are doing that for subsistence, food.

The other area is in the clothing area, and the last briefing that

we got from DLA was very optimistic in terms of the prime vendor

programs that they are going to adopt in that area. Right now,

they have a test down at Lackland Air Force Base where they are

looking at recruit items—socks, underwear, things like that—very,

very common items that they can provide military recruits on a

just-in-time basis.

What excited us was an estimate from DLA that over the next

3 to 5 years, once they implement those programs, they are talking

about a billion-dollar reduction in those inventories, and we are

going to be watching that very, very closely obviously, and to the

extent that that comes about, that will be a credit to DOD in these

Prime Vendor programs. So it just goes to prove what they can do

when they really put their mind to it.

Mr. SOUDER. That billion dollars starts to add up to real money.

Mr. KNOUSE. Yes, sir.

Mr. SOUDER. Unless there is objection, I would like to have your

full statement inserted into the record.

Mr. KNOUSE. Sure.

Mr. SOUDER. Also, if we do not get some questions asked, if there

is no objection, I will probably send you some written questions as

well.

Mr. KNOUSE. That will be fine.

Mr. SOUDER. I am now going to yield the chair back to the chairman, Mr. Hastert.

Mr. HASTERT. Thank you, Mr. Souder.

I have a couple of questions. In the history of the Defense Logistics Agency, their job is to purchase everything. Is that correct? Basically, everything——

Mr. HINTON. They largely purchase all the consumables. The

service purchases things, too. DLA also does all the warehousing

of everything that DLA purchases as well as the services.

Mr. HASTERT. They purchase lethal as well as nonlethal commodities. Is that right?

Mr. REPASKY. DLA does store some hazardous materials, if that

is what you are referring to—not the weapons themselves, the missiles, the bombs.

Mr. HINTON. That is all done by the service.

Mr. HASTERT. Repeat that.

Mr. HINTON. That is done by the services.

Mr. HASTERT. It is done by the services.

Mr. HINTON. Right.

Mr. HASTERT. So, the planes and missiles and things like that

are purchased by Defense Logistics.

Now, have you looked into the purchasing practices of DLA?

Mr. REPASKY. We have looked at the way DLA acquires those

consumable items, and my work in particular has focused on comVerDate 11-MAY-2000 12:01 Jun 07, 2002 Jkt 010199 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 W:\DISC\41844 pfrm01 PsN: 41844
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paring those purchasing methods and practices with the private

sector for the similar, same type of items.

Mr. HASTERT. What have you found?

Mr. REPASKY. We have found that there is a significant difference between the two.

Mr. HASTERT. In what way?

Mr. REPASKY. First of all, DLA or the Department of Defense

buys materials many years in advance of when they need them,

compared to the private sector, which purchases those types of materials in many cases in a just-in-time-type environment or basis.

Mr. HASTERT. Even things that we would call commodities, kind

of everyday?

Mr. REPASKY. Exactly. We are talking about, first of all, we are

talking about medical supplies, the syringes and cotton swabs and

things like that, all the way through nuts and bolts that are needed to repair aircraft component parts, as well as food and clothing

items.

Mr. HASTERT. How do they purchase? Do they do regular bids

like anybody else would go out and offer a bid?

Mr. REPASKY. Well, there is a variety of methods that they use.

I do not have a detailed—I cannot provide you a detailed description at this time of that, but there is a variety of methods. A lot

of it is basically bids and contracting, competitive-type contracting

procedures.

Mr. HASTERT. Have you looked at that procedure?

Mr. REPASKY. Not in detail. Personally, on the reviews that I

have conducted, we have not.

Mr. HASTERT. Is that something that you think, just from your

cursory view, that we ought to look at?

Mr. HINTON. Contract management in DOD is a high-risk area,

in our judgment, and it is one that we have not recently looked at,

Mr. Chairman, but it is one that we worry about a lot because

some of the oversight resources in DCAA and other activities like

that are downsizing at a time when dollars are going to grow in

the procurement accounts. DCAA and other agencies that oversee

and audit and evaluate those need to think about reengineering

their own activities to get the coverage. We have all been faced

with that, as audit and evaluation activities, but it is an area I

worry about as to whether we have got enough coverage.

