Defense Issues: Volume 12, Number 23-- Inventory Management Crucial to Mission Success
Mr. Chairman, members of the committee and staff, thank you for the opportunity to appear before you today to discuss the Department of Defense's inventory management program and the initiatives we have under way to increase efficiency while maintaining support to the warfighter's needs. In response to your specific requests in the letter of invitation, I will provide:
- A brief historical overview of defense inventory management issues;
- A discussion of significant measures taken by DoD in recent years to improve inventory management and the effectiveness of those measures;
- A summary of the relation of DoD inventory management reform to the ongoing logistics and infrastructure review within the congressionally mandated Quadrennial Defense Review; and
- Suggested legislative or policy reforms to improve DoD inventory management.
The DoD inventory management system affects every soldier, sailor, airman, and Marine -- and is crucial to their ability to perform their peacetime and wartime roles. DoD inventories of secondary items -- defined as spare parts to support weapons systems as well as personnel support commodities such as subsistence, medical materiel and clothing -- increased substantially during the 1980s. This growth was a direct result of effort to eliminate the "hollow forces" of the late 1970s, which led to planes that could not fly and other weapons systems that could not function due to lack of spare parts. This inventory growth was fully supported by Congress and necessary to provide the forces with the readiness and capabilities demanded by a global war scenario.
Force modernization resulted in significant inventory growth as parts were purchased to support new weapons systems. With the fall of the Berlin Wall in 1989, the ensuing collapse of the Soviet Union and the end of the Cold War, changes in national defense strategy led to a comprehensive program to resize our inventories while maintaining readiness. An indication of the importance of this review is found in the fact that in the post-Cold War era, the defense budget has declined from over $360 billion to $250 billion in 1996 (using FY [fiscal year]
96 dollars). These reductions have had dramatic impacts throughout the department and have prompted realignment and new approaches to logistics support.
Before we move on to discuss the measures we have taken to improve DoD inventory management, I should give additional background on the DoD inventory management system. First, it is crucial to note that most of the dollar value of the DoD inventory -– 73 percent -– consists of relatively expensive reparable items such as engines and avionics that are used, returned for repair and then reissued. Measured in dollar value, defense inventory tends to be inventory that has been used. However, since reparable items are used over and over, expenditures for new reparable items are only one-third of total DoD wholesale obligations. The remaining two-thirds of wholesale obligations are for consumable items, defined as items that are normally expended or used up beyond recovery in the use for which they are designed or intended.
A recent GAO [General Accounting Office] report which has received much press attention estimated that $41 billion of DoD inventory is "unneeded." DoD does not agree with that GAO estimate. In the year for which GAO provided their estimate (end of FY 1995 data), DoD inventory was valued at $69.6 billion. Of that amount, $51.8 billion was either authorized war reserves, materiel in transit or materiel estimated to be used within two years -- the DoD definition for "active inventory."
An additional $17.5 billion was materiel not anticipated to be used in the next two years, but for which a future use is anticipated. For this portion of the inventory, categorized as economic retention and contingency retention stock, the judgment has been made that either it is more economical to retain the inventory than to dispose of it and reprocure at a later time or that it is required for readiness. In other words, some future need is anticipated for $69.3 billion of the total $69.6 billion inventory. Finally, $300 million of the inventory is categorized as "potential reutilization/disposal" stock, meaning it fits none of the categories above and is awaiting disposal action.
This leads us to the second question in your invitation letter -- the significant measures taken by DoD in recent years to improve inventory management and the effectiveness of those measures. The department has aggressively pursued inventory reduction since 1990. In constant 1995 dollars, the inventory has gone from $107 billion in 1989 to $67 billion in 1996, a 37 percent reduction over seven years, and is forecast to decrease to $48 billion in 2003 -- a reduction since 1989 of 55 percent. In then-year dollars, DoD inventory was $91 billion at the end of FY 1989 and is $68 billion at the end of FY 1996 and is forecast to decrease to $58 billion by FY 2003.
It is crucial to note that inventory reductions are actually exceeding force structure reductions. Between 1990 and 1996, force structure reductions were just under 30 percent. By contrast, in the same period, inventory reductions as measured in constant FY 1995 dollars were 35 percent. Planned force structure reductions continue through 2000, when the reduction from the 1990 base will amount to just over 32 percent. By contrast, inventory reduction by 2000 will amount to 46 percent measured against the 1990 base.
To accomplish the inventory reductions thus far, the DoD has implemented a series of aggressive initiatives: We are reducing cycle times, such as the time it takes to fill a requisition, in order to reduce the need to hold "just-in-case" inventory. We are making greater use of existing inventory through initiatives such as Total Asset Visibility in order to reduce the need to buy new inventory. We are retaining less materiel and disposing of more materiel that is no longer required. Finally, we are significantly increasing our use of commercial logistics support capabilities in order to meet our materiel requirements.
