Defense Inventory: Navy Logistics Strategy and Initiatives Need to Address Spare Parts Shortages
Published: 2003-06-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1990, GAO has identified DOD inventory management as high risk because of long-standing management weaknesses. In fiscal years 2001 and 2002, Congress provided the Navy with more than $8 billion in operations and maintenance funds to purchase spare parts in support of the service's operations. Nevertheless, spare parts availability has fallen short of the Navy's goals in recent years. GAO examined the extent to which Navy strategic plans address mitigation of critical spare parts shortages, the likelihood that key supply system improvement initiatives will help mitigate spare parts shortages and enhance readiness, and the Navy's ability to identify the impact on readiness of increased spare parts investments.
section_title: What GAO Found
paragraphs: The Navy's servicewide strategic plan does not specifically address means to mitigate critical spare parts shortages. Its 2001 plan contained strategic goals, objectives, and performance measures, but the service did not use it to systematically manage implementation of logistics reform initiatives. The Navy is developing a new logistics strategic plan, but this document has not yet been published. Consequently, the service presently lacks an effective top-level plan that integrates a specific focus on mitigating spare parts shortages into its logistics transformation initiatives. Without such a plan, the Navy lacks guidance necessary to ensure its logistics initiatives mitigate critical spare parts shortages. GAO examined six of the key initiatives that the Navy has undertaken to improve the economy and efficiency of its supply system. While some of these initiatives have increased availability of select spare parts, GAO cannot determine their potential to mitigate critical spare parts shortages because they were not designed specifically to remedy this problem. For example, the Performance Based Logistics initiative aims to improve supply support at equal or lower cost by outsourcing a broad range of services. Though the initiative has increased availability of certain items, GAO could not measure the extent to which Performance Based Logistics contracts have mitigated critical spare parts shortages. The Navy has determined that an additional investment of $1.2 billion would be necessary to achieve supply availability levels that support the service's readiness objectives. However, the Navy did not ask for this funding in its fiscal year 2004 budget request, nor did it report linkages between resource levels and readiness rates for individual weapon systems, as recommended by the Office of the Secretary of Defense in 2002. The Navy did provide aggregate readiness data to the Office of the Secretary of Defense, but officials stated that they lacked information technology necessary to link readiness rates by weapon system to budget categories. DOD has an 85 percent supply availability goal, which means that 85 percent of the requisitions sent to wholesale supply system managers can be immediately filled from on-hand inventories. Navy supply system models are focused on achieving this goal in the aggregate. However, the Navy's overall wholesale supply system performance has fallen short of expectations in each of the last 3 fiscal years for both aviation- and ship-related repairable spare parts. Supply availability ranged between approximately 69 percent and 71 percent for aviation-related items, and between 79 percent and 84 percent for ship-related parts.

section_title: Letter
paragraphs: In fiscal years 2001 and 2002, the Navy spent $8.1 billion from operations  and maintenance appropriations for spare parts. At the end of fiscal year  2002, the Navy maintained inventories of spare parts with an estimated  value of $30 billion. However, the Navy continues to report that its parts  availability level is below the 85 percent goal. While recognizing that spare  parts shortages may never be eliminated, it is reasonable to expect the  services to place a priority on efforts to mitigate (reduce) those shortages  that adversely affect readiness. This priority should be inherent in the  service’s overall planning and stewardship of funds they request from  Congress, and in their accountability for making spare parts investment  decisions that provide a good readiness return. Since 1990, we have  identified the Department of Defense’s (DOD) inventory management as  high risk because of long-standing management weaknesses. In our  January 2003 High Risk Series Report, we wrote that DOD was  experiencing equipment readiness problems because of a lack of key spare  parts, and we recommended that DOD take actions to address those  shortages. As recently as August 2002, DOD recognized the need to  overcome critical spare parts shortages and recommended changes to  improve weapon system readiness.
This is one in a series of reports that respond to your request that we  identify ways to improve the availability of spare parts for aircraft, ships,  vehicles, and weapon systems. As agreed with your office, this report  addresses the following questions:    Does the Navy’s strategic plan for logistics address the mitigation of  critical spare parts shortages—those that adversely affect readiness?
Will key Navy logistics initiatives likely mitigate spare parts shortages  that affect readiness?
Does the Navy have the ability to identify the impact on readiness of  increased investments for spare parts?
To accomplish these objectives, we analyzed plans and initiatives  applicable to the management of the Navy’s inventory management  system. We interviewed officials and obtained information on inventory  management practices at Navy headquarters, the Naval Supply Systems  Command, the Naval Inventory Control Point, the Naval Sea Systems  Command, and the Naval Air Systems Command. We reviewed project  plans, implementation status, and performance measures for six supply  system improvement initiatives that Navy headquarters and Supply  Systems Command officials highlighted as key efforts for mitigating future  spare parts shortages and enhancing equipment readiness. We used the  Government Performance and Results Act of 1993, prior GAO reports, and  other key DOD documents as criteria to evaluate the Navy’s strategic plans  and initiatives. More details on our scope and methodology may be found  on page 25.
subsections: section_title: Background
paragraphs: In prior reports, we have identified major risks associated with DOD’s  spare parts inventory management practices. In 1996, and then again in  1998, we reported that the Navy’s logistics system often could not provide  fleet customers with necessary parts in a timely manner, despite billions of  dollars invested in inventory. In 2001, we found that chronic spare parts  shortages had degraded combat readiness for selected Navy weapon  platforms and had also contributed to problems in retaining skilled  maintenance personnel. Navy item managers interviewed for the 2001  report indicated that spare parts shortages resulted from inaccurate spare  parts requirements forecasts, as well as contracting problems with private  companies and repair delays at military and privately owned facilities.  Most recently, in our January 2003 report on major management  challenges and program risks, we recommended that DOD take action to  address key spare parts shortages as part of a long-range strategic vision  and a department wide, coordinated approach for improving logistics  management processes.
