DOD's High-Risk Areas: Efforts to Improve Supply Chain Can Be Enhanced by Linkage to Outcomes, Progress in Transforming Business Operations, and Reexamination of Logistics Governance and Strategy
Published: 2007-07-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The availability of spare parts and other critical items provided through the Department of Defense's (DOD) supply chains affects the readiness and capabilities of U.S. military forces. Since 1990, GAO has designated DOD supply chain management as a high-risk area. In 2005, DOD developed a plan aimed at addressing supply chain problems and having GAO remove this high-risk designation. DOD's plan focuses on three areas: requirements forecasting, asset visibility, and materiel distribution. GAO was asked to provide its views on (1) DOD's progress in developing and implementing the initiatives in its plan, (2) the results of recent work relating to the three focus areas covered by the plan, and (3) the integration of supply chain management with efforts to improve defense business operations. GAO also addressed broader issues of logistics governance and strategic planning. This testimony is based on prior GAO reports and analysis. To determine whether to retain the high-risk designation for supply chain management, GAO considers factors such as whether DOD makes substantial progress implementing improvement initiatives; establishes a program to validate the effectiveness of the initiatives; and completes a comprehensive, integrated strategy.
section_title: What GAO Found
paragraphs: The most recent update to DOD's plan shows that DOD has made progress developing and implementing its supply chain management improvement initiatives. DOD is generally staying on track for implementing its initiatives, although there have been delays in meeting certain milestones. However, the long-term time frames for many of these initiatives present challenges to the department in sustaining progress toward substantially completing their implementation. The plan also lacks outcome-focused performance measures for many individual initiatives and the three focus areas, limiting DOD's ability to fully demonstrate the results achieved through its plan. Increasing DOD's focus on outcomes will enable stakeholders to track the interim and long-term success of its initiatives and help DOD determine if it is meeting its goals of more effective and efficient supply chain management. GAO's recent work has identified problems related to the three focus areas in DOD's plan. In the requirements area, the military services are experiencing difficulties estimating acquisition lead times to acquire spare parts for equipment and weapon systems, hindering their ability to efficiently and effectively maintain spare parts inventories for military equipment. Challenges in the asset visibility area include lack of interoperability among information technology systems, problems with container management, and inconsistent application of radio frequency identification technology, which make it difficult to obtain timely and accurate information on assets in theater. In the materiel distribution area, challenges remain in coordinating and consolidating distribution and supply support within a theater. Improving defense business operations is integral to resolving supply chain management problems. Progress in DOD's overall approach to business transformation is needed to confront problems in other high-risk areas, including supply chain management. Because of the complexity of business transformation, GAO has stated that DOD needs a Chief Management Officer with significant authority, experience, and a term that would provide sustained leadership and the time to integrate DOD's overall business transformation efforts. GAO's work, pending legislation, and other recent studies indicate a consensus that the status quo is no longer acceptable. GAO's recent review of joint theater logistics raises concerns about whether DOD can effectively implement this initiative without reexamining fundamental aspects of the department's logistics governance and strategy. In this respect, joint theater logistics may serve as a microcosm of some of the challenges DOD faces in resolving supply chain management problems. Moreover, GAO recommended in that report that DOD align its approach to joint theater logistics with ongoing actions the department is taking to reform its logistics governance and develop its logistics strategy. Several recent studies of DOD logistics systems have recommended changes to DOD's organizational structure for providing joint logistics and supply support to military operations.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the progress made by the  Department of Defense (DOD) toward resolving long-standing problems  with supply chain management. The availability of spare parts and other  critical items that are procured and delivered through DOD’s supply chain  network affects the readiness and capabilities of U.S. military forces, and  can affect the success of a mission. In addition, the investment of  resources in DOD’s supply chains is substantial, amounting to more than  $150 billion a year according to DOD, and supply inventory levels have  grown by 35 percent from $63.3 billion in fiscal year 2001 to $85.6 billion in  fiscal year 2006. DOD also invests billions in information technology  systems that support supply chain management and other business  operations. Over time, DOD has sought to better integrate its supply chain  operations to effectively support military forces and to make its supply  chains more efficient from source of supply to point of consumption.  However, the challenges to successfully improving management of DOD’s  vast and complex supply chain network are formidable, and problems with  supply chain management have yet to be fully resolved. Today’s hearing is  the third time since 2005 that we have testified before this Subcommittee  on supply chain management. Your active involvement has been and will  continue to be vital to keeping attention focused on this important aspect  of DOD’s business and logistics support operations.
GAO’s audits and evaluations have identified a number of federal  programs and operations that are high risk because of their greater  vulnerabilities to fraud, waste, abuse, and mismanagement. In recent  years, GAO’s high-risk program has increasingly focused on those major  programs and operations that need urgent attention and transformation in  order to ensure that our government functions in the most economical,  efficient, and effective manner possible. We first designated DOD  inventory management as a high-risk area in 1990 because of ineffective  and inefficient inventory systems and practices. The problems we found— based on a large body of work on the management of military supplies— included on-hand inventory that was not needed to meet required  inventory levels, inadequate controls over items, and cost overruns. We  have reported on efforts to address this and other high-risk areas in our  biennial updates to our high-risk programs since then. In preparing the  2005 update of the high-risk series, we determined that systemic supply  problems extended beyond inventory management to other aspects of the  supply chain, including inaccurate supply forecasts, poor asset visibility,  and ineffective distribution. We therefore expanded our high-risk  designation to include the entirety of “DOD supply chain management.”