The DoD Logistics Strategic Plan, which was originally issued in July 1995 and has been updated twice, provides a framework acknowledging that DoD infrastructure must be reduced in parallel with the force structure. The General Accounting Office has reviewed the plan and given it high marks. A guiding principle of the plan is that the cost and "footprint" of logistics support must be reduced substantially without reducing readiness.
For example, reducing logistics cycle times is a primary goal of the plan. Each military service has implemented its own initiative to achieve these reductions. Through Army's Velocity Management, Navy's Expeditionary Logistics, Air Force's Lean Logistics and the Marine Corps' Precision Logistics, efforts are under way throughout the department to reduce cycle times and improve responsiveness to user requirements. In a basic measure of responsiveness, the time elapsed between issuance of a customer order and satisfaction of that order -- known as Logistics Response Time -- improved by 15 percent in 1995. By September 1997, our goal is to reduce Logistics Response Time by one-third compared to two years earlier, and we have every hope of meeting that goal. Faster response to customer requirements both improves efficiency and reduces the "just-in-case" stocks maintained by DoD customers to protect against longer response times.
Another way to reduce inventory is through more efficient utilization of existing assets in order to reduce the need to buy more. Our Joint Total Asset Visibility program seeks process improvements designed to maximize use of assets throughout the supply system. Total Asset Visibility refers to a combination of systems enhancements and business rules that allow managers to gather information about the quantity, location and condition of assets anywhere in the supply system and apply that information to fill customer orders without having to initiate new purchases. By ensuring maximum use of existing inventory, we reduce our requirement to buy more.
To enhance Total Asset Visibility, the Defense Distribution Standard System (DSS) has been implemented at 11 wholesale distribution depots. DSS provides enhanced tools for improving asset accuracy and control, improves the operating efficiency of depots, supports intransit Total Asset Visibility by allowing use of automated information technology devices, from bar codes to radio frequency tags and optical memory cards, to continuously update the Joint Total Asset Visibility database. By September 1998, DSS will be deployed in all wholesale distribution depots.
In addition to reducing cycle times and making greater use of existing inventory, the department is retaining less inventory. We have increased disposals of materiel that is no longer required. We have also lowered inventory retention levels -- the amount of stock that can be retained in inventory based on anticipated usage.
The last major method of reducing DoD's inventory is greater reliance on commercial logistics support capabilities. The department is relying upon a series of initiatives to increase the use of commercial practices and distribution systems to satisfy our materiel requirements. These initiatives include Direct Vendor Delivery and Prime Vendor programs. The Defense Logistics Agency (DLA), the department's commodity manager for nearly all consumable items, has taken the lead in these efforts. In those programs, suppliers deliver products directly to DoD customers and bypass DoD's warehousing and distribution system, thus reducing storage and transportation requirements.
Day-to-day food purchasing decisions have moved from supply center managers to individual customers. Troops in garrison now eat the same commercial food items that are served in restaurants and hotels. As a result of these changes, military food service operations are obtaining consistent, competitive prices and deliveries within 48 hours. DLA's inventory of subsistence items has been reduced by 76 percent, its cycle time by 93 percent and its operating costs by 31 percent. To date, emphasis has been on support to U.S. bases, but we are now working on using similar methods to support overseas garrison troop feeding.
In the area of medical distribution, we support one of the largest hospital systems in the world. Hospitals can now order brand-specific pharmaceuticals and medical supplies electronically from their prime vendors. Items are delivered within 24 hours instead of weeks. By relying more on commercial vendors, DLA has reduced its inventory of medical supplies by 55 percent.
With these two examples, let me also state that the Department of Defense has a primary commitment to military readiness and sustainment. While significant inventory reductions have been possible these categories of materiel using commercial distribution systems, all inventories cannot be eliminated. The department continues, for example, to stock rations for surge and sustainment in contingencies. Similarly, some types of medical supplies that could be required in large quantities in likely combat zones are not in wide commercial trade in the U.S. Therefore, some stockage will continue to be required. In cases where industrial capacity exists, it is our practice to incorporate readiness and surge provisions into contracts, so that requirements under all conditions can be met with minimal reliance on DoD inventories.
The department is also moving aggressively in other areas to expand the use of commercial logistics support capabilities to meet our materiel requirements. We have revised DoD regulations to grant greater authority to buy from local commercial suppliers rather than through the central supply system when such purchases provide the best value. By empowering our field activities to choose best-value sources for commercially available products, we reduce response times and administrative costs while limiting the role of our central supply system to those cases where it really adds value, such as weapon system-related items and other cases where we can leverage our DoD-wide buying power.
We have also issued policy to encourage use of the government purchase card for buys of commercial items up to $2,500. A series of studies have shown that using the purchase card provides substantial administrative savings and reduces response times to customers for common use items. The Navy has reduced its supply budget by $20 million due to efficiencies gained by increased use of the purchase card. The Army Audit Agency reports savings of $92 per purchase by using the purchase card.