Mr. HASTERT. One of the things in my limited experience that I

have had is that they let a contract, canceled the contract, let the

contract to another company, and then paid the first company for

all the expenditures they made in a year in advance for the products, so they basically have paid for everything twice. Not very efficient.

Mr. HINTON. Right.

Mr. HASTERT. It was a relatively interchangeable piece of equipment that they bought. So the taxpayers not only lost once on this;

they lost twice, and I think that is something that we need to continually look at. Not only do we have too much sometimes——

Mr. HINTON. Right.

Mr. HASTERT [continuing]. But we pay double for it before we

ever get it into the inventory in the first place.

95

I want to change scope a little bit here. There is a real question

about manufacturing specialized products for the military, and one

of the things that the gentleman from Defense Logistics talked

about is airplane engines. Obviously, the airplane engine that you

use on an F–16 or—I am not conversant on all the engines and all

the planes, but probably are not very interchangeable, especially

would not have much sale on the domestic market. Is that true?

Mr. REPASKY. In some of the work that we have done in the past,

one of the things that we did look at was aircraft engine operations

and logistics systems.

Mr. HASTERT. I am using that just as an example, but go ahead.

Mr. REPASKY. There are some similarities between DOD and

commercial hardware—engines, aircraft, whatever—but I would

not say it is a very large percentage. I think it is pretty much military unique, military specifications.

Mr. HASTERT. So, in the manufacturing of these products, probably they would run a line, and I am using numbers off the top of

my head, so I will try not to put any exactitude with anything here,

but let’s say you are making 1,000 planes of some description, and

with that order was 1,000 replacement engines, and maybe in the

long term they figured they would use 1,500 replacement engines.

For a company to put all their assemblage back in place to reproduce those 500 engines maybe 2 years down the road, is it usually

taken into consideration what is the most efficient cost at the time

of purchase and then repurchased? How does that work?

Mr. REPASKY. I think that the issue that you are talking about

here is that tooling up for a certain manufacturing process is an

expensive situation, and you want to maximize the production of

your units while you have that tooling in place to minimize the

unit cost of the items.

So, for example, when you are buying your aircraft, you buy as

many spare engines as you can right up front to minimize that unit

cost, or do you delay those purchases until later? It is the same dilemma that the airlines have to face when they buy the new Boeing Triple–7, for example, and there are some issues with initial

spares. We have talked to some airlines on how they minimize——

Mr. HASTERT. Can I stop you right there, though?

Mr. REPASKY. Sure.

Mr. HASTERT. If you buy a, you know, 777 and you are ABC Airlines, you may want to make that purchase now for extra equipment, but probably that plane will be in production for a period of

time. The engines and the hydraulics and the brakes and everything that would go on that probably would be purchasable 5 years

in the future at probably not an extra cost to tool up. Is that right?

So there would be a difference there. Right?

Mr. REPASKY. That is correct.

Mr. HASTERT. So it is not exactly the same decision that the private sector would have to make.

Mr. REPASKY. No, and I think that our work really is not focusing so much on the acquisition of determining how many initial

spares that you need directly. The work that we have done focuses

on how do you improve the efficiency of repairing those items once

you have them, and if you can reduce the amount of time that it

takes to repair that engine, then your up-front decision of how

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many engines you have to buy is affected. That is really the relationship between best practices that we have seen and its application to the Department of Defense.

Mr. HASTERT. What I am trying to do here, I am not trying to

string us out on a lot of esoteric stuff, but what I am saying, in

some situations there has to be unique decisions that have to be

made when you purchase X, Y, and Z and how it is used. Some of

it is not really appropriated just in time. I mean, to get a certain

turbine for a certain engine delivered, it is not going to be delivered

just in time if a company has to retool—— Mr. REPASKY. Absolutely.

