Defense Inventory: Improved Industrial Base Assessments for Army War Reserve Spares Could Save Money
Released: 2002-07-12T00:00:00

Letter

Background

DOD’s current policy calls for each military service to determine its requirements and acquire sufficient war reserve materiel for the execution of current wartime scenarios and to be able to sustain these operations until being re-supplied. Thus, in developing their plans, the services must consider the availability of spare parts in their peacetime operating stocks, their war reserve spare parts inventories, and from the industrial base, and then estimate what additional materiel they need to buy. The Army’s industrial base and stationing strategies and DOD’s regulations reflect the importance of the industrial base in supporting wartime operations and require the services to rely on the industrial base to the maximum extent possible. In addition, the Army is required to maintain a viable capability to monitor and assess the health of the industrial base and identify potential risks.

The U.S. Army Materiel Command is responsible for determining the Army’s requirements for war reserve spare parts, as well as the Army’s estimate of what private industry can be expected to provide during wartime, in order to derive the war reserve spare parts shortfall. It receives technical expertise from the Army Materiel Systems Analysis Agency in determining its war reserve requirements and an estimate of what can be expected from private industry. The Command’s major subordinate commands are responsible for purchasing specific types of materiel, such as aviation, tank, automotive, and communications parts, and they have a limited number of industrial base specialists who can be assigned to provide data for assessments. Figure 1 illustrates the steps that the Army follows to determine its war reserve shortfall.

To plan how much war reserve materiel it needs to buy, the Army develops estimates of when spare parts will be available from the industrial base during wartime so that it can determine how much war reserve materiel it needs to buy and put into its war reserve inventory. In preparing its estimates, the Army first calculates the total amount of war materiel that it needs to support current wartime scenarios. Specifically, it calculates its requirements by using a computer model that considers several factors, such as spare parts usage and breakage rates. Next, it determines the amount of peacetime and war reserve inventories that are available to meet that requirement. The Army then applies the amount it estimates the industrial base can be expected to provide during wartime. The remaining amount is considered the total spare parts shortfall. The total shortfall can then be divided into the amount for which Congress has authorized funding, any amounts budgeted for future years, and an additional amount the Army has not yet requested from Congress.

As table 2 shows, in preparation for its fiscal year 2003 budget submission to Congress (part of the fiscal year 2003-2007 out-of-cycle Program Objective Memorandum), the Army calculated that it required $3.30 billion for its wartime spare parts. Of this amount, it estimated that $1.93 billion worth of spare parts would be available from peacetime and war reserve inventories. Another $0.13 billion expected to be available from private industry was applied. The resulting total spare parts shortfall was $1.24 billion. Of this amount, the Army has been funded $0.11 billion for fiscal years 2000-2002 and expects to request $0.47 billion in fiscal years 2003-2007. Overall the Army reports a total spare parts shortfall of approximately $0.66 billion.

Army Industrial Base Assessments Do Not Use Current Industry Data

The Army’s approach for assessing wartime spare parts industrial base capability still does not use current data from industry. Rather, the Army’s assessments of industry’s capability to produce spare parts in wartime depend on historical data and lead-time factors that the Army develops itself. Without current data on industry’s capability, assessments could be unreliable, resulting in reduced readiness due to critical spare parts shortfalls in wartime or inflated and costly war reserve spare parts inventories in peacetime. Moreover, the Army’s budget requests to Congress for war reserve spare parts risk being inaccurate.

In the past, the Army collected data directly from private industry through paper questionnaires to industry representatives that were up to 22 pages long. It stopped this practice primarily because of the poor response rates. According to Army Materiel Command officials, industry representatives said they saw no apparent direct benefit from filling in the lengthy questionnaires and, moreover, felt they should be compensated for their time and effort. We were told that command officials themselves do not believe that collecting current data from industry is cost-effective.

