DOD operates a worldwide supply system to buy, store, and distribute inventory items. Through this system, DOD manages several million types of consumable items, most of which are managed by DLA. DLA is DOD’s largest combat support agency, providing worldwide logistics support in both peacetime and wartime to the military services as well as civilian agencies and foreign countries. DLA supplies almost every consumable item the military services need to operate. To do this, DLA operates three supply centers, including the Defense Supply Center in Philadelphia, Pennsylvania which is responsible for procuring nearly all the food, clothing, and medical supplies used by the military. In addition, DLA has supply centers in Richmond, Virginia and Columbus, Ohio. The Defense Distribution Center operates a worldwide network of 25 distribution depots that receive, store, and issue supplies. In addition, DLA’s Defense Energy Support Center has the mission of purchasing fuel for the military service and other defense agencies. DLA also helps dispose of excess or unusable materiel and equipment through its Defense Reutilization and Marketing Service. To meet its mission, DLA relies on contractors as suppliers of the commodities and as providers of services including the acquisition and distribution of certain commodities. Traditionally, DLA buys consumable items in large quantities, stores them in distribution depots until they are requested by the military services, and then ships them to a service facility where they are used. For example, DLA procures military uniforms through competitive contracts. Defense Supply Center-Philadelphia’s Clothing and Textile Directorate procures commodities such as battle dress uniforms, footwear, and body armor directly from contractors and stores them until they are needed by the services. DLA also relies on service contractors to help with the acquisition, management, and distribution of commodities. For example, DLA has a prime vendor arrangement in which a distributor of a commercial product line provides those products and related services to all of DLA’s customers in an assigned region within a specified period of time after order placement. Under the prime vendor process, a single vendor buys items from a variety of manufacturers and the inventory is stored in commercial warehouses. A customer orders the items from the prime vendor. Once the Defense Supply Center-Philadelphia approves the order, the prime vendor fills, ships, and tracks the order through final acceptance. The prime vendor then submits an invoice to Defense Supply Center-Philadelphia, which authorizes payment to the prime vendor and bills the customer. According to DLA, the benefits of prime vendor contracts include improved access to a wide range of high-quality products, rapid and predictable delivery, and reduced overhead charges. Other benefits of prime vendor contracts include significant reductions in the manpower needed to manage and warehouse these items at DLA and reduced transportation costs. In addition, prime vendor contracts provide for surge and broader mobilization capabilities, and worldwide customer support. DLA also uses service contractors to provide services other than the acquisition of commodities. For example, the Defense Reutilization and Marketing Service uses contractors to support the disposal of government equipment and supplies considered surplus or unnecessary to DOD’s mission. Similarly, DLA uses service contractors to provide oversight, audit, and verification procedures for the destruction of DOD scrap property; operate Defense Reutilization and Marketing Office locations around the world including sites in Kuwait, Iraq, and Afghanistan; and run the Defense Distribution Center, Kuwait, Southwest Asia which provides distribution services and surge capability to all four service components to support the warfighters operating in the region. Current commodities distributed by the center are repair parts, barrier/construction materiel, clothing, textiles, and tents. The center also provides consolidated shipment and containerization services, as well as, routine logistic support to the military community in the U.S. Central Command’s theater of operations. DLA determines what and how many items it buys based on requirements from its military service customers. Without a good understanding of customers’ projected needs, DLA is not assured it is buying the right items in the right quantities at the right time. Properly defined requirements are therefore fundamental to obtaining good value for contracts administered through DLA. As with any contracting decision, a prerequisite to good outcomes is a match between well-defined requirements and available resources. Our previous testimonies before this committee on weapons system acquisition and service contracts have highlighted several cases where poorly defined and changing requirements have contributed to increased costs, as well as services that did not meet the department’s needs. We also noted that the absence of well-defined requirements and clearly understood objectives complicates efforts to hold DOD and contractors accountable for poor acquisitions outcomes. In addition, requirements which are based on unrealistic assumptions make it impossible to execute programs that are within established cost, schedule, and performance targets. Our prior work has identified instances where problems in