Over the years DOD has taken actions toward its goal of integrating and  improving supply chain management. For example, it has revised policies  and practices aimed at addressing shortcomings identified during  Operation Iraqi Freedom. It has implemented recommendations made by  our office and other audit organizations regarding specific aspects of its  supply chain operations. It has also identified technologies and  commercial best practices that could lead to substantial improvements  over the long term. Another step has been the development of DOD’s  supply chain management improvement plan. In 2005, with the  encouragement of the Office of Management and Budget (OMB) and input  from our office, DOD developed this plan with the intent of addressing the  problems that have prompted us to retain this high-risk designation. (We  subsequently refer to this document as the plan.) DOD’s plan lists 10  initiatives aimed at making improvements in three focus areas of supply  chain management—requirements forecasting, asset visibility, and  materiel distribution.
DOD officials believe the commitment they have demonstrated to  resolving supply chain management problems, including developing the  plan and making progress implementing initiatives, justifies removing this  area from our high-risk list. In December 2006, the Under Secretary  formally requested that we consider removing supply chain management  from our list of high-risk areas. We decided that notwithstanding positive  steps taken by DOD to address problems, supply chain management  should remain a high-risk area until DOD can successfully demonstrate  improvements in requirements forecasting, asset visibility, and materiel  distribution, and we retained this designation in the 2007 biennial update  of our high-risk series.
Today, I would like to provide our perspectives on (1) DOD’s progress in  developing and implementing the initiatives in its plan, (2) the results of  our recent work relating to the three focus areas covered by the plan, and  (3) the integration of supply chain management with efforts to transform  and improve defense business operations. Finally, I will address broader  issues of logistics governance and strategic planning within DOD. My  statement is based on previous GAO reports and analysis, including a  report we are releasing today on DOD’s efforts to develop and implement  joint theater logistics, one of the initiatives in the plan. In addition, we  have met regularly with DOD and OMB staff to obtain updates on DOD’s  plan and information on the specific initiatives. We conducted our work in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: DOD relies on a number of individual processes and activities, known  collectively as supply chain management, to purchase, produce, and  deliver items and services to military forces. The department relies on  working capital (revolving) funds maintained by the defense and service  logistics agencies to finance the flow of these items to the forces. Working  capital funds allow these agencies to purchase needed items from  suppliers. Military units then order items from the logistics agencies and  pay for them with annually appropriated operations and maintenance  funds when the requested items—either from inventory or  manufacturers—are delivered to the units.
The Under Secretary of Defense (Acquisition, Technology, and Logistics)  has been designated by the Secretary of Defense as the department’s  Defense Logistics Executive, with authority to address logistics and supply  chain issues. Officials within the Office of the Assistant Deputy Under  Secretary of Defense for Supply Chain Integration completed the first  iteration of the plan in July 2005 and have updated it several times since  then based on information provided by designated lead proponents for the  individual initiatives. DOD has shared its plan externally with Congress,  OMB, and our office. OMB has characterized the plan as a model for other  federal agencies to use in developing their own plans to address their high- risk areas.
The plan has three focus areas: requirements forecasting, asset visibility,  and materiel distribution—issues that we have identified based on GAO  audits since 1995 as critical to improving DOD supply chain management.  Accurately forecasted supply requirements are a key first step in buying,  storing, positioning, and shipping items that the warfighter needs. DOD  describes asset visibility as the ability to provide timely and accurate  information on the location, quantity, condition, movement, and status of  supplies and the ability to act on this information. Distribution is the  process for synchronizing all elements of the logistics system to deliver  the “right things” to the “right place” at the “right time” to support the  warfighter. Our prior work has identified problems in these three focus  areas, as well as other aspects of supply chain management.
DOD’s plan identifies joint theater logistics as an initiative that will  improve both asset visibility and materiel distribution. Joint theater  logistics is intended to enhance the ability of a joint force commander to  direct various logistics functions, including distribution and supply  support activities, across the theater and, for several years, has been part  of DOD’s planned transformation of logistics capabilities. Joint theater  logistics is one of seven future logistics capabilities that DOD has grouped  under “focused logistics.” DOD has broadly defined joint theater logistics  as an adaptive ability to anticipate and respond to emerging theater  logistics and support requirements.
In general, when legislative and agency actions result in significant and  sustainable progress toward resolving a high-risk problem, we remove the  high-risk designation. Key determinants include a demonstrated strong  commitment to and top leadership support for addressing problems, the  capacity to do so, a corrective action plan, and demonstrated progress in  implementing corrective measures. From 1990 through 2007, we removed  18 areas from the high-risk list. Our decisions on removing supply chain  management from the high-risk list will be guided by whether DOD   (1) sustains top leadership commitment and long-term institutional  support for the plan; (2) obtains necessary resource commitments from  the military services, the Defense Logistics Agency, and other  organizations; (3) makes substantial progress implementing improvement  initiatives across the department; (4) establishes a program to  demonstrate progress and validate the effectiveness of the initiatives; and  (5) completes the development of a comprehensive, integrated strategy for  guiding supply chain management improvement efforts across the  department.