In addition to the risk associated with ineffective spare parts management  practices, DOD recently voiced concerns over the adverse impact spare  parts shortages have on readiness of weapon systems. In its August 2002  report on its inventory management practices, DOD said that the models it  uses to determine inventory purchases are generally biased towards the  purchase of low-cost items with high demands, not necessarily the items  that would improve readiness the most. The report recommended that  the services improve their ability to make inventory purchase decisions  based on weapon system readiness. Furthermore, the report  recommended that the services’ requests for funds to increase inventory  investments be justified on the basis of the corresponding increase in  weapon system readiness.
The Navy provides the fleet with spare parts through a multitiered  inventory system.
Retail inventory refers to spare parts that are stored shipside or  planeside in accordance with standardized spare parts allowance lists.  Retail level spare parts are funded by the Navy’s procurement and  operations accounts. Funding for initial outfitting parts is provided by  procurement appropriations, while funding for replenishment parts is  provided by operations and maintenance appropriations.
Wholesale inventory refers to spare parts the Navy buys to replenish  retail inventory. Initially Navy program managers tasked with  developing weapon systems purchase parts directly from vendors using  money from the procurement accounts. However, once a weapon  system is fully developed and integrated into the fleet, the Naval Supply  Systems Command assumes full responsibility for supporting that  system through funding provided by the Navy Working Capital Fund.  At this point, fleet customers use funding from outfitting procurement  and operations accounts to purchase parts from the Navy’s wholesale  inventory. The wholesale system functions as a middleman by  purchasing spare parts from vendors with Navy Working Capital Fund  dollars, and then reselling these parts to fleet customers. In order to  avoid inventory shortages, the wholesale system must accurately  forecast demand for spare parts and factor in lead times for  procurement and repair actions to mitigate delays in delivery of parts  to the fleet. Furthermore, the wholesale system must maintain a cash  balance in the Navy Working Capital Fund that approximates 7 to 10  days and, consequently, cannot stock more parts than it expects to  resell to the fleet.
Sponsor-owned inventory refers to items that program managers  purchase with appropriated funds to develop, test, and sustain weapon  systems. Program managers store sponsor-owned materials to support  work conducted at various locations, including air and sea warfare  centers. DOD guidance provides, in part, that when items are no longer  needed, they may be returned to the wholesale supply system or  reissued to other fleet customers.
The Deputy Chief of Naval Operations for Fleet Readiness and Logistics is  responsible for strategic planning of logistics functions and ensures that  the logistics system supports the Navy’s readiness objectives. The Naval  Supply Systems Command develops inventory management policies,  determines spare parts requirements, and formulates the Navy Working  Capital Fund budget. Within the Naval Supply Systems Command, the  Naval Inventory Control Point is assigned primary responsibility for  material management tasks, such as computing requirements and  providing procurement, distribution, disposal, and rebuild direction. The  Naval Air Systems Command, the Naval Sea Systems Command, and the  Space and Naval Warfare Systems Command, collectively referred to as  the hardware systems commands, interact with the wholesale supply  system to ensure that it procures sufficient quantities of spare parts to  satisfy the fleet’s allowance requirements.
section_title: Navy Logistics Strategic Plans Do Not Specifically Focus on Mitigating Spare Parts Shortages
paragraphs: The Navy’s servicewide strategic plans do not specifically address means  to mitigate critical spare parts shortages. The Navy’s fiscal year 2001 High  Yield Logistics Transformation Plan focused on improving logistics  overall, but did not state how the Navy expects to reduce spare parts  shortages. Also, while a key subordinate plan developed by the Naval  Supply Systems Command has a strategy to ensure the availability of spare  parts meets required performance levels; its objectives do not specifically  focus on mitigating critical spare parts shortages. This subordinate plan  does focus on improving supply availability and reducing customer wait  time, but does not specifically address mitigation of spare parts shortages.   Although the Navy is developing a new strategy, the Sea Enterprise plan, it  has not been published, and therefore we do not know whether it will  address ways to mitigate critical spare parts shortages.
