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Our cost and savings estimates are based on data compiled by DOD. Exhibit II-1 at the end of this issue provides an estimate of the costs to the services and DLA associated with modernization of ADP logistics systems. The total estimated cost, assuming that the modernization program is implemented over a four-year period, is approximately $1.4 billion.

Exhibit II-1 also details potential savings from improved inventory management and control systems. A onetime inventory reduction of $2.9 to $5.8 billion, or 7.3 to 14.5 percent, will be realized in the first two years of savings realization. Annual recurring savings are projected to reach approximately $.75-$1.5 billion in the second year of savings realization. This assumes that new or expanded systems are put into place over a four-year period. Midpoints of the range of savings estimates are $1,125.0 million and $3,187.5 million for Years 1 and 2.

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DOD should determine, as soon as possible, the extent to which the above recommendations for the modernization of ADP logistics can be carried out under the authority of Section 908 of P.L. No. 97-86. The recommendations should then be implemented as discussed. DOD should seek any additional legislation that may be needed to implement these recommendations free of the constraints of the Brooks Act.

The Secretary of Defense should create a strong central focus for ADP logistics by assigning the policy and review functions to an appropriate OSD unit that can assure compatibility of inventory systems across service lines at wholesale and retail levels.

Exhibit II-1

PROJECTED COSTS AND RESULTANT SAVINGS 5/
FROM ACCELERATION OF INVENTORY MANAGEMENT
SYSTEMS AND ADP MODERNIZATION

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Procurement efficiencies include savings resulting from
better knowledge of inventory levels and improved
demand forecasting, thus enabling procurement personnel
to improve the purchasing process.

Logistics support includes reduced transportation and administrative costs.

Productivity improvements result from more efficient use of maintenance and supply personnel.

The one-time inventory reduction is related to safety stock reductions, reduced economic order quantity levels, and lower levels of inactive inventories.

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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)

A.

LOGISTICS (CONT'D)

OSD 3: TRANSFER OF CONSUMABLE INVENTORY ITEMS

Summary Recommendation

The management of consumable inventory items for the Department of Defense (DOD) should be centralized in the Defense Logistics Agency (DLA) to the fullest extent possible. Accordingly, 900,000 of the 1.2 million consumable inventory items currently managed by the services should be transferred to the DLA. The transfer should be phased in over an 18-month period.

Financial Impact

$75 million annually

$125 million

Potential Savings: Estimated annual
savings of approximately $75 million
are based on personnel reductions which
would result from DLA's historically
higher ratio of items per manager.
Additional savings are possible, though
not quantified here, because of the
opportunity for increased competitive
bidding. for the transferred items.

Implementation Cost: A total of $125
million in one-time costs for item re-
assignment, and personnel and facili-
ties costs.

Background

DOD uses approximately 3.4 million consumable items. The term "consumable items" includes (a) expendable items, i.e., items, including minor spare parts, which are either consumed in use or discarded when no longer serviceable, and (b) field level repairables, i.e., items repaired or expended in the field rather than items returned for depot level repair. The DLA manages approximately 2.2 million consumable items and the services manage 1.2 million items. Approximately 25 percent of the items currently managed by the services are bought on the basis of competitive bidding, while the comparable statistic for DLA-managed items is 68 percent.

At the end of World War II, DOD operated 25 separate supply systems. This caused extensive fragmentation of effort and duplication of staff. As a result of the Hoover Commission Report, some changes were initiated in the 19531956 period with single manager assignments to the services for commodities such as fuel, medical and subsistence items, clothing, and textiles. Under these assignments, each single activity was designated a class manager with DODwide responsibility for management of all items in a group of Federal Supply Classes (FSC).

The next step toward integrated inventory management was the establishment of the Defense Supply Agency (DSA) in 1962 and the transfer of the single manager commodities to DSA. In January 1977, DSA was redesignated the Defense Logistics Agency (DLA). As additional FSCs were assigned to DLA, the Office of the Secretary of Defense (OSD) decided that certain items should remain with the services. These items included end items of equipment, depot level repairables, and selected consumable items.

Methodology

The Task Force interviewed supply and logistics officials in OSD, DLA, the General Accounting Office, and the services. A review was made of pertinent DOD reports and audits and of testimony presented before Congressional committees on the transfer of consumable inventory items to

DLA.

This issue was also reviewed in the report of the President's Private Sector Survey on Cost Control Procurement/Contracts/Inventory Management Task Force.

Findings

A two-world system has become more or less formalized with regard to consumables: DLA manages commodity items, while the services retain more complex, weapons systems related items. The Item Management Coding is the mechanism used to identify items or classes of items that are to be managed by the services or DLA. Ten criteria must be met for the services to retain an item. The cumulative effect of decisions taken over the years has been to increase the proportion of consumable items managed by DLA.

In 1977, the OSD staff proposed the consolidation of all service-managed consumables into DLA (except conventional ammunition). The proposal was presented to the Deputy Secretary of Defense in December 1978, and was forwarded to the services for comment. The Army and Air Force rejected the idea completely; the Navy acknowledged that 395 out of 520 items could go to DLA, but questioned the economics involved. All of the services felt that readiness would be adversely affected as a result of the higher degree of complexity of the items proposed for transfer. The services also questioned the economic analysis performed by OSD to demonstrate potential savings, and came up with their own data, which indicated higher costs if the transfer were made.

The OSD requested that the Defense Audit Service (DAS) review the OSD economic analysis and the services' cost data and arguments concerning readiness. In response, DAS Report No. 80-108 was issued on May 29, 1980. The report dealt extensively with the question of readiness impact. It pointed out that according to the two most important DOD measures of supply performance percent supply effectiveness (line fill rate) and total pipeline performance (percentage of requisitions filled within standard time) during the period 1978-1981, DLA consistently outperformed the services by 4 to 15 percentage points and 3 to 11 percentage points, respectively.

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The DAS also compared the functions performed and the costs allocated by the services in the management of consumable items to those functions performed and costs incurred by DLA to manage the same types of items. DAS pointed out that the services were using 6,126 personnel at an annual cost of $116.7 million to manage their consumable items, while DLA used 2,391 personnel at an annual cost of $43.8 million to manage the same number of items.

In response, the services argued that their performance had been adversely affected because of the complexity of the items they manage. They also pointed out that DLA performance seemed enhanced because the items it manages

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