section_title: DOD Has Made Progress in Developing and Implementing the Initiatives in Its Plan, but Current Performance Measures Do Not Fully Demonstrate Results
paragraphs: The most recent update to the plan in May 2007 shows that DOD, over the  past year, has made progress in developing and implementing its  improvement initiatives. We noted this progress in the January 2007  update of our high-risk series. Specific examples of progress made include  the following:    DOD has established joint deployment distribution operations centers in  each geographic combatant command. In early 2004, DOD established the  first of these operations centers in Kuwait, under U.S. Central Command,  after distribution problems arose during the initial stages of Operation  Iraqi Freedom. DOD has since expanded this organization to its other  geographic combatant commands. These operations centers can help joint  force commanders synchronize the arrival of supplies into a theater and  assist in other aspects of distribution and supply support. They are  designed to incorporate representatives from DOD components, such as  U.S. Transportation Command, the Defense Logistics Agency, and the  military services, who can provide a knowledgeable connection to  logistics supply centers in the United States and facilitate the distribution  of supplies to the theater. The expansion of these operations centers to all  the geographic commands was based on the success of the first operations  center in Kuwait, which has been credited with improving the  management of supplies moving across the distribution system and  achieving cost savings.
DOD has reported initial success with an initiative aimed at streamlining  the storage and distribution of common items for multiple military service  locations through the use of Defense Logistics Agency hubs. The  objectives of this initiative, called joint regional inventory and material  management, include eliminating duplicate materiel handling and  inventory layers. DOD has met key milestones in this initiative and  recently completed the pilot program in Hawaii. U.S. Pacific Command  officials stated that they had reduced redundant service-managed  inventories, the number of times they handle parts, and customer wait  times over the course of the pilot. They estimated that the services had  reduced their inventory levels by more than $10 million. In March 2007, the  Defense Logistics Agency was tasked to be the lead proponent for  continued worldwide implementation of joint regional inventory and  material management.
DOD also made progress toward improving transportation management of  military freight. Before the end of this fiscal year, U.S. Transportation  Command plans to award a contract to a third-party logistics provider, or  3PL, to coordinate the movement of freight shipments within the  continental United States. This effort, called the defense transportation  coordination initiative, is aimed at improving the reliability, predictability,  and efficiency of moving freight among DOD’s depots, logistics centers,  and field activities. In a recent report on this initiative, we stated that  DOD had taken numerous actions to incorporate the lessons learned from  a prior prototype program and, moreover, had taken positive steps to  adopt best practices employed by other public and private organizations to  transform their culture. Still, the long-term success of this effort remains  uncertain given the challenges in undertaking organizational  transformation and because the program is still in its early stages.
Despite the progress indicated by the development and implementation of  these initiatives, the recent update of DOD’s plan indicates some delays in  achieving certain milestones. For example, the radio frequency  identification (RFID) initiative experienced a slippage from December  2006 to September 2007 in its milestone to implement passive RFID at the  first 25 percent of Defense Logistics Agency’s distribution centers located  outside the continental United States. This milestone was adjusted based  on lessons learned from the implementation of RFID at sites within the  continental United States. Also, the item unique identification initiative  experienced a slippage of a year, from January 2007 to January 2008, for  the milestone on demonstrating integration with international entities,  because required ratification from the North Atlantic Treaty Organization  was delayed. Schedule delays such as these may be expected given the  long-standing nature of the problems being addressed, the complexities of  the initiatives, and the involvement of multiple organizations.  Furthermore, some of these initiatives are in the early stages of  implementation, with full implementation several years away. The long- term time frames for many of these initiatives present challenges to the  department in sustaining progress toward substantially completing their  implementation.
Since the last hearing before this Subcommittee in July 2006, we have not  seen significant changes in how DOD proposes to measure the impact of  its initiatives in its plan. The plan, as before, contains four performance  metrics—backorders, customer wait time, on-time orders, and logistics  response time. While these four measures capture broad aspects of  DOD’s supply chain performance, they can be affected by variables other  than the initiatives themselves. For example, natural disasters, wartime  surges in requirements, or disruption in the distribution process could  each result in increased backorders, longer customer wait time, fewer on- time orders, and slowed response time, regardless of DOD’s initiatives.  Consequently, changes in these high-level metrics might not be directly  attributable to the initiatives in the plan. While it may take years before the  results of programs become apparent, intermediate metrics can be used to  provide information on interim results and show progress toward intended  results. In addition, when program results could be influenced by external  factors, intermediate metrics can be used to identify the program’s  discrete contribution to the specific result.
As we noted last July, the results of DOD’s initiatives would be more  apparent if DOD applied more outcome-oriented performance metrics for  many of the individual initiatives and for the three focus areas. Outcome- oriented performance metrics show results or outcomes related to an  initiative or program in terms of effectiveness, efficiency, impact, or all of  these. Since last July, DOD has not added new outcome-focused  performance metrics to its plan. DOD also continues to lack cost metrics  that might show efficiencies gained through these supply chain efforts,  either at the initiative level or overall. In total, DOD’s plan identifies a need  to develop outcome-focused performance metrics for 6 initiatives, and 9  out of 10 initiatives lack cost metrics. We recommended in January that  DOD develop, implement, and monitor outcome-focused performance and  cost metrics for all the individual initiatives in the plan as well as for the  plan’s focus areas of requirements forecasting, asset visibility, and  materiel distribution. In response to our recommendation, DOD asserted  that it had developed and implemented outcome-focused performance and  cost metrics for logistics across the department, but it also acknowledged  that more work needed to be done to link the outcome metrics to the  initiatives in the plan as well as for the focus areas. DOD stated that these  linkages will be completed as part of full implementation of each initiative.