In fiscal year 2001, the Navy published a servicewide strategic plan—the  High Yield Logistics Transformation Plan—that identified initiatives  undertaken by its major support commands to improve the service’s  logistics overall and to address objectives listed in DOD’s Fiscal Year 2000  Logistics Strategic Plan. While the High Yield Plan contained attributes of  an effective strategic plan consistent with the Government Performance  and Results Act of 1993 (GPRA), such as long-term goals, objectives, and  performance measures, it did not specifically address key objectives for  mitigating critical spare parts shortages. The High Yield Plan identified  nine major goals, six of which are linked to DOD’s fiscal year 2000  Logistics Strategic Plan, and three that are unique to the Navy. The plan  served as a compendium of initiatives undertaken by Navy commands and  program offices to improve overall logistics support processes. In total,  the plan identified 80 individual initiatives; however, the plan did not  contain information that highlighted specific efforts to mitigate spare parts  shortages. Navy headquarters officials told us they stopped efforts to  report to DOD on the status of the 80 initiatives after DOD published a  new logistics strategic plan in June 2002, entitled the Future Logistics  Enterprise, that contained several new transformation strategies.
The Naval Supply Systems Command Strategic Plan has a strategy to  ensure that the availability of spare parts meets required performance  levels and includes numerous goals, objectives, and initiatives to improve  supply availability. However, this strategy does not specifically focus on  mitigating spare parts shortages, nor does it incorporate the objectives of  the Navy’s High Yield Transformation Plan. In November 2001, the Naval  Supply Systems Command updated its 1999 strategic plan to deliver  combat capability through delivery of quality supplies and services on a  timely basis. The plan identified 5 major goals, 16 implementation  strategies, and 63 individual initiatives. Implementation status of each  initiative is recorded in an automated tracking system and briefed to  command leadership several times each year. Under its third goal—to  achieve and demand the highest quality of service—one of the Command’s  strategies is to ensure the availability of spare parts meets required  performance levels, but its objectives do not specifically focus on  mitigating critical spare parts shortages, nor does the strategy link directly  to higher-level DOD and Navy strategic plans. Navy officials told us they  expect to start updating the plan during the summer of 2003. Without a  focus on mitigating spare parts shortages and linkage to the higher-level  plans, the Navy may lack assurance that its overall strategic goals and  objectives will be effectively addressed and that its key initiatives will  systematically address spare parts shortages.
In October 2002, the Navy embarked on a new servicewide strategic  planning effort, referred to as the Sea Enterprise, that seeks to improve the  efficiency and effectiveness of all aspects of the service’s business  operations, including organizational alignments, refining logistics  requirements, and reinvesting savings to purchase new weapon systems  and enhance combat capability. As of March 2003, the Sea Enterprise  plan had not been published, and the extent to which the new plan will  address the mitigation of critical spare parts shortages is unclear. Navy  documents indicate that officials were reviewing hundreds of ongoing and  planned initiatives for improving business operations, and that they  planned to select projects with the highest potential savings. The Navy  expects to have preliminary project plans and savings estimates available  for consideration in the fiscal year 2005 budget deliberations. Once key  initiatives are identified for the Sea Enterprise plan, a board of directors  will oversee development of implementation plans and monitor progress  toward achieving anticipated savings.
section_title: Several Key Initiatives Show Potential for Improved Spare Parts Support
paragraphs: We reviewed six initiatives that the Navy has undertaken to improve the  economy and efficiency of supply support. While some of these initiatives  have improved the overall supply availability and reliability of some spare  parts, we cannot measure their potential for mitigating critical parts  shortages and their impact on weapon system readiness because they  were not designed to specifically address this problem. The initiatives  included projects to (1) obtain more cost effective and timely support  from contractors, (2) improve the efficiency of inventory management  practices, and (3) increase the reliability of parts provided to military  customers.
subsections: section_title: Performance Based Logistics Contracts Have Improved Availability of Spare Parts
paragraphs: Performance based logistics contracts have generally improved supply  support to the fleet, but the Navy does not assess the extent to which  better supply availability mitigates critical spare parts shortages or  enhances the fleet’s combat readiness. Through performance based  logistics contracts, the Navy has outsourced a broad range of supply  support activities that have traditionally been carried out by the Navy’s  organic supply system, such as warehousing, repairing and distributing  parts, and determining spare parts requirements. According to Navy and  interim DOD guidance, the primary objective of performance based  logistics is to improve supply support while maintaining or reducing  costs. Under more extensive partnerships, contractors may redesign  weapon system configurations to optimize system performance, and may  also reengineer or replace spare parts to mitigate the effects of scarcity or  obsolescence. In the most advanced partnerships, contractors provide  technical and engineering support to fleet customers, perform weapon  system overhauls, and guarantee timely delivery of quality spare parts to  fleet customers.
Our review of Navy aggregate and individual program statistics indicated  that performance based logistics arrangements have generally improved  supply support to the fleet. From January 2001 to July 2002, the Navy’s  quarterly supply availability averaged 79.6 percent through a combination  of organic and contractor supply support. Without performance based  logistics contracts factored in to these data, quarterly supply availability  averaged 71.5 percent. We judgmentally examined 10 of 118 active  performance based logistics contracts, and found that one contract had no  specific vendor performance standards. In 7 of the 9 remaining contracts,  we found that vendors either satisfied or exceeded supply support goals.  Moreover, for select cases in which data were available for comparison  with baseline data, we found that performance based logistics  partnerships improved supply support. For instance, one vendor increased  availability of parts for an aviation computer system  from pre-contract  levels of 61 percent to current levels of 100 percent, and filled all 489  outstanding backorders within 13 months after the contract was awarded.  Similarly, another vendor increased overall supply availability for the ARC- 210 radio assembly from pre-contract levels of 60 to 70 percent to a  current average of 91 percent.
