Defense Inventory:

Actions Needed to Improve the Defense Logistics Agency's Inventory Management

GAO-14-495: Published: Jun 19, 2014. Publicly Released: Jun 19, 2014.

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merrittz@gao.gov

 

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What GAO Found

The Defense Logistics Agency (DLA) developed and met goals for reducing on-hand inventory and on-order excess inventory (i.e., already purchased items that may be excess due to subsequent changes in the services' requirements) and has made progress towards its goals for reducing backorders (shortages of spare parts), but challenges remain. DLA disposed of $4 billion in items for a net reduction of $2.5 billion to its on-hand inventory after continued replenishments to achieve its fiscal year 2013 goal of $11.7 billion. DLA used a risk-based approach to identify items to be disposed, resulting, for example, in a reduction of about $657 million in items with no demand in 5 years. Also, DLA has reduced on-order excess inventory from 6.7 percent of the total value of on-order inventory in 2011 to 5.6 percent in 2013, which is progress toward the Department of Defense's (DOD) 4 percent goal by the end of fiscal year 2016. DLA has also reduced backorders by nearly 30 percent through monthly reviews. However, some challenges remain.

On-hand inventory: To meet its fiscal year 2013 goal, DLA disposed of $855 million in items that DLA's economic analyses determined should be kept due to the risk DLA will need to buy the same items again in the future. The DLA Director stated that he was willing to accept the risk of needing to rebuy some inventory to reduce DLA's on-hand inventory. According to DLA's analysis, it will likely need to dispose of about $1.9 billion more in economic retention stock to meet its $10 billion goal for fiscal year 2014, increasing the likelihood of buying the same items again to meet future requirements. DOD guidance states that an economic analysis that balances the likelihood of repurchase with the cost of retention and disposal should guide retention decisions. In 2012, DLA estimated that it would have had to buy 42 percent of the dollar value of the items again over a 5-year period if it had disposed of all its economic retention stock. Without reassessing its goals and schedule for achieving them, DLA risks unneeded expenditures to buy the disposed of items again.

On-order excess inventory: Results across DLA's aviation, land, and maritime organizations—referred to as supply chains—have varied, with increases for land and maritime in fiscal year 2013. Also, DLA has not established supply chain–specific goals and does not regularly collect data or review on-order excess inventory performance for its supply chains, as it does with numerous other metrics, such as backorders. Although DLA has shown progress toward meeting DOD's goal for reducing on-order excess inventory, without establishing supply-chain goals and monitoring performance it may be challenged to meet its goal of reducing on-order excess to 4 percent by the end of fiscal year 2016.

DLA has implemented several improvement efforts, such as new methods for setting inventory levels and reducing procurement time. However, DLA data shows that its collaborative forecasting effort, which uses customer input to produce forecasts, has not improved aggregate forecast accuracy. DLA measures forecast accuracy, but lacks metrics for key aspects of performance, such as cost and return on investment, as required by DOD guidance, or regular performance meetings to monitor results and guide continued improvement. Without improved management of collaborative forecasting, DLA may not be using its resources efficiently and effectively to improve forecasting accuracy.

Why GAO Did This Study

DLA manages about one-fifth of DOD's $95 billion in secondary item inventory, such as spare parts to keep military equipment ready and operating. GAO has identified DOD supply-chain management as a high-risk area due in part to ineffective and inefficient inventory-management practices and weaknesses in forecasting the demand for spare parts. These factors have contributed to the creation of on-order and on-hand excess inventory.

GAO was asked to review DLA's inventory-management practices. GAO reviewed, among other things, the extent to which DLA has (1) developed and met goals to reduce on-hand inventory and on-order excess inventory while reducing backorders, and any challenges faced in doing so, and (2) implemented initiatives using a comprehensive management approach to improve inventory management. GAO analyzed inventory data from 2009 through 2013, evaluated DLA's inventory processes, and interviewed DLA and DOD officials.

What GAO Recommends

GAO is making multiple recommendations designed to strengthen inventory management, including that DLA reassess its inventory-reduction goals and schedule for achieving them based on DLA's economic analyses; regularly monitor its progress in reducing on-order excess inventory; establish supply chain–specific on-order excess inventory goals; and take steps to improve its collaborative forecasting, such as regularly monitoring performance. DOD concurs with GAO's recommendations.