section_title: Recent GAO Reviews Have Found That Systemic Supply Chain Management Problems Continue
paragraphs: Our recent work has identified continued systemic weakness in aspects of  DOD’s supply chain management. I will briefly highlight some of the  results from these reviews, structured around the three focus areas  covered by DOD’s plan.
subsections: section_title: Requirements Forecasting Problems Exist in Managing Spare Parts and Prepositioned Stocks
paragraphs: In the area of requirements forecasting, the military services are  experiencing difficulties estimating acquisition lead times to acquire spare  parts for equipment and weapon systems. Effective processes that  identify and manage acquisition lead times are of critical importance to  maintaining cost-effective inventories, budgeting, and having materiel  available when it is needed. In March 2007, we reported that 44 percent of  the services’ lead time estimates varied either earlier or later than the  actual lead times by at least 90 days. Overestimates and underestimates  of acquisition lead time contribute to inefficient use of funds and potential  shortages or excesses of spare parts.  We recommended a number of  actions DOD should take to improve the accuracy and strengthen the  management of lead times.  For example, we made specific  recommendations directed toward the Army, the Air Force, the Navy, and  the Defense Logistics Agency with the intent of improving their accuracy  in setting acquisition lead times.  DOD mostly concurred with our  recommendations.
In a separate review of the Air Force’s inventory management practices,  we found continuing problems hindering its ability to efficiently and  effectively maintain its spare parts inventory for military equipment. From  fiscal years 2002 through 2005, more than half of the Air Force’s secondary  inventory (spare parts), worth an average of $31.4 billion annually, was not  needed to support required on-order and on-hand inventory levels. We  found an average of 52 percent ($1.3 billion) of the Air Force’s secondary  on-order inventory was not needed to support on-order requirements.  This unneeded on-order inventory indicates that the Air Force did not  cancel orders or deobligate funds for items that were not needed to  support requirements. When the Air Force buys unneeded items, it is  obligating funds unnecessarily, which could lead to not having sufficient  funds to purchase needed items. The Air Force has continued to purchase  unneeded inventory because its policies do not provide incentives—such  as requiring contract termination review for all unneeded on-order  inventory or reducing the funding available for the Air Force Materiel  Command by an amount up to the value of the Air Force’s on-order  inventory that is not needed to support requirements—to reduce the  amount of inventory on order that is not needed to support requirements.  In addition, although the percentage of the Air Force’s on-hand inventory  was reduced by 2.7 percent during these years, about 65 percent   ($18.7 billion) of this inventory was not needed to support required  inventory levels. We calculated that it costs the Air Force from $15 million  to $30 million annually to store its unneeded items.  We recommended that  the Air Force improve its policies regarding on-order inventory, revalidate  the need to retain items that are not needed to meet inventory  requirements and for which there is no recurring demand, and take other  actions to improve accountability for, and management of, its secondary  inventory.  DOD generally concurred with our recommendations.
Another area of continuing concern has been the stocks maintained in the  Army’s prepositioning programs. Prepositioning is one of three ways,  along with airlift and sealift, that the U.S. military can deliver equipment  and supplies to field combat-ready forces. The Army drew heavily from its  prepositioned stocks to support Operations Iraqi Freedom and Enduring  Freedom, and these sustained operations have taken a toll on the  condition and readiness of military equipment. In February 2007, we  reported the Army was changing its overall prepositioning strategy and, in  doing so, faced major strategic and management challenges. One of these  challenges was that despite recent efforts to improve requirements setting,  the Army had not yet determined reliable requirements for secondary  items and operational project stocks. Also, the Army does not  systematically measure or report readiness for the secondary item and  operational project programs. Without sound requirements or reporting  mechanisms, the Army cannot reliably assess the impact of any shortfalls,  determine the readiness of its programs, or make informed investment  decisions about them. We recommended that the Army develop an  implementation plan that, among other things, completes ongoing  reevaluation of the secondary item and project stock requirements as well  as establishes systematic readiness measurement and reporting of  secondary items and operational project stock programs. DOD concurred  with this recommendation.
section_title: Effective Management of Supplies Is Hindered by Problems in Achieving Asset Visibility
paragraphs: Despite the benefits attributed to the joint deployment distribution  operations center in Kuwait, effective management of supply distribution  across the theater has been hindered by ongoing problems in achieving  asset visibility. Senior military commanders in Kuwait attributed these  problems to a lack of interoperability among information technology  systems that makes it difficult to obtain timely, accurate information on  assets in the theater. We have previously reported that the defense  logistics systems used by various components to order, track, and account  for supplies are not well integrated and do not provide the information  needed to effectively manage theater distribution and provide asset  visibility. Officials told us their staff must use manual work-arounds to  overcome the problems caused by noninteroperable information systems  and estimated that their staff spend half their time pulling data from  information systems, e-mailing it around for validation or coordination,  consolidating it on a spreadsheet, and then analyzing it to make  management decisions. In January 2007, a joint assessment conducted by  several DOD components at Camp Arifjan, Kuwait, found that separate  movement control battalions in Kuwait and Iraq use both automated and  handwritten transportation movement requests to track air and ground  movements and must consolidate manual and automated data into  spreadsheets in order to capture the total theater movement picture.  Neither movement battalion has total visibility over what is occurring in  both Kuwait and Iraq nor do they have total visibility of the surface  transportation resources necessary to optimize the distribution of  resources.