properly defining requirements can lead to ineffective or inefficient management of commodities. Inaccurate demand forecasting may result in inventory that does not match demand. The military services and DLA manage the acquisition and distribution of spare parts for defense weapon systems. Whereas the military services manage their own reparable spare parts, DLA provides the services with most of their consumable parts—that is, items of supply that are normally expended or intended to be used up beyond recovery. In prior work, we have reported that the Air Force, the Navy, and the Army had acquired billions of dollars of spare parts in excess to their current requirements. For example, for fiscal years 2004 to 2007, the Army had on average about $3.6 billion of spare parts inventory that exceeded current requirements, while also having inventory deficits that averaged about $3.5 billion. During that same time period, the Navy had secondary inventory that exceeded current requirements by an average of $7.5 billion dollars, or 40 percent of total inventory. Mismatches between inventory levels and current requirements were caused in part by inaccurate demand forecasting. In our Navy work, for example, we noted that requirements frequently changed after purchase decisions had been made and that the Navy had not adjusted certain inventory management practices to account for the unpredictability in demand. The military services’ difficulty in forecasting demand for spare parts is among the reasons we have placed DOD’s supply chain management on our high-risk series since 1990. In addition, we are currently reviewing DLA’s management of consumable spare parts for its service customers. We are evaluating (1) the extent that DLA’s spare parts inventory reflects the amounts needed to support current requirements and (2) the factors that have contributed to DLA having any excesses or deficits in secondary inventory. As part of our review, we expect to report on how demand forecasting may affect inventory levels compared with requirements and what actions DLA is taking to understand and mitigate problems with demand forecasting. Inaccurate requirements and supply forecasts can affect the availability of critical supplies and inventory for the military, which, in turn, can result in a diminished operational capability and increased risk to troops. For example, as we reported in 2005, the Army’s failure to conduct an annual update of its war reserve requirements for spare parts since 1999, as well the Army’s continued decisions to not fully fund war reserve spare parts, resulted in the inventory for some critical items being insufficient to meet initial wartime demand during Operation Iraqi Freedom. These items included lithium batteries, armored vehicle track shoes, and tires for 5-ton trucks, where demand exceeded supply by over 18 times the amount on hand. Similarly, while DLA had a model to forecast supply requirements for contingencies, this model did not produce an accurate demand forecast for all items, including Meals Ready-to-Eat. Therefore, Army officials had to manually develop forecasts for Operation Iraqi Freedom, but did not always have sufficient or timely information needed to forecast accurate supply requirements. As a result, they underestimated the demand for some items. For example, demand for Meals Ready-to-Eat exceeded supply in February, March, and April 2003, when monthly demand peaked at 1.8 million cases, while the inventory was only 500,000 cases. Some combat support units came within a day or two of exhausting their Meals Ready-to-Eat rations, putting Army and Marine Corps units at risk of running out of food if the supply distribution chain was interrupted. Unrealistic time frames for acquisition and delivery of commodities can also have negative impacts on obtaining value. We previously testified that the Army’s decision to issue black berets to all of its forces in just 8 months placed enormous demands on DOD’s procurement system. Due to the extremely short time frame for delivery of the berets to the Army, DLA contracting officials took a number of actions to expedite award of the contracts, including undertaking contract actions without providing for “full and open” competition as required by the Competition in Contracting Act of 1984. According to contract documents, the contract actions were not competed because of an “unusual and compelling urgency,” one of the circumstances permitting other than full and open competition. Despite these actions, DLA was unable to meet its deadline due to quality and delivery problems and had to terminate several contracts because the contractors could not meet delivery requirements. When contracting for commodities or services, DLA has a number of choices regarding the contracting arrangements to use. Selecting the appropriate type is important because certain contracting arrangements may increase the government’s cost risk whereas others transfer some of that cost risk to the contractor. We have previously testified before this committee that once the decision has been made to use contractors to support DOD’s missions or operations, it is essential that DOD clearly defines its requirements and employs sound business practices, such as using appropriate contracting vehicles. For example, we testified that we had found numerous issues with DOD’s use of time-and-materials contracts that increased the government’s risks.