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National Defense > Blog > Posts > Defense Auditors: Why So Many Spare Parts?
Defense Auditors: Why So Many Spare Parts?
By Sandra I. Erwin



Defense Department auditors regularly scour the Pentagon’s online procurement portal, known as Electronic Mall or DoD E-Mall — in search of clues to questionable spending.

One area that has drawn their attention in recent years has been spare parts orders. By some estimates, the Defense Department spends up to $70 billion a year on logistics support of weapons systems, which includes spare parts. The Pentagon has no precise estimate of current inventories.

Auditors have questioned whether many of these purchases meet legitimate needs. Of 114 audits that the Defense Department’s inspector general office is conducting in fiscal year 2013, nine target spare parts. IG reports over the past two years have increasingly challenged the quantities bought and the prices paid for military spare parts. Investigators also found warehouses packed with unneeded items, such as a 38-year supply of guided assemblies for Black Hawk helicopters and Stryker armored personnel carrier seats that the Army no longer uses in the vehicles.

Navy Vice Adm. Mark Harnitchek, director of the Defense Logistics Agency, has been candid about the bloated inventory problem. “Unnecessary supply stocks are a huge financial drain," Harnitchek told reporters in June 2012. “We need to do a better job buying inventory. We buy way too much inventory that we don’t use, and we keep it too long.”

DLA provides nearly 100 percent of the consumable items U.S. military forces need to operate — food, fuel, uniforms, medical supplies and construction equipment. DLA also supplies more than 84 percent of the military’s spare parts.

“We have to get rid of the hoarding mentality,” Harnitchek said last month at a logistics industry conference.

With U.S. forces at war for more than a decade and few restrictions on spending, the priority has been to deliver what troops needs, at whatever price. “Over time that has led to a culture of not caring what it costs,” said retired Army Lt. Gen. C.V. “Chris” Christianson. He is the director of the Center for Joint and Strategic Logistics, a research organization under the National Defense University and is a former director of logistics on the Joint Staff.

Christianson said the Defense Department should work with its vendors to understand the true costs of supplies and then find ways to reduce expenses. “That's the problem that the Defense Department and its commercial partners need to figure out,” he told National Defense. “When we're at war, we'll deliver what we need at any cost. The challenge now is to expose what it costs. Once we know what it costs, we can work on driving down cost, still keeping that outcome as the ‘holy grail.’”

Mimi Schirmacher, spokeswoman for the Defense Logistics Agency, said DLA has been working with the military services and the Defense Department “to reduce duplicative inventories.” There have been cases when supplies were purchased by the services from DLA which later became “excess,” she said. “Before DLA purchases new material, the agency solicits the services to determine if they have excess, and if found, uses that material instead of buying new,” Schirmacher said in a statement.

DLA and the services are also trying to improve the forecasting of spare parts needs, she said. The agency also expects to downsize warehouses as the Afghanistan war comes to an end, Schirmacher said, “so we can avoid over-buying spare parts that will no longer be necessary in the future.”

In the past 18 months, DLA has disposed of $3.3 billion in unneeded inventory, said Schirmacher. “We expect to reduce inventory even further in the next year.”

When Pentagon budgets were soaring, it was easy to overlook wasteful spending, a senior Defense Department official said during a recent meeting with reporters. But budgets have been declining since 2010, and deeper cuts are projected for the next decade. All expenditures are coming under scrutiny, and spare parts are a particularly big target, the official said.

Audits that began in 2011 revealed that the Defense Department is paying inflated prices for parts it already has in inventory, and the military services are buying items that DLA already owns.

“These behaviors built up over time,” the official said. “If I have this money I'm going to spend it. … It takes a while to change the corporate culture.”

Ongoing audits also reflect concerns about government oversight of contractors, he said. “Oversight is not as good as it could be,” he said. If companies overcharge for spare parts, he added, it is usually because the government allows it. “Unfortunately we do sign away on practices that are not in our best interest.”

IG investigations that are currently under way include DLA’s sole-source procurement of spare parts from The Boeing Co. Another involves spare parts inventories for Military Sealift Command’s cargo ships. One audit focuses on DLA’s procedures for purchasing “DoD mission critical assets,” specifically spare parts for tactical vehicles, small arms and Navy ships.

An inspector general audit, whose results were reported in June by Bloomberg News, revealed that DLA had overpaid Boeing $13.7 million for aviation spare parts. The agency has sought a refund but, according to Schirmacher, the dispute has not yet been resolved. “DLA requested a voluntary refund from Boeing and asked that they respond to the request by July 26, 2013,” she said.

One of the issues that audits are probing is whether the use of “performance based logistics” contracts, or PBLs, might contribute to excess buying. The question is “whether government-owned inventory is being effectively used before procuring the same parts from private contractors through performance-based logistics arrangements,” said an IG report summary.

PBLs are long-term deals where a contractor agrees to provide a certain “outcome” for a pre-negotiated price, rather than get paid for individual products and services. If the PBL is for tank engines, for instance, the contractor would be held accountable for ensuring that a certain number of engines are available at any given time.

The Pentagon’s new procurement policy, known as “Better Buying Power 2.0,” endorses PBLs as a contracting technique that could lower the cost of weapons maintenance. Defense contractors strongly favor the use of PBLs — which are used in the commercial sector and by many foreign militaries. A study by the consulting firm Deloitte said the Defense Department potentially could save up to 20 percent on weapons-support costs by using PBL contracts.

Tom Captain, leader of Deloitte U.S. and global aerospace and defense sector, said he has recently met with Pentagon officials and discussed the possibility of increasing the use of PBLs. “They're finding they can buy a heck of a lot more for less,” Captain said in an interview.

Only 5 percent of the military’s maintenance work is performed under such deals. Government contracting officers are not always qualified to write PBL contracts in ways that benefit the taxpayer, the Defense Department official said. “The department has been challenged when it comes to determining requirements.”

Christianson said the government should be using PBLs to its advantage, but that requires that contract terms be written so they provide financial incentives to cut cost. “Reshaping PBLs is key,” he said. “We still have to achieve some level of readiness but we have to expose cost.”

The cost of repair parts could be lowered under PBLs if the government structures the contract in a way that balances equipment availability needs against costs, said Christianson. “The PBLs we have today focus on availability and operational capability. They are not used in the repair parts business,” he said. “That's one area where DLA can show significant improvements.”

Schirmacher said DLA is currently pursuing a PBL to provide common aircraft support equipment on behalf of all the services.

The Defense Department should figure out how to write these contracts to demand a minimum level of equipment availability but also reward lower costs, said Christianson. “We haven't written many of those yet.”

Christianson said it could take years for government program managers to learn how to strike the right balance between commanders’ needs and fiscal realities. One problem is the adversarial relationship between Pentagon program managers and contractors, which has created a climate of mistrust, he said. “It takes government and industry working together to redefine what performance based logistics means,” he said. “There are still different interpretations of PBLs.” The lack of trust, he said, “makes it difficult to understand the costs.”

Photo Credit: Thinkstock

Comments

Re: Defense Auditors: Why So Many Spare Parts?

The principle metric is to spend every dollar asked for and provided and here is no incentive for cost management.  There is also poor to no inventory management looking at turnover and use  of parts and components. 

The solution is always order more with no analysis of fix, repair, replace or order new.  There is poor accountability and essentially no responsibility.
old geek at 8/9/2013 8:31 PM

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