The DOD supply chain is a global network through which DLA and the military departments provide commodities and distribution services to the U.S. military forces. The Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics and its subordinate, the Office of 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. The Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness also exercises authority, direction, and control over DLA. In addition, the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics has overall responsibility and oversight of DOD real property, including the infrastructure in DOD’s network of distribution centers, and its subordinate, the Office of the Assistant Secretary of Defense for Energy, Installations, and Environment, is responsible for managing policy for DOD’s real property. The Secretaries of the military departments also have specific assigned responsibilities for real property management that include implementing policies and programs to acquire, manage, and dispose of real property. The OUSD Comptroller establishes the policies and procedures for DOD’s financial management, including the Defense-wide Working Capital Fund. As part of this role, the OUSD Comptroller provides guidance in DOD’s Financial Management Regulation to operate the Defense-wide Working Capital Fund and to set prices for commodities and services that are to reimburse the fund. In addition, the OUSD Comptroller provides oversight of the prices set by DLA during the annual budget process. DLA is responsible for the effective and efficient provision of commodities and services that have been determined to be appropriate for integrated management by a single agency on behalf of all DOD components, or that have been otherwise specifically assigned. To carry out this responsibility, DLA is organized into five management subgroups for commodities that provide troop support—clothing and textiles, construction and equipment, industrial hardware, medical, and subsistence—three subgroups for commodities that support weapons systems—aviation, land, and maritime—and one subgroup for distribution services. During the annual budget formulation process, DLA establishes a price to charge its customers for commodities and distribution services for that upcoming budget year. In the current budget year, however, these prices remain unchanged. This “stabilized” price is intended to protect DLA’s customers, who are appropriated funds based on the expected price, from any market price volatility. Instead, the cash balance of the Defense- wide Working Capital Fund absorbs any fluctuations in the costs to procure or to provide the commodity or distribution services during the current budget year. According to DOD’s Financial Management Regulation, the goal of the fund is to remain revenue-neutral—to neither make a gain nor incur a loss—over time. At the end of execution of each budget year, DLA assesses its actual revenue against its actual costs. Any gains are returned to customers as reductions to future prices. Any losses will be added as increases to future prices, with the aim of ultimately recovering all costs to the fund. A price increase resulting from a loss will apply to all consumers of the good or service, regardless of the impact of their demand on DLA’s costs. This practice results in some cross-subsidization across the military departments. DLA considers three components to set prices for a budget year: costs, price adjustments, and estimated workload. Costs: DLA’s commodities include two types of costs, material costs and operating costs, while DLA’s distribution services involve only operating costs. Material cost is the cost of procuring a commodity from a vendor (e.g., purchasing fabric and having uniforms sewn) and operating costs are the non-material costs to provide a commodity (e.g., storing uniforms and shipping once ordered). Operating costs— also referred to as “overhead”—are further defined as direct or indirect costs. A direct cost is associated with direct support to a specific mission (e.g., labor to process uniform orders) while an indirect cost is associated with support provided to multiple missions or agency-wide operational activities (e.g., information technology). Both direct and indirect costs can include labor and non-labor costs. Price adjustments: There are four types of price adjustments that can be used to increase or decrease cash balances with the fund. These include responses to revenue gains or losses as well as cash surcharges, capital surcharges, and depreciations. DLA adjusts prices for both commodities and distribution services based on revenue gains or losses to remain revenue-neutral over time. In addition, DLA may use cash surcharges, capital surcharges, and depreciation to adjust prices for commodities. Cash surcharges are used to recover unplanned investments in inventory to ensure that the appropriate cash balance is maintained. Capital surcharges or depreciations are used to cover the costs associated with capital or infrastructure- related investments, depending on the number of years needed to recover the cost to prevent steep increases in the year-to-year price. Estimated workload: DLA’s estimation of its customers’ requirements for a future budget year is based on input from the military departments on their budget planning decisions and execution data from prior years. These estimates may be made as early as 18 months before the budget year. The sum of the costs and all price adjustments represents the amount of revenue that is required to break even. This total is divided by the estimated workload to determine a price, as shown in figure 1. Since fiscal year 2009, DLA has contributed to reductions in the costs to provide its commodities and has maintained fairly constant prices for them. Specifically, our analysis showed that DLA’s operating costs, as a percentage of material costs, declined by almost 6 percent between fiscal years 2009 and 2015. When developing annual budgets, DLA has also generally underestimated revenue for commodities, which has contributed to gains that were subsequently applied as reductions to future prices. Lastly, we found that DLA has maintained fairly constant prices for commodities, which have not exceeded an annual increase of more than 3.3 percent due, in part, to the reductions in costs and revenue gains. OUSD Comptroller officials told us that they consider increases above 5 percent to be significant. Since fiscal year 2009, DLA’s operating costs to provide commodities to the military departments and other customers has declined by almost 6 percent. As discussed earlier, DLA’s commodities include two types of costs, material costs (i.e., the cost of procuring a commodity from a vendor) and operating costs (i.e., the non-material costs to provide a commodity). DOD monitors the operating costs that DLA charges by assessing the proportion of these costs to the material cost, and then reports this information in budget justification materials for the Defense- wide Working Capital Fund. Our review of this information shows DLA’s proportion of operating costs to the total cost declined by 5.7 percent, from 14.0 percent in fiscal year 2009 to 13.2 percent in fiscal year 2015. DLA officials told us they have contributed to reductions in their operating costs, in part through various actions such as improvements to customer delivery methods and integration of information technology systems. For example, for items that are readily available from commercial vendors, such as most medical and subsistence commodities, DLA keeps operating costs low by not purchasing or storing these items. Instead, DLA has these items shipped directly from the vendors to DLA’s customers when ordered. In addition, DLA consolidated different legacy financial and business operation databases into one enterprise-wide system to streamline business functions across DLA and to improve the quality and timeliness of data used to inform DLA’s operations. For fiscal years 2009 through 2015, DLA underestimated annual revenue for commodities in all but 2 fiscal years, as shown in figure 2. DLA develops annual revenue estimates based on operating costs and the military departments’ estimated workload demands during the annual process to develop a budget and set prices for commodities. When actual revenue is more than estimated revenue, DLA must adjust future prices to return the gained revenue to its customers. Similarly, when actual revenue is less than estimated, DLA must increase future prices to make up for lost revenue. In the fiscal years that DLA underestimated revenue for commodities, the difference between the estimated and actual revenue ranged between 9.9 percent and 26.4 percent. For these years, DLA yielded a gain above estimated costs that ranged between $1.9 billion and $5.2 billion in fiscal year 2015 dollars. According to DLA officials, in years for which they underestimated revenue, the military departments had more workload demand than DLA had initially anticipated. Specifically, the military departments purchased more commodities than anticipated when DLA was formulating the budget for that fiscal year, a process that typically occurs more than 18 months earlier. Some of the difference can be explained by unanticipated changes in DLA’s actual workload that were not part of the estimated workload demand. For example, in 2010, the Defense Health Agency implemented a home prescription service that increased revenue for DLA’s medical supply chain group. Also, in 2014, the firefighting equipment and materials, known as “stock group 80”, was transferred from the General Services Administration to DLA, increasing DLA’s customers for the items to all federal, state, and local firefighters. In contrast, in fiscal years 2013 and 2014, DLA overestimated revenue by 3.2 percent and 4.4 percent, respectively, and experienced lost revenue of approximately $670 million and $970 million, respectively, in fiscal year 2015 dollars. These losses are much smaller in magnitude compared with the gains in other fiscal years. The workload demand in these 2 fiscal years was less than DLA had initially anticipated.