Defense Inventory: Further Analysis and Enhanced Metrics Could Improve Service Supply and Depot Operations
Published: 2016-06-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD manages approximately $97 billion of inventory. To enhance efficiency and effectiveness, the 2005 base realignment and closure round and a June 2005 decision by the Under Secretary of Defense for Acquisition, Technology, and Logistics required the military services to transfer to DLA all of their retail inventory supply, storage, and distribution functions at most depot-level industrial sites.
Senate Report 114-49, accompanying a bill for the National Defense Authorization Act for Fiscal Year 2016, included a provision for GAO to examine DLA's supply support to DOD industrial sites.
This report evaluates the extent to which (1) the services have transferred retail supply, storage, and distribution functions at DOD industrial sites to DLA, and whether the results have been used to inform future efforts, and (2) DLA and the services have adopted metrics that allow them to effectively and efficiently manage supply and maintenance operations. GAO reviewed DOD, DLA, and service guidance and documentation; evaluated DLA and service processes; and interviewed officials.
section_title: What GAO Found
paragraphs: The military services have, to varying degrees, transferred retail supply, storage, and distribution functions at their depot-level industrial sites to the Defense Logistics Agency (DLA) and achieved some efficiencies, but have not fully assessed the costs and benefits of transferring more retail functions to DLA at Army and Marine Corps depots and Navy shipyards. Specifically, Air Force Air Logistics Complexes (ALC) and Navy Fleet Readiness Centers (FRC) transferred all retail supply, storage, and distribution functions to DLA over the course of several years. For example, according to officials and GAO's assessment, these changes have led to a number of benefits, including a 20 percent reduction in on-hand inventory and a 10 percent reduction in backorders at the Air Force ALCs over a 5-year period (see figure for examples of benefits).
By contrast, the Army and Marine Corps have retained most supply functions at their depots and DLA manages inventory at the Navy shipyards while still using Navy systems and processes, rather than those of DLA. The Navy and DLA began to transition to DLA business processes and systems at Norfolk Naval Shipyard in 2012, but the Navy reversed course after 7 months when it resulted in increased waits for inventory and work stoppages. Meanwhile, DLA is pursuing limited steps to improve retail supply, storage, and distribution functions at the industrial sites to improve supply support and overcome service concerns. However, the Department of Defense (DOD), DLA, Army, Navy shipyards, and the Marine Corps have not conducted business case analyses on the benefit of additional transfers of retail functions, though the Army is planning to conduct one. Without such analyses, decision makers will not be positioned to ensure that further transfers of retail functions, if warranted, are efficient and effective.
DOD, DLA and the services have some internal efficiency measures, but they generally do not have metrics that would allow for more effective and efficient management of supply and maintenance operations. Specifically, DOD, the services and DLA have not adopted metrics on the accuracy of planning factors, such as the accuracy of part lists, or the costs created by backorders. Officials noted that accurate planning factors improve demand forecasts needed to minimize backorders and excess inventory. Without relevant metrics on cost and planning factors, DOD, DLA and the services will be unable to optimize supply and maintenance operations and may miss opportunities to improve the efficiency and effectiveness of depot maintenance.
section_title: What GAO Recommends
paragraphs: GAO is making six recommendations including that DLA, the Army, Navy shipyards, and Marine Corps conduct business case analyses, drawing on lessons learned, to determine if further transfer of retail functions is warranted, and that DOD, DLA, and the services develop metrics to monitor costs and accuracy of demand planning factors. DOD concurs with GAO's recommendations.

section_title: Letter
paragraphs: The Department of Defense (DOD) manages approximately 5 million  secondary inventory items (hereafter referred to as inventory) with a  reported value of approximately $97 billion as of September 2014. The  Defense Logistics Agency (DLA) manages approximately one-fifth of the  value of this inventory and provides billions of dollars in consumable  items on an annual basis for depot maintenance conducted at defense  industrial sites–Army and Marine Corps depots, Navy Fleet Readiness  Centers (FRC) and Navy shipyards, and Air Force Air Logistics  Complexes (ALC)–where combat vehicles, planes, helicopters, and ships  are repaired and overhauled.
As a result of the 2005 base realignment and closure (BRAC) round and  a June 2005 administrative decision by the Under Secretary of Defense  for Acquisition, Technology, and Logistics, the services were required to  transfer to DLA their retail supply, storage, and distribution functions at  depot-level industrial sites. These actions were intended to improve the  efficiency of the supply chain while enhancing the effectiveness of  logistics support to operational forces. DOD’s supply chain is a global  network that provides materiel, services, and equipment to the joint force.  Supply chain management encompasses the processes and systems for  delivering the right items to the right place at the right time, and at the  right cost. DLA’s provision of spare parts in a timely manner is key to  cost-effective maintenance of DOD’s weapon systems at service  industrial sites. Additionally, with long-term fiscal challenges likely to  continue, DOD must strategically, efficiently, and effectively operate its  supply, storage, and distribution of spare parts at DOD’s industrial sites in  order to minimize overall maintenance costs and support the warfighter.
Since 1990, we have identified DOD supply chain management as a high- risk area due in part to ineffective and inefficient inventory management  practices and procedures, weaknesses in accurately forecasting the  demand for spare parts, and other supply chain challenges. Our work  has shown that these factors have contributed to the accumulation of  billions of dollars in spare parts that are excess to current needs. We  found in May 2012, June 2014, and April 2015 that DOD had made  progress in reducing its excess inventory and implementing its  Comprehensive Inventory Management Improvement Plan, which was  developed and implemented in response to a provision of the National  Defense Authorization Act for Fiscal Year 2010. As a result of this body  of work, we have made and DOD has concurred with all 18 of our  recommendations aimed at improving the efficiency and effectiveness of  the department’s inventory management. As of March 2016, DOD had  implemented 10 of the recommendations and are taking actions on the  remaining 8 recommendations, which are focused generally on re- assessing inventory goals, improving metrics, and making changes to  information technology systems used to manage inventory. In addition, in  February 2015 we identified steps that the department should take to  address high-risk issues including its inventory management. These steps  include, among other things, demonstrating that progress made in  reducing excess inventory is sustainable, enhancing management and  oversight of its inventory to ensure that disposal decisions are analytically  supported and consistent with guidance, and establishing a baseline for  DOD’s demand forecast accuracy metrics along with appropriate  corrective actions.
Senate Report 114-49, accompanying a bill for the National Defense  Authorization Act for Fiscal Year 2016, included a provision for GAO to  examine matters related to DLA’s supply support to DOD’s industrial  sites. This report evaluates the extent to which (1) the services have  transferred retail supply, storage, and distribution functions at DOD  industrial sites to DLA, and whether the results have been used to inform  future efforts, and (2) DLA and the services have adopted metrics that  allow them to effectively and efficiently manage supply and maintenance  operations.
To assess the extent to which the services transferred retail supply,  storage, and distribution functions at DOD industrial sites to DLA, and  whether the results have been used to inform future efforts, we reviewed  DOD and service guidance and documentation related to retail inventory  management at service industrial sites; conducted interviews with officials  from Office of the Secretary of Defense (OSD), DLA, service materiel  commands, and service industrial sites; and visited 7 of 17 service  industrial sites to observe maintenance operations and retail inventory  processes. This non-generalizable sample was selected to ensure a mix  of services and weapon systems repaired, among other factors. We also  analyzed pertinent documents and interviewed officials responsible for  retail inventory management at these industrial sites to determine any  challenges related to retail inventory management, and discuss any  assessments prepared by DLA and the services on the costs and benefits  of transferring retail supply, storage, and distribution functions to DLA.
To determine the extent to which DLA and the services have adopted  metrics that allow them to effectively and efficiently manage supply and  maintenance operations, we analyzed DOD, DLA, and service policies,  regulations, and guidance pertaining to the use of metrics for the  management of inventory and maintenance operations. We reviewed  documentation, such as performance management briefing slides, and  analyzed DLA’s and the services’ use of metrics to manage their  inventory against DOD guidance. We also conducted interviews with  OSD, DLA, and service officials to understand and corroborate the use of  performance metrics to inform inventory and depot maintenance  management decisions. Appendix I provides further information on our  scope and methodology.
We conducted this performance audit from May 2015 to June 2016 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: DOD Organizational Structure for Inventory Management and Industrial Sites
paragraphs: The DOD supply chain is a global network that provides materiel,  services, and equipment to the joint force. The Under Secretary of  Defense for Acquisition, Technology and Logistics and its subordinate,  the Assistant Secretary of Defense for Logistics and Materiel Readiness,  prescribe policies and procedures for the conduct of logistics,  maintenance, materiel readiness, and sustainment support, to include  supply and transportation, and monitor and review these activities.  Inventory management, a key component of the DOD supply chain, is the  process of determining requirements and procuring, managing,  cataloging, distributing, overhauling, and disposing of materiel.  Management and oversight of DOD inventory is a responsibility shared  among the Under Secretary of Defense for Acquisition, Technology and  Logistics, DLA, and the services. Specifically, DLA procures, stores, and  distributes mostly consumable items—those that are normally expended  or intended to be used up beyond recovery or repair—and provides these  items to the services when requisitioned in support of approximately  2,400 weapon systems. On the other hand, the services manage mostly  reparable items—items that are generally more cost-effective to repair  and reuse than to dispose of and replace.
DOD maintains weapon systems (e.g., aircraft and ships) and equipment  (e.g., generators and radars) that require regular and emergency  maintenance to continue being available for DOD to meet national  security goals. To sustain these systems and equipment at the depot  level, the department uses a combination of military depots—public- sector facilities that are government-owned and government-operated— and private-sector contractors. Depot maintenance plays a key role in  sustaining the complex weapon systems and equipment both in  peacetime and during a mobilization, contingency, or other emergency.  DOD’s 17 depot maintenance industrial sites are managed by the Army,  Navy, Air Force, and Marine Corps, as shown in figure 1 below. These  sites, which are managed by the service materiel commands—Army  Materiel Command, Naval Sea Systems Command, Naval Air Systems  Command, Air Force Materiel Command, and Marine Corps Logistics  Command—repair and overhaul a wide range of vehicles and other  military assets, including helicopters, combat vehicles, air defense  systems, ships, fighter and bomber aircraft, intercontinental ballistic  missiles, jet aircraft engines, components, and software.
section_title: DLA’s Management of Supply, Storage, and Distribution Functions at DOD’s Industrial Sites
paragraphs: As a result of the 2005 BRAC round and a June 2005 administrative  decision by the Under Secretary of Defense for Acquisition, Technology,  and Logistics, the services were required to transfer to DLA all of their  supply, storage, and distribution functions at depot-level industrial sites.  These actions were intended to improve the efficiency of the supply chain  by reducing the number of supply distribution warehouses and related  excess capacity while enhancing the effectiveness of logistics support by  reconfiguring DOD’s wholesale supply, storage, and distribution network  and consolidating functions at several service maintenance sites.  Traditionally, DLA had been DOD’s wholesale inventory manager for  consumable items; however, the transfer of supply, storage, and  distribution functions at the depot maintenance industrial sites, as  recommended by BRAC, placed DLA in the role of managing consumable  items at the retail level. As a wholesale inventory manager, DLA procures  consumable items from commercial vendors and stores them in  distribution warehouses to be requisitioned by the retail supply system,  which is typically managed by the services. As a retail inventory manager  at industrial sites, DLA manages the supply, storage, and distribution of  consumable items at the industrial site and provides the items directly to  the user (e.g., the depot artisan working to repair a weapon system).  While sharing some similarities, the management of inventory at the  wholesale and retail levels has a different focus—namely placing DLA in  a direct, prominent role supporting service depot-level maintenance.  Specifically, DLA, as a wholesale inventory manager, is typically  replenishing retail inventory stocks, but as a retail inventory manager at  the industrial sites DLA must have the part when it is needed; otherwise,  there are operational effects to the depot maintenance being conducted  on the end item being repaired.