For more information, contact Zina Merritt at (202) 512-5257 or merrittz@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In our June 2014 report, "Defense Inventory: Actions Needed to Improve the Defense Logistics Agency's (DLA) Inventory Management," we reported that DLA, in order to meet its on-hand inventory goal in fiscal year 2013, disposed of $855 million in inventory that its own economic analyses determined should be kept due to the risk DLA will need to buy the same items again in the future. To ensure that DLA does not dispose of inventory that is more economic to keep, in accordance with DOD guidance, GAO recommended that the Secretary of Defense direct the Director, DLA, to reassess and, if determined appropriate, revise DLA's inventory reduction goals and schedule to achieve them in a way that minimizes risks and costs of having to buy items again in the long term. Based on our recommendation, in July 2014 DLA conducted and documented a re-examination of its on-hand inventory reduction goal for fiscal year 2014. As a result of the review, DLA revised its on-hand inventory goal for fiscal year 2014 from $10 billion to about $10.9 billion. DLA's adjustments to its goals result in less inventory needing to be disposed of to meet the goals, which reduces the risk DLA may have to re-buy the same inventory in the future.

    Recommendation: To ensure that DLA does not dispose of inventory that is more economic to keep, in accordance with DOD guidance, the Secretary of Defense should direct the Director, DLA, to reassess and, if determined appropriate, revise DLA's inventory-reduction goals and schedule to achieve them in a way that minimizes risks and costs of having to buy items again in the long term.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In our June 2014 report, "Defense Inventory: Actions Needed to Improve the Defense Logistics Agency's (DLA) Inventory Management," we reported that DLA senior management does not regularly review on-order excess inventory performance and that performance across DLA's aviation, land, and maritime supply chains varied. To improve management and minimize the amount of on-order excess inventory, we recommended the Secretary of Defense direct the Director, DLA, to regularly monitor progress reducing on-order excess inventory through DLA's senior management performance briefings. Based on our recommendation, in July 2014 DLA began including on-order excess inventory metrics in DLA's Agency Performance Review, which is reviewed quarterly by the DLA Director and monthly by DLA headquarters senior logistics operations managers. These actions will provide senior management oversight of on-order excess inventory performance and allow senior management to guide continued improvement managing its on-order inventory.

    Recommendation: To improve management and minimize the amount of on-order excess inventory, consistent with federal standards for internal control and leading practices for performance management, the Secretary of Defense should direct the Director, DLA, to regularly monitor progress reducing on-order excess inventory through DLA's senior management performance briefings.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: Based on our recommendation, as of June 2016, DLA had implemented a monthly report process that reviews performance cancelling on-order excess inventory as well as the reasons for decisions to retain or cancel on-order excess contracts. As part of this review process, DLA reports bi-annually on the status of its on-order excess inventory, specifically the reasons for retaining on-order excess contracts. These actions will provide DLA the ability to provide better oversight of on-order excess inventory, including tracking and monitoring the reasons for retaining on-order excess inventory.

    Recommendation: To improve management and minimize the amount of on-order excess inventory, consistent with federal standards for internal control and leading practices for performance management, the Secretary of Defense should direct the Director, DLA, to track and regularly review performance data, such as the amount of on-order excess inventory reviewed, modified, or cancelled, and the reasons for not modifying or cancelling, in its on-order excess inventory management processes through its newly established automated report.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: In our June 2014 report, "Defense Inventory: Actions Needed to Improve the Defense Logistics Agency's (DLA) Inventory Management," we reported that DLA was not monitoring supply chain performance for on-order excess inventory and performance across DLA?s aviation, land, and maritime supply chains varied. To improve management and minimize the amount of on-order excess inventory, we recommended the Secretary of Defense direct the Director, DLA, to monitor on a regular basis DLA's progress achieving supply chain-specific goals for on-order excess inventory. Based on our recommendation, in July 2014 DLA began monitoring supply chain-specific on-order excess inventory performance against DOD's established department wide goals as part of its Agency Performance Reviews, which occur monthly. These comparisons will assist DLA in assessing the performance of each of its specific supply chains and identify potential focus areas for additional reductions in on-order excess inventory.

    Recommendation: To improve management and minimize the amount of on-order excess inventory, consistent with federal standards for internal control and leading practices for performance management, the Secretary of Defense should direct the Director, DLA, to monitor on a regular basis DLA's progress toward achieving the supply chain-specific goals.