Now, rather than collecting current data from private industry, the Army uses data that it acquired several years ago from private industry to create lead-time factors for estimating its wartime industrial base capability. These factors are based on out-of-date industry data. Furthermore they were developed from a limited range of spare part items but were applied to all parts needed for war. For example, in developing its fiscal year 2003 budget submission to Congress, the Army used a formula with wartime lead-time factors that were derived from estimated accelerated peacetime administrative lead times and production lead times. These accelerated lead-time factors of 85 and 61 percent, respectively, were based on data obtained prior to 1998 for specific items, such as howitzers, that were managed by the Army Tank and Automotive Command’s Rock Island facility. According to an Army document, this method of calculating lead times fails to account for variations that exist from item to item and can lead to unrealistic industrial base capability estimates. For example, a 1998 Army study found that 44 of 86 parts assumed to be supported by industry could not be and that 176 of 218 parts that were assumed not to be supported by the industrial base were.

Partly in response to the recommendation in our prior report, the Army has several initiatives underway to improve its industrial base capability assessments, but these initiatives continue to focus on historical, rather than current industry data. In one initiative, the Army is developing a new approach to calculate its wartime spare parts requirements, in part, from data collected from private industry during 1998. In another, the Army Materiel Command has designed a tool—called the Industrial Base Hub— that brings together in one Web-based automated system a broad range of existing industrial base data. The data consist of war reserve requirements, producer capabilities, contract awards and actions, contractor businesses, and commercial businesses and finances. The Industrial Base Hub relies on historical data rather than on current data from industry. In a third initiative, the Army Materiel Systems Analysis Agency has proposed periodically collecting data on production lead times for the 100 costliest spare parts, which account for 70 percent of the total dollar value of the entire wartime spare parts requirement. The Army Materiel Systems Analysis Agency believes that collecting current data periodically from the private manufacturers of the top 100 costliest spare parts could be a reasonable way to get a cost-effective, reliable industrial base offset estimate.

Opportunities Exist to Improve the Reliability of the Army’s Industrial Base Capability Assessments

The Army could improve the reliability of its industrial base assessments by considering several key attributes present in DLA’s industrial base assessment program. These include the collection of up-to-date industry data, the timely analysis of data to develop current and reliable industrial base assessments, and the use of analytical data to create management strategies aimed at reducing spare parts costs and the risk of shortfalls.

DLA’s Assessment Program

To improve its management of spare parts for the services, and thus reduce costs and inventory, DLA re-engineered its industrial base capability assessment program. DLA’s assessment program, called the Worldwide Web Industrial Capabilities Assessment Program, was started in the fall of 1999. It consists of a data collection tool and an analytical tool, which is used to create management strategies. (See appendix I for a more detailed description.) The data collection tool provides the capability to gather new and updated information directly from private companies via the Internet. Company representatives voluntarily respond to a series of on-line survey questions that, depending on how answered, are self- tailored to that company to simplify and speed up the survey process.

Private companies provide information on what spare part items they can provide (or are willing to provide); what quantities they can produce; how long it will take to produce them under different scenarios (e.g., normal or crisis conditions); and what potential bottlenecks (e.g., availability of certain materials, or equipment constraints) exist that could limit the production of certain spare parts. DLA validates this information as part of its assessment process before acting on the information.

The program’s analytical tool provides analysts with immediate access to the automated data collected from industry. This provides the capability to develop timely and reliable assessments of industry’s ability to provide various spare parts in peacetime as well as wartime. In addition, it provides the capability to use the analytical data to identify actual or potential parts availability problems (e.g., items with unusually long lead times or items that are involved in bottlenecks) and, based on this information, to create a management strategy for resolving these problems, for example, by changing its acquisitions procedures or targeting investments in material and technology resources to reduce production lead times.

Benefits of DLA’s Assessment Program

Although DLA’s industrial base assessment program is relatively new, it provides a number of examples that illustrate the effectiveness of collecting current data directly from the industrial base. Table 3 shows the impact on production lead time when it is based on up-to-date industry data. For example, clamp couplings for tanks, aircraft, and aircraft engines have a production lead time of 35 days during a crisis (surge) situation rather than a lead time of 156 days (lead time of record) previously estimated by DLA for normal, or peacetime, situations.