In 2007, 2008, and 2009, we reviewed the implementation of the supply,  storage, and distribution BRAC recommendation and reported that a  number of the assumptions used by the BRAC commission to calculate  the potential cost savings of this recommendation were not validated and  relied on flawed data, and that DLA faced numerous challenges in  implementing the recommendation. For example, service officials  expressed concerns that inserting DLA into depot operations may hinder  their ability to meet depot production schedules and maintain equipment  readiness. However, we did not make any recommendations pertaining to  the transfer of supply, storage, and distribution functions at the industrial  sites in those reports given that DLA’s planning process incorporated  several key elements that were intended to provide a smooth transition  and mitigate the risk of disrupting depot operations.
section_title: The Depot Maintenance Process
paragraphs: The depot maintenance process across the services generally involves  three primary steps–planning, disassembly, and rebuilding–as shown in  figure 2 below.
Step 1: The depot maintenance process begins by planning the  maintenance to be conducted on a particular end item, which could be  a weapon system (e.g., C-5 Galaxy cargo plane, M1A2 Abrams tank)  or depot-level reparable (e.g., a ship blade propeller, brake  assembly). Initially, a detailed statement of the specific work to be  performed is developed for the end item. Once this scope of work is  decided upon, a number of key planning factors are necessary to  identify the materials and spare parts needed for the maintenance: (1)  the number of end items to go through maintenance, (2) the schedule  for inducting the end items into maintenance, (3) the bill of materials  (i.e., the list and quantity of parts needed to conduct the maintenance  on the end item), and (4) the replacement factors (i.e., the estimated  frequency of replacement based on historical trends and engineering  estimates) for the parts on the bill of materials. These planning  factors are used to forecast the spare parts needed to conduct the  maintenance on the end item, as shown in figure 3 below. Proactive  and accurate planning is necessary to ensure the timely availability of  spare parts for the maintenance process, especially since the  acquisition lead time for spare parts can range from days to years  depending upon the specific part. However, in 2011, 2013, and  2015, we found that part shortages was one of several factors  negatively affecting the industrial sites’ ability to complete  maintenance timely and efficiently. Accurate planning is also  important in preventing the accumulation of excess inventory.
Step 2: Once the end item is inducted into the maintenance process it  is disassembled. During this step, the end item and its components  are inspected to determine the type and degree of repair required or  whether the parts need to be replaced. While some parts are always  replaced, other parts are assessed for repair. Repairs vary by the time  and type of use since the last overhaul. Because usage differs from  end item to end item, demands on the supply chain for new and  repaired items varies.
Step 3: Following disassembly, the end item is then rebuilt with new  and repaired parts. In general, the rebuilding of the end item follows a  sequential process, necessitating the timely availability of new and  repaired parts to ensure the efficient reassembly of the end item. Part  shortages (i.e., backorders) require workarounds–additional efforts to  obtain a part (e.g., local manufacturing or obtaining parts from another  end item)–that can delay maintenance and negatively affect  productivity and costs of depot maintenance. Once the end item is  rebuilt, then it is tested and validated for sale to and use by the  customer (e.g., a military unit).
Navy F/A-18 Hornet Maintenance  One of the primary end items repaired at  Fleet Readiness Center (FRC) Southwest  and FRC Southeast is the F/A-18 Hornet.  The first aircraft was manufactured in the late  1970s and became operational in the early  1980s. As an aircraft ages, it incurs additional  inspections and structural repairs. One of  those additional inspections occurs when an  aircraft reaches 8,000 flying hours.
DOD’s aging weapon systems pose sustainment challenges that affect  depot maintenance as well as supply support, especially for aircraft.  Depot maintenance on aging weapon systems becomes less predictable  as structural fatigue occurs and parts that were not expected to need  replacement begin to wear out. Cracking, corrosion, or other  unanticipated issues–identified through detailed inspections–must be  remedied through the repair or the manufacture of new parts, often  requiring engineering support and estimates that can take considerable  time to develop. For example, the Navy F/A-18 Hornet jet and Air Force  B-52 Stratofortress bomber–both aging weapon systems–have recently  experienced unanticipated structural and part replacement issues (see  sidebar for information on the F/A-18 Hornet). Additionally, diminishing  manufacturing sources and material shortages, and part obsolescence  issues increase as weapon systems age, complicating supply support  for the depot maintenance process and potentially resulting in a less  efficient process if not properly mitigated or resolved. Manufacturers  discontinue production and support of needed items because it is no  longer profitable to produce the part given low or sporadic demand.  DOD’s diminishing manufacturing sources and material shortages  guidebook provides guidance on mitigating and managing these issues  as well as examples in which the department successfully managed and  resolved these issues, such as parts obsolescence for the B-1 Lancer  bomber and the Virginia class submarine. of the aircraft to identify structural  weaknesses, such as metal fatigue and  cracks in the aircraft, and determine what  needs to be repaired.    engineering support to develop repair  solutions for the damaged areas of the  aircraft. Structural repairs needed to fix  the aircraft are non-standard repairs that  must be designed and approved by FRC  engineers. According to FRC engineers  and engineering information documents  we reviewed, it may take as long as a  year or more for an engineer to  determine and document the step-by- step instructions needed to repair the  aircraft.
The services have transferred the management of retail supply, storage,  and distribution functions to DLA in varying degrees across service  industrial sites, as seen in figure 4. DLA management of all retail supply,  storage, and distribution functions at Air Force ALCs and Navy FRCs has  provided inventory management benefits. DLA also manages some  elements of retail supply, storage, and distribution functions at Army and  Marine Corps depots and Navy shipyards, but these sites have not seen  the same benefits as the sites that fully transferred their retail supply,  storage, and distribution functions to DLA. In addition, the Marine Corps  depot and Navy shipyards have not assessed the costs and benefits of  further transferring retail management functions to DLA, while the Army  only recently began making plans to examine the costs and benefits.
section_title: Air Force ALCs and Navy FRCs Transferred All Retail Supply, Storage, and Distribution Functions to DLA
paragraphs: The Air Force between 2007 and 2008 and the Navy between 2008 and  2009 transferred the management of retail supply, storage, and  distribution functions to DLA at the ALCs and FRCs. The transfer of the  entire retail supply, storage, and distribution functions at ALCs and FRCs  involved transferring hundreds of personnel from the services to DLA  while remaining largely co-located with the actual maintenance activities  at the sites. The ALCs in 2007 and the FRCs in 2008 began to transition  retail supply functions to DLA and interfaced their maintenance  information systems with DLA information technology systems in 2008 at  ALCs and 2013 at FRCs. The ALCs and FRCs now use DLA’s business  processes and expertise to manage the supply, storage, and distribution  of DLA-managed inventory. Specifically, DLA used an Inventory  Management and Stock Positioning system to extend capabilities and  system functionality necessary to support retail-level supply, storage and  distribution in order to implement the BRAC 2005 recommendation.
section_title: Army and Marine Corps Depots and Navy Shipyards Have Retained Some Retail Supply, Storage, and Distribution Functions
paragraphs: In contrast to the ALCs and FRCs, the Army and Marine Corps  transferred their retail storage and distribution functions to DLA at  industrial sites from 2010 to 2011, but have largely retained the  management of their retail supply functions. The Army’s and Marine  Corps’ prior reluctance to transfer positions to DLA stemmed from  concerns related to work-in-process operations, which comprise highly  integrated production and supply functions with many of the same  personnel performing both functions. As a result, the Army and Marine  Corps officials maintained that they did not have “retail” inventory, and  that these positions should not transfer to DLA. The Marine Corps and  DLA agreed to the transfer of some storage and distribution functions and  positions to DLA in April 2007. Also, after repeated opposition to the  transfer of certain positions, the Army agreed to comply with direction  from the Office of the Secretary of Defense to transfer similar storage and  distribution functions and positions to DLA in July 2007. The Navy  transferred retail supply, storage, and distribution functions at Navy  shipyards to DLA in 2009 and 2010 and these functions are currently  performed by DLA personnel using the same Navy processes and  approaches that were used by the Navy prior to the transfer of personnel.
section_title: DLA Management of All Retail Supply, Storage, and Distribution Functions at Air Force ALCs and Navy FRCs Has Produced Inventory Management Benefits
paragraphs: The Air Force and Navy, as well as our analysis, have identified a number  of benefits resulting from using DLA’s expertise and management in retail  functions at the ALCs and FRCs. As part of the transfer of retail functions,  DLA purchased the retail inventory it now manages at the ALCs and  FRCs from the services and shifted DLA’s “point of sale” from the  wholesale warehouse to the production line at the industrial site where  inventory items are actually used. According to DLA and service officials,  this arrangement has allowed DLA to see real-time demand signals rather  than waiting for the demand signal to occur when the retail level  requisitions inventory from DLA’s wholesale inventory stocks. This means  that DLA can make adjustments to its forecast for parts as soon as  changes are known, which can reduce the wait times for parts and help  prevent the accumulation of excess inventory. Navy, Air Force, and DLA  officials stated that the transfer of retail supply, storage, and distribution  functions to DLA at the FRCs and ALCs has allowed them to reduce the  amount of on-hand inventory, increase warehouse efficiencies, enhance  information-sharing and coordination between maintenance and supply,  and improve supply performance outcomes such as decreased  backorders or increased throughput.
