During the course of our review Defense changed its strategy for materiel management systems. We therefore refocused our review to include evaluating the risks associated with the new migration strategy and the extent to which it will facilitate improvement of DOD’s materiel management operations. We reviewed DOD’s directives, instructions, and guidance for developing and implementing systems under the CIM initiatives, as these projects relate to the materiel management business area. We interviewed officials responsible for the old and new materiel management strategies as well as those in charge of developmental testing and those who participated in the early deployment of some applications. We also analyzed system design documents, program assessments, acquisition methodologies, and strategies. Our audit was performed from January through May 1996 in accordance with generally accepted government auditing standards. We performed our work primarily at the offices of the Deputy Under Secretary of Defense for Logistics (DUSD(L)) in Washington D.C.; the Joint Logistics Systems Center (JLSC) at Wright-Patterson Air Force Base, Ohio; and the MMSS prototype site at the Marine Corps Logistics Base, Albany, Georgia. Appendix I details our scope and methodology. The Deputy Under Secretary of Defense for Logistics provided written comments on a draft of this report. These comments are discussed at the end of this report and presented, along with our evaluation, in appendix II. Materiel management involves determining the type and amount of consumable and reparable items needed for daily military operations, such as ammunition, fuel, paint, and spare parts; purchasing these materials from private vendors or manufacturing agencies within DOD; and tracking materials from their purchase to end use. Materiel management business operations incorporate four major business activities—asset management, requirements determination, supply, and technical data support. Annually, the Department spends about $19 billion on materiel management operations, and it currently manages a reported 6.3 million inventory items valued at a reported $73.6 billion. DOD’s worldwide logistics operation includes about 1,400 warehouses at 27 distribution depots and other locations that provide supplies such as electronics, construction, and industrial items to the military services. The military services use large amounts of these items to maintain and repair weapon systems and other equipment. For example, the three services operate a total of about 25 facilities that perform detailed, time-consuming maintenance of major weapon system components such as radars, navigation aids, and various types of communication equipment. The services also store supplies (known as retail inventory) in warehouses at or near these maintenance facilities. From these warehouses, supplies are distributed to the mechanics or end-users when needed. The mechanics also hold some of these same items in nearby storage bins. We have previously reported that DOD’s large inventory levels reflect the management practice of buying and storing supplies at both wholesale and retail locations to ensure that they are available to customers—sometimes years in advance of when actually needed. DOD often stores inventories in as many as four different layers between suppliers and end-users. Storing inventory at many different locations results in inventory that turns over slowly, which produces large amounts of old, obsolete, and excess items. DOD’s multilayered supply system also increases the amount of supply on hand and drives up the cost of holding inventory. As discussed in previous reports in 1993 and 1994, this is a philosophy that private firms have moved away from in an attempt to lower the cost of doing business, provide better service, and remain competitive. For example, during the past decade, the private sector instituted a logistics management philosophy that provides a sharp contrast to DOD’s methods of managing and distributing inventories. Some private sector companies have avoided inventory management problems by using modern, “just-in-time” business 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 to them only when needed. Some companies have achieved large savings for certain items by standardizing items being used, eliminating bulk storage locations and, most importantly, relying on prime vendors to deliver small quantities when and where needed. A major characteristic of these new logistics practices is the way the companies buy supplies. Companies have reduced the number of suppliers they use by establishing long-term agreements with only a few key suppliers. Typically, suppliers are contracted to provide a company’s supplies for a particular commodity. Thus, most of the management responsibilities are shifted from the company to the suppliers. The suppliers take on these responsibilities because they are promised a long-term relationship with the company. Other steps companies have taken to change their inventory management practices include using direct delivery programs, primarily through the use of a prime vendor . By using direct delivery programs, companies bypass the need for intermediate storage and handling locations. Once the end-users order supplies, the suppliers deliver the items directly to the user’s facility close to the time when the items are needed. Also, to facilitate communication channels with the suppliers, electronic ordering systems and the use