Mr. HASTERT. So we need to sort that out.

Mr. REPASKY. Absolutely.

Mr. HASTERT. In your testimony, of course, in your study I hope

maybe we have sorted that out. So we really need to look at those

things that are really kind of special, set-aside stuff. I do not know

what the number was, but there was only a $30 million—— Mr. REPASKY. Basically—let me make one point here, is that

when we place our recommendations to DOD, we do it in the sense

that there is not one solution for their problems. We think that

they really have to test a variety of concepts and apply them in a

manner where they make the most sense. There is not one technique. Like just-in-time does not apply to all aspects of DOD logistics operations, including consumable items and repairable items.

We think there are areas where that would be the most effective,

but it would not apply across the board.

Mr. HASTERT. But there is a real gap between what Defense Logistics today came in and said, you know, well it is tens of millions

of dollars that we have in excess, and you are saying, well, maybe

it is really tens of billions of dollars that you have in excess. Where

do we start to find middle ground there?

Mr. HINTON. Well, as Mr. Souder was there, I was walking him

through what we had there, and if you could visualize two baskets,

Mr. Chairman. One is the needed inventory, and what is in that

needed inventory is what you need for current operations, what you

need for war reserve materials, what you need for safety levels,

what you need for administrative lead times to place an order until

that part comes back.

That is a fairly large basket of on hand inventory, if you will,

that you need right now for current operational needs and war reserves, at least 2 years, and the safety level on just the administrative lead time alone. So over that, you have war reserves, and you

have your current operation needs, and in our view, we are not

raising any questions around the war reserves.

Now, if you go over to the second basket, which is your

unneeded, that is where we have a difference with DOD, and it is

how far out that you need to go to buy your inventory, and that

is where we differ a little bit because what we have been trying to

push DOD to do is bring their buy decisions a little closer to when

they need it. What happens for us to characterize that they have

this unneeded inventory in that second basket is that over a period

of time what they expected to be a lot of demands for that inventory they bought does not occur. Some of the weapons systems may

become obsolete, and they have a whole bunch of parts that are

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there, and so the longer that they look out and buy that, it is a

high-risk decision that some of those demands may not occur in the

system.

Mr. HASTERT. Let’s talk about obsolete weapons and the commodities that you buy to support those things. Let’s look at a Huey

helicopter that is mothballed and it is not there and they have engines and blades and all those things and turbines that go to support those, when that product—when that commodity or piece of

equipment is mothballed or set aside, do we keep up the inventory

for those?

Mr. HINTON. You will probably have some—you may not be buying those parts, but you may retain some of those parts until a

later date, and they may be in our unneeded basket. You are retaining them, but you do not have a likely demand to come about

it.

Mr. HASTERT. Let’s say that those hulls, then, are given away or

into another country and sold or whatever?

Mr. HINTON. Then you might be able to sell those parts as part

of the package.

Mr. HASTERT. Those parts would normally then follow.

Mr. HINTON. Sure.

Mr. HASTERT. There is a reason to keep those, then.

Mr. HINTON. To the extent that we are successful in finding buyers for some of those old systems, there might be some rationale

in that.

Mr. HASTERT. If you are a student of history at all, you find out

that at the beginning of World War II, before we really got into the

war in the late-1930’s and very early forties, that we started to

gear up for the war, and people went down in warehouses that

were not too far from this building and started to look in them, and

there was stuff that was literally there from the Civil War.

There really was not much relevance there, and one of the things

that we do not want to have happen, and hopefully we will never

have to gear up for a major encounter of any type, but to have that

experience as well, not only the cost of the equipment that we probably could have rotated out at some savings, but also just the cost

of storage.

Mr. HINTON. In the unneeded basket that we have been talking

about it costs about $100 million to warehouse that unneeded inventory.

Mr. HASTERT. What price do you put at the unneeded inventory?

Is that your $69 billion?