A 2014 study sponsored by the Assistant Secretary of Defense for  Logistics and Materiel Readiness also identified specific benefits from  transferring retail supply, storage, and distribution functions at ALCs and  FRCs as well, such as reduced inventory levels and lower storage  costs. These have been evidenced in aggregate performance  measures, as noted in figure 5. Specifically, over a five-year period  between January 2010 and April 2015, DLA data shows that the ALCs  experienced a 20 percent reduction in on-hand inventory while also  reducing backorders by 10 percent, and reducing the number of end  items awaiting parts by 20 percent. FRCs saw a 6 percent reduction in  on-hand inventory during 2014 without overall degradation to other  performance measures such as order fill rates and material availability. In  addition, the number of backorders decreased across all Navy FRCs by  about 28 percent during fiscal year 2015. Officials we spoke with at the  FRCs also stated that DLA participation in retail supply management has  resulted in more efficient replenishment of consumable items used on the  shop floor and less time awaiting parts. Site-specific improvements have  also been realized. For example, Warner Robins ALC officials attributed a  decrease in unused spare parts stored on the production line, which  increase costs, create excess stock, and take up production floor space,  to DLA management of retail supply, storage, and distribution functions.
While many of the benefits realized are quantifiable, officials also stated  that there are qualitative benefits from transferring retail supply, storage,  and distribution functions to DLA. For example, Air Force and DLA  officials we spoke with at Warner Robins ALC stated that having DLA  personnel and Air Force personnel integrated and co-located at the shop  floor results in a great deal of information sharing. This allows supply  planners to identify potential changes to inventory demand patterns  before aggregate data may exist to indicate changes affecting  procurement actions. This is especially important for items that have long  lead times for production, or are relatively expensive to procure.  Specifically, identifying an upward tick in demand as early as possible  may allow backorders for items with long lead times to be prevented, and  identifying downward ticks in demand may allow the purchase of  expensive items to be avoided.
According to officials we spoke with, initial transfer efforts at ALCs and  FRCs encountered some difficulties related to the adoption of DLA  systems and processes, and some personnel were reluctant to trust DLA  at first. However, they noted that collaborative efforts were made to  overcome challenges and foster an atmosphere of trust. Additionally, DLA  tailored its processes and approach for retail supply support to align with  the maintenance processes that are unique at the FRCs and ALCs. For  example, the metrics used to monitor DLA’s performance at the ALCs and  FRCs are different given some differences in the maintenance processes  and approaches. Furthermore, based on the lessons learned from these  implementations, DLA developed a DLA Retail Supply Chain Materiel  Management Policy to establish policies, assign responsibilities, and  implement high-level procedures for DLA’s management of retail supply,  storage, and distribution functions at applicable industrial sites to  incorporate lessons learned from DLA’s management of the retail supply,  storage, and distribution functions at the ALCs and FRCs. Additionally,  DLA has developed a manual to guide its management of retail supply,  storage, and distribution functions at ALCs, and according to officials is in  the process of developing a similar manual for the FRCs.
section_title: Army and Marine Corps Depots and Navy Shipyards Have Not Experienced the Same Improvements as Industrial Sites That Transferred More Retail Functions to DLA
paragraphs: The Army and Marine Corps depots and Navy shipyards have not  experienced the same improvements as the Air Force ALCs and Navy  FRCs that transferred retail supply, storage, and distribution functions to  DLA. These sites continue to experience (1) delayed response from the  DLA wholesale inventory system when there is a change in demand  rather than an immediate response from DLA (with corresponding  adjustments) and (2) inefficient warehouse practices resulting from  multiple levels of storage and inventory processing (i.e., practices  requiring an increased number of “touches” to process inventory to the  customer). Army and Marine Corps officials recognize that some benefits  may be gained by transferring additional retail supply support  responsibility to DLA and have been exploring the possibility of doing so,  although these initiatives have only recently begun.
While DLA has three to five supply-related personnel at each Army and  Marine Corps depot, these officials do not perform retail supply functions  and largely act as liaisons between the depots and the relevant wholesale  DLA supply chains. The small number of DLA personnel on site makes it  difficult to engage in the constant information sharing seen at the Air  Force ALCs and Navy FRCs given the volume of parts used by the  depots. For example, there are only four DLA personnel on site to  perform customer service functions at Anniston Army Depot and three  DLA personnel on site to perform similar functions at the Marine Corps  industrial site in Albany, Georgia. About 30 DLA personnel perform  storage functions at the retail inventory warehouses at each of these  locations, but decisions affecting supply functions are made by Army and  Marine Corps officials. In contrast, there are about 200 DLA personnel at  Warner Robins ALC, and about 120 DLA personnel at Cherry Point FRC  participating in all aspects of supply, storage, and distribution.
The Navy nominally transferred its retail supply, storage, and distribution  functions at the Navy shipyards to DLA resulting in DLA detachments with  hundreds of previously Navy personnel that are largely co-located with  the actual maintenance activities at the shipyards. However, the  shipyards continue to use the same retail supply, storage, and distribution  processes and Navy information systems that existed prior to the transfer.  In January 2012, the Navy attempted to fully transfer its retail supply,  storage, and distribution functions to DLA at Norfolk Naval Shipyard by  implementing DLA information technology systems and transferring  ownership of all inventory to DLA. However, after 7 months, the Navy and  DLA agreed to revert back to the previous processes, systems, and Navy  ownership of the inventory after seeing increases in the time to issue  retail inventory to the maintenance area which resulted in some work  stoppages.
Ineffective Leadership and Program  Management: Inconsistent leadership  engagement, insufficient training and  communication, and lack of clear  responsibilities and accountability for the  outcome. For example, DLA had no clear  operational control during implementation.   Insufficient Preparation: End-to-end  testing was insufficient and not focused  on end-user functionality, a complete  inventory was not conducted prior to  conversion of inventory to DLA, and  simultaneous testing, training, and  modifications to the system led to an  unstable data environment.
Cultural Resistance: A shared vision of  end-state operations was not established  among stakeholders, a perception existed  among shipyard personnel that their  business processes were not supposed to  change, and personnel interviewed stated  that there was an atmosphere of distrust  between the shipyard and DLA.
According to a Naval Sea Systems Command investigation, the attempt  to transfer functions failed for a variety of reasons (see sidebar). In  addition, Navy and DLA officials stated that implementation encountered  cultural resistance to change at Norfolk Naval Shipyard that hindered  successful implementation. Furthermore, the Navy and DLA agreed that  any further transfer of functions at the four shipyards would be halted  indefinitely as of 2012. As a result, the Navy continues to rely on retail  supply, storage and distribution processes in place prior to BRAC 2005.  Officials at Norfolk Naval Shipyard confirmed that although personnel  transfers did occur to shift retail functions from the Navy to DLA,  personnel participating in retail supply, storage, and distribution functions  continue to use legacy Navy processes rather than DLA processes.
The investigation concluded that the decision  to reverse the transition to DLA means  shipyards are foregoing the benefits of  automated inventory technology and proven  standard distribution processes (storage and  job aids, standard training) that are built into  DLA processes and systems.
Throughout the effort to implement the 2005 BRAC supply, storage, and  distribution recommendation, the Army and Marine Corps maintained that  the retail supply functions at the depots are integral to the maintenance  process and therefore should not be transferred to DLA. The Army and  Marine Corps only transferred responsibility for managing some storage  and distribution functions to DLA. As a result, DLA does not make supply  decisions such as determining the items to be stocked and the levels for  those items. This means that decisions between the wholesale and retail  inventory levels are handled by two separate organizations and therefore  produce a delay in demand signals and may not be as easily coordinated.  The Army and Marine Corps officials stated that they are not certain  performance would improve if they transferred additional functions to  DLA, though they are exploring further efforts.
Army officials expressed concerns about transferring retail supply  functions at the depots to DLA. First, officials stated they were concerned  that some of the efficiencies and effectiveness that are provided by its  information technology system (i.e., the Logistics Modernization Program)  could be lost if it transfers further retail management functions to DLA.  However, the Air Force and Navy successfully integrated their information  technology systems with DLA’s systems at the ALCs and FRCs, and  Army officials told us that the Army has not explored whether this could  be done with the Army’s system as well. In addition, officials we  interviewed at Anniston Army Depot also expressed concern with DLA’s  ability to provide parts to support depot operations, though these  concerns were not based on a comprehensive business case analysis.
Marine Corps officials also expressed concern about not having control  over supply functions and noted that it plans to take a gradual approach  with respect to further transfer of functions to DLA to ensure that DLA  performs sufficiently. For example, the Marine Corps and DLA are  working together to improve demand planning by establishing a new  organization within Marine Corps Logistics Command that interacts  directly with DLA to improve supply chain performance, such as the  quality of planning information and the availability of spare parts.  However, the Marine Corps depot continues to purchase items from DLA  wholesale and have them store the inventory until it is needed for  maintenance. According to DLA officials this requires the service to invest  in additional inventory, incur storage costs, and experience longer waits  for parts. While the Marine Corps has been able to reduce its amount of  retail inventory since January 2014, the retail inventory warehouse  supporting the Albany Production Plant at the end of fiscal year 2015  contained about 67,000 separate inventory items valued at about $126  million, according to DLA. DLA officials stated that this represents a much  larger amount of retail inventory than is likely needed. While Marine  Corps officials credited this inventory with preventing some backorders,  56 percent of the serviceable retail inventory items at that site had no  demand between March 2015 and March 2016, a potential indicator of  unneeded inventory, although officials noted that some of this materiel  was likely purchased and kept as a result of unexpected schedule  changes.
Army and Marine Corps depot and Navy shipyard officials state that their  maintenance processes differ from those at the Navy FRCs and Air Force  ALCs. However, while maintenance processes may be tailored from one  industrial site to another depending on the type of end items being  maintained, the basic elements that determine retail inventory needs are  the same. These include determining the number and schedule of end  items to go through maintenance, the bill of materials (i.e., part lists), and  the replacement factors for those parts. Officials also expressed concern  over losing visibility of retail inventory if DLA is allowed to manage retail  warehouses. However, similar concerns were addressed by DLA and  service officials at Warner Robins ALC by allowing officials from both  entities to access each other’s information systems. This has allowed the  Air Force to benefit from tools and expertise available to DLA while  increasing transparency and information-sharing. Additionally, as  previously discussed, DLA in coordination with the Air Force and Navy  have established extensive written policies, guidance, and processes for  the management of the retail supply, storage, and distribution functions at  the ALCs and FRCs.
section_title: Army and Marine Corps Depots and Navy Shipyards Have Not Assessed Costs and Benefits of Further Transferring Retail Management Functions to DLA
paragraphs: The Army and Marine Corps depots and the Navy shipyards have not  assessed the costs and benefits of further transferring retail management  functions to DLA. Although benefits may be realized by transferring retail  supply, storage, and distribution functions to DLA as evidenced by the  experience of the Air Force ALCs and Navy FRCs, the partial transfers of  retail management functions have not yielded similar benefits for the  Army and Marine Corps depots and Navy shipyards. Congress, in the  House Report accompanying a bill for the National Defense Authorization  Act for Fiscal Year 2014, mandated the Secretary of Defense conduct an  assessment of the roles and missions of DLA. The assessment made  several recommendations, one of which was for the Office of the  Secretary of Defense and DLA to work with the Army and Marine Corps  to prepare business case analyses on the transfer of retail supply,  storage, and distribution responsibilities to DLA.