In our review of joint theater logistics, we also found continuing problems  with container management that hinder asset visibility and impede DOD’s  ability to effectively manage logistics operations and costs, although  improvements had been made since we last reported on this issue in  2003. Some challenges that DOD faces with container management  include the application of RFID on containers in the supply chain,  compliance with container management processes, and the return of  commercial containers to maritime carriers.
In 2004, the Under Secretary of Defense (Acquisition, Technology, and  Logistics) directed the use of active RFID on all consolidated shipments  moving to, from, or between overseas locations in order to provide global  in-transit visibility, and U.S. Central Command has emphasized the need to  use this technology to improve asset visibility in Iraq and Afghanistan.  However, according to U.S Central Command officials, DOD continues to  struggle with the application of RFID in the theater supply chain because  of problems such as containers shipped without RFID tags or with tags  that are broken, tags with incorrect information, or tags that are rewritten  but not cross-referenced to the original shipping information.  Noncompliance with container management processes established by U.S.  Central Command can also limit asset visibility. For example, the Army’s  system has not been able to effectively track containers as they pass  through distribution channels, significantly hampering asset visibility in  theater because tagged containers can become “lost” in theater, with no  one able to track the location of the container or its contents. In addition,  if the container is commercially owned and not returned to the carrier  within a specified time period, detention charges begin accumulating.
During our review of joint theater logistics we also found that U.S.  Transportation Command and the Military Surface Deployment and  Distribution Command, to improve management and accountability over  containers and to address the growing detention charges, developed a  theater container management process and established the container  management element—a unit responsible for tracking and providing  management oversight of containers in the theater. In addition, the Army  decided to purchase, or “buy out,” commercial containers to reduce  monthly detention charges. Container management element officials told  us that through a combination of container buyouts and increased  oversight, detention charges decreased from approximately $10.7 million  per month in December 2005 to $3.7 million per month in October 2006.  However, although DOD has been able to reduce monthly detention  charges on commercial containers, it is still experiencing problems with  retaining visibility over containers, and its problem with commercial  container detention charges is shifting from Iraq to Afghanistan.
In addition, the Army continues to experience problems in developing and  implementing system initiatives affecting asset visibility. For example, the  Logistics Management Program, one of the Army’s major business system  modernization efforts intended to manage its inventory and depot  maintenance operations, has continued to experience problems with  accurately recognizing revenue and billing customers, and the accuracy of  its financial reports continues to be questionable. If information contained  in asset accountability systems is not accurate, complete, and timely,  DOD’s day-to-day operations could be adversely affected. As of September  30, 2006, the Army reported that approximately $452 million had been  obligated for this system effort and estimates that it will invest at least  another $895 million in this program. Also, its schedule to reach full  operational capability has slipped from fiscal year 2005 to fiscal year  2010. We have recently reviewed the Army’s progress in achieving asset  visibility and expect to issue our report by the end of this month.
section_title: Challenges Remain in Coordinating and Consolidating Distribution and Supply Support within a Theater
paragraphs: In our review of joint theater logistics, we found that DOD components  have made progress developing and implementing joint theater logistics  initiatives in the areas of distribution and supply support; however, the  department faces a number of challenges that hinder its ability to fully  realize the benefits of these efforts. Unless DOD successfully addresses  these challenges, the initiatives are not likely to significantly improve the  ability of a joint force commander to harness the diffuse logistics  resources and systems that exist within the department and effectively and  efficiently direct logistics functions, including distribution and supply  support activities, across the theater of operations to accomplish an  assigned mission.
For example, initiatives to improve the coordination of surface  transportation assets—mainly trucks—in a theater of operations face  challenges such as potential duplication of responsibilities, the  unavailability of information technology tools, and unclear lines of  command and control. According to a 2005 RAND Corporation study,  during the initial phase of Operation Iraqi Freedom there was no single  organization deployed in theater with the authority to rebalance  transportation assets across the theater and integrate and synchronize the  surface deployment and distribution movements of materiel in support of  the commander’s priorities. As part of its modular transformation, the  Army is creating theater and expeditionary sustainment commands that  are aimed in part at centralizing control over Army surface transportation  assets within a theater of operations. In a separate initiative, U.S.  Transportation Command created a new organization, the director of  mobility forces-surface, to integrate surface deployment and distribution  priorities set by the joint force commander.
Army officials raised concerns about whether the theater and  expeditionary sustainment commands would have the information  technology tools and personnel necessary to effectively and efficiently  carry out their missions. They said that these commands were designed to  be smaller than their predecessors, based on an assumption that certain  information technology tools would be available to enable the commands  to operate with fewer personnel. However, some of these information  technology tools—such as the next generation Mobile Tracking System,  Battle Command Sustainment Support System, and Transportation  Coordinator’s Automated Information for Movements System II—have  experienced problems during their development that have limited their  capability or have delayed their fielding. According to Army officials, the  shortcomings in available information tools have resulted in the need for  additional staff in the theater and expeditionary sustainment commands  and have required the commands to use manual, ad hoc techniques, which  are cumbersome and manpower intensive, to validate, coordinate, and  analyze data for decision making.