of bar coding are often used to eliminate paperwork and speed up the ordering process. DOD is beginning to move away from its current multilayered inventory management philosophy by developing initiatives, similar to those adopted in the private sector, which involve some combination of long-term contracting agreements, direct delivery of items from suppliers to the services, and electronic data interchange for streamlining the ordering process. The use of these initiatives is allowing DOD to (1) decrease procurement lead times, (2) increase accuracy in forecasting future item demands, (3) reduce paperwork, and (4) reduce inventory levels. While DOD has used these commercial practices, the initiatives generally have been limited in scope and represent only a small portion of its overall operations. Defense wants to develop and deploy materiel management systems to improve business operations and processes nationally for DOD materiel management and reduce the costs associated with inventory, personnel, and inefficient systems. Historically, while the services and DLA have had similar logistics activities, they employed widely different processes and supporting information systems. Currently, Defense relies on over a reported 500 legacy systems to carry out wholesale logistics operations. As these systems become fragmented, outdated, and inefficient, they require billions of dollars in maintenance costs. According to Defense, because today’s materiel managers do not have access to timely, accurate, and reliable logistics information, they increasingly make unnecessary requisitions, which, in turn, result in excess inventory and waste. In addition, according to Defense, fragmented systems and the lack of current technology have severely affected the ability to achieve greater asset visibility; quickly adjust requirements for materiel supply items to support military operations; standardize planning, requisitioning, and inventory control; and provide greater support with fewer resources. By embarking in 1992 on a strategy to develop the materiel management standard system (MMSS), Defense sought to replace hundreds of service-unique legacy systems being used to acquire, manage, move, and maintain inventory items with nine standard systems. These are the (1) Central Secondary Item Stratification System, (2) Configuration Management Information System, (3) Deficiency Reporting System, (4) Initial Requirements Determination/Readiness Based Sparing System, (5) Maintenance Planning and Execution System, (6) Production Definition Support System, (7) Provisioning Cataloging Technical Support System, (8) Requirements Computation System, and (9) Stock Control System. The specific functions of each of these nine systems are described in appendix III. Generally, these systems are intended to improve business operations in the following ways: Asset management—provide greater asset visibility from the time of purchase to use and the capability to track and monitor product quality using automated deficiency reports during the wholesale process. Requirements determinations—better define initial and repair requirements for supply items based on readiness scenarios and automate the computation of repair schedules and budgets. Supply and technical data—automate paper copy guidebooks, procedures, and regulations needed to catalog new inventory items and provide managers with greater configuration control of inventory items. Defense referred to this program as the “Big Bang” strategy because it involved installing the entire suite of applications at each of the 17 inventory control points, rather than deploying each application as it was developed. The new systems were to be integrated so that the services and DLA could communicate and exchange data with each other and across business activities outside materiel management, such as finance, procurement, personnel, and logistics. JLSC planned to field MMSS across all 17 inventory control points and have the system be fully implemented in 7 to 8 years. JLSC expected this standard system to save billions of dollars in logistics costs by consolidating and streamlining management operations, improving the responsiveness, accuracy, and timeliness of data, and eliminating the cost of maintaining some information systems that support the same business processes. From 1992 to late 1995, Defense spent about $714 million developing standard systems with minimal results. During that time, there were dramatic changes in the goals and expectations for the program and only one application was partially deployed. Because of changes in objectives and scheduling and problems in development, prospects for achieving the original objective of implementing a standard suite of integrated materiel management systems appeared dim. At the same time, the services and DLA were asking for quicker system deployments. As table 1 shows Defense began the migration strategy in 1992 with the intent of implementing an integrated MMSS system in 7 to 8 years. But only a year later, it decided to implement the system in 3 years. About 2 years after that, the program was completely rebaselined because of funding cuts, cost overruns, schedule slippages, and poor contractor performance. During the same time period, the objectives of the program changed: at the start of the program, business process improvements were to be identified while systems were under development; in 1993, improvements were to be identified after implementation.