DLA began exploring further transfer of retail management functions at  the Army and Marine Corps depots and Navy shipyards in the spring of  2015. DLA and the Marine Corps have agreed to an inventory  consolidation and optimization effort in support of the Marine Corps’  Albany and Barstow production plants. As a result, DLA has begun to  make adjustments in its approach to supporting these Marine Corps sites,  but the Marine Corps will continue to manage their retail supply function.  According to DOD officials, DLA has also initiated discussions with Army  depot and Navy shipyard officials about the management of retail supply,  storage, and distribution functions. For example, in December 2015 the  Army and DLA established an integrated project team to identify  additional opportunities for retail improvement. Officials state this effort  will ultimately include the development of a cost-benefit analysis on  shifting DLA’s point-of-sale to the Army forward to the production line  while retaining the capabilities provided by Army information systems.  However, DLA is taking these preliminary steps without official decisions  by the Army, Marine Corps, and Navy on the optimal level of  management by DLA at the depots and shipyards, respectively. DLA  officials stated that these steps were being taken in an effort to overcome  service reluctance to transferring retail functions to DLA at the depots and  shipyards and achieve further inventory efficiencies across the  department. However, neither the Assistant Secretary of Defense for  Logistics and Materiel Readiness nor the services have prepared a  comprehensive business case analysis–drawing on lessons learned from  previous implementations–that systematically examined the costs,  benefits, risks, and challenges associated with fully transferring supply,  storage, and distribution functions at the Army and Marine Corps depots  and Navy shipyards to DLA.
DOD guidance states that DOD materiel management shall operate as a  high-performing and agile supply chain responsive to customer  requirements during peacetime and war while balancing risk and total  cost and that the Assistant Secretary of Defense for Logistics and  Materiel Readiness should monitor the overall effectiveness and  efficiency of the DOD materiel management systems and continually  develop improvements. The guidance further states that all costs  associated with materiel management, including acquiring, distributing,  transporting, storing, maintaining, and disposing, shall be considered in  making best value decisions throughout the DOD supply chain. Past GAO  work indicates a standard way to assist in making best value decisions is  the development and use of a comprehensive business case analysis.  Our prior work on establishing a “lessons learned” process also found that  assessing and using lessons learned from previous experience can  provide a powerful method of ensuring that beneficial information is  factored into the planning and work processes of future activities.
While DLA continues to pursue expanded retail management, the  department has not prepared comprehensive business case analyses  identifying the costs and benefits of such transfers in order to inform final  decisions. Without conducting comprehensive business case analyses of  costs, benefits, risks, and challenges for further transfer of retail  management functions to DLA at the Army and Marine Corps depots and  Navy shipyards, DOD leadership will not have the information needed to  make informed decisions on developing improvements and cannot  position the department to efficiently and effectively support and sustain  weapon systems for the warfighter. In addition, examining lessons  learned from previous transfers of retail supply, storage, and distribution  functions–such as the successful Air Force ALC and Navy FRC  implementations and the failed implementation at Norfolk Naval  Shipyard–could help inform decisions and analysis on the degree of any  future transfer efforts at the Army and Marine Corps depots and Navy  shipyards. Further, without a decision based on business case analyses  regarding the extent to which DLA should manage the supply, storage,  and distribution functions at the Army and Marine Corps depots and  Naval shipyards, the department risks underutilizing the expertise of DLA  and not realizing the benefits DLA can bring to the management of  supply, storage, and distribution functions—such as those realized by Air  Force ALCs and Navy FRCs. As a result, DOD may continue to have a  less efficient and effective supply chain at the Army and Marine Corps  depots and Navy shipyards.
section_title: DLA and the Services Have Adopted Metrics Assessing Customer Service, but Do Not Have Metrics Needed to More Effectively and Efficiently Manage Operations
paragraphs: DLA and the services have adopted and review customer service metrics  that measure the timely availability of spare parts for depot maintenance  operations, but do not have metrics that allow them to fully assess the  effectiveness and efficiency of supply operations. DOD guidance requires  DLA and the services to be responsive to customer requirements while  balancing risk and costs, conduct periodic performance and cost  evaluations, and adopt metrics that provide information on customer  service, internal efficiency, and costs. In an effort to do this, DLA and  the services have adopted numerous customer service metrics that  assess the timely availability of spare parts for depot maintenance.  However, while DLA and the services have some internal efficiency  measures, they generally have not adopted metrics that measure the  accuracy of planning factors that are necessary to plan efficient and  effective support of depot maintenance. Additionally, the services and  DLA do not track the potentially significant costs created by a backorder  (i.e., disruption costs) to supply and depot maintenance operations, which  may prevent DLA and the services from optimizing supply and  maintenance operations and may improve the efficiency and  effectiveness of depot maintenance.
subsections: section_title: DOD’s Guidance Requires Performance Evaluations Using Varying Types of Metrics
paragraphs: DOD guidance requires DLA and the services to be responsive to  customer materiel requirements while balancing risk and costs, conduct  periodic performance and cost evaluations, and adopt metrics that  provide information on customer service, internal efficiency, and costs.  There are three types of metrics used in evaluating supply support.
Customer service metrics: assess the timely availability of spare parts.
Internal efficiency metrics: generally measure the amounts of excess  inventory and the accuracy of the forecast for spare parts. As  previously noted, there are a number of planning factors–the number  and schedule of end items inducted into maintenance, the bill of  materials (i.e., the list and quantity of parts), and the replacement  factors (i.e., the estimated frequency of a part needing to be  replaced)–that are key to forecasting the needed parts for depot  maintenance.
Cost metrics: measure the costs of supply, storage, and distribution  functions at industrial sites as well as the cost-effectiveness of  resource planning and execution.
As we concluded in June 2014 and April 2015, a balanced approach  across these key areas is important because without it any given metric  could be optimized at the expense of other metrics. For example, a  supply chain could achieve a high level of customer service if it was less  focused on the costs of purchasing excess materiel and storing it.  Alternatively, a supply chain could reduce its costs if it was less focused  on the resulting effect on parts availability, the efficiency of depot  maintenance operations, and readiness. Finally, a supply chain may not  place enough of an emphasis on internal efficiency metrics, such as  forecast accuracy and the accuracy of associated planning factors,  resulting in excess inventory or part shortages (i.e., backorders) that are  detrimental to customer service and increase costs. See figure 6 below  for an overview of the general types of supply chain metrics and the  importance of balancing these metrics.
section_title: DLA and the Services Have Adopted and Review Customer Service Metrics that Assess the Timely Availability of Spare Parts
paragraphs: DLA and the services have adopted and review numerous customer  service metrics that assess the timely availability of spare parts for depot  maintenance. However, the specific customer service measures used  vary by service and largely depend upon the nature of DLA’s involvement  in the retail supply, storage, and distribution functions at the industrial  sites. In general, DLA reviews material availability, the number and age of  backorders, and critical part shortages for all of the services’ industrial  sites as well as a number of storage and distribution metrics, such as the  time to receive and stow a part in storage and inventory accuracy. standard (e.g., 92 percent within 2 days)–and delivery response time–the  time from a maintenance order being placed to the order being delivered  to the depot artisan (e.g., 8 hours). With respect to the FRCs, DLA  measures the fill rate for DLA-managed items on the gross demand plan– the monthly plan submitted by the FRCs to DLA as part of a formal  collaborative forecasting process for FRCs’ projected spare part needs.  Additionally, DLA measures metrics associated with depot-level  reparables that are awaiting DLA-managed items in order to complete the  repair process for both the ALCs and FRCs.
84 percent of the material and parts were  ordered after the start of maintenance on  the USS Ronald Reagan (CVN 76) in  2012 and 2013,
69 percent of the material and parts were  ordered after the start of maintenance on  the USS West Virginia (SSBN 736) in  2011-2013, and
51 percent of the material and parts were  ordered after the start of maintenance on  the USS Topeka (SSN 754) in 2013 and  2014.
DLA and the Navy shipyards focus on additional customer service metrics  that are driven by the unique operating processes for ship maintenance.  For example, DLA and the shipyard measure DLA’s performance  providing the materials and parts identified by the shipyard at the start of  a particular ship’s maintenance. However, these materials and parts  only make up a portion of the total needed for maintenance since a large  volume of the work on a ship is conducted through “open and inspect”  processes, meaning that the need for a new part is not discovered until  the ship is being disassembled and inspected in the shipyard, according  to Navy officials (see sidebar). With respect to these materials and parts  ordered after the ship enters maintenance, DLA and the shipyard track  the average days from ordering the part to receiving the part at the  shipyard.
Because DLA does not manage the retail supply functions at the Army  and Marine Corps depots, the metrics used at these are largely limited to  the previously mentioned customer service metrics of material availability,  the number and age of backorders, and critical part shortages. In 2014,  DLA and the Army began using the Army Supply Plan–a collaborative  forecasting process for Army depots’ projected spare part needs–that has  increased the complexity of the customer service metrics used to  evaluate performance at Army depots. Specifically, DLA’s performance  on material availability and backorders is broken out based on whether  the collaborative forecast provided by the Army to DLA was used. In  2013, the Marine Corps and DLA began collaborating more closely on  demand planning by establishing a new organization within Marine Corps  Logistics Command that interacts directly with DLA to improve the  accuracy of demand planning information and the availability of spare  parts, according to Marine Corps officials. The Marine Corps and DLA  have also expanded the number of items that use collaborative  forecasting in an effort to improve supply availability. In 2015, DLA and  the Marine Corps began an inventory consolidation and optimization effort  to reduce DLA’s response time and improve its support to the Albany and  Barstow Production Plants. The Marine Corps and DLA are monitoring  performance of this new arrangement through a number of metrics, such  as customer wait time (i.e., the number of days from ordering an item to  receiving the item) and delivery response time.
section_title: DLA and the FRCs Have Adopted Internal Efficiency Metrics, but DLA and the Other Industrial Sites Do Not Have Metrics that Assess the Accuracy of Key Planning Factors
paragraphs: DLA and the FRCs have adopted internal efficiency metrics that measure  the accuracy of key supply planning factors, but DLA and the other  industrial sites generally do not have these types of metrics, which are  critical to efficient support of depot maintenance. While the Army and  Marine Corps depots, Air Force ALCs, and Navy shipyards have adopted  some internal efficiency metrics, such as demand forecasting accuracy or  the percentage of excess material, these metrics do not allow them, in  conjunction with DLA, to identify inaccurate planning factors that can  result in inefficiencies in the depot maintenance process.
subsections: section_title: Navy FRCs and DLA Have Adopted Metrics Measuring Key Planning Factors
paragraphs: The Navy FRCs and DLA have adopted and review metrics measuring  the accuracy of their demand forecasting and key planning factors: (1) the  number and schedule of end items inducted into maintenance, (2) the bill  of materials (i.e., the list and quantity of parts), and (3) the replacement  factors (i.e., the estimated frequency of a part needing to be replaced).  Since fiscal year 2013, the Navy and DLA have used a performance- based agreement for depot-level reparables that includes metrics that  measure the accuracy and stability of the schedule, bills of material, and  the replacement factor as well as other types of performance metrics.  Additionally, the Navy FRCs review the accuracy of bills of material and  replacement factors for their major weapon systems on a regular basis  and developed a metrics guide that defines and provides information on  key metrics, such as bill of material and replacement factor accuracy  metrics.