We are rapidly moving toward buying common-use, commercially available items, such as office supplies and base maintenance items, at the local base using the Internet and the government purchase card to obtain delivery directly to the end user in a few days rather than maintaining multiple levels of inventory of such items within the department. The success of these initiatives is demonstrated by the nearly 80 percent increase in DoD use of the government purchase card from fiscal year 1995 to fiscal year 1996 -- from just under [$]800 million to more than $1.4 billion. We anticipate further substantial increases in the future as we seek to maximize our use of commercial sources and distribution systems for common-use, commercially available items.
In addition, we are now moving to maximize use of commercial logistics support capabilities for maintenance depot requirements for weapons system repair support. Known as Virtual Prime Vendor, this initiative solicits private sector proposals for enhanced supply support to depot maintenance activities by employing best practices from the commercial world. The pilot site is the Avionics/Electronic Warfare Shops at Warner Robins Air Logistics Center [Robins Air Force Base, Ga.], which initiated Virtual Prime Vendor in January 1997.
Contractor proposals are being requested for other air logistics centers as well as Army and Navy maintenance activities. Virtual Prime Vendor offers the department the opportunity to thoroughly test and assess the most advanced commercial logistics practices and determine their applicability throughout the DoD logistics system.
Another commercial logistics support initiative in the maintenance area is the Navy's Power-by-the-Hour initiative, which provides power plant maintenance support to government-owned aircraft engines in return for payment of established fees generated from the use of that engine. Services available from the commercial provider may take the form of any combination of logistics, engineering, technical and maintenance support.
The impact of our initiatives to modernize our logistics processes is demonstrated in measures beyond inventory figures. In addition to significantly reducing its inventory since 1989, DoD has eliminated 38 distribution facilities, reduced storage capacity by 42 percent and reduced depot personnel by 35 percent. We expect additional infrastructure benefits from realigning inventory control point responsibilities. Since 1991, the Army has gone from six inventory control points to four, and Navy from two to one. DLA has gone from six to five and will reduce to four in 1999. Air Force will reduce from five to three in 2001.
Storage capacity was reduced from 788 million cubic feet in 1992 (when DLA was designated as wholesale distribution manager for the department) to 568 million cubic feet in 1995 -- a 29 percent reduction in just three years. Occupied storage area was reduced from 631 million cubic feet to 395 million cubic feet in that period -- a 37 percent reduction in three years.
DLA reduced distribution personnel by 21 percent between 1993 and 1996 -- from 22,000 to 17,300. Further reductions in storage capacity, occupied storage area and distribution personnel are scheduled annually over the next five years.
This brings us to the third issue in your invitation letter -- the relation of DoD inventory management reform to the ongoing logistics and infrastructure review within the congressionally mandated Quadrennial Defense Review. The best example of this relationship is in the area of expanded use of commercial logistics support capabilities, such as those discussed above.
The analysis of the cost avoidance made possible by continuing and expanding these ongoing initiatives will be a key element of the recommendations to be made by the logistics task force of the infrastructure panel. These recommendations are among those to be forwarded later this month to the secretary [of defense] for his review. The DoD report to Congress in fulfillment of the statutory requirement is due by May 15.
Finally, your invitation letter asked about suggested legislative or policy reforms to improve DoD inventory management. Our assessment of DoD inventory management reform progress does not indicate a need for new legislation. We believe we have sufficient authority to continue our progress in reforming defense inventory management. We look forward to working with you as future requirements emerge that may call for legislative relief.
The Department of Defense is both proud of the progress we have made in reforming DoD inventory management and committed to further improvements. The inventory reduction of 37 percent between 1989 and 1996 (from $107 billion to $67 billion measured in constant 1995 dollars) indicates our commitment in this area. Our projection of a further reduction to $48 billion by 2003 (again in constant 1995 dollars) establishes an ambitious target for the future.
Our inventory drawdown is not only on track with force structure reductions, it actually exceeds those reductions. We are confident that management improvements, ambitious deployment of technological advances and our expanded use of commercial logistics support capabilities will enable us to continue our progress in this area. And we must continue this progress in order to continue to support warfighter requirements while executing our stewardship responsibility to the taxpayers to get the biggest bang from every buck.
We appreciate the interest of the subcommittee in defense inventory management reform and look forward to working with you in the future to ensure success in this crucial area. ...
Published for internal information use by the American Forces Information Service, a field activity of the Office of the Assistant Secretary of Defense (Public Affairs), Washington, D.C. Parenthetical entries are speaker/author notes; bracketed entries are editorial notes. This material is in the public domain and may be reprinted without permission. Defense Issues is available on the Internet via the World Wide Web at http://www.defenselink.mil/speeches/index.html. 8