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Department of Defense (DOD) supply chain management has experienced weaknesses in the management of supply inventories, materiel distribution, and asset visibility. For example, DOD’s most recent available data shows that in September 2011 it had $9.2 billion worth of on-hand excess inventory, categorized for potential reuse or disposal, and $523 million worth of on-order excess inventory, already purchased but likely to be excess due to changes in requirements. Also, a number of challenges, including incomplete delivery data for many surface shipments to Afghanistan, have hindered the distribution of supplies and equipment to the warfighter, and will likely continue to affect operations in Afghanistan and limit DOD’s visibility and oversight of the supply chain. GAO added this area to the High Risk List in 1990.

DOD has made moderate progress in addressing supply chain management weaknesses, but several long-standing problems have not yet been resolved. GAO found that DOD has met two of the five criteria for removing the high-risk designation in the supply chain management area. Specifically, DOD has demonstrated top leadership support for improving supply chain management, and the department has the capacity to resolve risks in this area. For example, DOD leadership has developed and begun implementing a congressionally mandated plan for improving inventory management. In addition, DOD has directed time and resources to reduce distribution costs and improve distribution services, as well as undertaking efforts to improve asset visibility.

However, DOD has not yet fully met the remaining three criteria, which include developing a corrective action plan for materiel distribution and asset visibility, monitoring and independently validating the effectiveness and sustainability of corrective measures, and demonstrating sustained progress in implementing corrective measures. With respect to inventory management, DOD has not yet implemented all the activities associated with its improvement plan that runs through fiscal year 2015. For example, DOD is in the early stages of implementing numerous actions to improve demand forecasting, such as establishing improved methods and techniques for demand forecasting. In the areas of materiel distribution and asset visibility, DOD has not established integrated, comprehensive approaches for overseeing and addressing problems across the department and implementing associated initiatives; however, DOD has begun developing a strategy to coordinate efforts to improve asset tracking and in-transit visibility. Finally, DOD’s development of enterprise-wide performance metrics for monitoring the effectiveness and efficiency of supply chain management remains a work in progress. Each of these areas is discussed in more detail below.

Inventory management. In the area of inventory management, prior GAO work reviewing spare parts management at the military services and the Defense Logistics Agency (DLA) found ineffective and inefficient inventory management practices. Problems with accurately forecasting demand for spare parts was a major factor contributing to mismatches between inventory levels and requirements, resulting in purchasing and storing excess inventory. In response to a provision of the National Defense Authorization Act for fiscal year 2010, DOD submitted a corrective action plan to Congress in November 2010 aimed at reducing excess inventory by improving inventory management practices. DOD established overarching goals in the plan to reduce on-order excess inventory, those items already purchased but likely to be excess due to changes in requirements, and on-hand excess inventory, those items categorized for potential reuse or disposal. Additionally, DOD developed actions to improve inventory management in nine key areas, including improving demand forecasting for spare parts.

GAO reported in 2012 that DOD had made progress in implementing its inventory improvement plan and was tracking reductions to its excess inventory, but the department was only 18 months into a 4-year implementation period and many planned activities still remained to be completed. DOD reported that from fiscal years 2009 to 2011 it had reduced on-order excess inventory by approximately $632 million—a reduction that achieved its initial target 4 years early. With respect to on-hand excess inventory, since fiscal year 2009 DOD had met its fiscal year 2012 target of having no more than 10 percent of its inventory categorized as on-hand excess. Since DOD was exceeding its initial targets for reducing excess inventory, GAO observed in its 2012 report that DOD’s inventory management improvement efforts would benefit from establishing challenging, but achievable targets for reducing excess inventory and recommended the department periodically reexamine and update its targets. In response to the recommendation, DOD reexamined its on-order and on-hand targets and revised its on-hand excess inventory target to 8 percent by fiscal year 2016. However, DOD did not make any changes to its on-order excess inventory targets.

GAO also found overall implementation of the plan was generally on schedule, but some activities remained to be implemented. For example, DOD was in the early stages of implementing numerous actions to improve demand forecasting, such as identifying improved methods and techniques for demand forecasting. Most but not all of the progress at that time had been in gathering and analyzing data, and reviewing guidance and practices from the services and DLA. For example, DOD, as part of the plan, was revising DOD guidance to standardize and strengthen inventory management practices across DOD. Additionally, DOD demonstrated progress in other areas of the plan’s implementation, such as reviewing regularly items that have had no demand for 5 or more years and increasing participation among the services in an in-storage visibility program that is designed to prevent unnecessary procurements. Over time, implementation of these and other planned activities could enable DOD to demonstrate progress in implementing corrective measures and to achieve sustained results in improving inventory management.

Materiel distribution and asset visibility. DOD has had individual efforts under way to improve materiel distribution and asset visibility. These efforts have been positive steps; however, GAO for many years has encouraged DOD to take a more integrated, comprehensive approach to overseeing and addressing problems across the department and implementing associated initiatives. One indication of progress in this area is that DOD is developing a strategy to guide its collective efforts to improve asset tracking and in-transit visibility throughout its supply chain. Such a strategy, once completed and implemented, could provide a basis for DOD to integrate its corrective measures and ultimately demonstrate progress in improving asset visibility.

In 2011, GAO found that DOD had taken steps to mitigate some of the challenges concerning supplying the warfighter in Afghanistan, but it continues to face several challenges in delivering and maintaining visibility of supplies and equipment. Problems include unmet delivery standards and time lines for cargo shipments, as well as incomplete delivery data for many surface shipments, inadequate radio-frequency identification information to track all cargo movements, lack of a common-operating picture for distribution data that integrates DOD’s many transportation information systems and processes, difficulties in collecting information on all incidents of pilferage and damage of cargo, and ineffective tracking and managing of cargo containers. GAO made a number of recommendations to address these specific concerns. Furthermore, GAO found that DOD’s oversight of materiel distribution is fragmented. Although U.S. Transportation Command oversees the distribution of supplies and equipment into a theater of operations, no single entity is responsible for overseeing the global distribution pipeline, including the tactical movement of items from major bases in Afghanistan to the warfighter. This fragmented nature of DOD’s chain of command for distribution to Afghanistan ultimately limits visibility, control, and accountability for items needed by the warfighter. DOD’s lack of full oversight for delivery to the warfighter in Afghanistan somewhat limits its ability to identify where delays in the distribution system exist and to take corrective actions to improve DOD’s logistics response time.

Over the last few years, DOD implemented several improvement efforts—under an umbrella initiative known as Distribution Process Owner Strategic Opportunities—to reduce distribution costs and improve distribution service to the warfighter. According to DOD, these efforts led to more than $490 million in cost avoidances through increasing utilization of containers, pallets, and aircraft; shifting more cargo to larger containers; and positioning supplies closer to overseas customers. Furthermore, DOD reported that these efforts led to better shipment delivery times for a limited number of customers.

Although DOD achieved some positive results from these improvement efforts, they were not developed with the intent to address all challenges that DOD faces in its materiel distribution system, including some that GAO has identified in its prior work. For example, GAO reported in 2012 that the Distribution Process Owner Strategic Opportunities initiative was designed to improve segments of DOD’s distribution system, but its scope did not include efforts specifically targeting the tactical movement of supplies and equipment within theaters of operation, such as Afghanistan. As discussed earlier, GAO’s work on distribution challenges in Afghanistan found that DOD’s oversight of its entire distribution system was fragmented, and DOD officials acknowledged that the design and scope of Distribution Process Owner Strategic Opportunities limits its ability to optimize DOD’s entire distribution system. An absence of comprehensive oversight for materiel distribution limits DOD’s ability to measure and evaluate the effectiveness of the entire process and influence change across the spectrum of DOD’s operations.

In 2012, a GAO review of DOD’s efforts to incorporate Item Unique Identification (IUID) technology into supply chain management found a number of implementation challenges. IUID technology allows DOD to label an item and assign a unique number to the item, could improve the accountability of property and equipment, and could enable DOD to track equipment as it moves between its components. Challenges GAO identified include incomplete information on the number of items that need to be marked with IUID labels, difficulties in collecting information on IUID implementation costs, and the lack of an overarching schedule for the integration of IUID into DOD’s information technology systems. For example, DOD does not have complete information on the total number of legacy items its components have marked with IUID labels and must mark in the future, does not have a full set of quantifiable goals or interim milestones that correspond to the criteria for marking items with IUID, and does not use consistent criteria among its components to track progress. Without the components reporting complete and comparable data, DOD’s ability to assess progress in marking legacy items will remain limited.

Also, DOD’s ability to track and share data on uniquely identified items across its components is hampered by the lack of full integration of data into certain information technology systems. DOD is revising its supply chain management policy and guidance to better include IUID use, but has not fully defined requirements for using these data, nor developed complete, integrated master schedules for integrating IUID department-wide and within components’ systems.

Enterprise-wide supply chain performance metrics. As GAO has reported previously and most recently in 2012, the department continues to lack additional performance measures to assess the overall effectiveness and efficiency of the supply chain across the enterprise. DOD logistics officials currently provide performance information—customer wait time by military service, perfect order fulfillment for DLA, and the on-order and on-hand excess inventory measures—to the DOD Deputy Chief Management Officer for inclusion in the department’s performance budget. In addition, the Office of the Secretary of Defense is leading the development of a supply chain metrics strategy designed to identify key department-wide metrics to monitor the performance of the supply chain and serve as a basis for making supply chain guidance and resource decisions. The development of department-wide metrics is based on one outcome—readiness—and four attributes—responsiveness, reliability, cost, and planning and precision—of the supply chain. To support the measurement of the outcome and attributes, DOD identified potential department-wide metrics to be collected and assessed. However, DOD has not made final decisions and the effort is a work in progress, as it has been since 2007.

Inventory management. DOD’s plan to reduce excess inventory and improve inventory management practices covers fiscal years 2010 through 2015 and many actions in the plan remain to be completed. As implementation continues, DOD needs to continue to monitor its progress achieving the targets for on-order and on-hand excess inventory and update the targets, as necessary, to ensure the department has challenging, yet achievable targets to guide continued improvement. Additionally, several areas of the plan present considerable implementation challenges due to their complexity. These areas include improving demand forecasting, accelerating the use of modeling to determine the optimal number and types of parts needed at the wholesale and retail levels to achieve readiness and cost goals, and implementing the revised DOD guidance on the processes and procedures for retaining inventory. As it implements the remainder of the plan, DOD will need to address these areas and demonstrate sustained progress in implementing corrective measures.

Materiel distribution and asset visibility. DOD needs to take a number of additional actions to address problems and challenges with materiel distribution and asset visibility that affect delivery of critical items to the warfighter, and to ensure that its improvement efforts are integrated and comprehensive.

• To address materiel distribution and asset visibility challenges such as those identified in Afghanistan, DOD needs to take steps to implement prior GAO recommendations that include investigating cases of undelivered cargo shipments, ensuring sufficient data is entered on radio frequency identification tags, better integrating its many transportation information systems to establish a common operating picture, improving visibility of the incidence and cost of pilferage and damage to cargo, and improving container management.
• To address DOD’s fragmented oversight of its materiel distribution system, DOD needs to revise several of its distribution policies to provide clear guidance on how it will oversee the overall effectiveness, efficiency, and alignment of DOD-wide distribution activities. Such changes could reduce fragmentation by helping to ensure comprehensive oversight over the entire DOD-wide global distribution pipeline, including the tactical movement of items on the battlefield.
• DOD also needs to take additional actions to improve asset visibility, to include completing and implementing its strategy for coordinating improvement efforts across the department for asset tracking and in-transit visibility.
• With respect to IUID, DOD needs to, among other steps, take actions to improve management of IUID implementation, enable the components to report complete data for marking items with IUID labels, and enable the components to share data across DOD enterprise information systems.

Enterprise-wide supply chain performance metrics. DOD needs to complete the development of a comprehensive, standardized set of department-wide supply chain metrics, incorporate these metrics into guidance, and employ these metrics in monitoring the effectiveness and efficiency of its supply chains, including inventory management, materiel distribution, and asset visibility. The metrics also should be incorporated into the existing inventory management improvement plan, the new strategy being developed for asset visibility, and any similar efforts in the area of materiel distribution.

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