FRC Southwest officials noted that the availability and use of these  metrics are critical to ensuring efficient and effective supply support.  Specifically, FRC Southwest senior depot maintenance leaders  emphasized to us that part shortages are often not the fault of DLA, but  rather because DLA was not provided the necessary and accurate  information by maintenance officials. Also, FRC East officials told us that  the availability of the planning factor accuracy metrics has allowed them  to better identify the issues that need to be addressed with respect to  depot maintenance and supply support planning. For example, FRC East  officials told us that the bill of materials and replacement factors are fairly  accurate and stable, but that the scheduling of work (specifically for the  depot-level reparables) was less than ideal, leading to inefficient depot  maintenance processes and inadequate supply support.
section_title: Army and Marine Corps Depots, Air Force ALCs, and Navy Shipyards Have Not Adopted Metrics Measuring the Accuracy of Key Planning Factors
paragraphs: By contrast, the Army and Marine Corps depots, Air Force ALCs, and  Navy shipyards have not adopted similar internal efficiency metrics that  measure the accuracy of key supply planning factors, although  department officials told us their accuracy was fundamental to efficient  and effective supply support by DLA. For example,
Army depots: We were told by Anniston Army Depot maintenance  officials that inaccurate planning factors are negatively affecting  efficient and effective supply support for depot maintenance. The  officials provided documentation that in fiscal years 2014 and 2015  there was a total of 1,167 program changes to ordered work at the  depot valued at $212.1 million and requiring about an additional 1.5  million workload hours at Anniston Army Depot. Also, in June 2013,  we found that the Army significantly underestimated the amount of  new depot maintenance orders to be received from its customers  across fiscal years 2006–2012 by a total of $10.1 billion. According  to Army officials, such changes and additions to the workload make it  difficult to efficiently and effectively plan supply support for depot  maintenance. Furthermore, in September 2014, the DOD Inspector  General found that the Army did not provide DLA with reliable  forecasts for spare parts needed to support planned depot  maintenance largely due to inaccurate and missing information  associated with the bill of materials and replacement factors. The  Army is in the process of taking steps to address the findings of that  report, such as requiring material supportability analyses prior to  accepting workload, improving schedule accuracy and stability,  developing better policy and processes to review the accuracy of bills  of materials, and developing metrics to assess the accuracy of the bill  of materials. However, these recommended changes have not been  completely implemented as of March 2016.
Marine Corps depot: Marine Corps depot officials told us on our visit  to the Albany Production Plant in October 2015 that the depot had not  received its complete planned work schedule for fiscal year 2016 even  though fiscal year 2016 had already started. Additionally, Marine  Corps officials told us that changes to planned work, including  additions of unplanned work, occur throughout the year of execution.  In 2012, we found that for 45 of the 60 orders for fiscal years 2010  and 2011 that we reviewed, customers increased quantities or added  unanticipated workload requirements throughout the fiscal year that   delayed completing work on existing orders. The Marine Corps  depot maintenance officials noted that these types of changes have a  negative effect on supply support given the need for proactive and  advanced planning. Officials emphasized that an inaccurate schedule  can lead to both excess inventory and part shortages.
Air Force ALCs: The Air Force has processes in place to periodically  review and update some planning factors, such as the bill of materials  and replacement factors, but has not adopted metrics that are  regularly reviewed across the three ALCs to oversee the accuracy of  planning factors. Further, information provided by Warner Robins ALC  indicates issues associated with the accuracy of bills of materials for  weapon systems. Specifically, the information reported by the officials  shows a large percentage of the parts ordered for maintenance of  weapon systems were not on the bills of materials. Oklahoma City  and Warner Robins ALC officials and DLA officials also told us that  accurate and stable scheduling of end items for maintenance was  important to efficient and effective supply and maintenance  operations. For example, improvements in the scheduling– establishing a set and consistent number of repairs being conducted  monthly–of depot-level reparables (e.g., constant speed drives)  resulted in improvements to supply support as well as overall  performance of the repair shops for those end items (see sidebar).
Naval Shipyards: Naval Sea Systems Command and Norfolk Naval  Shipyard officials told us that they do not have metrics that track the  accuracy of planning factors, except for an excess material metric  calculated at the end of a ship’s maintenance. We asked the Navy  officials whether any thought had been given to conducting a “what if”  analysis of the supply support for a ship’s maintenance to determine if  the accuracy of the advanced planning could be improved, resulting in  a more efficient supply operation that was less focused on ordering  material and parts during maintenance and resolving backorders  when material and parts were not available. To their knowledge, the  officials could not recall such an assessment being conducted, but  noted that the advanced planning for ship maintenance did consider a  number of factors, such as past demand and the cost of the parts.  Naval Sea Systems Command officials noted that they are currently  reviewing the metrics associated with supply support at the shipyards,  but this effort was in the very early stages and no decisions had been  made as of early 2016.
The 2014 study sponsored by the Assistant Secretary of Defense for  Logistics and Materiel Readiness also determined that the accuracy of  planning factors, such as the bill of materials, was a problem and  recommended that the Office of the Secretary of Defense, DLA and the  services invest more effort in maintaining accurate bills of materials.  Accurate schedules, bills of materials, and replacement factors are  important to efficient and effective supply support across DOD depot  maintenance. The less accurate the planning factor the more likely DLA  will not be able to provide the correct mix of parts at the right time for  depot maintenance to operate efficiently and effectively. Ultimately, the  costs of inaccurate planning factors are both excess inventory and  backorders. Without relevant metrics on forecast planning factors, DLA  and the services are unable to determine the accuracy of their key  planning factors and take actions to resolve any issues identified through  measuring the accuracy of planning inputs in an effort to improve supply  and depot maintenance operations.
section_title: Services Have Not Adopted Cost Metrics That Would Allow the Assessment of the Cost- Effectiveness of Supply and Depot Operations
paragraphs: DLA and the services review the general operating costs of supply,  storage, and distribution functions that are managed by DLA, but have not  adopted other cost metrics, such as the potentially significant costs  created by backorders (i.e., disruption costs) to supply and depot  maintenance operations. The cost of DLA’s management of retail supply,  storage, and distribution functions for depot maintenance operations  varies across the services. For example, the Air Force and DLA have  agreed to a local recovery rate–a rate set at an estimated level to recover  the costs of services–for DLA’s management of retail supply, storage, and  distribution at the ALCs. DLA and the Navy are evaluating a similar  methodology, but further negotiations are needed to reach agreement,  according to the Fiscal Year 2017 Defense Working Capital Fund Budget.  The Army and Marine Corps reimburse DLA for the costs associated with  operating the storage and distribution functions at the depots, according  to Army, Marine Corps, and DLA officials.
However, DLA and the services do not consistently measure or track  other cost metrics, such as any cost created by backorders (i.e.,  disruption costs) to supply support and depot maintenance operations. As  previously described, DLA and the services track the number, age, and  criticality of backorders, but they do not consistently track the costs  associated with workarounds–additional efforts to obtain a part and  resolve a backorder so that depot maintenance can be completed. As  figure 7 below illustrates, there are four general types of workarounds– cannibalization, expediting, local procurement, and local manufacturing– that all have potential costs to supply support and depot maintenance  operations.
In our visits to 7 of 17 depot maintenance industrial sites, we identified  examples of workarounds to obtain parts being tracked to some degree.  For example, FRC Southwest tracks the parts that are cannibalized from  one end item to satisfy a part need on another end item that is further  along in the maintenance process. Warner Robins ALC also tracks similar  information for the weapon systems (e.g., F-15, C-130, and C-5 aircraft)  on which it conducts depot maintenance and reviews this information as  part of supportability analyses that it conducts to improve parts support  for future maintenance on the weapon systems. The Marine Corps  depot maintenance and DLA officials told us that they use an “urgent and  emergency requirements impact statement” to request an expedited  purchase for a spare part from DLA. This statement includes the effects  of the part not being available to depot maintenance operations, such as  a line stoppage (i.e., maintenance not being able to continue) and a  reduction in the workforce. However, according to DLA officials, there can  also be costs associated with the expediting action by DLA, such as  paying a premium to the commercial supplier providing the parts.
In addition to the potential costs directly associated with these  workarounds, they also require personnel resources to arrange and  execute the workaround. Depot maintenance and DLA officials told us  that there is a general tendency to focus resources and attention on  reacting to backorders (i.e., backorder resolution through workarounds)  as opposed to preventing backorders. In our visits to the Anniston Army  Depot and Oklahoma City ALC we observed depot maintenance  production reviews conducted by senior service officials that  demonstrated this heightened attention to backorder resolution.  According to service and DLA officials, while these workarounds are  needed at times so that work on an end item can be completed in a timely  manner without halting or slowing the maintenance production process,  DLA and the services generally do not fully track the necessary data– direct costs of the workaround as well as indirect costs such as personnel  dedicated to backorder resolution–that would allow them to calculate,  report, and assess the financial cost or benefit of the workaround.
In some instances, a backorder cannot be mitigated by a workaround and  changes are required in the depot maintenance process, which is another  type of disruption cost. In other words, depot maintenance and DLA  officials have exhausted all options to obtain a suitable part for  maintenance to continue its work and it must wait for the part to arrive. In  these cases, depot maintenance officials report that they have several  general options for mitigating the effect of an unavailable part.
Effect of Parts Shortages on High-Mobility  Multi-purpose Wheeled Vehicle (HMMWV)  Depot Maintenance   In June 2013, we found that the depot  maintenance work at Letterkenny and Red  River Army Depots in fiscal years 2011 and  2012 could not be completed when  anticipated due to parts shortages.
First, the sequence of maintenance can be adjusted so that  maintenance can be continued on the end item. Once the part is  received, then the depot artisan will move forward with the work that  was stalled due to the lack of part.
Second, depot maintenance officials do as much work as possible,  remove the end item from the maintenance production area once no  more work can be conducted given the lack of parts, and begin work  on another end item up until the same point (see sidebar). Once the  parts are received, then the end items are brought back into the  maintenance production area to finish the maintenance on the end  items.
Third, depot maintenance officials may decide to stop maintenance on  the end item(s) entirely, redistributing depot artisans to other  maintenance efforts and clearing the production area for new work.