Mr. HINTON. Well, that is the total, and we would split that; that

$35, $37 billion is unneeded in our analysis. Within that unneeded

inventory that we have there is about $15 billion that DOD has no

projected demands on that inventory. There is about a billion of it

that has a 100-year supply.

Mr. HASTERT. That is the purchase price. Right?

Mr. HINTON. Yes.

Mr. HASTERT. If you cycled that out, do you have any idea——

Mr. HINTON. Well, the number that Mr. Emahiser had, 21⁄2 percent, this morning, those that would go to disposal. On those 21⁄2

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geted for disposal. What it cost us to buy that $300 million was $12

billion.

Mr. HASTERT. How integrated are the various supply and information systems within the DOD inventory management?

Mr. HINTON. That is an area that GAO has been reporting on.

Information management is also a high-risk area across the government. It is a key to the efficient running of any inventory operation, as well as a whole lot of the processes in Government, but

in DOD it is not well integrated, particularly in the material management.

DOD was going through the processes of coming up with an integrated system. Once they identified the cost for that system, they

changed strategy, and we are going with individual systems

against various parts of the materiel management process right

now, but we have not gone through—DOD has not gone through

the drill of determining whether or not their plans are going to be

the cost-effective solutions for what they ultimately want to

achieve. We have a report on that.

I would be happy to make that a part of the record, and it is an

area that is very key to having good information to make the decisions that we were talking about when Mr. Souder was here. What

is at risk here, Mr. Chairman, is $15 billion. That is what DOD

spends annually to buy inventory. So if we are talking over the life

of the future-year defense plan, which covers 6 years, that comes

to the tune of about $90 billion. To put the $15 billion in context,

that is more than NASA’s budget, which is $13 billion.

Mr. HASTERT. Let me ask one more question, and I would like

to pass the time over to the gentleman from Arizona, but, you

know, I have been around this Congress 10 years. Some people say

maybe that is 10 years too long, but I remember having a discussion 10 years ago in this committee that, boy, we are not being

very efficient on the inventory, and it was an issue when we had

a lot more inventory as well as we saw the early slide of, those

charts this morning. Some people said, at that time saying that we

had defense inventory problems for 20 years. Well, now, it is 30

years. Why has change been so difficult, in your opinion?

Mr. HINTON. I think there is a lot of service parochialism in the

Department that makes it very difficult to change over there. I

think change itself is very difficult.

One of the things that I think we have had that businesses in

the private sector have not had, we have had a lot of money to keep

an inefficient system running. It is not a question of we have got

incapable people working in the system; what we have is an inefficient system. Over the years we continued to pay to run that inefficient system, and what we have been suggesting through our work,

Mr. Chairman, is the need to change.

DOD has got to come forward, and that is our recommendation

that deals with the high-risk report that we have issued, to think

of a strategy for changing the culture over in the Department. A

key part of changing that culture is adopting some of these best

management practices that we have seen in the private sector, and

it has got to be done from the top down. That is the way you overcome the stovepipes that are within the individual system—services.

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Mr. HASTERT. Thank you very much. Mr. Shadegg, do you have

any questions for this panel?

Mr. SHADEGG. Mr. Chairman, I do not. Thank you.

Mr. HASTERT. Thank you. Thank you very much, gentlemen. I

appreciate your testimony, and I would be interested in discussing

some of these things with you further, obviously.

Mr. HINTON. Sure. I would be happy to, Mr. Chairman. Thank

you very much.

[The information referred to follows:]

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Mr. HASTERT. I ask now the third panel if they would please

come forward. It is composed of Dr. Jacques Gansler, vice chairman

of the Defense Science Board; and Retired Admiral Luther

Schriefer of the Business Executives for National Security, who is

executive director of their Tail-to-Tooth Commission. Gentlemen, if

you would please rise and take the oath, as required by the committee.

[Witnesses sworn.]

Mr. HASTERT. Let the record show that the witnesses responded

in the affirmative, and Dr. Gansler, please proceed.

STATEMENTS OF JACQUES GANSLER, VICE CHAIRMAN, DEFENSE SCIENCE BOARD; AND ADMIRAL LUTHER F.