The U.S. Transportation Command-led efforts to establish the director of  mobility forces-surface have also faced implementation challenges. The  initial assessment of the director of mobility forces-surface pilot in Kuwait  by U.S. Transportation Command and U.S. Central Command indicated  that the initiative faces a number of challenges related to command and  control, availability of information technology tools, securing personnel  with the expertise and knowledge to use the information technology tools  that are available, and potential duplication of responsibilities with other  Army organizations. U.S. Central Command discontinued the pilot in May  2007 until some of these issues were resolved. In addition, the Army  reviewed more than 100 proposed responsibilities of the director of  mobility forces-surface and found that most of these responsibilities are  already covered by the Army’s theater and expeditionary sustainment  commands or other commands.
DOD also has developed initiatives to consolidate and improve storage  and shipping of materiel, including node management and deployable  depot, joint regional inventory and material management, and theater  consolidation and shipping point, but such efforts have been  implemented on a limited scale. During our visits to Kuwait, we found that  the Defense Logistics Agency and the Army were operating separate  facilities that have the potential for consolidation, which could result in  more efficient use of resources. We discussed this issue with senior U.S.  military officials in Kuwait and with Defense Logistics Agency officials.  Following these discussions and the completion of our fieldwork, the  Defense Logistics Agency assessed ways to improve theater distribution  and made recommendations to consolidate and relocate existing  operations. Specifically, in April 2007, the Defense Logistics Agency study  team recommended terminating the theater consolidation and shipping  point contract, assuming these functions at the defense distribution depot,  and drawing down inventory and operations at the Army general support  warehouse at Camp Arifjan.
Finally, various options have emerged for improving the ability of a joint  force commander to exercise command and control over joint theater  logistics functions. U.S. Joint Forces Command is coordinating the joint  experimental deployment and support initiative, whose objective is to  experiment with a range of command and control options that can provide  logistics coordination, integration, and synchronization to meet the  combatant commander’s priorities. The initiative builds upon DOD’s joint  deployment distribution operations center concept and progresses along a  continuum to include more robust organizational options. However, the  military services have raised concerns about how their own roles and  responsibilities for providing logistics support might be affected and have  opposed expansion of the most robust command and control option that  has emerged—known as the joint force support component command.
Our discussions with officials from the combatant commands and the  military services indicated that there are unresolved issues related to  exercising joint command and control over logistics functions in a theater  of operations. A number of officials had concerns about how organizations  such as the joint force support component command would be staffed and  what roles and authorities it would have. Specifically, they mentioned  statutory requirements for logistics support, directive authority for  logistics, and operational and financial considerations. The services  expressed concerns about mandating that they provide staff to the joint  force support component command, while also fulfilling their Title 10  responsibilities to man, train, and equip their forces. Officials from  military service components in the geographic combatant commands  raised the issue of having a service component take direction from a  separate component command at the same level, rather than from a  higher-level command, and they were resistant to losing personnel to such  an organization because the service component commands still have  tactical logistics responsibilities to fulfill. Some military service officials  raised questions about the effectiveness of a joint force support  component command that lacked an ability to exercise directive authority  for logistics. This authority gives the combatant commander the ability to  shift logistics resources within the theater in order to accomplish a  mission. Officials we interviewed did not believe this authority could be  delegated below the level of a joint force commander or service  component commander to an entity such as the joint force support  component command. Thus, they questioned how the joint force support  component command differs from other logistics command and control  organizations if the organization can make recommendations to the joint  force commander but not actually direct the transfer of assets across the  service components, known as cross-leveling. Readiness and financial  considerations related to exercising directive authority for logistics  include the military operational risks and trade-offs associated with cross- leveling. Assets diverted from one unit to support another unit may affect  the giving organization’s ability to conduct a future operation, and officials  raised concerns that logisticians in a separate logistics command may not  fully understand the impact of cross-leveling on the next military mission.  Additionally, because the services obtain funding for their own assets,  several officials told us that some form of financial reconciliation must be  considered when exercising directive authority for logistics.
section_title: Transforming and Improving Defense Business Operations Are Integral to Resolving Supply Chain Management Problems
paragraphs: DOD spends billions of dollars to sustain key business operations intended  to support the warfighter, including systems and processes related to the  supply chain and other business areas. We have reported on inefficiencies  in DOD’s business operations, such as the lack of sustained leadership and  a comprehensive, integrated, and enterprisewide business plan. Moreover,  at a time of increasing military operations and growing fiscal constraints,  billions of dollars have been wasted annually because of the lack of  adequate transparency and appropriate accountability across DOD’s  business areas.
As we have previously stated, progress in DOD’s overall approach to  business transformation is needed to confront problems in other high-risk  areas, including supply chain management. Because of the complexity  and long-term nature of business transformation, we have stated that DOD  needs a Chief Management Officer with significant authority, experience,  and a term that would provide sustained leadership and the time to  integrate DOD’s overall business transformation efforts. Without formally  designating responsibility and accountability for results, reconciling  competing priorities among various organizations and prioritizing  investments will be difficult and could impede the department’s progress  in addressing deficiencies in key business areas. Based on our long- standing body of work, pending legislative language, and the results of  studies completed by the Defense Business Board and the Institute for  Defense Analysis, there is a clear consensus that the department needs a  Chief Management Officer and that the status quo is no longer acceptable.
The two other DOD high-risk areas that are most closely linked with  supply chain management are modernizing business systems and  improving financial management. Successful resolution of supply chain  management problems will require investment in needed information  technology. The DOD systems environment that supports these operations  is overly complex and error prone, and is characterized by little  standardization across the department, multiple systems performing the  same tasks, the same data stored in multiple systems, and the need for  data to be entered manually into multiple systems. Modernized business  systems are essential to the department’s effort to address its supply chain  management issues. In its plan, DOD recognizes that achieving success in  supply chain management depends on developing interoperable systems  that can share critical supply data. One of the initiatives included in the  plan is business system modernization, an effort that is being led by DOD’s  Business Transformation Agency and that includes achieving materiel  visibility through systems modernization as an enterprisewide priority.
Regarding financial management, we have repeatedly reported that  weaknesses in business management systems, processes, and internal  controls not only adversely affect the reliability of reported financial data,  but also the management of DOD operations. Such weaknesses have  adversely affected the ability of DOD to control costs, ensure basic  accountability, anticipate future costs and claims on the budget, measure  performance, maintain funds control, and prevent fraud. In 2005, DOD  issued its Financial Improvement and Audit Readiness Plan, which is  intended to provide DOD components with a road map for resolving  problems affecting the accuracy, reliability, and timelines of financial  information and obtaining clean financial statement audit opinions.  However, tangible evidence of improvements in financial management  remains limited, and DOD recognizes that it will take several years to  implement the systems, processes, and other improvements needed to  address its financial management challenges.
section_title: Improving Supply Chain Management May Involve Reexamining Fundamental Aspects of DOD’s Logistics Governance and Strategy
paragraphs: Our recent review of joint theater logistics raises concerns about whether  DOD can effectively implement this initiative without reexamining  fundamental aspects of the department’s logistics governance and  strategy. In this respect, joint theater logistics may serve as a microcosm  of some of the challenges DOD faces in resolving supply chain  management problems. We found that DOD has not developed a  coordinated and comprehensive management approach to guide and  oversee implementation of joint theater logistics across the department.  Efforts to develop and implement joint theater logistics initiatives have  been fragmented among various DOD components largely because of a  lack of specific goals and strategies, accountability for achieving results,  and outcome-oriented performance measures—key principles of sound  management. While DOD has broadly defined joint theater logistics as an  adaptive ability to anticipate and respond to emerging theater logistics and  support requirements, it has not developed specific goals and strategies  linked to this vision. In addition, DOD has not assigned accountability for  achieving results under joint theater logistics and has not developed  outcome-oriented performance measures that would enable the  department to know whether its efforts are fully and effectively achieving  a joint theater logistics capability. Without a coordinated and  comprehensive approach to managing joint theater logistics, DOD lacks  assurance that it is on the right path toward achieving this capability or  that individual initiatives will collectively address gaps in logistics  capabilities. Further, DOD will have difficulty achieving the desired  improvements in distribution and asset visibility associated with joint  theater logistics as portrayed in the plan.
Based on our review, we recommended that DOD develop and implement  a coordinated and comprehensive management approach to guide and  oversee efforts across the department to improve distribution and supply  support for the U.S. forces in a joint theater. This approach should  encompass sound management principles, including developing specific  strategies and goals, assigning accountability for achieving results, and  using outcome-oriented performance measures. Moreover, in that report  we recommended that DOD align its approach to joint theater logistics  with ongoing actions the department is taking to reform its logistics  governance and strategy, which are discussed below. In considering  options for implementing this recommendation, we stated that DOD  should determine whether any changes should be made to DOD’s  organizational structure and control of resources for joint logistics  support, and identify the steps needed to make these changes, including  changes to existing laws, such as Title 10. DOD concurred with our  recommendation.
Regarding logistics governance, DOD has been testing a new approach to  managing joint capabilities as a portfolio. In September 2006, the Deputy  Secretary of Defense selected joint logistics as one of four capability areas  for testing capabilities portfolio management. These experiments were  initiated in response to the 2006 Quadrennial Defense Review, which  emphasized DOD’s need to build on capabilities-based planning and  management. According to DOD officials, the purpose of this test is to  determine if DOD can make better leadership decisions by managing a  portfolio of capabilities instead of managing systems and capabilities  individually. Thus, this portfolio test is intended to enable senior leaders to  consider trade-offs across previously stovepiped areas and to better  understand the implications of investment decisions across competing  priorities. Specifically in the joint logistics area, the portfolio includes all  capabilities required to project and sustain joint force operations,  including supply chain operations. While DOD officials told us the initial  results of the test have been completed and have shown that portfolio  management is an effective means for managing capabilities, they said that  decisions had not yet been made on how to implement this new  governance approach.
The decisions DOD makes on capabilities portfolio management will also  influence the development of its logistics strategy. In our prior work, we  have noted that DOD has undertaken various efforts over the years to  identify, and plan for, future logistics needs, but it has lacked an  overarching, consistent logistics strategy. Last year, the department began  to develop a “to be” road map to guide future logistics programs and  initiatives. DOD officials described the “to be” road map as portraying  where the department is headed in the logistics area and how it will get  there; monitoring progress toward achieving its objectives; and  institutionalizing a continuous assessment process that links ongoing  capability development, program reviews, and budgeting. According to  DOD officials, the initiatives in the plan will be incorporated into the “to  be” road map. At this time last year, the first edition of the “to be” road  map was scheduled for completion in February 2007, in conjunction with  the submission of the President’s Budget for Fiscal Year 2008, with annual  updates planned. However, DOD subsequently put the “to be” road map on  hold pending the completion of the capabilities portfolio management test.  DOD officials have told us that the “to be” road map is now scheduled to  be completed in summer 2008. In January, we recommended that DOD  improve its ability to guide logistics programs and initiatives across the  department and to demonstrate the effectiveness, efficiency, and impact of  its efforts to resolve supply chain management problems by completing  the development of a comprehensive, integrated logistics strategy that is  aligned with other defense business transformation efforts. DOD  concurred with our recommendation.