Despite positive supply availability effects attributed to performance  based logistics contracting, we could not measure the initiative’s overall  impact on spare parts shortages. These contracts vary widely in scope and,  according to Navy policy, are intended to improve logistics support while  maintaining or reducing costs. Consequently, these contracts do not aim  specifically to increase the availability of spare parts that experience  chronic shortages, and are generally approved only if they can generate  savings for the Navy’s wholesale supply system. While Navy officials  stated that improved supply support is linked to enhanced equipment  readiness, we could not determine whether performance based logistics  contracts have mitigated the readiness effects of spare parts shortages.
The Navy’s inability to quantify cost savings—or losses—generated by  individual contracts impedes the service’s ability to prove the initiative is  achieving its objective. Navy and interim DOD guidance specify that each  performance based logistics contract is to improve supply support to the  warfighter without increasing cost; however, the Navy does not track  individual contract savings. Instead, Navy officials approximate aggregate  savings attributable to performance based logistics contracting. Although  the Navy reports that it has reduced estimated expenditures for spare  parts and labor by approximately $100 million for the fiscal year 2000-2005  period, it does not have the information that its leadership and other  decision makers may likely need in order to determine whether individual  contracts satisfy the initiative’s cost saving objective.
section_title: The Potential for Total Asset Visibility Initiative to Improve Inventory Management Practices Hindered by Implementation Challenges
paragraphs: Under the Total Asset Visibility initiative, the Naval Supply Systems  Command has established asset visibility over a large portion of the  service’s spare parts inventories. However, changing completion milestone  dates, difficulties in linking data contained in numerous nonstandard  automated data systems, and concerns over the lack of top-level  management emphasis—including effective business rules and incentives  that encourage customers to share parts—have hindered the initiative’s  timely and effective implementation. Because of these limitations, the  extent to which this initiative will help mitigate critical spare parts  shortages and improve weapon system readiness is uncertain. The Supply  Systems Command has recognized these difficulties and prepared a long- term plan to centrally manage supply, but the Navy has not yet approved  the plan for implementation.
The Total Asset Visibility initiative is intended to facilitate redistribution of  materials between Navy customers by allowing Navy supply managers to  fill critical orders from excess or unneeded stocks held by other Navy  customers. DOD’s Material Management Regulation, issued in May 1998,  requires the services to provide timely and accurate information on the  location, movement, and status of all material assets. The regulation  stipulates that wholesale-level inventory managers should have visibility of  all in-storage materials, including assets held by military units,  maintenance depots, and shipyards. Item managers may use this  information to mitigate critical spare parts shortages by redistributing  items from one customer’s storage facility to another customer with more  urgent needs. In our October 1999 report, we stated that the Navy  characterized its Total Asset Visibility program as a “mature” initiative that  would be fully implemented by September 2002. To improve the potential  for timely and effective implementation, in our October 1999 report we  recommended that the Navy establish clearly defined goals, quantifiable  performance measures, and implementation milestones to better assess  the initiative’s impact on supply system effectiveness. However, the Navy  has yet to establish such a plan.
At the end of fiscal year 2002, Navy data indicated that the Navy had  established asset visibility over 96 percent of the $42 billion inventory that  the service had targeted for inclusion under the program. In May 2003, a  Navy official stated that this data collection did not target the full range of  government-owned materials kept at naval shipyards, aviation repair  depots, and commercial contractor facilities. Our work shows that while  the Navy supply managers currently have visibility over Navy-managed  items held at naval retail storage facilities and most sponsor-owned  inventories kept at naval warfare centers, access to unneeded materials  held at these locations must be arranged on a case-by-case basis. For  example, the Navy has implemented an inventory management visibility  system for its retail-level spare parts inventories held aboard ship and at  major shore stations. However, these assets are “owned” by the operating  fleet commands, and in practice are not subject to redistribution outside  the command. An official at the Naval Inventory Control Pointthe  activity responsible for management of wholesale level inventories and  processing customer requisitionsstated that while they have visibility  over retail level inventories held aboard ship and at shore stations  controlled by the fleet operational commands, they rarely ask for a part,  even though the retail–level inventories may have accumulated parts in  excess of local needs. The use of the asset visibility system as a tool for  mitigating spare parts shortages between Navy commands could benefit  from the development of business rules and management incentives that  encourage Navy customers to relinquish control and ownership of  unneeded supplies.
Progress toward achieving total asset visibility and accountability at some  storage locations has been hampered by difficulties in linking data  contained in numerous nonstandard information systems. For example,  after a 5-year test, the Naval Sea Systems Command terminated efforts to  establish centralized visibility and accountability over an estimated $4.3  billion in government-furnished materials provided to commercial  shipbuilders. The test was terminated for a variety of reasons, including  the lack of common information systems that would allow the transfer of  data between commands, the lack of coordinated management emphasis,  and difficulties changing legacy contractual reporting requirements.  Moreover, at the Naval Air Systems Command, officials stated that their  subordinate activities currently record inventory data on four different  management information systems.
