Defense Logistics: Too Much Unwanted Inventory, Not Enough of What Is Needed
The Pentagon spends about $1 billion a year on unneeded or unused inventories of spare parts and other goods, a recent study found. The unwanted inventory, managed by the Defense Logistics Agency, is a consequence of not being able to accurately predict customer demand, said a Pentagon-funded study by The Rand Corp. The customers, in this case, are the military branches that rely on the Defense Logistics Agency to deliver supplies to installations in the United States and around the world. Consumers pay the agency for the items as well as a surcharge for its services.
Not being able to predict demand has been a long-standing problem in defense logistics, said Eric Peltz, one of the authors of the study who is associate director of Rand’s national security research division.
When demand for an item unexpectedly declines, excess inventory is likely to develop. Similarly, when requests for an item surges without sufficient warning, supplies might not be available in a timely fashion, he said.
The Pentagon has in recent years sought to curb inefficiency by investing in costly information systems to better manage its supplies. Improvements have been made, the study said, but the Defense Department is still way behind the private sector. “Supply chain agility,” which in business-speak means the ability to respond quickly and efficiently to changes in demand and supply, is what is needed to reduce costs and provide better customer service, the study said.
“DLA and the Defense Department have made strides in inventory management and forecasting,” Peltz told National Defense. “But they have taken it as far as you can go with a technical solution in inventory management. Now they have to take the next step which is more difficult.” That will require a change in culture and business practices, he added. “It takes a lot of collaboration with suppliers and customers.” The Defense Logistics Agency has been working on its “internal processes,” said Peltz. “Supplier management is the next horizon. It’s a more difficult problem.” The agency needs to better “understand volatile field demand.”
The estimated billion dollars worth of excess inventory is a fraction of the Defense Logistics Agency’s entire stock of about $40 billion, but it is a significant amount by most standards. It mostly consists of spare parts that are obsolete or no longer usable. The military typically must order spare parts months or years in advance because they are complex and often customized.
The management of its supply chain has been a long-term challenge for the Defense Logistics Agency, Peltz said. The military is downsizing, reducing overseas deployments and as a result is spending less on supplies, which reduces the “working capital fund” that funds the agency. “As demand goes down, it’s critical for them to find cost savings,” he said. “They need to make sure they remain competitive in line with demand. The challenge is to adjust their size and infrastructure.”
The Rand study suggested the Defense Logistics Agency put more emphasis on reducing the production lead time of items. That will take a different approach to negotiating contracts. “We found that DLA’s acquisition processes are, by and large, not focused on reducing production lead time,” the study said. “Acquisition staff members do not incorporate production lead time or order quantities — and the associated disposal risks — into the definition of ‘best value.’ This is partly due to a limited understanding of how long production lead times contribute to inventory risk and cost, and to a lack of tools to account for the risk of disposal.”
Negotiating production lead time, order quantity and price all at the same time may require additional training for buyers, the study noted. In some cases, the Defense Department benefits from signing long-term contracts. That gives vendors incentives to improve service and cut cost. Rand analysts interviewed 10 DLA suppliers across major supply chains like aviation, land, and maritime and troop support. The feedback from vendors was that DLA could do more to help suppliers improve efficiency by sharing more information, the study said. “The level of sophistication of a supplier’s processes may affect the type of information that it can use to plan inventory and production.”
DLA officials did not dispute the Rand study’s findings and said they value the advice. “Researchers coordinated extensively with DLA in performing their study,” said Jeffrey Curtis, executive director of DLA logistics policy and strategic programs. “Their recommendations validated and provided additional insight into ongoing DLA efforts to reduce order quantities and reducing lead times through various methods including expanded use of long term contracts,” Curtis said in a written statement.
Logistics experts in the private sector said they are not surprised by Rand’s conclusions.
In a Jan. 22 report, the Defense Business Board that advises the secretary of defense listed “supply chain and logistics” among the six most inefficient operations in the entire Defense Department. The others are human resources, health care, real property and financial management, acquisition and procurement.
The DBB suggested billions of dollars could be saved by adopting industry “best practices,” but there also has to be a “cultural change” in how the Defense Department does business. “Technical solutions are an enabling tool for more efficient, effective and streamlined business processes but will not, by themselves, achieve the savings and process improvements envisioned.”
Ed Talerico, industry strategy director at supply chain software firm Infor, said it has been “difficult for defense agencies to make a move to commercially accepted business practices.” Defense logistics for the most part still runs on decades-old technology that is generations behind the commercial sector, he said in an interview. “The American public would be shocked to see the technology used to manage defense companies,” he said. “There are still a lot of legacy systems used out there.” Some of Infor’s defense industry clients, he noted, are still using mainframe Cobol solutions that were written in-house more than 30 years ago.
Some defense agencies have invested billions of dollars in sophisticated information systems like enterprise resource planning, or ERP, software, but their business practices to manage inventory have not necessarily changed, he said. “Waste is the price of doing business. … I have been involved in numerous attempts to modernize Defense Department logistics. It is hard because they have unique requirements compared to commercial organizations.”
The biggest reason the Defense Department can never be as efficient as the private sector is the accounting requirements for programs, Talerico observed. “They require businesses to segregate inventories by program rather than looking at them in totality across the enterprise. A commercial firm looks at demand across the entire enterprise to get economies of scale.” This alone creates excess inventory, he said. “Accounting requirements make a huge difference.”
Cost accounting and auditing requirements make it difficult to modernize and manage supply chains like commercial companies would, added Talerico. “In the defense sector, the mindset is one of having as much inventory as possible.”
In the Defense Department, there is little incentive for inventory control, he said. “In commercial business, you’re measured by how you manage inventory. Government has no such measures that I’m aware of. The focus in government always is on availability and reliability.”
Considering the “outdated solutions we have in place,” he said, “it’s amazing we ever send the right stuff to the right place at the right time.”
Other logistics experts have championed technologies like additive manufacturing, also known as 3D printing, as a possible fix for excess inventories. Spare parts that used to require months or years to produce could be made at military forward bases on a tight timeline, said James Joyce, a supply chain, manufacturing operations and strategy specialist at Deloitte. Additive manufacturing gives the Defense Department huge opportunities to save money, he said in an interview. “It has the potential to support operational readiness by creating a more a reliable supply chain, shorter lead times, potentially lower costs and more accurate inventory levels,” he said. “The Defense Department could manufacture parts on-site in near-real time and deliver systems faster.”
Having military forces deployed around the world “puts an incredible burden on the supply chain to move the necessary parts and pieces to keep the equipment running,” Joyce said. “The defense market for 3D printing is considered to be very big because the complexity of defense supply chains is higher than the commercial world. It’s a natural fit.”