Background

In DOD, supply systems inventories are basically organized into two levels, the wholesale (or distribution) level and retail (or user) level. Inventories at the wholesale level are stored in about 30 depots around the country. Inventories at the retail level include those on board ships and on numerous military bases, both in the continental United States and abroad.

As of September 1981, DOD reported a total secondary item inventory of about $40 billion (excluding fuel and subsistence items). Secondary items include assets such as spare parts, medical supplies and operating supplies. This category excludes weapons, ammunition and aircraft engines which are considered principal items. Approximately $30 billion of the secondary item inventory is considered wholesale inventory, and the balance of $10 billion is considered retail inventory.

The wholesale level normally acquires materials from vendors, and then issues them to the retail level (the users) according to their demand, generally through the requisition procedure. Once the items have been transferred to the retail (user) level inventories, the inventory control systems at the wholesale level no longer track them. Also, the various retail inventory systems function as almost totally self-contained entities with little or no communication among facilities.

DOD expects to spend approximately $4 billion in FY 1983 on maintaining existing ADP systems for logistics support. By the end of FY 1983, DOD will have approximately 9,100 conventional computers, excluding weapon systems embedded computers. Almost half of these will be pre-1974 vintage, and many are no longer serviced by vendors. supply and inventory ADP systems are mostly batch-oriented, running programs developed over 20 years ago in some

Methodology

DOD

The OSD Task Force made a comprehensive review of published studies and reports on the DOD supply inventory systems. These include General Accounting Office (GAO) audit reports, DOD reports, and contractor studies. Extensive interviews were conducted with service and DLA personnel responsible for management of inventory control systems. Additionally, Task Force personnel analyzing this issue were experienced in private sector inventory management and control techniques.

For

This issue and issues related to it were reviewed by other President's Private Sector Survey task forces. further information, refer to the reports of the:

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Air Force Task Force,

Automatic Data Processing Task Force,
Navy Task Force, and

Procurement/Contracts/Inventory
Management Task Force

Findings

In the past, attention has been directed at the management of inventory at the wholesale level within each service. In the mid-1970s, DOD diverted some attention to the need to improve inventory management at the user level and introduced the Retail Inventory Management and Stockage Policy (RIMSTOP). This policy was developed from a 19741976 study conducted by a joint work group with participation of all of the services.

The RIMSTOP report concluded that improving the management of retail inventories not only would affect the size and effectiveness of the retail inventories, but also would have a significant impact on improving the management of the wholesale inventories. Obtaining more accurate and timely data on supply usage and inventory activities at the user level is one of the most important for improving the management of inventories, including the ability to better balance stocks and minimize excess stock buildup, thus avoiding unneeded inventory investment and excessive obsolescence. The services are in various phases of complying with this policy. However, it appears that full compliance will be dependent on extensive modernization of existing automated inventory data systems.

The outdated ADP systems force artificial constraints on inventory management in general. For example, using the current ADP systems, economic order quantities for inventory items are calculated within a minimum order period of six months and a maximum of three years. The minimum constraint is the result of the inability of the ADP system to physically handle purchase requisitions more than twice a year per item. There are many items, particularly consumable items, that should be ordered monthly. Some small requisitions are not completely automated, but faster ADP equipment and higher dollar limits on fully automated requisitions are now completely automated, but faster ADP equipment and higher dollar limits on fully automated requisitions would permit purchases of many items in monthly lot sizes and could reduce average inventory by 2.5 months for these items.

The outdated ADP systems also create the following problems:

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The equipment experiences frequent downtime, resulting in late reports with data updates sometimes omitted, due to lack of available running time. This poor service affects the productivity of end users and of ADP personnel.

Equipment running costs are excessive because of high maintenance charges, large floor space requirements, higher electrical and air conditioning usage with more uninterruptible power supply equipment requirements, and additional operating personnel. Software maintenance costs are high because the programs are old and have been extensively patched and modified.