SCHRIEFER (USN, RETIRED), EXECUTIVE DIRECTOR, BUSINESS EXECUTIVES FOR NATIONAL SECURITY

Mr. GANSLER. Mr. Chairman, members of the committee, at your

request, I am here to report on the Defense Science Board’s 1996

summer study. The title of it was ‘‘Achieving an Innovative Support Structure for the 21st Century Military Superiority.’’ We subtitled it ‘‘Higher Performance at Lower Cost.’’ It was dated November 1996, and I served as co-chairman of the study.

Before commenting on the study itself, I think it is appropriate

to briefly note the role of the Defense Science Board. This board

was established in 1956, actually in response to the Sputnik at that

time, to provide an objective and an independent advice on technology and management issues to the Secretary of Defense, the

Deputy Secretary, Under Secretary, and also to the chairman of the

Joint Chiefs and the vice chairman. Currently, it is composed of 28

representatives from academia, industry, and research institutions.

We meet three times a year for 2 days each.

It achieves its impact, though, through the various task forces

that are put together from a combination of board members and

outside experts that we bring in, and we look at specific problems

of concern to the various senior DOD officials that it serves.

It has to be emphasized that the role of the DSB is simply an

advisory one, and our recommendations and positions do not necessarily represent those of the Department of Defense. Rather, the

board is perceived as a way for the secretary and his senior personnel to receive outside counsel and advice in areas that are critical to the future evolution of America’s national security posture.

I currently serve as vice chairman of that board.

Now, let me address the specifics of the 1996 summer study. As

I said, that was on the innovative DOD support structure for the

future. Our requested task was to address two critical issues. First,

with the recognition that the Nation had essentially put off weapons modernization for the past decade and with a clear recognition

that it is unlikely there will be a large increase in the defense

budget in the coming years.

Thus, how is it possible to generate the tens of billions of additional dollars annually required for modernizing the forces? That is

an action that is required to both replace the aging equipment and

to update it to match the requirements of advanced technology; in

other words, in order to meet the demands of the revolution in

military affairs.

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The second question we were asked: Since it will be necessary to

generate these modernization dollars by a shift from within the

overall level of current expenditures, particularly a shift from the

support areas, will it be possible to maintain or even improve overall combat effectiveness while simultaneously significantly reducing

the current levels of DOD’s support costs and personnel?

To address this set of issues, a group of senior people, 28 of us,

outside advisors, of whom 11 were DSB members, were assembled.

They were assisted by an outstanding group of Government advisers who provided the interface with the DOD.

We began our analysis by looking at the current approximately

$250 billion of annual defense expenditures, and our objective was

trying to make a significant shift, tens of billions of dollars per

year, from the over 55 percent of the dollars that are spent in the

support area, and we wanted to shift these into the required combat and modernization areas.

So we focused on the approximately $140 billion a year that are

spent in the areas typically referred to as support and infrastructure. These run the full gamut from medical and housing to school

house training and base operations. They also consume a very large

share of both the civilian and military 21⁄2 million people that make

up the active-duty and civilian work force.

I might note that only about 14 percent of the dollars are directly

expended on combat operations, and only about 14 percent of the

total personnel are actually in combat positions.

Now, since our objective was to increase the percentage of the

dollars available for modernization and combat, we focused on finding savings in the support area. We took each of the various support areas and analyzed whether there could be performance improvements and/or cost reductions in each of them, and we did this

through applying modern information technology and management

principles, along with maximizing the use of competitive forces

from the private sector.

Our conclusions, as described in detail in the report, are that

there are dramatic performance improvements that are potentially

made if you, in fact, make the simultaneous changes that we described here. By the end of, say, a 5-year period a shift of tens of

billions of dollars per year can be made from the support area into

the combat and modernization area.