This more reliable information could result in greater economy in purchasing decisions. For example, private industry says it can provide a resilient mount within 70 days during a crisis rather than in the 163 days that DLA previously estimated. The war reserve requirement for this item occurs during the first 3 months of a war. The reduction in production lead time from 163 to 70 days means that the third month could be covered with a savings of $4,810 by not buying the items. Likewise, the war reserve requirement for the centrifugal fan spreads over the first 6 months of a war with the bulk occurring during the last 3 months. The lead-time reduction from 109 days to 56 days means that months 2-6 could be covered with a savings of $62,560 by not buying the items.

Additional benefits from the assessment program stem from evaluating currently collected and analyzed information to identify potential problems with production and create various management strategies to resolve them. For example, by identifying an unusually long lead time for a cesium lamp and examining the reasons for this, DLA was able to ultimately reduce the lamp’s lead time of 360 days to only 30 days. The lamp is used on several types of Navy, Marine Corps, and Air Force aircraft in electronic counter measure systems to defeat infrared missiles. The lamp cartridge, which is a critical element used in these systems, is made of exotic materials and operates at extreme temperatures and power levels.

An industrial capabilities assessment concluded that the lead time of record for this item was 360 days. Negotiations with the vendor, however, reduced this to 300 days. The lead time of 300 days is due to the use of highly technical processes and several long-lead-time materials in its production. Because of the unique nature of the cesium lamp, additional measures were needed to reduce the lead time further. As part of a targeted investment, DLA awarded a contract to preposition and rotate long-lead materials and partially finished components, resulting in a further 270-day reduction in lead time to 30 days. As a result, DLA is spending $530,000 for this investment, compared with the $1.1 million it would cost to purchase and store an equivalent amount of finished product to meet war reserve requirements, saving approximately $600,000.

Army Industrial Base Capability Assessments Can Be Improved

The Army’s approach for assessing wartime spare parts industrial base capability can be improved. A comparative analysis of DLA’s program to the Army’s approach shows opportunities to improve, specifically in the areas of data collection, data analysis, and management strategies. Table 4 compares the DLA and Army industrial base assessment approaches for the three key attributes.

By focusing on the above attributes, DLA’s industrial base capability assessment program has become an improved, simplified, time-saving process for companies to provide current production capability data. For example, the process uses a streamlined Internet based data collection tool that industry representatives say is an improvement over the old paper process. Also DLA uses follow-up letters and phone calls to encourage use of the online data collection tool. Companies can then participate with DLA in creating management strategies to reduce lead times, which can reduce required war reserve inventories.

Conclusions

Industrial base capability assessments designed to have current data such as DLA’s create opportunities for sound decision making regarding the planning for and purchase of Army war reserve spare parts. The Army’s approach to industrial base capability assessments lacks key attributes that include the collection of current industry data, the analysis of that data and the creation of management strategies for improving wartime spare parts availability. Out-of-date data could result in reduced readiness and inflated or understated war reserve spare parts funding requests within budget submissions to Congress. Without a process that provides such analysis, the Army cannot identify long lead times and create management strategies to reduce lead times and thus the amount of inventory needed.

Recommendations for Executive Action

In order to improve the Army’s readiness for wartime operations, achieve greater economy in purchasing decisions, and provide Congress with accurate budget submissions for war reserve spare parts, we recommend that the Secretary of Defense direct the Secretary of the Army to have the Commander of Army Material Command take the following actions to expand or change its current process consistent with the attributes in this report: establish an overarching industrial base capability assessment process that considers the attributes in this report; develop a method to efficiently collect current industrial base capability data directly from industry itself; create analytical tools that identify potential production capability problems such as those due to surge in wartime spare parts demand; and create management strategies for resolving spare parts availability problems, for example, by changing acquisition procedures or by targeting investments in material and technology resources to reduce production lead times.