Recognizing current Navy supply system inefficiencies, the Naval Supply  Systems Command has proposed a single worldwide inventory  management system whereby a national inventory manager would  determine requirements for all wholesale inventories, retail ashore, and  afloat allowances. The national inventory manager would direct the  distribution of materials and maintain day-to-day visibility and control of  spare parts inventories regardless of location or funding source. The  national inventory manager would also retain ownership of the material  until the items were consumed, at which time the stock fund would  receive a reimbursement to finance the cost of stock replenishment. At the  time of our review, the Navy had not approved the plan. Naval Supply  Systems Command representatives believe this concept would eliminate  many of the redundancies and inefficiencies in the current inventory  management framework. In addition, they said effectiveness of the  concept would be dependent upon the full and timely implementation of a  common information system shared by all Navy customers regardless of  location, or their place in the command hierarchy. Navy officials are  planning to replace many of their nonstandard information systems within  the next 5 to 10 years.
section_title: Logistics Engineering Change Proposals Provide More Reliable Spare Parts at Lower Cost, but Investment Criteria Limit the Initiative’s Scope
paragraphs: The Navy’s Logistics Engineering Change Proposal initiative has  demonstrated potential to enhance equipment readiness by improving the  quality of spare parts, and thus reducing the frequency of maintenance  actions. However, our work shows that the initiative’s impact may be  limited by criteria that require rapid return on investment in spare parts  engineering projects and discourage large investments in such projects. By  reducing expenditures on low-quality items, this initiative has generated  measurable savings for the Navy supply system, and could yield further  savings if expanded to include more types of spare parts.
The Navy undertook the Logistics Engineering Change Proposal initiative  to systematically provide Navy customers with more reliable and less  costly spare parts. This initiative’s primary objective is to make up-front  investments in high-quality replacement parts as a means of avoiding  higher long-term material and labor costs associated with frequent  replacement of low-quality items. Through the engineering change  proposal process, the Navy identifies items with high failure or turnover  rates, and then conducts a logistics and engineering assessment to  determine how the quality of these items could be improved. In some  instances, parts are reengineered; in other cases, alternative parts are  tested for reliability and system compatibility, and then installed to replace  lower quality items. To ensure that engineering change proposals offer a  cost-effective alternative to standard components, the Navy conducts a  cost analysis for each project. To be approved, projects must be expected  to realize a 2-to-1 return on investment over the first 5 years after the  redesigned part is initially installed in the fleet.
We reviewed 21 projects in which reengineered parts had been fully  installed in operational equipment. All 13 projects for which comparative  performance data were available demonstrated gains in reliability. These  reliability improvements implicitly mitigate spare parts shortages and  enhance fleet readiness by reducing the frequency of maintenance actions.  The Replacement Inertial Navigation Unit—a navigation component  installed on P-3 aircraft—illustrates this point. According to Navy  documents, the original item was no longer in production, and was costly  to maintain due to high failure rates. The replacement model, however,  boosted the part’s mean time between failure from 56 to 5,375 hours, and  is expected to save the Navy approximately $69.4 million in spare parts  expenditures over the lifetime of the project.
While material quality improvements resulting from engineering change  projects implicitly enhance fleet readiness, we believe that this initiative’s  scope and overall impact are limited because of restrictive return on  investment criteria. Navy officials told us several potential projects had  been rejected in recent years due to insufficient projected return on  investment. For example, officials said that a reengineered F-18 navigation  component that offered superior reliability over the existing component  was rejected because its predicted return on investment would fall  substantially below the return on investment threshold. Moreover, they  stated that the Navy considered the project’s anticipated first year  investment of approximately $155 million unaffordable. Figure 1 illustrates  the changes in investment criteria and funding since the inception of the  engineering change initiative. As shown, the return on investment  expectation ranged from break even in 5 years to the current criterion,  which requires a 2-to-1 return on investment over the first 5 years after the  redesigned part is initially installed. In addition, the amount of available  investment funding declined from more than $100 million in fiscal years  1997 and 1998 to a current total of about $40 million.
Because of the long-term nature of these investments, they typically do not  yield savings in the early years while initial costs are being incurred.  According to the Navy’s most recent assessment, 62 approved aviation  projects yielded about $2 million in net savings from fiscal year 1997  through fiscal year 2002. These projects, along with 11 forthcoming ones,  are expected to generate additional savings of approximately $785 million  from fiscal year 2003 to fiscal year 2010. In addition, Navy officials noted  that unmeasured savings may accrue through cost avoidance resulting  from reduced maintenance, processing, and transportation of broken or  defective items. Navy officials told us that the service is reviewing plans to  facilitate project approval by relaxing current return on investment  criteria. Management attention to the investment criteria could expand the  number of eligible parts, help mitigate spare parts shortages, and increase  the readiness return on investment.
section_title: The Serial Number Tracking Initiative Is Expected to Reduce Part Loss and Facilitate Maintenance
paragraphs: The Navy’s Serial Number Tracking initiative shows potential to improve  supply support, as well as increase fleet readiness, by strengthening  controls over in-transit items and facilitating weapons system  maintenance. Furthermore, according to preliminary Navy estimates, the  Serial Number Tracking initiative will likely generate savings that exceed  the costs of program implementation. However, we could not assess its  impact on spare parts shortages because the initiative will not be fully  implemented until May 2004, and because the initiative’s performance  metrics are not designed to measure its impact on spare parts shortages.