Now, since your focus here today is on the DOD’s logistic system,

which is the largest of its overall support areas, let me briefly summarize our findings in that area. In 1996, the DOD expenditures

for the overall logistics support were about $60 billion a year. Some

of this was for direct battlefield support, but the vast majority of

it was associated with the infrastructure, primarily that located

within the continental United States.

Importantly, over one-half million, active-duty military personnel

are involved in the logistics area. That is over 30 percent of the active-duty military, and approximately 300,000 of the DOD civilians

are involved in this area. Now, recognizing the critical importance

of this area to DOD’s future, and that is from a performance as

well as a budget perspective, we found that there have, in fact,

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tics infrastructure area. In my prepared remarks, I listed those initiatives, and you heard those from the DOD today.

Now, these actions are all very commendable, and they have to

be aggressively pursued. However, we found that there is still very

significant room for improvement. For example, we found that the

response times of the DOD logistics systems, in terms of distribution, repair, and procurement, are still dramatically higher than

those achieved by world-class commercial organizations on similar,

or in some cases identical, equipment.

In fact, we found these world-class benchmarks are measured in

hours or, at most, in days, while the DOD performance tends to be

measured more in weeks or months. For example, while Caterpillar

delivers parts anywhere in the world within 1 to 4 days, or, in fact,

if it is not within 4 days, they pay for it, the DOD, with these identical parts, took 40 to 60 days to be distributed during the Gulf

War.

Essentially, the difference is that the commercial world has been

moving to a totally re-engineered logistics system, one that relies

on total asset visibility and rapid transportation. For the DOD to

move from its historic what has been called just-in-case inventory

system and supply system to achieve comparable high performance

at dramatically lower costs, it will be necessary to totally reengineer the current system—some refer to that as a World War II system or, at best, a cold war logistics system—moving to one that focuses on a concept of on-demand, rapid, intermodal delivery right

from the factory to the foxhole.

The changes in the DOD logistics system we envision are not

small, incremental changes, but they are what the commercial

firms have been forced to do to become competitive. These firms

fully applied modern information technology to keep track of the

availability of all inventory on a worldwide basis, including that in

transit, and they take full advantage of rapid, worldwide transportation.

They also continuously improve the reliability of their parts and

systems so as to minimize their down time and thus maximize

their readiness, while simultaneously reducing the inventory and

the repair costs.

Thus, the specific issue being addressed by this committee,

namely, defense inventory management and repair parts, cannot be

effectively addressed in isolation. It has to be seen simply as a part

of a dramatically transformed and streamlined, overall DOD logistics system, one utilizing far fewer people, far fewer parts, and far

fewer facilities, yet greatly enhancing the logistics performance.

This is the essence of our study findings. Clearly, the potential

exists for dramatic improvements in DOD’s support performance

and a significant shift of resources from support to combat and

modernization. However, the challenge is achieving the implementation of these changes that are required in order to realize these

potentials.

I personally believe that the Secretary, the Deputy Secretary of

Defense, as well as the chairman and vice chairman of the Joint

Chiefs of Staff, and each of the service chiefs are now committed

to achieving these changes. I also believe that the initial impact of

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these changes will be reflected in the final results of the QDR process.

However, it has to be recognized that these will be extremely difficult changes to bring about, as they were in American commercial

industry. Thus, achieving these changes will require the full cooperation of America’s military and political leaders for its realization.

I believe you on this committee and the other Members of Congress can play a significant part in removing the barriers that currently exist for the required transformations that must take place

within the DOD over the next few years. I think only in this way

will America be able to modernize its forces in order to be fully prepared for military operations in the early 21st century. Thank you.

[The prepared statement of Mr. Gansler follows:]

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Mr. SOUDER [presiding]. Thank you very much for your thoughtful testimony. Admiral Schriefer.

Admiral SCHRIEFER. Mr. Chairman and members of the subcommittee, first of all, I want to thank you for inviting us today.

Second, I would like to ensure that our written testimony we provided gets entered into the record.

I would like to talk a little bit about Business Executives for National Security [BENS] to make sure everybody understands who

and what we are and why we are involved in this. Now, BENS is

a national, nonpartisan organization of business and professional

leaders that are dedicated to the idea that national security is everyone’s business.

