The Department of Defense (DOD) operates a worldwide logistics system to buy, store, and distribute inventory items. Traditionally, the Defense Logistics Agency (DLA) buys and stores consumable items (such as food, clothing, and hardware supplies) in large quantities until they are needed by the military services. Faced with increasing costs associated with acquiring supplies, and increasing competitive pressures, some private sector companies have developed new inventory management practices to reduce inventories and operating costs. Over the past 5 years, we have compared DOD’s inventory practices for these items to the practices of a number of progressive private sector firms with similar operations. The Secretary of Defense created DLA in 1962 to be the wholesale manager of “consumable supplies” commonly used by the military services, other DOD components, and federal agencies. Consumable supplies are items discarded after use rather than repaired. Through its wholesale system, DLA manages 3.6 million of DOD’s 4.4 million consumable items. For about 30 years, DLA has generally bought items in large quantities, stored the items until the services requested them, and then shipped them to the services’ retail facilities. To receive, store, and issue these items and other inventories to the military services and other DOD organizations throughout the world, DLA maintains over 1,400 warehouses at 27 distribution depots, which are DOD facilities with several large warehouses that store a variety of supplies, and also uses other storage locations. The locations of the 27 distribution depots are shown in figure 1.1. Consumable items are classified as hardware (construction, electronics, general, and industrial) and personnel (clothing, food, and medical) items. As of June 1994, hardware items accounted for 77 percent of DLA’s wholesale inventory, and personnel items accounted for 23 percent (see fig. 1.2). DLA reported that its June 1994 inventory of consumable items was about $10.2 billion. Electronics ($2.2) General ($2.2) Industrial ($1.5) During fiscal year 1994, DLA sold $5.6 billion of consumable items to the services and other federal agencies. The services use large amounts of these items in their peacetime operations. For example, the services operate about 25 industrial centers where large amounts of maintenance and repair supplies are used for regularly scheduled maintenance of equipment and weapon systems. The services operate 14 recruit induction centers and over 300 military exchange stores that issue clothing items to military personnel. In addition, large quantities of medical supplies and food are consumed annually at U.S. military hospitals and troop dining halls. The services at the retail facilities usually store these items at different locations until they are needed by service personnel, who are the ultimate end-users. Like DOD, private sector companies use similar consumable supplies in their day-to-day operations. In addition, both DOD and the private sector have a common requirement to control costs while meeting customer needs. During the 1980s, competition and increasing inventory costs forced many private sector companies to assess inventory management practices and to adopt new methods that reduced inventories and associated operating costs. Recognizing that inventories can be reduced without affecting supply availability, private sector companies began to change the way they buy, store, and distribute large quantities of supplies. The private sector has tried new techniques on consumable items because these items are generally standard and low unit cost, are commonly stocked by several suppliers, and are used in large quantities. Many private sector facilities are analogous to the services’ facilities in DOD’s supply system. To identify ways for DOD to reduce inventory costs, while maintaining quality service, over the past 5 years we have compared DOD’s logistics practices involving DLA-managed consumable items with those of companies that have adopted best practices for their logistics operations. Best practices are often defined as implementation of the most efficient means of inventory management to improve cost savings for the organization and enhance levels of service for the customer. On December 3, 1993, the former Chairman (now ranking minority member), Subcommittee on Oversight of Government Management and the District of Columbia, Senate Committee on Governmental Affairs, asked us to review DOD’s efforts to adopt best practices for consumable items managed and distributed by DLA. Specifically, the former Chairman asked us to address DOD’s progress in adopting the practices recommended in our prior five reports in which we compared DOD’s logistics practices with those of the private sector. This report summarizes our past reviews and addresses (1) the extent to which DOD has adopted the specific practices we recommended, (2) the savings and benefits being achieved through the use of these practices, and (3) DOD’s overall progress in improving consumable item management. To obtain information on DOD’s logistics practices, policies, and procedures, we contacted officials from the following organizations: Office of the Deputy Under Secretary of Defense, Logistics, Washington, Office of the Assistant Secretary of Defense, Health Affairs, Washington, Headquarters, Defense