For 16 years, DOD’s supply chain management processes, previously identified as DOD inventory management, have been on our list of high- risk areas needing urgent attention because of long-standing systemic weaknesses that we have identified in our reports. We initiated our high- risk program in 1990 to report on government operations that we identified as being at high risk for fraud, waste, abuse, and mismanagement. The program serves to identify and help resolve serious weaknesses in areas that involve substantial resources and provide critical services to the public. The department’s inventory management of supplies in support of forces was one of the initial 14 operational areas identified as high risk in 1990 because, over the previous 20 years, we had issued more than 100 reports dealing with specific aspects and problems in DOD’s inventory management. These problems included excess inventory levels, inadequate controls over items, and cost overruns. As a result of this work, we had suggested that DOD take some critical steps to correct the problems identified. Since then, our work has shown that the problems adversely affecting supply support to the warfighter—such as requirements forecasts, use of the industrial base, funding, distribution, and asset visibility—were not confined to the inventory management system, but also involved the entire supply chain. In 2005, we modified the title for this high-risk area from “DOD Inventory Management” to “DOD Supply Chain Management.” In the 2005 update, we noted that during Operation Iraqi Freedom, some of the supply chain problems included backlogs of hundreds of pallets and containers at distribution points, millions of dollars spent in late fees to lease or replace storage containers because of distribution backlogs and losses, and shortages of such items as tires and radio batteries. Removal of the high-risk designation is considered when legislative and agency actions, including those in response to our recommendations, result in significant and sustainable progress toward resolving a high-risk problem. Key determinants include a demonstrated strong commitment to and top leadership support for addressing problems, the capacity to do so, a corrective action plan that provides for substantially completing corrective measures in the near term, a program to monitor and independently validate the effectiveness of corrective measures, and demonstrated progress in implementing corrective measures. Last year, with the encouragement of OMB, DOD developed a plan for improving supply chain management that could reduce its vulnerability to fraud, waste, abuse, and mismanagement and place it on the path toward removal from our list of high-risk areas. This plan, initially released in July 2005, contains 10 initiatives proposed as solutions to address the root causes of problems DOD identified in the areas of forecasting requirements, asset visibility, and materiel distribution. By committing to improve these three key areas, DOD has focused its efforts on the areas we frequently identified as impeding effective supply chain management. For each of the initiatives, the plan contains implementation milestones that are tracked and updated monthly. Since October 2005, DOD has continued to make progress implementing the initiatives in its supply chain management improvement plan, but it will be several years before the plan can be fully implemented. Progress has been made in implementing several of the initiatives, including its Joint Regional Inventory Materiel Management, Readiness Based Sparing, and the Defense Transportation Coordination Initiative. For example: Within the last few months, through its Joint Regional Inventory Materiel Management initiative, DOD has begun to streamline the storage and distribution of defense inventory items on a regional basis, in order to eliminate duplicate materiel handling and inventory layers. Last year, DOD completed a pilot for this initiative in the San Diego region and, in January 2006, began a similar transition for inventory items in Oahu, Hawaii. Readiness Based Sparing, an inventory requirements methodology that the department expects to enable higher levels of readiness at equivalent or reduced inventory costs using commercial off-the- shelf software, began pilot programs in each service in April 2006. Finally, in May 2006, the U.S. Transportation Command held the presolicitation conference for its Defense Transportation Coordination Initiative, a long-term partnership with a transportation management services company that is expected to improve the predictability, reliability, and efficiency of DOD freight shipping within the continental United States. DOD has sought to demonstrate significant improvement in supply chain management within 2 years of the plan’s inception in 2005; however, the department may have difficulty meeting its July 2007 goal. Some of the initiatives are still being developed or piloted and have not yet reached the implementation stage, others are in the early stages of implementation, and some are not scheduled for completion until 2008 or later. For example, according to the DOD supply chain management improvement plan, the contract for the Defense Transportation Coordination Initiative is scheduled to be awarded during the first quarter of fiscal year 2007, followed by a 3-year implementation period. The War Reserve Materiel Improvements initiative, which aims to more accurately forecast war reserve requirements by using capability-based planning and incorporating lessons learned in Operation Iraqi Freedom, is not scheduled to begin implementing an improved requirements forecasting process for consumable items as a routine operation until October 2008. The Item Unique Identification initiative, which involves marking personal property items with a set of globally unique data elements to help DOD track items during their life cycles, will not be completed until December 2010 under the current schedule. While DOD has generally stayed on track, DOD has reported some slippage in meeting scheduled milestones for certain initiatives. For example, a slippage of 9 months occurred in the Commodity Management initiative because additional time was required to develop a departmentwide approach. This initiative addresses the process of developing a systematic procurement approach to the department's needs for a group of items. Additionally, the Defense Transportation Coordination Initiative experienced a slippage in holding the presolicitation conference because defining requirements took longer than anticipated. Given the long-standing nature of the problems being addressed, the complexities of the initiatives, and the involvement of multiple organizations within DOD, we would expect to see further milestone slippage in the future. In our October testimony, we also identified challenges to implementation such as maintaining long-term commitment for the initiatives and ensuring sufficient resources are obtained from the organizations involved. Although the endorsement of DOD’s plan by the Under Secretary of Defense for Acquisition, Technology, and Logistics is evidence of a strong commitment to improve DOD’s supply chain management, DOD will have to sustain this commitment as it goes forward in implementing this multiyear plan while also engaged in departmentwide business transformation efforts. Furthermore, the plan was developed at the Office of the Under Secretary of Defense level, whereas most of the people and resources needed to implement the plan are under the direction of the military services, DLA, and other organizations such as U.S. Transportation Command. Therefore, it is important for the department to obtain the necessary resource commitments from these organizations to ensure the initiatives in the plan are properly supported. While DOD has incorporated several broad performance measures in its supply chain management improvement plan, the department continues to lack outcome-focused performance measures for many of the initiatives. Therefore, it is difficult to track and demonstrate DOD’s progress toward improving its performance in the three focus areas of requirements forecasting, asset visibility, and materiel distribution. Performance measures track an agency’s progress made towards goals, provide information on which to base organizational and management decisions, and are important management tools for all levels of an agency, including the program or project level. Outcome-focused performance measures show results or outcomes related to an initiative or program in terms of its effectiveness, efficiency, impact, or all of these. To track progress towards goals, effective performance measures should have a clearly apparent or commonly accepted relationship to the intended performance, or should be reasonable predictors of desired outcomes; are not unduly influenced by factors outside a program’s control, measure multiple priorities, such as quality, timeliness, outcomes, and cost; sufficiently cover key aspects of performance; and adequately capture important distinctions between programs. Performance measures enable the agency to assess accomplishments, strike a balance among competing interests, make decisions to improve program performance, realign processes, and assign accountability. While it may take years before the results of programs become apparent, intermediate measures can be used to provide information on interim results and show progress towards intended results. In addition, when program results could be influenced by external factors, intermediate measures can be used to identify the programs’ discrete contribution to the specific result. For example, DOD could show near-term progress by adding intermediate measures for the DOD supply chain management improvement plan, such as outcome-focused performance measures for the initiatives or for the three focus areas. DOD’s supply chain management improvement plan includes four high- level performance measures that are being tracked across the department, but these measures do not necessarily reflect the performance of the initiatives or explicitly relate to the three focus areas. DOD’s supply chain materiel management regulation requires that functional supply chain metrics support at least one enterprise-level metric. In addition, while not required by the regulation, the performance measures DOD has included in the plan are not explicitly linked to the three focus areas, and it has not included overall cost metrics that might show efficiencies gained through supply chain improvement efforts. The four measures are as follows: Backorders—number of orders held in an unfilled status pending receipt of additional parts or equipment through procurement or repair. Customer wait time—number of days between the issuance of a customer order and satisfaction of that order. On-time orders—percentage of orders that are on time according to DOD’s established delivery standards. Logistics response time—number of days to fulfill an order placed on the wholesale level of supply from the date a requisition is generated until the materiel is received by the retail supply activity. The plan also identifies fiscal year 2004 metric baselines for each of the services, DLA, and DOD overall, and specifies annual performance targets for these metrics for use in measuring progress.