BENS members apply our experience and commitment to help

our Nation’s policymakers build a strong and effective, affordable

defense and find practical ways to use and encourage that all these

business practices become a reality, and that is really the crux of

what our organization is about. We work with Congress. We work

with the Pentagon and the White House to ensure that the changes

we recommended are put into practice, and that is really why I am

here today.

Before joining BENS, I had recently retired from 37 years of active duty in the Navy, and in that position I have really become

familiar with the topic we are addressing this morning: improving

defense inventory management. I have seen it from several perspectives, both in the Navy as a commander and observer of what

we do, and also observing the best in the private sector of their inventory management practices. I can say that from my vantage

point, American industry has much to offer and to teach and apply

to the inventory practices of the Department of Defense.

I would like to talk about some of these methods today. As I said

earlier, I want to not only thank you, but I want to commend you

for addressing this, because I cannot think of anything that is more

critical than the way we go about our business in the Department

of Defense. That is the imbalance of the force structure-to-structure

ratio, the problem of tooth-to-tail.

Too much of our limited defense dollars go to support areas, the

tail, like inventory management. In fact, support and infrastructure now consume nearly 70 percent of the defense dollars. This

type of excessive overhead is inexcusable when many war-fighting

needs, the tail, go unmet.

In fact, BENS considers this problem so acute that we are standing up a Tail-to-Tooth Commission, and that word order is intentionally inverted so that we highlight the dangerous reversal in the

resources we devote to the combat end of the national defense.

When our commission’s work is done, we can reverse that name,

having restored the military resources to the ratio the United

States needs to defend our interests and the ideals into the 21st

century.

Your hearings, directed toward that same goal, will ultimately

free the resources that can be directed at other, more critical defense needs.

As we heard this morning, the Pentagon has long suffered from

deficiencies in its inventory practices. I took the liberty of tracing

the history of the problem and found that GAO has studied this for

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some 30 years. These type of supply deficiencies were costly annoyances during the cold war period. In today’s era of rapid, come-asyou-are warfare, inventory problems could prove deadly.

To their credit, the military services do recognize this danger.

Since Desert Storm, military experts have cited two capabilities as

crucial to superior battlefield performance: intelligence collection on

enemy plans and activities, and the ability to stand up logistics

trains stretching 7,000 miles back to the warehouse and depots in

the United States.

Management of our logistics inventory was a key to success in

Desert Storm. In fact, since World War II, no other industrial nation has matched our ability to deploy and support military forces

on a worldwide scale, but today our prowess has become our problem. At huge cost of national treasure—and we have seen that

today—we have maintained stocks of supplies and equipment just

in case they were needed. However, the end of the cold war and

the squeeze on resources allocated to national defense has made

just in case an unaffordable strategy.

Now, we have seen and witnessed the many past excesses of

DOD inventory and to the incremental management improvements

that have been made since the early 1900’s. Now, we have also had

some successes. For example, let me just mention one. The Air

Force now uses the private sector to move materiel from depots to

bases worldwide. In 1992, the Air Force Materiel Command operated its own air transportation system, called LOGAIR, to move

high-value repair parts around the United States and overseas. It

was costing $135 million a year and required nearly 200 full-time

civil servants to run that program.

To get a benchmark, the Air Force went to Fed Ex to see how

they ran their program. In the process, they asked one of the managers of the Fed Ex warehouse if he could move engines. He looked

around and said, ‘‘Well, we are moving Mercedes automobiles, so

I think we can move engines.’’ Today, the Air Force saves nearly $50 million in that process.

The point which underlies this example is that inventory is a

part of a complex problem, as well as the entire system. Piecemeal,

step-by-step change will have long-term impact. Real reform requires creation of an entirely new system. As we just heard Dr.

Gansler say, it needs to be re-engineered. It is a revolution, not

evolution, and it must occur.

That was the lesson that our American industry learned in the

1980’s. As recently as 10 to 15 years ago, many large corporations

maintained inventory systems which resembled what the Pentagon

does today. They were largely vertically oriented. They put key

parts in warehouses, supplies and other items that had to be

shipped around the world. These corporate structures are now

something of the past. The reason simply is that American business simply had no choice.

Faced with that serious challenge from foreign suppliers and

using sophisticated inventory systems and lean production teams,

our U.S. firms were forced to change. They were, in fact, very successful.

Supply chain management is not just the latest management fad.

According to the Department of Commerce, U.S. companies have

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cut inventories 9 percent since 1980. That has freed up $82 billion.

The savings are the other bonus. Not only do you get more efficient

management, but you save money as well.

If supply chain management sounds like it is just in time, I want

to insist that it does not. I have not mentioned just in time, because it may not make sense in many critical, combat-related cases.

It makes sense in some industrial sectors, but in most cases customers remain uncertain about their future needs.

When a company’s projections of future demand are too high, inventory grows; when too low, sales opportunities are lost, and may

be a rare exception when used in the military, but for example,

what Boeing is now doing with their new versions of the 737 could

equally be applied to the Defense Department. An expanded spares

distribution network and a reliable, critical parts delivery system

can reduce the number of spares an airline has to keep on hand.

Improved data analysis allows parts to be shipped closer to the

dates when they will be needed for repairs.

Boeing has successfully tested this program with one airline.

They predict the plan could reduce an airline’s initial spares investment by up to 60 percent. That, in fact, could be applied to the Department of Defense. We need to look at several areas.

Lean thinking. Lean thinking means that management should

spend its time looking at processes rather than at organizations

and functions.

Asset availability. All firms must maintain a minimum level of

inventory, but even this minimum level can be more effectively

managed. Advanced software and parts management systems, pioneered by the aftermarket, retail parts industry, can help.

Inventory management, as we have heard today, is not an isolated event. It is part of the life cycle of a product, or in the Pentagon’s case, an entire weapons system. You cannot suboptimize inventory management and hope to achieve an overall solution in the

life cycle problem. The entire process has to be reformed.

The right amount of inventory varies by situation. Customers

and soldiers in the battlefield do not always know in advance what

they want or will need. What is important is how you manage that

inventory. Inventory management to achieve corporate goals has

been pioneered by the private industry. The most important lesson

that the U.S. private sector can share with the Defense Department is that there is no need to benchmark a better way of managing inventory when you simply can hire a quality provider to

perform a service for you. In short, benchmark not to emulate but

to outsource.

Mr. SOUDER. Admiral, for time reasons, we are going to need you

to summarize in the next minute or so.

Admiral SCHRIEFER. OK. I will summarize with the recommendations. The first one is that we have to focus on advances in inventory management software. Advances in inventory software have

been revolutionary. Software is the tool that allows the entire supply chain to become visible and responsive to the inventory manager.

No. 2: Buy off the shelf. Buying commercial makes sense because

it reduces contract costs and overhead.

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No. 3: Plan for life cycle costs. For new systems, consider longterm contractor support and outsourcing maintenance as a first option.

Finally, centralized inventory management: A caution here, however, and I emphasize that centralized management is not an excuse for a large management headquarters, which is one of the biggest problems we have today. I thank you for the opportunity to

present this.

[The prepared statement of Mr. McInerney follows:]

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Mr. SOUDER. I want to thank you, Admiral, and you, Dr. Gansler.

I appreciate your testimony. You all have had to wait a little bit

longer today and be here with us longer than you, I think, had

originally anticipated. Because of this vote and because we have already lost our members on the minority side and because I am

going to have to run to make the vote myself, what we are going

to do is conclude the hearing at this time without any questioning,

but ask you—advise you that we will submit written questions

which we would very much appreciate your answering; and, Admiral, your full statement—each of your full statements will be made

a part of the record.

Thank you very much, and with that, I will conclude. This hearing is adjourned.

[Whereupon, at 12:15 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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