Agency Comments and Our Evaluation

DOD partially concurred with the overall findings and recommendations. However, it nonconcurred with specific points in several of our recommendations relating to the need to improve the capability of the Army’s approach to assessing industrial base capabilities. Our evaluation of the Department’s specific comments on each recommendation follows.

DOD agreed with the overall point of our first recommendation that it establish an overarching industrial base assessment process relying on the most accurate information available. However, it did not concur that the Army should change its current process to be consistent with attributes of the DLA program. It stated that the Army’s current system already applies many of these attributes and must have the flexibility to do so in its own manner consistent with its specific requirements and resources. As we reported, our analysis shows the Army’s program does not have all the key attributes such as collecting current industrial base capability data from industry. Furthermore, we considered the Army’s need for flexibility in managing and executing its program when developing our recommendation by stating that the Army should be consistent with—not necessarily mirror the attributes of DLA’s program. Therefore, we continue to believe our recommendation is appropriate.

DOD agreed with the underlying premise of our second recommendation that the most accurate data lead to the most accurate estimates. However, it stated that we provided no evidence that more current data would result in a more accurate forecast of industry’s capability to provide parts for war. As pointed out in our report, DLA provided examples of how it could save money by using current data it collected from industry, such as over $62,000 on the centrifugal fan. Furthermore, we noted that a study done by the Army in 1998 showed that data collected at that time about actual industrial base capability significantly disagreed with the Army’s estimated industrial base capability. The department also did not agree to a comprehensive data collection effort because keeping more current data does not warrant additional resources and stated that it will direct the Army examine the feasibility of attempting to proactively collect production data for a limited number of items. We recognized the potential for such an initiative in our report and stated that the Army Materiel Systems Analysis Agency believes that periodically collecting current data on the top 100 costliest spare parts could be a reasonable approach. Although this is a good first step, a comprehensive effort to collect current industrial base capability data directly from industry is basic to the recommendation’s underlying premise and is a best practice. Therefore we continue to believe that our recommendation has merit.

DOD concurred with the point of our third recommendation that there is a need to identify potential production capability problems such as those resulting from a wartime surge in demand for spare parts. However, it did not agree that the Army does not have such a process. While the Army’s approach may have many analytical features, it does not provide specific analyses of production capability. Such analyses contribute to identifying possible production capability problems and could enhance the Army’s management decisions. Therefore, we continue to recommend that the Army create such analytical tools. Furthermore, in response to DOD’s comment about the need to validate survey data on production capability before taking action, we added information to our report stating that DLA does validate its industry surveys as part of its process.

With regard to our fourth recommendation, DOD concurred with the concept that management strategies are needed to resolve spare parts availability problems. But, it disagreed with the implication that the Army has no such strategies. While the Army does have some processes at the individual command level that identify and address spare parts availability problems, we did not find an overarching process to create management strategies designed to reduce lead times and inventories. Therefore, we continue to believe that our recommendation is appropriate.

Scope and Methodology

To determine whether the Army is using current industrial base data for assessing wartime spare parts industrial base capability, we interviewed Army officials responsible for war reserve spare parts planning, requirements development, and estimation of industrial base capability in the Office of the Army Deputy Chief of Staff for Logistics in Washington, District of Columbia; the Army Materiel Command in Alexandria, Virginia; the Army Aviation and Missile Command at Redstone Arsenal, Alabama; and the Army Materiel Systems Analysis Agency at Aberdeen Proving Grounds, Maryland.

To determine whether opportunities exist to improve the reliability of the Army’s industrial base capabilities assessments, we compared the Army’s approach to key attributes of the DLA’s program by interviewing DLA officials in the Supplier Assessment and Capability Division at Fort Belvoir, Virginia, and the Defense Supply Centers in Richmond, Virginia, and Columbus, Ohio, that are responsible for an industrial base data collection and analysis activity using information from private industry to improve spare parts management. We also reviewed the processes used by the Army and DLA to assess industrial base capability.

We performed our review between October 2001 and May 2002 in accordance with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Defense and the Secretary of the Army. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

Please contact me on (202) 512-8412 if you or your staff has any questions concerning this report.

Appendix I: Defense Logistics Agency Industrial Base Planning

The Defense Logistics Agency’s (DLA) industrial base assessment program operates within the Supplier Assessment and Capability Division in the Acquisition Management and Logistics Policy Directorate. Among the division’s objectives are: (1) to provide information tools to assess the capabilities of suppliers and (2) to identify potential readiness shortfalls and mitigate them through various business practices such as investing in long-lead materials and by taking advantage of manufacturing commonalities.

To achieve these objectives, the division has developed a variety of tools to assess the supplier base in each of its major product categories— weapon systems and hardware, construction, medical supplies, subsistence items, and clothing and textiles. Using these tools, DLA is able to evaluate suppliers’ capabilities to provide items in both peacetime and wartime, to take actions to mitigate quantifiable risks, and to examine broad industrial base issues and trends, using statistically valid information. The tools allow assessments to be made by individual item or grouped by items, product family, sector or subsector, weapon system or platform, or supplier.

One of these tools, the Worldwide Web Industrial Capabilities Assessment Program, was designed for assessing supplier resources available to the Defense Department. The program is an automated, interactive, Web- based program that allows the gathering of information from industrial suppliers and the use of this data to assess the industrial sector’s capabilities for supplying various items. It also enables information to be analyzed in a wide variety of formats in order to identify strategies directed toward reducing costs and providing wartime readiness.

Developed in 1997, the Worldwide Web Industrial Capabilities Assessment Program replaced the old data collection process, which relied on mass mailings of lengthy (up to 22 pages), cumbersome questionnaires that suppliers had to fill out by hand. The response rate from industry was typically too low to allow any statistically relevant analysis. In addition, the narrative answers to key questions were incompatible with computer analysis, and thus the information that industry provided could not be acted upon.

The development of the program changed both the way information is collected from industrial suppliers and the way that information is used to conduct industrial base assessments and analyses.

Data Collection Tool

The data collection tool was built specifically for industrial base assessments. It resides on a Web site that can be easily accessed by industry representatives. It uses an interactive survey format to collect information directly from a company about its ability to supply certain items. A company’s representative checks in and fills out, or updates, a survey questionnaire for each item or group of items that is supplied. Depending on how a user answers a question, the questionnaire automatically adjusts itself to remain as short as possible but still collect the essential information that is needed for analysis. The survey information is saved in a permanent database, which eliminates the need for a company to reenter information when it is updated.

The program identifies each item by the supplier’s own part number grouped by an industry standard classification code. This simplifies input of information for multiple items that might use the same production line or equipment. It requests a wide range of information about the industry’s ability to supply an item, including high and low estimates of production time, capacity, potential constraints and bottlenecks, and inventory on- hand. See table 5 for a list of the data fields.

Analytical Tool

While the data collection tool interfaces with industry via the Web to gather data, the analytical tool, also Web-based, is a centralized tool that is available to all approved personnel regardless of location. The analytical tool allows analysts to assess what is needed in the way of industrial items and what the industrial base is capable of providing. It does this by combining the current information supplied by industry with existing DLA legacy data (e.g., item purchase histories, and previous item shortfalls). Analysts can use this integrated database to examine information at various levels (e.g., individual item, family groups, sector and subsector, weapon system and platform, or supplier) and to graphically depict this information in a range of formats and export the data to external files for further complex analysis. They can create statistically valid samples of discrete data to analyze. With this information, they are able to identify acquisition strategies that take advantage of similar manufacturing processes and affect changes in peacetime buying practices as a low-cost way of providing wartime readiness.

Appendix II: Comments from the Department of Defense

Appendix III: Staff Acknowledgments

Acknowledgments

Key contributors to this report were Richard Payne, Paul Gvoth, Leslie Gregor, Douglas Mills, and Nancy Benco.