    Agency Affected: Department of Defense

  5. Status: Open

    Comments: As of September 2016, the Defense Logistics Agency (DLA) is in the process of developing an additional metric that will measure whether collaborative forecasting on a customer-by-customer basis is beneficial (i.e., the collaborative forecast added-value versus using a statistical forecast). DLA plans to work on the implementation of the metric for the remainder of 2016 and early 2017 with full implementation planned for July 2017. We will continue to monitor DLA's progress in implementing the new metric as well as its efforts to monitor collaborative forecasting outcomes with the Army, Navy, Marine Corps, and Air Force.

    Recommendation: To ensure DLA is improving its collaborative forecasting effort, in accordance with DOD guidance that emphasizes monitoring the efficient use of resources and leading practices for results-oriented management, the Secretary of Defense should direct the Director, DLA, in collaboration with the Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness and the Secretaries of the Army, Navy, and Air Force, to use these metrics to monitor the performance of collaborative forecasting across DOD through a results-oriented management approach, such as regular performance management meetings.

    Agency Affected: Department of Defense

  6. Status: Open

    Comments: As of September 2016, the Defense Logistics Agency (DLA) is in the process of developing an additional metric that will measure whether collaborative forecasting on a customer-by-customer basis is beneficial (i.e., the collaborative forecast added-value versus using a statistical forecast). DLA plans to work on the implementation of the metric for the remainder of 2016 and early 2017 with full implementation planned for July 2017. DLA, in collaboration with its customers (e.g., the Army, Navy, Marine Corps, and Air Force) have taken steps, such as developing more extensive metrics and improving the collaboration process, to enhance its collaborative forecasting programs, as we reported in GAO-16-450. We will continue to monitor DLA's progress in implementing the new metric as well as its efforts to monitor collaborative forecasting outcomes with the Army, Navy, Marine Corps, and Air Force.

    Recommendation: To ensure DLA is improving its collaborative forecasting effort, in accordance with DOD guidance that emphasizes monitoring the efficient use of resources and leading practices for results-oriented management, the Secretary of Defense should direct the Director, DLA, in collaboration with the Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness and the Secretaries of the Army, Navy, and Air Force, to develop and implement the necessary corrective actions to improve the results of collaborative forecasting across DOD.

    Agency Affected: Department of Defense

  7. Status: Open

    Comments: As of September 2016, the Defense Logistics Agency (DLA) is in the process of developing an additional metric that will measure whether collaborative forecasting on a customer-by-customer basis is beneficial (i.e., the collaborative forecast added-value versus using a statistical forecast). DLA plans to work on the implementation of the metric for the remainder of 2016 and early 2017 with full implementation planned for July 2017. We will continue to monitor DLA's progress in implementing the new metric and the degree to which it addresses the intent of our recommendation.

    Recommendation: To ensure DLA is improving its collaborative forecasting effort, in accordance with DOD guidance that emphasizes monitoring the efficient use of resources and leading practices for results-oriented management, the Secretary of Defense should direct the Director, DLA, in collaboration with the Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness and the Secretaries of the Army, Navy, and Air Force, to develop metrics, in addition to currently developed demand forecast accuracy and error metrics, that allow DLA and the services to evaluate whether the program is improving supply-chain management performance and providing an adequate return on its investments.

    Agency Affected: Department of Defense

  8. Status: Closed - Implemented

    Comments: In our June 2014 report, "Defense Inventory: Actions Needed to Improve the Defense Logistics Agency's (DLA) Inventory Management," we reported that DLA has not established supply chain-specific goals for on-order excess inventory and performance across DLA's aviation, land, and maritime supply chains varied. To improve management and minimize the amount of on-order excess inventory, we recommended the Secretary of Defense direct the Director, DLA, to establish supply chain-specific on-order excess goals that support DLA minimizing its investment in inventory that is not needed to meet requirements and achieving the Department of Defense goal of 4 percent of the total value of on-order inventory by the end of fiscal year 2016. Based on our recommendation, DLA established supply chain-specific goals of 6 percent in July 2014 that were aligned with DOD goals for fiscal year 2014. In October 2014, DLA adjusted these goals to 5 percent. These actions will provide DLA the ability to guide continued improvement in reducing on-order excess inventory as well as monitor supply chain-specific performance against DOD's goals.

    Recommendation: To improve management and minimize the amount of on-order excess inventory, consistent with federal standards for internal control and leading practices for performance management, the Secretary of Defense should direct the Director, DLA, to establish supply chain-specific on-order excess goals that support DLA minimizing its investment in inventory that is not needed to meet requirements and achieving the DOD goal of 4 percent of the total value of on-order inventory by the end of fiscal year 2016.

    Agency Affected: Department of Defense

 

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