Logistics Agency, Alexandria, Virginia; Defense Construction Supply Center, Columbus, Ohio; Defense Industrial Supply Center, Philadelphia, Pennsylvania; Defense Personnel Supply Center, Philadelphia, Pennsylvania; Defense Electronics Supply Center, Dayton, Ohio; and Defense Distribution Depot Susquehanna, Pennsylvania. Our discussions focused on (1) the inventory management practices that DOD is using for consumable items; (2) commercial practices, programs, and tests underway or planned to improve DOD operations and reduce costs; and (3) DOD officials’ positions on the use of best practices as alternatives to traditional DOD inventory practices. We reviewed and analyzed detailed information on past, present, and future annual usage amounts; inventory levels; and other related inventory factors, such as calculations of days of supply on hand. Days of supply is a measure of how efficiently a business manages its inventory investment and is calculated by dividing the aggregate inventory by the sales per day at cost. To determine the nature and extent of DOD’s progress in adopting best practices, we visited the following military organizations: Walter Reed Army Medical Center, Washington, D.C.; Kenner Army Community Hospital, Fort Lee, Virginia; Blanchfield Army Community Hospital, Fort Campbell, Kentucky; Malcolm Grow Air Force Medical Center, Andrews Air Force Base, Langley Air Force Hospital, Langley Air Force Base, Virginia; Portsmouth Naval Hospital, Portsmouth, Virginia; Director of Logistics, Fort Lee, Virginia; and Air Force Services, Langley Air Force Base, Virginia. These organizations are involved in initiatives that are to improve DOD’s logistics operations. At these locations, we discussed with logistics personnel and medical and food service end-users the results of the initiatives and the impacts on supply operations and customer satisfaction. We also discussed with private sector companies that act as prime vendors to these organizations the initiatives, the impact on their operations, and the feasibility of adopting these programs to encompass a greater part of DOD’s operations. These companies included (1) McKesson Drug Company, Landover, Maryland; (2) Owens & Minor Corporation, Savage, Maryland; (3) Bergen Brunswig Corporation, Norfolk, Virginia; and (4) Sandler Foods, Virginia Beach, Virginia. In addition, we visited the Vanderbilt University Medical Center, Nashville, Tennessee—highlighted in our 1991 report because of its leadership in hospital logistics management—to discuss the steps it has taken to improve its logistics operations since 1991 and any planned changes to adopt new and best inventory management practices. We conducted our review from January 1994 to December 1994 in accordance with generally accepted government auditing standards. We previously reported that DOD’s large inventory levels reflect DOD’s management practice of buying and storing supplies at both wholesale and retail locations to ensure they are available to customers—sometimes years in advance of when actually needed. Storing inventory at many different locations results in inventory that often turns over slowly, thereby producing large amounts of old, obsolete, and excess items. In the private sector, many companies avoid these types of problems by using inventory practices that shift responsibilities for storing and managing inventory to suppliers. In fact, companies that are using the most aggressive practices no longer store inventory in intermediate locations at all; their suppliers deliver inventory only when needed. As a result, we recommended that DOD test the applicability of using similar types of private sector practices as an alternative to its current multilayered system. DOD concurred with our recommendation, but implementation progress and results have varied with the different commodities. Specific details on DOD’s progress in adopting these best practices are described in chapter 3. At a time when many private sector companies were adopting practices that reduced intermediate storage locations while improving service levels, DOD continued to use a logistics system that stored duplicative inventories between suppliers and end-users. DOD often stored inventories in as many as four different layers. In 1992, at the wholesale level, DLA stored $11 billion worth of consumable items in distribution depots and warehouses located throughout the United States. Our analysis indicated that this inventory could last DOD an average of over 2 years based on past demand. At the retail level, the services hold inventory at three different layers near the locations where the items are used—base warehouses, central storerooms, and end-user locations. Service facilities we visited had retail stock on hand sufficient to last from 1 month to over 5 years. Several factors contribute to this multilayered system, including DOD’s philosophy of relying on large stock levels at wholesale and retail locations to readily meet customer needs and the long procurement lead times that require DOD to hold inventory to ensure items are available until ordered supplies are received from suppliers. The private sector provides a sharp contrast to DOD’s methods of managing and distributing consumable items. Private sector companies have modified their inventory practices to reflect an increasingly competitive business environment.