Equipment is running at or near capacity to handle basic operating needs. Limitations in power and memory preclude the possibility of expanding the systems. Obsolete equipment prevents the use of modern and efficient magnetic tape and disks. Inventory management decisions are suboptimal due to lack of timely data and high error rates. The two principal operating problems resulting from faulty data are poor retail asset visibility from the wholesale level and poor demand forecasting.

With respect to retail asset visibility, the
Army has no visibility of consumables at the
retail level; the Navy has visibility of these
assets on a quarterly basis at best; and the
Air Force has retail visibility of the major-
ity of its consumables. One problem resulting
from poor retail asset visibility is that
scarce maintenance resources are used to
repair parts that are in long supply. Repair-
ables, which are more costly than consumables,
should have tight controls with respect to
visibility. OSD has confirmed that a signifi-
cant cause of excess inventory and long supply
is the lack of retail asset visibility. For
example, a requisition may be sent to an in-
ventory control point (wholesale level) and be
filled from wholesale stocks, which will be
replenished by a purchase transaction. At the
same time, there may be excesses of the same
item elsewhere in the retail system which

could have been used to fill the requisition, or the requisitioning retail activity may be stockpiling the asset. In the absence of retail asset visibility, item managers are unable to balance stocks within the total

system.

Previous DOD efforts to modernize ADP hardware and software have been frustrated by the time-consuming and inefficient ADP procurement procedures that have evolved under the Brooks Act, P. L. No. 89-306. The Brooks Act establishes mandatory Government-wide procedures for the procurement of computer and data processing equipment. In 1981, Congress partially exempted DOD from the Brooks Act, by enacting Section 908 of the DOD Authorization Act for 1982, P. L. No. 97-86. Among other things, the purpose of Section 908 was to permit DOD to streamline its ADP procurement procedures and to exempt "mission-related logistics support systems" from the Act. However, DOD has not yet exercised its Section 908 authority, because it has been unable to reach internal agreement on what ADP hardware and software should be exempt.

Conclusions

In the DOD supply systems, reporting and processing of inventory data is automated, but the equipment in use is frequently obsolete. Present computer facilities are in need of upgrading so that inventory data can be processed in a more accurate and timely manner. In addition, the development of compatible inventory data systems for the services and DLA would increase retail asset visibility and improve requisition efficiency.

Updated inventory management techniques would also enable more efficient management of spare parts and would have a positive impact on readiness. Improved inventory management systems could increase weapons availability by 5 to 15 percent, according to estimates provided by the services. For example, the Air Force has estimated that with improved inventory management, it could field an additional 40 to 60 aircraft at all times.

Recommendations

OSD 2-1: DOD should initiate a program to substantially modernize its ADP logistics systems for inventory management and control. The following elements should be considered in this modernization plan:

Improvement in systems for inventory control and management will require replacement of obsolete

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ADP hardware and software. DOD should streamline
the ADP approval process which could be accom-
plished, in part, by a determination that ADP
logistics systems are mission-related and, there-
fore, should be exempt from Brooks Act acquisition
requirements. Currently, ADP acquisition time
for DOD is approximately three times that for the
private sector.

Modernization of ADP hardware and software will
require training of ADP personnel in state-of-
the-art ADP logistics support techniques. We
recognize that this is a cost which will have to
be expended to ensure effective implementation of
new ADP systems, and will reduce estimated sav-
ings to some degree in the short term. However,
greatly increased efficiencies in inventory
management and control will result in the long

term.

Improved systems planning is necessary so that a link is established between inventory investment and readiness. New systems must satisfy operational needs. For example, data should be available through the system which would allow the services to project the impact of reduced spare parts inventory on aircraft availability.

The planning and review of ADP logistics systems should be centralized to ensure that the new or modernized ADP systems are compatible across the services, DLA and at the wholesale and retail levels. We recommend that a central ADP logistics policy group be created, reporting to the Assistant Secretary of Defense for Manpower, Reserve Affairs and Logistics. This group should help define system objectives and also monitor the ability of the systems to meet these objectives.

Savings and Impact Analysis

After the four years necessary to implement ADP modernization, the savings would be: