United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Oversight of

Government Management and the

District of Columbia, U.S. Senate

July 1996 INVENTORY

MANAGEMENT

Adopting Best

Practices Could

Enhance Navy Efforts

to Achieve Efficiencies

and Savings

G O A

years

1921 - 1996

GAO/NSIAD-96-156

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-271850 

July 12, 1996

The Honorable Carl Levin

Ranking Minority Member

Subcommittee on Oversight of

 Government Management and the

 District of Columbia

Committee on Governmental Affairs

United States Senate

Dear Senator Levin:

This report is the ninth in a series of reports comparing the Department of

Defense’s (DOD) logistics practices with those of the private sector.1

 As you

requested, we are continuously examining DOD’s inventory management

practices to identify areas where costs can be reduced and problems can

be avoided by adopting leading commercial practices. While DOD has

implemented some innovative practices, many opportunities exist for

improving the logistics system. This report focuses on the Navy’s logistics

system for aircraft parts. The objectives of this review were to (1) examine

the current performance of the Navy’s logistics system, (2) review the

Navy’s efforts to improve its logistics system and reduce costs, and

(3) examine leading best practices used by the airline industry to identify

potential opportunities to improve the efficiency and effectiveness of the

Navy’s logistics operations.

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

environment, is faced with the challenge of improving its service while

lowering costs. As a result, many companies have adopted innovative

business practices to meet customer needs and retain profitability. Since

DOD is facing a similar challenge of providing better service at a lower cost,

it has begun to reexamine its business practices. With the end of the Cold

War, the DOD logistics system must support a smaller, highly mobile, high

technology force with fewer resources. Also, due to the pressures of

budgetary limits and base closures, DOD must seek new and innovative

ways to make logistics processes as efficient and effective as possible.

To supply reparable parts for its approximately 4,900 aircraft, the Navy

uses an extensive logistics system based on management concepts largely

1

See Related GAO Products.

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developed decades ago.2 The Navy’s system, commonly called a

“pipeline,” consists of many activities that play a key role in providing

aircraft parts to end-users when and where needed. This pipeline

encompasses several functions, including the purchase, storage,

distribution, and repair of parts. Another important function of this

pipeline is to provide consumable parts (e.g., nuts, bearings, and fuses)

that are used extensively to fix reparable parts and aircraft. The Defense

Logistics Agency (DLA) provides most of the consumable parts that Navy

repair activities need and handles a large part of the warehousing and

distribution of reparable parts.

Although not as large as the Navy, commercial airlines have similar

operating characteristics to the Navy. They maintain fleets of aircraft that

use reparable parts and operate logistics pipelines whose activities are

similar. For both the Navy and commercial airlines, time plays a crucial

role in the responsiveness of logistics operations and the amount of

inventory needed. Pipeline complexity also adds to logistics costs by

increasing overhead and adding to pipeline times. Condensing and

simplifying pipeline operations, therefore, simultaneously improves

responsiveness and decreases costs by reducing inventory requirements

and eliminating infrastructure (warehouses, people, etc.) needed to

manage unnecessary material.

Results in Brief The Navy is working to improve its logistics system. Our work shows that

the best practices we identified in the airline industry have the potential

for use in the Navy’s system. These practices, if applied where feasible,

could improve the responsiveness of the Navy’s logistics system and

potentially save hundreds of millions of dollars. The Navy’s system,

characterized by a $10-billion inventory of reparable parts, is slow and

complex and often does not respond quickly to customer needs. For

example, customers wait, on average, 16 days at operating bases and 

32 days on aircraft carriers to receive parts from the wholesale system. If

the wholesale system does not have the item in stock, customers wait over 

2.5 months. Many factors contribute to this situation, but among the most

prominent is a slow and complex repair pipeline. Within this pipeline,

broken parts can pass through as many as 16 steps, which can take as long

as 4 months, before they are repaired at a repair depot and available again

for use. Specific problems that prevent parts from flowing quickly through

the pipeline include a lack of consumable parts needed to complete

2

Reparables are parts that, if damaged or worn, can be fixed or overhauled for less than the cost of

new items. These items include landing gear, hydraulic pumps, and “black boxes” essential to an

aircraft’s operations.

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repairs, slow distribution, and inefficient repair practices. For example,

the Navy’s practice of routing parts through several workshops at repair

depots increases the time needed to complete repairs. One item we

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

actually repairing the item. The remaining 212 hours involved time to

handle and move the part to different locations.

The Navy recognizes it must improve its logistics system to make it more

responsive and less costly. To achieve these goals, the Navy has

established programs that focus on centralizing supply management and

repair activities and outsourcing certain material management functions. It

has also established a logistics response team to analyze the Navy’s

pipeline and identify opportunities to reduce its length and complexity.

The Navy is in the early stages of developing these programs and has not

yet identified many of the specific business practices that it will use to

achieve its goals. However, the initiatives provide a framework for

improvements by focusing on pipeline time and complexity.

Best practices used by the private sector provide opportunities to build on

the Navy’s improvement efforts. These best practices appear feasible for

inclusion in the Navy’s efforts and could potentially save hundreds of

millions of dollars while improving customer service. The commercial

airline industry has adopted leading-edge practices that have resulted in

significant improvements and reduced logistics costs. Leading firms in the

airline industry hold minimum levels of inventory that can turn over four

times as often as the Navy’s. Parts are more readily available and delivered

to the customer within hours. The repair process is faster, taking an

average of 11 days for certain items at one airline we examined, compared

to the Navy’s 37-day process. Specific practices that have enabled

companies to achieve these results include (1) repairing items promptly

after they break, (2) employing a “repair cell” concept to speed the repair

of component parts, (3) using local distribution centers and integrated

supplier programs to improve consumable item support and reduce

“just-in-case” inventory, and (4) using third-party logistics providers to

manage logistics functions.

Although we cannot say with certainty that these best practices can be

integrated into the Navy’s logistics system, we believe they are compatible

with many aspects of the Navy’s operations. Because of the significant

benefits realized by private firms, we further believe that the potential

benefits to the Navy in adopting these practices are enough to justify a

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demonstration project. Such an approach can determine with certainty the

feasibility or cost-effectiveness of the practices.

The Navy’s System

Results in Large Costs

and Untimely Service

The Navy’s overall inventory management philosophy is one of

maintaining large inventory levels at many different locations to ensure

parts are readily available to meet customers’ needs. As of September

1995, the Navy had reparable inventory valued at $10.4 billion. However, a

portion of this inventory is not needed to support daily operations and war

reserves. Of the $10.4 billion inventory, the Navy classifies $1.9 billion 

(18 percent) as long supply—a term denoting that more stock is on hand

than is needed to meet daily operations and war reserve requirements.3

The $10.4-billion and the $1.9-billion inventories were valued using DOD’s

standard valuation methodology—reparables requiring repair were

reduced by the estimated cost of repair and excess inventory was valued

at salvage prices (2.5 percent of latest acquisition cost). Figure 1 details

the Navy’s allocation of its inventory to daily operations, war reserves, and

long supply.

3

In our report entitled, Defense Inventory: Opportunities to Reduce Warehouse Space

(GAO/NSIAD-95-64, May 24, 1995), we recommended that DOD systematically review and dispose of

items most likely to have no future need.

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Figure 1: Navy Inventory Allocation

0.1%

War reserves

18.5% • Long supply

81.4%•

Daily operationsa

aIncludes parts in transit between locations.

Source: DOD’s Supply System Inventory Report as of September 30, 1995.

The inventory turnover rate is a measure of how efficiently a business uses

its inventory investment and can be expressed as the ratio of the dollar

value of repairs to the average inventory value. One commercial airline we

visited calculated that, using this ratio, it would turn its reparable

inventory over once every 5 months. In comparison, we calculate that,

based on fiscal year 1995 repairs, the Navy’s wholesale-level inventory of

reparable parts would turn over once every 2 years.4

 The Navy incurs

significant costs to manage this large inventory investment. At the

wholesale level alone, the Navy estimates it spent almost $1.8 billion to

repair, buy, and manage reparable parts during fiscal year 1995 (see 

table 1). This amount does not include the costs to store and maintain

parts at operating locations, such as bases and aircraft carriers.

4

Wholesale-level stocks are generally held in large quantities at DLA storage depots. This stock is used

to resupply end-user locations.

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Table 1: Navy Wholesale Costs for

Reparable Parts—Fiscal Year 1995 Dollars in millions

Category Costs

Component repairs $957.4

Purchases 250.4

Material management 584.8

Total $1,792.6

Source: Naval Inventory Control Point.

Despite the billions of dollars invested in inventory, the Navy’s logistics

system is still often unable to provide spare parts when and where needed.

During fiscal year 1995, Navy aircraft were not mission capable

11.9 percent of the time because spare parts were not available to repair

the aircraft (see fig. 2).

Figure 2: Navy Aircraft Readiness

Rates—Fiscal Year 1995

72.0% • Mission capable

•

11.9%

Not mission capable due to the

lack of parts

•16.1%

Not mission capable due to

maintenance actions

Source: Navy data.

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One reason parts were not available was that the Navy’s system often does

not provide timely deliveries of parts. The Navy reported that, between

October 1994 and June 1995, parts were not immediately available to

mechanics at operating locations 25 percent of the time for reparable parts

and 43 percent for consumable parts. When a part is not available, an

end-user requisitions the part from the wholesale supply system.

According to the Navy’s data, the length of time from requisition to

delivery of a part takes, on average, 16 days to operating bases and 32 days

to aircraft carriers. If the Navy’s wholesale system does not have the item

in stock (32 percent of the time for reparable parts), the Navy places the

item on backorder. According to the Navy’s data, customers wait over 

2.5 months, on average, to receive backordered items. The Navy reported

that, as of June 1995, it had more than 31,000 backorders for reparable

parts, worth about $831 million.

The delay in receiving parts often forces mechanics to cannibalize parts

(removing parts from one aircraft to make repairs on another). Between

July 1994 and June 1995, the Navy reported that its mechanics at operating

bases and on aircraft carriers cannibalized parts at least 70,500 times. This

practice is inefficient because the mechanics have to remove a working

part from one aircraft and then install the part on a different aircraft.

According to Navy guidance, cannibalization is a symptom of a failure

somewhere in the logistics system, but, in some instances, can be a viable

management tool in keeping aircraft operational. Aircraft squadron

officials at several locations we visited, however, told us that cannibalizing

parts is a routine practice because the Navy’s system does not consistently

provide replacement parts on a dependable basis.

Several Factors

Contribute to

Inefficient System

The Navy’s large inventory costs and slow customer service are the result

of several factors, but the largest contributor is a slow and complex repair

pipeline. According to Navy officials, about 75 percent of component

repairs are relatively minor in nature and can be done by maintenance

personnel at the operating bases. They also stated that, when a part

requires more complex and extensive repair (about 25 percent of the

time), the process can create as many as 16 time-consuming steps as parts

move through the repair pipeline (see fig. 3). Component parts can

accumulate at each step in the process, which increases the total number

of parts that are needed to meet customer demands and to ensure a

continuous flow of parts. Tracking parts through each of the 16 steps

listed in figure 3, we estimate, using the Navy’s flow time data, that it can

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take about 4 months, on average, from the time a broken part is removed

from an aircraft until the time it is ready for reissue.

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Figure 3: Navy Repair Pipeline (for parts requiring repair beyond the base level)

Wholesale Level

Approximate

 Flow Times

Base Level

Base Level

Base Supply

Base Maintenance

Base Shipping

Consolidation Point

Consolidation Point

Central Receiving

Warehouse Storage

Repair Facility Receiving

Repair Workshops

Central Receiving and Packaging

Warehouse Storage

Central Shipping

Flightline

Flightline

Base Supply

Base Receiving

Base Supply

16 days

unknown

5 days

73 days

unknown

27 days

12 days

__

__

__

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As figure 3 illustrates, a broken part can pass through a number of baseand wholesale-level steps. At the base level, after a mechanic removes a

broken part from an aircraft, the item is routed through base maintenance.

If the part cannot be repaired at the base, it is then sent to a wholesale

storage location, where it sits until scheduled for repair. Once scheduled,

it is inducted into repair workshops and fixed, then sent to storage or used

to fill a customer’s order. The Navy reported that over 190,000 parts were

fixed through this process during fiscal year 1995 at a cost of about

$957 million.

While the repair pipeline time can take as long as 4 months, on average, it

could be significantly longer because it does not include the time parts sit

in wholesale storage awaiting repair. The Navy does not measure this step

in the process; however, this time could be substantial. For example, the

Navy does not promptly forward items to repair workshops after they

break. Also, because the Navy schedules most repairs quarterly, many

broken items could sit in storage for several months before being repaired.

Parts may also sit in storage because many broken items in the Navy’s

system are not needed to support daily operations or war reserves.

Of the portions of the pipeline that are measured, the time spent receiving

and repairing items at repair facilities accounts for the largest amount of

pipeline time. Shown in figure 3 as “repair facility receiving” and “repair

workshops,” these activities take an average of 73 days to complete.5

 In

examining the repair process at two repair facilities, we found that parts

can be routed through several different workshops, thereby increasing the

time to complete repairs. Functions such as testing, cleaning, machining,

and final assembly are sometimes done at different locations at the repair

facility. As a result, parts could be handled, packaged, and transported

several times throughout the repair process. According to Navy officials,

this is a common practice at the Navy’s repair facilities.

At one repair facility, we examined 10 frequently repaired pneumatic and

hydraulic components and found that about 85 percent of the repair time

needed for these parts involved activities such as unpacking, handling, and

routing the part to different workshops. The remaining 15 percent of the

time was spent on the actual repair of the items. One item we examined

had a repair time of 232 hours. However, only 20 hours was needed to

actually repair the item; the remaining 212 hours involved time to handle

and move the part to different locations.

5

Based on an August 1995 Naval Inventory Control Point analysis.

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In addition to delays caused by routing parts to different locations,

mechanics often do not have the necessary consumable parts (nuts, bolts,

bearings, fuses, etc.) that are used in large quantities to repair parts.

According to Navy officials, having the necessary consumable parts is

another important factor affecting the timely repair of components. The

Navy calculates that the lack of parts adds as much as 4 weeks to the

average repair time. As of February 1996, the Navy had 11,753 reparable

aircraft parts, valued at $486 million, in storage because parts were not

available during the repair process to complete repairs. These items,

which had been packaged and moved to a warehouse next to the repair

facility, had been in storage for an average of 9 months. Figure 4 shows

aircraft components awaiting parts in a warehouse at the Navy’s repair

depot at Cherry Point, North Carolina.

Figure 4: Components Awaiting Parts

at a Navy Repair Depot

The Navy’s data indicates that DOD’s distribution and transportation system

is slow in moving material among storage, repair, and end-user facilities

and is another factor adding to the length of the repair pipeline. For

example, with the current system, it takes an average of 16 days for a

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customer to receive a part at an operating base after a requisition is

placed. As of June 1995, the Navy estimated that over one-half of this time

involved DLA’s retrieval of the part from the warehouse and shipment of

the part to the customer.

The Navy Recognizes

the Need to Improve

Logistics Operations

In recognition of a changing global threat, increasing budgetary pressures,

and the need for improvements to logistics system responsiveness, the

Navy has recently undertaken three primary initiatives aimed at

streamlining logistics operations. These initiatives are the regionalization

of supply management and maintenance functions, privatization and

outsourcing, and logistics response time reductions. The Navy is in the

early stages of developing these initiatives and has not yet identified many

of the specific business practices that it will use to achieve its goals. We

have not reviewed the feasibility of these initiatives. However, we believe

the initiatives provide a framework for improvements by focusing on the

speed and complexity of the logistics pipeline.

Regionalizing Supply

Management and

Maintenance Functions

Under its regional supply initiative, the Navy is consolidating certain

supply operations that are managed by a number of organizations under

regionally managed supply centers. For example, naval bases, aviation

repair depots, and shipyards each have supply organizations to manage

their parts needs. These activities often use different information systems

and business practices and their own personnel and facilities. Under the

new process, one supply center in each of seven geographic regions will

centrally manage the spare parts for these individual operations, with the

objective of improving parts’ visibility and reducing the overhead expenses

associated with separate management functions. The Navy also hopes this

approach will lead to better sharing of inventory between locations, thus

allowing it to reduce inventories. The Navy is not consolidating inventories

into fewer storage locations; however, it is transferring data and

management functions to the centers.

Similarly, maintenance activities, such as base-level repair operations and

depot-level repair operations, are managed by different organizations. As a

result, maintenance capabilities, personnel, and facilities may be

unnecessarily duplicated. Under the regional maintenance initiative, the

Navy is identifying these redundant maintenance capabilities and

consolidating these operations into regionally based repair facilities. For

example, in one region, the Navy is consolidating 32 locations used to

calibrate maintenance test equipment into 4 locations.

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The Navy believes that, by eliminating the fragmented management

approach to supply management and maintenance, it can decrease

infrastructure costs by reducing redundancies and eliminating excess

capacity. The Navy also believes that by moving away from highly

decentralized operations, it will be better positioned to improve and

streamline operations Navy-wide. Both initiatives are in the early phases,

however, so broad-based improvements have not yet occurred.

Privatizing and

Outsourcing Functions

The Navy also has an initiative to outsource and privatize functions. This

initiative encompasses a broad spectrum of Navy activities, and possible

outsourcing of functions within the reparable parts pipeline is only one

aspect of this effort. Within the pipeline, the Navy has identified several

material management functions, such as cataloging of items and overseas

warehousing operations, as potential candidates for outsourcing. In

January 1996, the Navy began developing cost analyses to determine

whether contracting these functions out would be beneficial. Navy

officials told us that they did not know when analyses on all candidates

would be completed. One official said, however, that some candidates may

be outsourced in 1997 at the earliest.

The Navy expects other activities to be targeted for outsourcing in the

future. According to Navy officials, those candidates will be identified as

the Navy’s initiatives to streamline and improve operations progress.

Improving Logistics

System Responsiveness

The objective of this initiative is to reduce the amount of time it takes a

customer, such as a mechanic, to receive a part after placing an order. This

initiative takes into account the series of processes that contribute to

ensuring customers get the parts they need. These processes include

placing and processing orders; storing, transporting, and distributing

inventory; and repairing broken items. The Office of the Secretary of

Defense (OSD) has established responsiveness goals that the Navy and

other services are encouraged to meet. OSD wants to reduce the time it

takes to fill a customer’s order from wholesale stock to 5 days by

September 1996 and to 3 days by September 1998. OSD also wants to

reduce the average backorder age to 30 days by October 2001. The Navy

hopes to achieve these goals by looking at the pipeline as a whole and

improving processes where needed.

To identify and carry out improvements, the Navy has established a

Logistics Response Time team, consisting of representatives from across

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the Navy and from DLA. Thus far, the team has focused primarily on

collecting the data needed to accurately measure pipeline performance. In

the spring of 1996, the team expects to begin identifying areas where

process improvements should be applied to achieve the biggest gains in

performance. This work will then be used to identify specific practices for

carrying out these improvements.

Industry Best

Practices Can Be

Used to Build on Navy

Initiatives

The airline industry has developed leading-edge practices that focus on

reducing the time and complexity associated with logistics operations. We

identified four best practices in the airline industry that have the potential

for use in the Navy’s system. These practices have resulted in significant

improvements and reduced logistics costs, especially for British Airways.

These practices include the prompt repair of items, the reorganization of

the repair process, the establishment of partnerships with key suppliers,

and the use of third-party logistics services. When used together, they can

help maximize a company’s inventory investment, decrease inventory

levels, and provide a more flexible repair capability. In our opinion, they

address many of the same problems the Navy faces and represent

practices that could be applied to Navy operations. These practices appear

particularly suited to Navy facilities that repair aircraft and components,

such as repair depots and operating bases.

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

prevents the broken items from sitting idle for extended periods.

Minimizing idle time helps reduce inventories because it lessens the need

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

service. In addition, repairing items promptly promotes flexible scheduling

and production practices, enabling maintenance operations to respond

more quickly as repair needs arise.

Prompt repair involves inducting parts into maintenance shops soon after

broken items arrive at repair facilities. Prompt repair does not mean that

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

are needed. One airline that uses this approach routes broken items

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

warehouses, so that mechanics can quickly access broken parts when it

comes time for repair. These holding areas also give mechanics better

visibility of any backlog.

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It is difficult to specifically quantify the benefits of repairing items

promptly because it is often used with other practices to speed up pipeline

processes. One airline official said, however, that his airline has kept

inventory investment down partly because it does not allow broken parts

to sit idle. In addition, the Air Force found through a series of

demonstration projects that prompt repair, when used with other

practices, could enable operations to be sustained with significantly fewer

parts. For example, the Air Force reported in February 1995 that after the

new practices were put in place at one location, 52 percent ($56.3 million)

of the items involved in the test were potentially excess. The Air Force

tested the new practices as part of its Lean Logistics program, which aims

to improve Air Force logistics operations.

Reorganizing the Repair

Process

One approach to simplify the repair process is the “cellular” concept. This

concept brings all the resources, such as tooling and support equipment,

personnel, and inventory, that are needed to repair a broken part into one

location, or one “cell.” This approach simplifies the flow of parts by

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

different locations. It also ensures that mechanics have the technical

support so that operations run smoothly. In addition, because inventory is

placed near workshops, mechanics have quick access to the parts they

need to complete repairs more quickly. British Airways adopted the

cellular approach after determining that parts could be repaired as much

as 10 times faster using this concept. Another airline that adopted this

approach in its engine-blade repair shop was able to reduce repair time by

50 to 60 percent and decrease work-in-process inventory by 60 percent.

Figure 5 shows a repair cell used in British Airways maintenance center at

Heathrow Airport.

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Figure 5: A British Airways Repair

Center Cell

Establishing Partnerships

With Key Suppliers

Several airlines and manufacturers have worked with suppliers to improve

parts support while reducing overall inventory. Two approaches—the use

of local distribution centers and integrated supplier programs—

specifically seek to improve the management and distribution of

consumable items. These approaches help ensure that the consumable

parts for repair and manufacturing operations are readily available, which

prevents items from stalling in the repair process and is crucial in speeding

up repair time. In addition, by improving management and distribution

methods, such as using streamlined ordering and fast deliveries, these

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

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

stocks of “just-in-case” inventory.

Local distribution centers are supplier-operated facilities that are

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

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

suppliers to establish more than 30 centers near its major repair

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

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

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

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

of consumable items nearly in half.

Integrated supplier programs involve shifting inventory management

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

for monitoring parts usage and determining how much inventory is needed

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

customer’s requirements and can include placing a supplier representative

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

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

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

establishment of data interchange links and inventory bar coding, and

vendor selection management. One manufacturer that used this approach

received parts from its supplier within 24 hours of placing an order 

98 percent of the time, which enabled it to reduce inventories for these

items by $7.4 million—an 84-percent reduction.

We have issued a series of reports on similar private sector practices that

could be applied to DOD’s consumable inventories.6

 These reports

recommended new techniques that would minimize DOD’s role in storing

and distributing consumable inventories. Companies, such as PPG

Industries and Bethlehem Steel, have reduced consumable inventories by

as much as 80 percent and saved millions in associated costs by using

“supplier parks” and other techniques that give established commercial

distribution networks the responsibility to manage, store, and distribute

inventory on a frequent and regular basis to end-users.

Using Third-Party Logistics

Providers

The airlines we contacted provided examples of how third-party logistics

providers can be used to reduce costs and improve performance.

Third-party firms take on responsibility for managing and carrying out

certain logistics functions, such as storage and distribution. Outsourcing

these tasks enables companies to reduce overhead costs because it

eliminates the need to maintain personnel, facilities, and other resources

that are required to do these functions in-house. It also helps companies

improve various aspects of their operations because third-party providers

can offer expertise that companies often do not have the time or the

resources to develop.

6

Inventory Management: DOD Could Build on Progress in using Best Practices to Achieve Substantial

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

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

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

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

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For example, one airline contracts with a third-party logistics provider to

handle deliveries and pickups from suppliers and repair vendors, which

has improved the reliability and speed of deliveries and reduced overall

administrative costs. The airline receives most items within 5 days, which

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

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

Third-party providers can also assume other functions. One third-party

firm that we visited, for example, can assume warehousing and shipping

responsibilities and provide rapid transportation to speed parts to

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

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

addition, this company maintains the data associated with warehousing

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

British Airways Illustrates

Benefits of Using Best

Practices

The best practices that we observed in the airline industry can prove

particularly beneficial when used in an integrated fashion. One airline,

British Airways, used all of these practices as part of an overall

reengineering effort, and it illustrates the benefits of using such an

integrated approach. These efforts have helped transform British Airways

from a financially troubled, state-owned airline into a successful private

sector enterprise. British Airways today is considered among the most

profitable airlines in the world and has posted profits every year since

1983. Table 2 shows several key logistics performance measures of British

Airways and the Navy.

Page 18 GAO/NSIAD-96-156 Inventory Management
B-271850 

Table 2: British Airways and Navy

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

Consumer-level supply availability rates

Reparable parts 86% 75%

Consumable parts 97% 57%a

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

Inventory turnover

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

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

Repair times

Avionics 11 days 37 daysd

aDLA-managed items only.

bRepresents the time it takes to obtain an item through the wholesale system when it is

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

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

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

dDoes not include time awaiting parts.

In addition to implementing the four practices discussed earlier, British

Airways took a number of other steps to successfully reengineer its

logistics operations. One of the first steps was to undertake a fundamental

shift in corporate philosophy, where British Airways placed top priority on

customer service and cost containment. This philosophy directed all

improvement efforts, and specific practices were assessed on how well

they furthered these overall goals. Also, British Airways approached the

process of change as a long-term effort that requires a steady vision and a

focus on continual improvement. Although the airline has reaped

significant gains to date, it continues to reexamine and improve its

operations.

Additional steps taken by British Airways to reengineer its operations

include (1) reorienting the workforce toward the new philosophy;

(2) providing managers and employees with adequate information systems

to control, track, and assess operations; and (3) refurbishing existing

facilities and constructing new ones to accommodate the new practices.7

7

Our recent report, Best Management Practices: Reengineering the Air Force’s Logistics System Can

Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 21, 1996), provides additional detail on how British

Airways carried out improvements in each of these areas.

Page 19 GAO/NSIAD-96-156 Inventory Management
B-271850 

Recommendations As part of the Navy’s current efforts to improve the logistics system’s

responsiveness and reduce its complexity, we recommend that the

Secretary of Defense direct the Secretary of the Navy, working with DLA, to

develop a demonstration project to determine the extent to which the

Navy can apply best practices to its logistics operations. We recommend

that the Secretary of the Navy identify several naval facilities to participate

in the project and test specific practices highlighted in this report. The

practices should be tested in an integrated manner, where feasible, to

maximize the interrelationship many of these practices have with one

another. The specific practices that should be tested are

• inducting parts at repair depots soon after they break, consistent with

repair requirements, to prevent parts from sitting idle;

• reorganizing repair workshops using the cellular concept to reduce the

time it takes to repair parts;

• using integrated supplier programs to shift the management

responsibilities for consumable inventories to suppliers;

• using local supplier distribution centers near repair facilities for quick

shipments of parts to mechanics; and

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

spare parts between the depots and end-users to improve delivery times.

We recommend that this demonstration project be used to quantify the

costs and benefits of these practices and to serve as a means to identify

and alleviate barriers or obstacles (such as overcoming a strong internal

resistance to change and any unique operational requirements) that may

inhibit the expansion of these practices. After these practices have been

tested, the Navy should consider expanding and tailoring the use of these

practices, where feasible, so they can be applied to other locations.

Agency Comments In its comments on a draft of this report, DOD agreed with the findings and

recommendations. DOD stated that by September 30, 1996, the Deputy

Under Secretary of Defense (Logistics) will issue a memorandum to the

Secretary of the Navy and the Director of DLA, requesting that a

demonstration project be initiated. According to DOD, this project should

be started by the first quarter of fiscal year 1997. The Navy will conduct a

business case analysis and assess the leading-edge practices highlighted in

this report for their applicability in a Navy setting and, where appropriate,

will tailor and adopt a version of these practices for use in its repair

process. DOD also stated that it will ask the Navy to submit an in-process

review not later than 6 months after the inception of the business case

Page 20 GAO/NSIAD-96-156 Inventory Management
B-271850 

analysis. Finally, DOD agreed that after the practices have been tested, the

Navy should consider expanding and tailoring the use of these practices so

they can be applied to other locations. DOD’s comments are included in

appendix I.

Scope and

Methodology

We reviewed detailed documents and interviewed officials about the

Navy’s inventory policies, practices, and efforts to improve its logistics

operations. We contacted officials at the Office of the Chief of Naval

Operations, Washington, D.C.; U.S. Naval Supply Systems Command,

Arlington, Virginia; U.S. Naval Air Systems Command, Arlington, Virginia;

U.S. Atlantic Fleet Command, Norfolk, Virginia; and the Naval Inventory

Control Point, Philadelphia, Pennsylvania. Also at these locations, we

discussed the potential applications of private sector logistics practices to

the Navy’s operations.

To examine Navy logistics operations and improvement efforts, we visited

the following locations:

• Naval Aviation Depot, Cherry Point, North Carolina;

• Naval Aviation Depot, Jacksonville, Florida;

• Oceana Naval Air Station, Virginia Beach, Virginia;

• Jacksonville Naval Air Station, Jacksonville, Florida;

• Norfolk Naval Air Station, Norfolk, Virginia;

• Fleet and Industrial Supply Center, Norfolk, Virginia;

• Fleet and Industrial Supply Center, Jacksonville, Florida;

• Defense Distribution Depot, Cherry Point, North Carolina;

• Defense Distribution Depot, Jacksonville, Florida; and

• U.S.S. Enterprise.