The Naval Supply Systems Command undertook this initiative in response  to the Navy’s Aviation Maintenance Supply Review, which recommended  that specific actions be taken to reduce overall maintenance and supply  costs, increase readiness, and make systemic improvements in support of  naval aviation forces. Since 1990, we have regarded DOD inventory  management as a high-risk area because of vulnerabilities to waste, fraud,  abuse, and mismanagement. In 1999, we reported that the Navy was  unable to account for over $3 billion in inventory that was in-transit within  and between storage facilities, repair facilities, and end-users. A business  case analysis commissioned by the Naval Supply Systems Command in  support of the Serial Number Tracking initiative found that improper  accounting of in-transit repair items generates considerable material  losses, as well as additional labor costs associated with lost maintenance  history data and reconciling records for lost or missing parts.
The Navy’s Serial Number Tracking program has potential to enhance the  efficiency of maintenance and repair processing in a number of ways.  Once the program is fully implemented, parts transferred between Navy  customers, storage facilities, and repair sites will be marked with bar  codes, which maintenance and supply personnel will scan at every transfer  point to record each item’s transit history. Navy customers will then be  able to access this information by logging in to a centralized database. The  Navy expects this process to minimize the risk of in-transit part loss, as  well as the chance of maintenance record errors resulting from manual  data entry. In addition to bar coding, the Serial Number Tracking initiative  provides for select aviation components to be outfitted with computer  chips, called contact memory buttons, that store critical maintenance  history and warranty information. As parts circulate through the repair  pipeline, maintenance personnel will be able to scan the memory buttons  in order to identify what maintenance work has been previously executed,  and then determine what additional maintenance actions should be taken.
According to the Navy’s analysis, serial number tracking will streamline  maintenance work by facilitating identification of maintenance problems  and part defects, measurement of part reliability, and investigations of  spare part engineering. Moreover, the initiative could reduce time required  to complete certain maintenance actions.
The Navy has budgeted approximately $58 million over 5 years to  implement Serial Number Tracking. This amount includes engineering  research to determine which components are compatible with contact  memory button technology, installation of contact memory buttons and  barcodes, and outfitting maintenance facilities with scanning equipment.  Despite these start-up costs, the Navy anticipates that this initiative will  yield net savings of more than $193 million over 7 years, resulting  primarily from reduced spare parts loss.
section_title: Initiative to Improve Procedures for Returning Unserviceable Items to Repair Sources Lacks Performance Measures
paragraphs: The Naval Supply Systems Command and its Inventory Control Point staff  are implementing a project to redesign and shorten the time required for  unserviceable items to be returned to repair facilities. Navy officials told  us they anticipate that the reengineered process will reduce the number of  unfilled customer requisitions and create efficiencies in the scheduling and  repairing of broken parts. At the time of our review, responsibility for  overall project management was transitioning from the Naval Supply  Systems Command to the Naval Inventory Control Point. Because there is  no documented performance plan, the extent to which data will be  available to document the initiative’s impact on equipment readiness and  mitigation of critical spare parts shortages is unclear.
Currently, Navy officials said, the typical unserviceable item is handled  and processed 3 to 5 times during an average period of 35.8 days from  initial turn-in by the fleet customer to receipt of the broken part at the  designated repair activity. The Navy envisions a computer Web-based  system whereby a sailor aboard ship can query a computer system and get  immediate shipping and packaging instructions. This will reduce the  number of shipping destinations and enable the Navy to reduce overall  costs. However, without a management plan that specifies performance  goals and implementation milestones, the Navy cannot be assured that the  initiative will be fully implemented and achieve intended results.
section_title: Readiness-Based Sparing Initiative Could Help Mitigate Critical Spare Parts Shortages If Expanded
paragraphs: The Navy’s use of the Readiness-Based Sparing initiative as a criterion for  stocking parts aboard ships appears to have potential for improving  critical spare parts availability and operational capability of selected  weapon systems. However, according to DOD, because this model is not  fully supported by current data collection processes, much of the analysis  must be developed off-line. Currently, Navy officials stated that they have  used readiness based sparing techniques in determining spare parts  allowances in support of some older weapon systems and all new systems  being provided to the fleet.
The Naval Supply Systems Command is continuing to develop computer  models that base allowances for weapon system component parts on  readiness considerations. Under the traditional approach, allowances are  largely based on historical failure rates of individual parts. The Navy’s new  readiness-based models are geared to the operational readiness  requirements of selected critical subsystems, and consider how random  part failures might adversely affect the ability of the installed component  to perform the overall mission. Officials explained that the traditional  demand-based sparing model works well for mechanical-type parts, which  tend to break down at regular intervals as a result of usage. However,  experience has shown that newer electronic components have much less  predictable failure patterns. To compensate for this, weapon system  designers sometimes build in redundancies that enable equipment to  continue working even after random part failures occur. For example, by  using the readiness based sparing process, Navy officials anticipate that  the operational availability of the Close-In Weapons System will improve  from 45 percent under the demand-based approach to 87 percent under  the readiness-based allowance model, and the AEGIS system from 24  percent to 91 percent, respectively.
section_title: Impact of Additional Spare Parts Funding on Supply Availability and Readiness Estimated but Not Reported
paragraphs: The Navy has analyzed how additional wholesale supply funding would  affect the availability of spare parts as well as equipment readiness rates,  and has determined that an additional investment of $1.2 billion would be  necessary to support readiness objectives established by the Chief of  Naval Operations. However, the Navy did not ask for this funding as part  of its fiscal year 2004 budget request, nor did its budget estimates link  planned spending to individual weapon system readiness, as  recommended by the Office of the Secretary of Defense in an August 2002  study.