In reviewing DOD’s approach to developing and implementing joint  theater logistics initiatives, we found that the diffused organization of  DOD’s logistics operations, including separate funding and management of  resources and systems, complicates DOD’s ability to adopt a coordinated  and comprehensive approach. Several recent studies of DOD logistics  system have reached similar conclusions. Since 2003, a number of studies  have recommended changes to DOD’s organizational structure for  providing joint logistics and supply support to military operations. Some  of these organizations have noted that control over resources is a critical  issue to be addressed. For example, the Defense Science Board  recommended creation of a joint logistics command that would combine  the missions of U.S. Transportation Command, the Defense Logistics  Agency, and service logistics commands. The Center for Strategic and  International Studies also suggested the creation of a departmentwide  logistics command responsible for end-to-end supply chain operations.
Regarding resource allocation, this study further stated that resources  should be organized, managed, and budgeted largely along military service  lines, but in those instances where joint capability needs are not being met  by the services, the Secretary must turn to joint processes and entities.  The Lexington Institute, which also recommended creation of a U.S.  logistics command at the four-star level, concluded that Title 10 may need  to be amended in order to create this command. The Lexington Institute  also concluded that existing funding mechanisms act as disincentives for  joint logistics transformation and interoperability. The Defense Business  Practice Implementation Board, while not agreeing with the idea of  combining U.S. Transportation Command and the Defense Logistics  Agency, recommended that DOD elevate leadership for supply chain  integration by designating a new under secretary of defense who would  have authority to direct integration activities, including control over  budget decisions affecting these two components and the military  services. While we noted that transformational changes such as those  proposed by these organizations may not be possible without amending  existing laws, the scope of our joint theater logistics review did not  include an assessment of these proposals or what changes, if any, would  require congressional action.
Also contributing to coordination problems in the area of supply chain  management have been difficulties in clearly defining the responsibilities  and authorities of defense components that have a role in supply chain  operations. For example, although the Secretary of Defense in 2003  designated the Commander, U.S. Transportation Command, as DOD’s  distribution process owner—with responsibilities for overseeing the  overall effectiveness, efficiency, and alignment of DOD-wide distribution  activities—DOD has yet to issue a directive defining the process owner’s  authority, accountability, resources, and responsibility. We have  recommended that DOD enhance its ability to take a more coordinated  approach to improving the supply distribution system by, among other  things, clarifying the scope of responsibilities, accountability, and  authority between the distribution process owner and other  organizations. Although DOD did not concur with this recommendation  at the time we issued our report in 2005, DOD officials have recently told  us they plan to issue a directive aimed at more clearly defining the role of  the distribution process owner. Until this directive is issued, the  responsibilities and authorities of the distribution process owner remain  unclear. Echoing this theme, the Defense Business Board in April 2007  recommended that DOD take steps to clearly identify decision-making  authority regarding supply chain integration. Specifically, the Defense  Business Board recommended that DOD define and communicate  enterprise goals in order to align initiatives; clearly define responsibilities  and authorities of all players in the supply and distribution processes; and  allocate responsibility and authority to set direction and oversee progress,  and make necessary decisions to carry out DOD’s agreed-upon supply  chain management strategy and achieve enterprise goals.
DOD, like much of the federal government, will face critical challenges  during the 21st century that will test fundamental notions about how  agencies and departments should be organized and aligned to carry out  their missions. For example, the department faces challenges in  accomplishing its transformation goals and making improvements in key  business areas such as supply chain management. We have suggested that  decision makers may need to reexamine fundamental aspects of DOD’s  programs by considering issues such as whether current organizations are  aligned and empowered to meet the demands of the new security  environment as efficiently as possible and what kinds of economies of  scale and improvements in delivery of support services would result from  combining, realigning, or otherwise changing selected support functions,  including logistics.
section_title: Concluding Observations
paragraphs: Between now and the next update of our high-risk series in 2009, we plan  to continue to assess DOD’s progress in resolving supply chain  management problems against the criteria we have established for  removing a high-risk designation. In addition to monitoring the progress of  DOD’s plan, we plan to conduct audits related to specific aspects of supply  chain management. As I indicated earlier, a priority for the department as  it moves forward should be to track and assess the outcomes achieved  through its initiatives and the progress made in resolving supply chain  management problems in the three focus areas of asset visibility,  requirements forecasting, and materiel distribution. We will also consider  progress made in defense business transformation, business system  modernization, and financial management because of the close linkage  between these efforts and DOD’s success in improving its supply chain  management. We look forward to working with the department to provide  an accurate appraisal of progress toward the goal of successfully resolving  problems that have hindered effective and efficient supply chain  management.
Mr. Chairman, this concludes my prepared remarks. I would be happy to  answer any questions you or other Members of the Subcommittee may  have.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact William  Solis at (202) 512-8365 or solisw@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this statement. Individuals making contributions to this testimony  include Tom Gosling, Assistant Director; Karyn Angulo; Larry Junek; and  Marie Mak.
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