In order to perform the work on these vehicles,  Letterkenny had to reestablish its production  line which was previously shut down due to  the lack of HMMWV work. Further, both  depots had to hire contractor personnel to  staff the production line and establish a supply  chain so that the depots could obtain the parts  to perform the work.   Both depots encountered problems with  obtaining sufficient quantities of parts, such as  doors, gunner protection kits, windshields,  turret bearings, and half shafts, to perform the  work. This parts problem was exacerbated at  Red River when the depot went to a double  shift on disassembling and assembling the  vehicles in April 2012. As a result of the parts  shortage, the depots assembled 4,254  vehicles but the vehicles were missing parts  and the work had to be carried over into fiscal  year 2013 for completion once the parts were  available.    We made 3 recommendations–all of which  have been implemented–related to improving  budgeting for working capital funds and  reducing carryover. When work has been  ordered and funded (obligated) by customers  (such as the services), but has not been  completed at the end of a fiscal year, it is  referred to as carryover.
In each of these cases, the lack of spare parts introduces multiple  disruption costs that affect the efficiency and effectiveness of depot  operations. important concepts, such as demand forecasting accuracy, across the  department by establishing a team of subject matter experts from each of  the services and DLA (see sidebar). experts, such as logistics management  specialists, information technology and  data experts, and  operations research  analysts (i.e., individuals with expertise in  advanced mathematical and analytical  methods), representing each of the  services and the Defense Logistics  Agency (DLA).   sources and methods used by the  services and DLA and evaluated potential  department-wide metrics for measuring  demand forecasting accuracy based on  the available data sources.
At FRC East, Navy and DLA officials stated that disruption costs have a  major effect on the efficiency and effectiveness of depot operations, and  thought that it was not only reasonable but necessary for depot  maintenance operations to develop metrics that measure them.  Furthermore, during our visit to FRC East these officials provided a basic  example of how a depot maintenance operation could articulate the  disruption costs and the effect of those costs. Based on FRC East and  DLA data, FRC East had $26 million in backorders accumulated across  fiscal years 2010–2015 that resulted in $131 million in depot-level  reparables being unable to complete repair and be provided back to the  warfighter. This approximate 1 to 5 ratio of backorders to sales revenue  (i.e., the completion of the repair and the sale of the end item to the  warfighter) provides an estimate of the disruption cost of backorders to  the efficiency and effectiveness of depot operations.
Furthermore, through the process of  establishing these metrics, DOD developed  additional areas for exploration and  improvement, such as improving its guidance  on demand forecasting.
However, the officials also stated that this estimate of or proxy for the  disruption cost is likely a conservative one because it does not factor in  many of the disruption costs discussed above. For example, the estimate  does not include the costs associated with (1) the time and efforts to  resolve those backorders through workarounds by personnel, (2)  packaging up the dissembled pieces of the end item since maintenance  could not be completed, (3) moving the end item away from the  maintenance area to a storage warehouse, (4) storing the end item until  the necessary part(s) arrive, (5) bringing the end item back to the  production area once the parts arrive, and, lastly, (6) preparing the end  item for the maintenance process to continue.
A 2014 study sponsored by the Assistant Secretary of Defense for  Logistics and Materiel Readiness found that the costs of not having parts  when they are needed can be considerable and that the department, if  they could measure such costs, might find that the disruption costs of not  having parts are high relative to the costs of steps that would improve  material availability. Based on our work in the area and our visits to 7 of  17 depot maintenance industrial sites, the lack of metrics to track and  assess disruption costs prevents decision makers from understanding the  financial effect of backorders and taking any necessary actions to  systemically mitigate disruption costs. Additionally, service depot  maintenance and DLA officials are unable to make tradeoffs with respect  to investing in stocking additional retail inventory or making improvements  to supply support rather than relying on workarounds that can be costly in  terms of financial and personnel resources, as described in figure 8.
As a result the services and DLA lack the information necessary to make  decisions about the cost-effective use of limited resources. For example,  the total disruption costs to a depot maintenance industrial site created by  85 percent material availability by DLA may be more costly than the  investments needed to improve the material availability to 90 percent.  However, the department does not track this type of performance  information to guide its decisions in optimizing the cost-effectiveness of  supply and depot maintenance operations. Without measuring, tracking,  and reviewing the disruption costs associated with backorders, DLA and  the services are not able to assess whether the right investment in  inventory at a particular industrial site is being made to support cost- effective supply and maintenance operations at industrial sites.
section_title: Conclusions
paragraphs: Cost-effective and efficient management of inventory is integral to  ensuring that the services’ depot-level industrial sites can fulfill their  mission to provide the warfighter with reliable weapon systems in a timely  manner. DOD actions in response to the 2005 BRAC recommendation to  transfer supply, storage, and distribution functions at these sites from the  services to DLA have had some positive effects at the Air Force ALCs  and the Navy FRCs, but the services could take additional steps to  ensure they realize the possible benefits of further transfers of retail  functions. For instance, the Army and Marine Corps depots and Navy  shipyards may benefit from transferring more of their retail supply  functions to DLA. While officials relayed to us the concerns they had  about transferring functions to DLA, they have not fully assessed the  costs and benefits of doing so. Without conducting business case  analyses that, among other things, draw on lessons learned from the  experiences at the ALCs and FRCs—as well as the failed implementation  at Norfolk Naval Shipyard—the Army and Marine Corps depots and Navy  shipyards are not positioned to know what could be gained by further  transferring retail functions to DLA and the department is unable to  determine the degree to which the retail supply functions should be  transferred to DLA.
Another key step to promoting cost effective and efficient supply support  at the industrial sites is accurate measurement and monitoring of  performance, which can provide insight into an organization’s successful,  and less than successful, strategies. For instance, without accurate  measures of planning factors—such as how often a part needs to be  replaced—the services and DLA will not have information that could aid  them in determining the efficiency of their supply and depot maintenance  operations, as well as identify root causes of inefficiencies. Similarly,  there may be metrics to more accurately determine the disruption costs of  backorders than the services and DLA are currently using. As we discuss,  disruptions to the orderly flow of work through the maintenance process  may sometimes cost more than taking other steps to avoid such  disruptions—as well as leading to lost productivity and delayed delivery to  the warfighter. Developing metrics to determine the full costs of such  disruptions may be difficult given differences across the services and  involve considerable effort, but the department has demonstrated the  ability to develop and implement metrics that assess complex concepts,  such as demand forecasting accuracy, through establishing a team of  experts to evaluate available data sources and approaches. Without  taking measured steps to implement such metrics, the services and DLA  will continue to have an imperfect understanding of the current costs of  their processes, and will lack insight into areas where they could take  action to achieve greater cost-effectiveness.
section_title: Recommendations for Executive Action
paragraphs: To increase department-wide supply chain efficiencies and effectiveness  in support of maintenance at the Army and Marine Corps depots and  Navy shipyards, we recommend that the Secretary of Defense direct the  Assistant Secretary of Defense for Logistics and Materiel Readiness, in  conjunction with the Director, Defense Logistics Agency, and the  Secretaries of the Army and Navy and the Commandant of the Marine  Corps to take the following two actions: assess through a comprehensive business case analysis–drawing on  lessons learned from previous efforts–the costs and benefits of DLA  managing the retail supply, storage, and distribution functions at the  Army and Marine Corps depots and Navy shipyards; and use the analysis to make a decision on the degree to which DLA  should manage these functions at the Army and Marine Corps depots  and Navy shipyards.
To improve the efficiency and effectiveness of supply and maintenance  operations, in accordance with DOD guidance, we recommend that the  Secretary of Defense direct the Assistant Secretary of Defense for  Logistics and Materiel Readiness, in conjunction with the Director,  Defense Logistics Agency, and the Secretaries of the Army, Navy, and Air  Force and the Commandant of the Marine Corps to take the following two  actions: develop and implement metrics that measure the accuracy of planning  factors, such as the schedule, bill of materials, and replacement  factors, used for depot maintenance; and  take action, as appropriate and necessary, to resolve any issues  identified through measuring the accuracy of planning inputs in an  effort to improve supply and depot maintenance operations.
To be able to assess the cost-effectiveness of supply and depot  maintenance operations, in accordance with DOD supply chain  management guidance, we recommend that the Secretary of Defense  direct the Assistant Secretary of Defense for Logistics and Materiel  Readiness, in conjunction with the Director, Defense Logistics Agency,  the Secretaries of the Army, Navy, and the Air Force, and the  Commandant of the Marine Corps to take the following two actions:  take steps to develop and implement metrics, to the extent feasible, to  measure and track disruption costs created by the lack of parts at  depot maintenance industrial sites by, for example, establishing a  team of supply and depot maintenance experts from DLA and the  services to assess potential data sources, approaches, and methods;  and  take action, as appropriate, to address any inefficiencies identified by  the disruption cost metrics in supply and depot maintenance  operations.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for comment.  In written  comments, DOD concurred with our six recommendations.  DOD’s  comments are also reprinted in their entirety in appendix V. DOD also  provided technical comments, which we incorporated into the report as  appropriate.
DOD concurred with our recommendations to assess the costs and  benefits of allowing DLA to manage retail supply, storage, and distribution  functions at the Army and Marine Corps depots and Navy shipyards using  a comprehensive business case analysis and to use this analysis to guide  future decision making.  DOD noted that the Army and DLA are currently  working together to investigate and evaluate the costs and benefits of  having DLA manage the retail supply, storage, and distribution functions  at the Army depots. The Army and DLA plan to have this completed by  July 2016 and to share the results of the analysis with the Marine Corps  and Navy. We agree that this is a good first step with respect to the Army  and DLA, but also believe that, consistent with our recommendation, this  effort should be broadened.  Specifically, the Assistant Secretary of  Defense for Logistics and Materiel Readiness in conjunction with the  Navy, Marine Corps, and DLA should also conduct an analysis of the  costs and benefits of DLA managing the retail supply, storage, and  distribution functions at the Navy shipyards and Marine Corps depot.  Furthermore, the Assistant Secretary of Defense for Logistics and  Materiel Readiness in collaboration with the Army, Navy, and Marine  Corps following this analysis of costs and benefits should make a  decision on the degree to which DLA should manage these functions.
DOD concurred with our recommendations related to the improvement of  metrics that measure the accuracy of planning factors.  DOD stated that it  will begin developing planning factor metrics related to schedule variance,  delivery time variance, and the accuracy of the bills of materials.  DOD  also noted that the Army and Navy have already begun developing  metrics related to the accuracy of planning factors.  DOD expects to have  these metrics completed by October 2018.
DOD concurred with our recommendations related to the improvement of  metrics to measure and track the disruption costs created by the lack of  parts at depot industrial sites. DOD is determining whether measuring  such costs is feasible, and plans to include service input to help identify  the different costs associated with these disruptions. They are also  looking at the disruptions caused by additional factors outside of supply  and maintenance, such as unexpected program or funding changes. DOD  also expects to have concluded this effort by October 2018.