DOD has an 85 percent supply availability goal, which means that 85  percent of the requisitions sent to wholesale supply system managers can  be immediately filled from on-hand inventories. Navy supply system  models are focused on achieving this goal in the aggregate. However, the  Navy’s overall wholesale supply system performance has fallen short of  expectations in each of the last 3 fiscal years for both aviation- and ship- related repairable spare parts. Supply availability ranged between  approximately 69 percent and 71 percent for aviation-related items, and  between 79 percent and 84 percent for ship-related parts. Navy officials  commented that they have had difficulty achieving the desired 85-percent  goal for aviation parts due to a number of reasons, including increased  demand stemming from aging weapon systems and accelerated  operational requirements.
The Navy has estimated that an extra investment in the working capital  fund of approximately $1.2 billion would increase aviation- and ship- related  spare parts inventories to levels that support current readiness  standards. According to a recent study conducted by the Naval Supply  Systems Command, constraints in repair pipeline requirement models  accounted for a 6 to 8 percent decrease in supply availability for aviation  parts, which equated to an estimated 5 to 6 percent decline in fully mission  capable rates for naval aircraft. This study concluded that a working  capital fund investment of $225 million would remedy wholesale inventory  deficiencies resulting from inaccurate requirements models, and that  another $688.5 million would prevent further decline in supply availability  of aviation spare parts resulting from constraints that prevent the working  capital fund from procuring new inventory requirements driven by  increased demand. Furthermore, the study calculated that an additional  $300 million investment would be required to increase supply availability  across all inventory segments to 85 percent.
In its budget estimate submitted to Congress in February 2003, however,  the Navy did not ask for additional investment in the working capital fund  to meet the supply availability and aviation readiness rates described  above. At present, it is unclear whether the Navy will choose to request  funding for these requirements in later years. In its fiscal year 2004 budget  exhibits, the Navy linked its planned working capital fund expenditures to  aggregate spare parts availability, but not to mission capable supply rates  or other readiness rates for individual weapon systems. The benefit of  such a link was cited in an August 2002 study by the Office of the  Secretary of Defense, which recommended that service requests for funds  for spare parts inventories be linked to specific weapon system readiness.  The service did provide aggregate ship and aviation readiness information  to the Office of the Secretary of Defense. However, Navy officials said that  the service cannot directly link spare parts funding and readiness data by  budget category until better information technology becomes available.  Without information that links funding to readiness, the Navy’s budget  package does not provide Congress the return on readiness investment  information it may need to make resource decisions.
section_title: Conclusions
paragraphs: Since 1990, we have repeatedly reported that DOD’s inventory  management practices are high risk. In our 2003 High Risk Series Report  we recommended that DOD take action to address key spare parts  shortages as part of a long-range strategic vision and a departmentwide,  coordinated approach to logistics management. However, our work shows  that the Navy currently lacks a servicewide strategic logistics plan and  supporting plan that include a specific focus on mitigating critical spare  parts shortages. In addition, the Navy’s current key logistics initiatives to  improve the efficiency of supply and inventory management practices do  not include a specific focus on mitigating these shortages. Instead, these  initiatives address many underlying issues, such as reducing customer wait  time, increasing asset visibility, improving the management of items  turned in for repair, and increasing the reliability of repair parts. Without a  focus on mitigating spare parts shortages, the Navy lacks a coordinated  approach, with attributes of an effective plan, such as goals, objectives and  performance measures, to systematically address the shortages and assess  progress in mitigating them. The ongoing development of the Sea  Enterprise plan and imminent update of the Naval Supply Systems  Command Strategic Plan provide an opportunity to include this focus and  provide the coordination needed to ensure that the Navy’s key logistics  initiatives we reviewed can achieve their maximum financial and readiness  benefits. Lastly, without information that links spare parts funding to  individual weapon system readiness and provides assurance that  investments in spare parts are based on the greatest readiness returns,  such as that recommended in the August 2002 Inventory Management  Study, Congress and other decision makers cannot determine how best to  prioritize and allocate future funding.
section_title: Recommendations
paragraphs: We recommend that the Secretary of Defense direct the Secretary of the  Navy    develop a framework for mitigating critical spare parts shortages that  includes long-term goals; measurable, outcome-related objectives;  implementation goals; and performance measures as a part of either  the Navy Sea Enterprise strategy or the Naval Supply Systems  Command Strategic Plan, which will provide a basis for management to  assess the extent to which ongoing and planned initiatives will  contribute to the mitigation of critical spare parts shortages, and  implement the Office of the Secretary of Defense’s recommendation to  report, as part of budget requests, the impact of funding on individual  weapon system readiness with a specific milestone for completion.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, DOD generally concurred  with the intent of both recommendations, but not the specific actions.   DOD’s written comments are reprinted in their entirety in appendix I.