At these locations we discussed with supply, maintenance, and aircraft

squadron personnel, the operations of the current logistics system,

customer satisfaction, and the potential application of private sector

logistics practices to their operations. Also, we reviewed and analyzed

detailed information on inventory levels and usage; repair times; supply

effectiveness and response times; and other related logistics performance

measures. Except where noted, our data reflects inventory valued by the

Navy at latest acquisition costs. We did not test or otherwise validate the

Navy’s data.

To identify leading commercial practices, we used information from our

February 1996 report that compared Air Force logistics practices to those

Page 21 GAO/NSIAD-96-156 Inventory Management
B-271850 

of commercial airlines. This information included an extensive literature

search to identify leading inventory management concepts and detailed

examinations and discussions of logistics practices used by British

Airways, United Airlines, Southwest Airlines, American Airlines, Federal

Express, Boeing, and Tri-Star Aerospace. We also participated in

roundtables and symposiums with recognized leaders in the logistics field

to obtain information on how companies are applying integrated

approaches to their logistics operations and establishing supplier

partnerships to eliminate unnecessary functions and reduce costs. Finally,

to gain a better understanding on how companies are making

breakthroughs in logistics operations, we attended and participated in the

Council of Logistics Management’s Annual Conference in San Diego,

California. We did not independently verify the accuracy of logistics costs

and performance measures provided by private sector organizations.

We conducted our review from June 1995 to April 1996 in accordance with

generally accepted government auditing standards.

We are sending copies of this report to the appropriate congressional

committees; the Secretaries of Defense and the Navy; the Directors of DLA

and the Office of Management and Budget; and other interested parties.

We will make copies available to others upon request.

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

questions concerning this report. The major contributors to this report are

listed in appendix II.

Sincerely yours,

David R. Warren, Director

Defense Management Issues

Page 22 GAO/NSIAD-96-156 Inventory Management
Page 23 GAO/NSIAD-96-156 Inventory Management
Contents

Letter 1

Appendix I 

Comments From the

Department of

Defense

26

Appendix II 

Major Contributors to

This Report

29

Related GAO Products 32

Tables Table 1: Navy Wholesale Costs for Reparable Parts—Fiscal Year

1995

6

Table 2: British Airways and Navy Logistics Performance

Measures

19

Figures Figure 1: Navy Inventory Allocation 5

Figure 2: Navy Aircraft Readiness Rates—Fiscal Year 1995 6

Figure 3: Navy Repair Pipeline 9

Figure 4: Components Awaiting Parts at a Navy Repair Depot 11

Figure 5: A British Airways Repair Center Cell 16

Abbreviations

DLA Defense Logistics Agency

DOD Department of Defense

OSD Office of the Secretary of Defense

Page 24 GAO/NSIAD-96-156 Inventory Management
Page 25 GAO/NSIAD-96-156 Inventory Management
Appendix I 

Comments From the Department of Defense

Page 26 GAO/NSIAD-96-156 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on p. 20.

Now on p. 20.

Page 27 GAO/NSIAD-96-156 Inventory Management
Appendix I 

Comments From the Department of Defense

Now on p. 20.

Page 28 GAO/NSIAD-96-156 Inventory Management
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Charles I. (Bud) Patton, Jr.

Kenneth R. Knouse, Jr.

Dayton Office Matthew B. Lea

Robert L. Repasky

Jeanne M. Willke

Norfolk Office Sandra F. Bell

Jeffrey L. Overton, Jr.

Patricia F. Blowe

Page 29 GAO/NSIAD-96-156 Inventory Management
Appendix II 

Major Contributors to This Report

Page 30 GAO/NSIAD-96-156 Inventory Management
Appendix II 

Major Contributors to This Report

Page 31 GAO/NSIAD-96-156 Inventory Management
Related GAO Products

Best Management Practices: Reengineering the Air Force’s Logistics

System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 21, 1996).

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

to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug. 4, 1995).

Commercial Practices: DOD Could Reduce Electronics Inventories by Using

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

Commercial Practices: Leading-Edge Practices Can Help DOD Better

Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, Apr. 13, 1994).

Commercial Practices: DOD Could Save Millions by Reducing Maintenance

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

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

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

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

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

Commercial Practices: Opportunities Exist to Reduce Aircraft Engine

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

(709140) Page 32 GAO/NSIAD-96-156 Inventory Management
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