We are sending copies of this report to the appropriate congressional  committees; the Secretary of Defense; the Secretaries of the Army, Navy,  and Air Force; the Commandant of the Marine Corps; the Under  Secretary of Defense for Logistics and Materiel Readiness; and the  Director, Defense Logistics Agency. In addition, the report is available at  no charge on the GAO website at http://www.gao.gov. If you or your staff  have questions about this report, please contact me at merrittz@gao.gov  or (202) 512-5257. GAO staff who made key contributions to this report  are listed in appendix VI.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess the extent to which the services transferred retail supply,  storage, and distribution functions at Department of Defense (DOD)  industrial sites to the Defense Logistics Agency (DLA), and whether the  results have been used to inform future efforts, we reviewed Office of the  Secretary of Defense (OSD), DLA, and service guidance, and  documentation related to retail inventory management at service  industrial sites; we conducted interviews with officials from OSD, DLA,  service materiel commands, and service industrial sites; and, visited 7 of  17 service industrial sites to observe maintenance operations and retail  inventory processes. This non-generalizable sample was selected to  provide a mix of services (at least one per type of industrial site–Army  depot, Navy shipyard, Navy Fleet Readiness Center, Air Force Air  Logistics Complex, and Marine Corps depot), types of weapon systems  repaired (a mix of air, ground, and sea vehicles as well including facilities  that conduct component-level repair), and the extent to which DLA  performs retail supply, storage, and distribution functions at the site  (including those that had fully transferred these functions to DLA and  those that had not). We also took into consideration the recommendations  of service supply chain personnel. We analyzed pertinent documents and  interviewed officials responsible for retail inventory management at  selected defense industrial sites to determine any challenges related to  transferring retail functions, and whether the services have assessed the  costs and benefits of further transferring retail functions to DLA. We  interviewed officials about the extent to which different information  systems used by DLA and the services were used for retail inventory  management and how these systems interface, if at all. We reviewed  inventory data from 2010 through 2015 using DLA’s Enterprise Business  System, the Army’s Logistics Modernization Program, the Navy’s  Enterprise Resource Planning system, and the Air Force’s D200 system,  which is a legacy system the Air Force uses to track most of its inventory.  To assess the reliability of the data, we reviewed summary level inventory  data, interviewed officials responsible for generating the data, and  observed data entry during retail inventory operations at service industrial  sites. We determined that the data we used were sufficiently reliable for  the purposes of this report.
To support our analysis on each of the objectives, we contacted or  interviewed officials from the following organizations:  Office of the Secretary of Defense
Office of the Deputy Assistant Secretary of Defense for Maintenance
Office of the Deputy Assistant Secretary of Defense for Supply Chain
Defense Logistics Agency, Headquarters
Defense Logistics Agency, Aviation
Defense Logistics Agency, Land and Maritime
Defense Logistics Agency, Distribution
Army Materiel Command
TACOM Life Cycle Management Command
Anniston Army Depot
Naval Air Systems Command
Naval Sea Systems Command
Naval Supply Systems Command
Fleet Readiness Center East
Fleet Readiness Center Southwest
Norfolk Naval Shipyard
Marine Corps Logistics Command
Albany Production Plant
Air Force Materiel Command
Air Force Sustainment Command
Oklahoma City Air Logistics Complex
Warner Robins Air Logistics Complex  To determine the extent to which DLA and the services have adopted  metrics that allow them to effectively and efficiently manage supply and  maintenance operations, we analyzed DOD, DLA, and service policies,  regulations, and guidance pertaining to the use of metrics for the  management of inventory and maintenance operations. We visited 7 of 17  depot maintenance industrial sites, using a non-generalizable sample as  previously described, in order to discuss with the DLA and service depot  maintenance officials the metrics used to manage supply and depot  maintenance operations as well as to understand the application of the  metrics at depot maintenance industrial sites. We reviewed  documentation, such as performance management briefing slides, and  analyzed DLA’s and the services’ use of metrics to manage their  inventory in against DOD guidance, which requires DLA and the services  to be responsive to customer requirements while balancing risk and  costs, conduct periodic performance and cost evaluations, and adopt  metrics that provide information on customer service, cost, and internal  efficiency. Specifically, we assessed DLA and a service as using a  particular type of metric providing information on customer service, cost,  or internal efficiency if the metric was a regular part of service inventory  management and depot maintenance performance reviews. We also  conducted interviews with DLA, service, and Office of the Secretary of  Defense officials to understand and corroborate the use of performance  metrics used to inform inventory and depot maintenance management  decisions. We also observed a number of inventory management  meetings held at the services, such as those discussing backorders and  backorder resolution, schedules, and the supportability of repair  programs.
To assess the status of backorders for DLA-managed items at service  industrial sites, we collected DLA’s complete backorder data from its  Enterprise Business System for fiscal years 2013 through 2015. From this  data, we removed all “unactionable” backorders, as well as backorders  that were not tied to a service industrial site. The remaining data were  then analyzed by service industrial site, supply chain, and acquisition  advice code. In addition, we assessed the reliability of these data by  analyzing the policies and processes in place to ensure data collected  through this information system are correct and protected from  unauthorized modification, conducting interviews on the information  system with knowledgeable DLA officials, and examining the data for  errors and outliers. We determined that the data were sufficiently reliable  for our purposes. To assess the extent to which DLA and each of the  services have implemented collaborative forecasting methods at the  industrial sites, we analyzed and compared the collaborative processes  used by the Army, Navy, Air Force, and Marine Corps. We reviewed the  metrics used to monitor collaborative forecasting efforts and interviewed  DLA and service representatives involved with collaborative forecasting,  as well as the depot customers who rely on accurate forecasts. Finally, to  describe service inventory improvement efforts, we analyzed documents  and conducted discussions with service personnel, had service and DLA  supply personnel identify key improvement efforts undertaken by their  respective organizations, and compared inventory improvement efforts  among services.
We conducted this performance audit from May 2015 to June 2016 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Backorders for Defense Logistics Agency (DLA) Managed Spare Parts at Service Industrial Sites
paragraphs: Total backorders for DLA-managed spare parts at the service industrial  sites decreased by about 15 percent from October 2012 through  September 2015, though they are currently higher than the low achieved  around February 2014, as shown in figure 9 below. We collected  backorder data from DLA for fiscal years 2013 through 2015 and focused  our analysis on backorders for DLA-managed spare parts that occurred at  one of the service industrial sites.
subsections: section_title: Backorders for DLA’s Supply Chains Generally Decreased
paragraphs: Backorders associated with each of DLA’s supply chains generally  decreased from October 2012 through September 2015, as shown in  figure 10 below. DLA has multiple supply chains, which handle the  procurement of inventory parts, as well as conduct customer outreach  and handle backorders. DLA has designed their business processes  such that a given customer (e.g., a service industrial site) only needs to  interact with a single supply chain when it needs to order parts, discuss  forecasts, or receive updates on backorders. For example, Anniston Army  Depot interfaces directly with DLA’s Land supply chain, even for those  parts that are not specifically handled by the Land supply chain. DLA’s  Land supply chain saw an increase of around 17 percent in backorders  over this time period, though the other DLA supply chains saw reductions  of at least 15 percent, and the Maritime supply chain exhibited a decrease  of nearly 40 percent. The increases and decreases to backorders seen  here are discussed in more detail in the service-specific sections below.
section_title: Most Backorders Are For Stocked or Insurance Parts
paragraphs: DLA’s backorders, when categorized by how the part is acquired and  stocked, have remained generally steady from October 2012 through  September 2015, although backorders for parts that are the most  regularly stocked have increased since March 2014, as shown in figure  11 below. The Department of Defense (DOD) uses a coding system– known as “acquisition advice codes”–to categorize parts according to its  approach for acquiring and stocking them. This includes parts that are  regularly stocked (code “D”), not stocked and must be procured (code  “J”), directly delivered from vendors (code “H”), or kept on hand in small  quantities, referred to as “insurance items” (code “Z”), among others.
As seen in figure 11 above, the majority of DLA’s backorders for spare  parts at service industrial sites are actually for parts coded “D,” which  represent parts that are described by DLA as “stocked.” These are the  parts that, due to their regular demands, are intended to be “on the  shelves” on a regular basis. Parts that are supposed to be stocked can  experience backorders if there is a sudden spike in demand or difficulties  with the supply of inventory. These are parts where an increased  investment in inventory may prevent work-disrupting backorders with  minimal risk, since they are parts that DLA expects to sell over time, and  therefore carry less risk to DLA to purchase. DLA officials attributed the  fluctuation in stocked parts and insurance parts in late 2012 and early  2013 to the implementation of new methods for setting inventory levels for  certain parts.
The second largest category of backorders is comprised of items coded  “Z,” which represent what are called “insurance items.” These are parts  that are only needed intermittently, and so DLA keeps a nominal quantity  on hand in order to mitigate the effects of long lead times. The relatively  low demand for “Z” coded parts suggests that the backorders could be a  result of the tradeoffs that DOD has to make with respect to inventory  investment and customer service. On the one hand, stocking more of  these inventory parts could conceivably lower these types of backorders.  However, this would entail a larger investment in inventory and would  also increase DLA’s risk of purchasing and paying to store excess  inventory. DLA has to make decisions on which parts are most likely to  be needed by its customers in order to strike a balance between inventory  investment and customer service.
The remaining parts we analyzed were coded either “J” or “H.” Code “J”  parts are considered “non-stocked” items, which are not generally on the  shelf and are procured only when DLA receives a funded requisition for  the part. In other words, DLA generally does not purchase these parts  based only on a forecast. Code “H” parts are those that are delivered  directly to the customer by a third-party vendor. While DLA centrally  manages these parts, they do not always keep a stock of them on hand,  relying instead on the commercial vendor to provide the part when  requisitioned.
section_title: Changes in Backorders Vary by Service
paragraphs: The trend of the number of backorders for DLA-managed spare parts  varies across the service industrial sites. With respect to the Army,  backorders for DLA-managed spare parts at the depots decreased for  almost every location from October 2012 through September 2015, as  shown in figure 12 below. With the exception of Red River Army Depot,  which saw an increase of about 7 percent, each of the Army industrial  sites saw backorders for DLA-managed parts fall by at least 35 percent,  while two sites–Corpus Christi and Anniston–saw their backorders fall by  more than 70 percent and 49 percent, respectively. DLA officials  attributed the reductions to a concerted effort at backorder reduction  undertaken within the Land and Maritime supply chains. DLA officials also  noted that while backorders at Red River have increased between fiscal  years 2013 and 2015, backorders there had decreased in fiscal year  2015, which they attributed partially to the implementation of the Army  Supply Plan.