In concurring with the intent of our first recommendation, DOD expressed  concern that because spare parts shortages are a symptom of higher-level  problems, including the need for more reliable spare parts and more  effective life cycle support processes, its management improvement plans  must focus on improving the processes, rather than on the symptoms.   According to DOD, the Naval Supply Systems Command’s current strategic  plan and planned revisions are/will be focused on improving the Navy’s  overall supply support processes to ensure that its naval forces have  sufficient support to achieve required readiness performance levels.   Therefore, DOD does not agree that the Navy needs to modify the Naval  Supply Systems Command Strategic Plan or include provisions in the  evolving Sea Enterprise strategy that are specifically focused on spare  parts shortages.  DOD stated that the Navy’s process improvement  initiatives are intended to reduce the need for spare parts through the use  of more effective inventory management practices aboard ship,  standardizing the use of readiness based sparing concepts on board ship  and at shore facilities, and developing an effective total asset visibility  plan.  DOD believes that these efforts will improve the efficiency and  effectiveness of the Navy’s supply system and inherently minimize any  future shortages of critical spare parts.
We disagree that these process improvements alone are sufficient to meet  our recommendation. Our report recognizes that the Navy’s logistics plans  focus on efforts to improve overall logistics support practices, and upon  successful implementation will likely contribute to improved supply  availability. Based on our report’s findings, however, we believe that the  goals, objectives and milestones of the Naval Supply Systems Command’s  strategic plans, or the higher-level Sea Enterprise plan, should include a  focus on the mitigation of critical spare parts shortages. Without such a  focus the Navy’s efforts to address the problem of critical spare parts  shortages are more likely to be duplicative or ineffective. Therefore, we  believe implementation of our recommended actions is necessary to  ensure improved equipment readiness for the Navy’s legacy and future  weapon systems.
In concurring with the intent of our second recommendation, DOD stated  that the Navy is investing in information systems to help it link inventory  investment decisions with weapon system readiness.  DOD stated that the  Navy will provide information to link weapon system readiness and  inventory investments for its major weapon systems as information  becomes available.  Because the Financial Management Regulation already  requires the Navy to submit this information as part of its annual budget  submission, DOD stated that more specific direction from DOD is not  necessary, and that current Navy actions satisfy the intent of our  recommendation.
We support the Navy’s actions, but remain concerned that the service has  not specified milestones for developing information systems that link  readiness and spare parts budget data.  Providing this information in a  timely manner will strengthen the Navy’s stewardship and accountability  of requested funds, and will assist the Congress in making spare parts  investment decisions that provide a good readiness return. We have  therefore modified our second recommendation to include a provision that  the Navy establish completion milestones for implementing the reporting  requirement, as discussed above.
section_title: Scope and Methodology
paragraphs: To determine if the Navy’s strategic plans address spare parts shortages,  we obtained and analyzed pertinent spare parts and logistics planning  documents. We focused our analysis on whether these strategic plans  addressed spare parts shortages and included the performance plan  guidelines identified in the Government Performance and Results Act. We  interviewed officials in the Office of the Deputy Chief of Naval Operations  for Fleet Readiness and Logistics and in the Naval Supply Systems  Command to clarify the content, status, and linkage of the various  strategic plans.
To determine the likelihood that key supply system initiatives will mitigate  critical spare parts shortages and improve weapon system readiness, we  obtained and analyzed service documentation on six of the initiatives that  Navy officials believe are key to the future economy and efficiency of the  service’s supply operations. We interviewed officials in the office of the  Deputy Chief of Naval Operations, the Naval Supply Systems Command,  the Naval Inventory Control Point, the Naval Air Systems Command, and  the Naval Sea Systems Command. We obtained and analyzed Navy data  pertaining to plans, objectives, performance goals, and implementation  status and challenges for each of the six selected management initiatives.
To determine the extent to which the Navy can identify the impact of  additional investments in spare parts inventories, we interviewed officials  and analyzed documents at the Naval Inventory Control Point. We also  reviewed the Navy’s fiscal years 2004 and 2005 budget estimates provided  to the Congress in February 2003, and considered DOD’s  recommendations in its August 2002 Inventory Management Study.  However, we did not independently validate or verify the accuracy of the  Navy’s supply availability performance data or the analysis that estimated  the increased funding needed to achieve the targeted supply system  performance.
We performed our review from August 2002 through March 2003 in  accordance with generally accepted government auditing standards.
We are sending copies of this report to the Secretary of Defense; the  Secretary of the Navy; the Director, Office of Management and Budget;   and other interested congressional committees and parties. We will also  make copies available to others upon request. In addition, the report will  be available at no charge on the GAO Web site at http://www.gao.gov.
Please contact me on (202) 512-8365 or Richard Payne on (757) 552-8119 if  you or your staff have any questions concerning this report.  Key  contributors to this report were Glenn Knoepfle, Paul Rades, Barry  Shillito, George Surosky, and Susan Woodward.
section_title: Appendix I: Comments from the Department of Defense