With respect to the Navy shipyards, changes in the backorders for DLA- managed parts varied at every location from October 2012 through  September 2015, as shown in figure 13 below. For example, Norfolk  Naval Shipyard saw a decrease in backorders of over 60 percent, while  Portsmouth saw a decrease of around 20 percent. Meanwhile, Puget  Sound held relatively steady with an increase in backorders of less than 2  percent, while Pearl Harbor saw its backorders increase by over 40  percent. DLA officials stated that they were not entirely certain why  backorders increased at Pearl Harbor, but speculated that it might be due  to the extended repairs of two Virginia-class submarines during this time  period. DLA officials noted that the high number of backorders for Norfolk  Naval Shipyard in late 2012 were due to the attempted transfer of the  supply function at Norfolk Naval Shipyard to DLA’s information systems  and processes. As previously discussed in this report, DLA and the  Norfolk Naval Shipyard attempted the full transfer of the supply function to  DLA’s information systems and processes, but after 7 months decided to  revert back to Norfolk Naval Shipyard’s information systems and  processes. DLA officials also attributed the spike at Norfolk in September  2014 to increased end-of-year spending by the Navy.
With respect to the Navy Fleet Readiness Centers (FRCs), backorders for  DLA-managed parts generally increased from October 2012 through  September 2014, as shown in figure 14 below. The Navy FRCs  implemented DLA’s Inventory Management and Stock Positioning (IMSP)  system during this time frame. However, the FRCs made the transition at  different times. San Diego was the first to implement IMSP, in June 2013,  while Jacksonville made the transition to IMSP in late October 2013. By  contrast, Cherry Point did not move to IMSP until March 2014, which  corresponded with a significant increase in backorders. FRC officials at  Cherry Point told us that there was a significant increase in unplanned  workload during that time due to the transition of the AV-88 program from  the commercial sector to Cherry Point. However, the overall trend for all  FRCs has been a steady increase of at least around 40 percent during  the transition, peaking generally in September 2014. This could reflect the  “growing pains” of transitioning to IMSP, as Air Force Air Logistics  Complex (ALC) officials noted that it took them more than 2 years to work  through the initial implementation challenges of fully transferring the retail  supply function to DLA’s information systems and processes. As such, it  is not yet clear if the FRCs will experience the same backorder reduction  noted by the ALCs over the 5-year period after they transferred retail  inventory functions to DLA.
With respect to the Air Force ALCs, backorders for DLA-managed parts  decreased, and in some cases significantly, from October 2012 through  September 2015, as shown in figure 15 below. For example, DLA- managed backorders at Ogden have dropped by more than 40 percent  over the past 3 years. Though not as large, the reductions seen at  Oklahoma City and Warner Robins have also been meaningful, at about  13 percent and 38 percent, respectively. As noted in the report, Air Force  officials attribute their reduced backorders over the past 5 years to the  decision to transfer retail supply, storage, and distribution functions to  DLA.
With respect to the Marine Corps Production Plants, backorders for DLA- managed parts increased from October 2012 through September 2015,  as shown in figure 16 below. While Albany saw its backorders for DLA- managed items increase by 9 percent over the 3-year period, Barstow’s  backorders increased by over 40 percent during that same time. DLA  officials noted that DLA supports the Marine Corps by focusing primarily  on key items that impact the materiel availability at the depots, but that a  majority of their regular business still involves other parts that are not  particularly emphasized.
section_title: Appendix III: Service Methods to Support Collaborative Forecasting with the Defense Logistics Agency (DLA) at Industrial Sites
paragraphs: Each of the services has implemented a different method for developing  and providing collaborative forecasts to DLA, though these methods do  share some characteristics. Through collaborative forecasting, DLA and  the customer (i.e., the industrial site) work together to evaluate historical  demand data for spare parts and tailor forecast plans for those spare  parts based on projected future usage. Collaborative forecasting is  prospective, in that it uses various planning factors–the repair schedule,  the list of parts required for the repair, and the rates at which those parts  are replaced–to guide inventory management decisions, rather than  DLA’s historical sales data. As part of the 2010 Comprehensive Inventory  Management Improvement Plan, the Department of Defense (DOD)  created a sub-plan to improve inventory forecasting that included  expanding the use of collaborative forecasting. In addition, DOD Manual  4140.01, Vol. 2 requires the use of collaboration to improve the accuracy  of forecasts. In June 2014, we found that DLA’s collaborative forecasting  program had not improved the aggregate forecasting accuracy or used a  comprehensive approach to manage the program and recommended that  the department take steps, such as developing additional performance  metrics and using those metrics to measure and monitor performance  through regular performance management meetings. To address the  recommendation, DLA officials stated that they have begun to consider  additional metrics to assess the performance of the effort, and senior  management has begun to monitor demand forecasting accuracy across  DLA.
As noted earlier, service industrial sites rely on several key factors when  planning workload, and similar factors–the number of end items that need  repair, parts lists (i.e., bills of materials), and replacement rates–are just  as important when the services develop a collaborative forecast. Each of  the services’ collaborative forecast methods uses these three factors as  the basis to develop their submission to DLA. Some service methods also  have other similarities, as noted in table 1.
However, while these methods share similar characteristics, they also  differ in some key respects. For example, the methods focus on different  timeframes. The Army Supply Plan looks out 5 years, as does the Air  Force’s method, while Navy Aviation provides data for 2 years. The  services also have different levels of experience using the methods.  Officials noted that the Air Force has been using Demand Data Exchange  since 2009, Navy Aviation has been using its Gross Demand Plan since  2013, and the Army started the Army Supply Plan in late 2014.
Further, the services do not send the same amount of data to DLA. The  Navy and Army submit all required parts and quantities for all planned  maintenance at the industrial sites to DLA and DLA and the services have  automated and manual processes in place to review these submissions.  Once reviewed, the collaborative forecast submission is used by DLA in  establishing its demand plans. The Air Force and Marine Corps, in  collaboration with DLA, identify items through a manual process and  establish projected forecasts that are used by DLA in establishing its  demand plans. Officials noted that these items are identified based on  anticipated changes in demand or the fact that the item has been  problematic in some fashion.
Finally, the service forecasting methods are supported in different ways  by DLA. For example, the Army and Navy Aviation both submit a full list  of depot requirements to DLA. However, DLA uses different methods to  support both sets of data; the Army is supported heavily by DLA’s Peak  and Next-Gen level-setting methods, which are designed for items that  are inherently difficult to forecast. However, these methods initially  excluded retail inventory, and so are not as regularly used to support  Navy Aviation.
As noted in the above table, the services and DLA have developed a  number of different ways of assessing the effectiveness of collaborative  forecasting. The collaborative forecasting mechanisms–specifically the  inputs, outputs, and performance metrics–are all regularly reviewed by  DLA and service personnel. In addition, Office of the Secretary of  Defense officials noted that their future plans for inventory management  involve monitoring and assessing the effectiveness of these different  collaborative forecasting mechanisms.
Background  We reviewed a number of depot  improvement efforts the services  have underway.  While some  officials described these as  “leading” or “best” practices, we did  not assess the extent to which  these efforts made concrete  improvements to inventory  outcomes, in part due to the  difficulty of separating causal  factors from the large number of  variables involved. In addition, we  only visited 7 of the 17 service  industrial sites (Anniston Army  Depot, Norfolk Naval Shipyard,  Fleet Readiness Center East, Fleet  Readiness Center Southwest,  Oklahoma City Air Logistics  Complex, Warner Robins Air  Logistics Complex, and Albany  Production Plant). Therefore, there  may be additional efforts that have  not been identified.
Goals of the Efforts  The efforts listed have varying  goals, but their overall focus can  be grouped into three categories:  1.
Inventory management: Providing better accountability, reducing costs, and distilling lessons learned.
Navy Aviation includes Marine Corps Aviation.
subsections: section_title: 2. Collaboration: Improving the
paragraphs: level of trust and communication between the service and Defense Logistics Agency. 3. Maintenance throughput: Increasing the rate at which the depot can repair end items.
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Zina D. Merritt, (202) 512-5257, or merrittz@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Suzanne Wren (Assistant  Director), John Bumgarner, James Lackey, Amie Lesser, Greg Pugnetti,  Mike Silver, Sabrina Streagle, John Trubey, and Erik Wilkins-McKee  made key contributions to this report.
section_title: Related GAO Products
paragraphs: Defense Inventory: Services Generally Have Reduced Excess Inventory,  but Additional Actions Are Needed. GAO-15-350. Washington, D.C.: April  20, 2015.
High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February  11, 2015.
Defense Inventory: Actions Needed to Improve the Defense Logistics  Agency’s Inventory Management. GAO-14-495. Washington, D.C.: June  19, 2014.
High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February  14, 2013.
Defense Inventory: Actions Underway to Implement Improvement Plan,  but Steps Needed to Enhance Efforts. GAO-12-493. Washington, D.C.:  May 3, 2012.
Defense Logistics: DOD Needs to Take Additional Actions to Address  Challenges in Supply Chain Management. GAO-11-569. Washington,  D.C.: July 28, 2011.
Opportunities to Reduce Potential Duplication in Government Programs,  Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington,  D.C.: March 1, 2011.
High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February  2011.
DOD’s 2010 Comprehensive Inventory Management Improvement Plan  Addressed Statutory Requirements, But Faces Implementation  Challenges. GAO-11-240R. Washington, D.C.: January 7, 2011.
DOD’s High-Risk Areas: Observations on DOD’s Progress and  Challenges in Strategic Planning for Supply Chain Management.   GAO-10-929T. Washington, D.C.: July 27, 2010.
Defense Inventory: Defense Logistics Agency Needs to Expand on Efforts  to More Effectively Manage Spare Parts. GAO-10-469. Washington, D.C.:  May 11, 2010.
High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January  2009.
Defense Inventory: Army Needs to Evaluate Impact of Recent Actions to  Improve Demand Forecasts for Spare Parts. GAO-09-199. Washington,  D.C.: January 12, 2009.
Defense Logistics: Lack of Key Information May Impede DOD’s Ability to  Improve Supply Chain Management. GAO-09-150. Washington D.C.:  January 12, 2009.
Defense Inventory: Management Actions Needed to Improve the Cost  Efficiency of the Navy’s Spare Parts Inventory. GAO-09-103. Washington,  D.C.: December 12, 2008.
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.  GAO-07-1064T. Washington, D.C.: July 10, 2007.
Defense Inventory: Opportunities Exist to Save Billions by Reducing Air  Force’s Unneeded Spare Parts Inventory. GAO-07-232. Washington,  D.C.: April 27, 2007.
Defense Inventory: Opportunities Exist to Improve the Management of  DOD’s Acquisition Lead Times for Spare Parts. GAO-07-281.  Washington, D.C.: March 2, 2007.
High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January  2007.
DOD’s High-Risk Areas: Progress Made Implementing Supply Chain  Management Recommendations, but Full Extent of Improvement  Unknown. GAO-07-234. Washington, D.C.: January 17, 2007.
DOD’s High-Risk Areas: Challenges Remain to Achieving and  Demonstrating Progress in Supply Chain Management. GAO-06-983T.  Washington, D.C.: July 25, 2006.
Defense Inventory: Actions Needed to Improve Inventory Retention  Management. GAO-06-512. Washington, D.C.: May 25, 2006.
High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January  2005.