Commercial Practices: Leading-Edge Practices Can Help DOD Better Manage
Clothing and Textile Stocks (Chapter Report, 04/13/94, GAO/NSIAD-94-64).
At a time when private sector companies are cutting costs by minimizing
inventories, the Pentagon continues to store redundant levels of
clothing and textile inventories. Much of this material is aged and
obsolete--for about 26 percent of the items, the Defense Department
(DOD) had 10 years of supplies on hand. DOD is incurring unnecessary
inventory storage and handling costs because of the large supply
operations infrastructure required to maintain these stocks. DOD's
inventory practices stand in significant contrast to those used in the
best managed private sector firms. Competition has forced private sector
firms to cut costs by moving to "just-in-time" inventory concepts that
help keep inventories low, turn stock frequently, and fill orders
quickly while maintaining good customer service. For example, leading
private sector uniform providers have 60 to 90 days worth of wholesale
supplies on hand while the Defense Logistics Agency (DLA) has 2 to 10
years of supply. Many private sector firms and some federal agencies
with uniformed employees are relying on prime vendors to manage their
clothing inventories. DOD recently began to increase its use of
innovative concepts, such as "quick response," but progress has been
slow. In particular, DLA has yet to explore the possibility of using
prime vendors to supply high volume clothing and textile items, even
though they appear particularly well suited to the operations of the
induction centers for recruits.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-94-64
TITLE: Commercial Practices: Leading-Edge Practices Can Help DOD
Better Manage Clothing and Textile Stocks
DATE: 04/13/94
SUBJECT: Military inventories
Inventory control systems
Military procurement
Computerized information systems
Management information systems
Federal supply systems
Clothing industry
Military cost control
Administrative costs
Federal property management
**************************************************************************
* This file contains an ASCII representation of the text of a GAO *
* report. Delineations within the text indicating chapter titles, *
* headings, and bullets are preserved. Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are *
* identified by double and single lines. The numbers on the right end *
* of these lines indicate the position of each of the subsections in the *
* document outline. These numbers do NOT correspond with the page *
* numbers of the printed product. *
* *
* No attempt has been made to display graphic images, although figure *
* captions are reproduced. Tables are included, but may not resemble *
* those in the printed version. *
* *
* A printed copy of this report may be obtained from the GAO Document *
* Distribution Facility by calling (202) 512-6000, by faxing your *
* request to (301) 258-4066, or by writing to P.O. Box 6015, *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time. *
**************************************************************************
Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Oversight of Government
Management, Committee on Governmental Affairs, U.S. Senate
April 1994
COMMERCIAL PRACTICES -
LEADING-EDGE PRACTICES CAN HELP
DOD BETTER MANAGE CLOTHING AND
TEXTILE STOCKS
GAO/NSIAD-94-64
Commercial Practices
Abbreviations
=============================================================== ABBREV
C&T - clothing and textile
DDT - dichloro-diphenyl-trichloroethane
DLA - Defense Logistics Agency
DOD - Department of Defense
DPSC - Defense Personnel Support Center
GAO - General Accounting Office
RIC - recruit induction center
UPS - United Parcel Service
Letter
=============================================================== LETTER
B-255599
April 13, 1994
The Honorable Carl Levin
Chairman, Subcommittee on
Oversight of Government Management
Committee on Governmental Affairs
United States Senate
Dear Mr. Chairman:
This report was prepared as part of your request that we continue to
compare commercial logistics practices with similar Department of
Defense operations. It summarizes the results of our review of
inventory management practices used by leading private sector
companies and the Department of Defense to provide clothing and
textile supplies. It describes various private sector initiatives
having potential application to the military clothing logistical
environment.
We plan no further distribution of this report until 30 days from the
date of the report, unless you publicly announce its contents
earlier. We are sending copies of this report to appropriate
congressional committees; the Secretaries of Defense, the Air Force,
the Army, and the Navy; the Director, Office of Management and
Budget; and other interested parties. We will also make copies
available to others on request.
If you have any questions, please call me on (202) 512-8412. Other
major contributors are listed in appendix II.
Sincerely yours,
Donna M. Heivilin
Director, Defense Management and
NASA Issues
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
Between 1980 and 1988, the Department of Defense's (DOD) secondary
inventories, which include spare parts for weapon systems and
consumable items such as shoes and socks, increased by about $60
billion. Concerned about identifying ways in which DOD can address
wasteful inventory management practices, the Chairman, Subcommittee
on Oversight of Government Management, Senate Committee on
Governmental Affairs, asked GAO to compare DOD's logistics practices
with the private sector's. This report focuses on DOD's inventory
management system for supplying clothing and textile (C&T) items to
the military services, currently valued at $1.8 billion.
Specifically, the report addresses (1) inventory problems and other
inefficiencies in the Defense Logistics Agency's (DLA) C&T logistics
system, (2) commercial practices used in the private sector to reduce
inventory holding and distribution costs, and (3) DOD's progress in
improving C&T inventory management.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
DOD spent about $650 million in fiscal year 1992 to purchase C&T
inventories for the military services. Clothing items include
apparel such as shirts, trousers, uniforms, socks, shoes, and hats.
Textile items include mattress covers, body armor, tents, and flags.
The Defense Personnel Support Center (DPSC), part of DLA, manages the
C&T inventory at the wholesale level and stores it at six principal
distribution depots and two specialized support depots across the
United States. In fiscal year 1992, DPSC charged $1.3 billion for
C&T items it sold to military service customers, primarily the
services' 14 recruit induction centers and over 300 military exchange
stores.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
At a time when private sector companies are cutting costs by
minimizing inventories, DOD continues to store redundant levels of
C&T inventories throughout its wholesale and retail system. Much of
this inventory is aged--for about 26 percent of the items, DOD had 10
years of supply on hand. To maintain these stocks, DOD employs a
large supply operations infrastructure and, in doing so, often incurs
unnecessary inventory storage and handling costs.
DOD's inventory practices stand in significant contrast to those used
in the best managed private sector firms. Competition has forced
private sector firms to cut costs by moving to "just-in-time"
inventory concepts that help keep inventories low, turn stock
frequently, and fill orders quickly while maintaining good customer
service. For example, leading private sector uniform providers have
60 to 120 days of wholesale supplies on hand while DLA has 2 to 10
years of supply. At the retail level, uniform consumers hold no
supply, while DLA has an average of 90 to 120 days.
Many private sector firms and some federal agencies with uniformed
employees are relying on prime vendors to manage their clothing
inventories. Prime vendors provide timely and direct delivery
between customers and suppliers, and order additional stock from
manufacturers on short notice, with quick turnaround, to minimize
inventory holding costs. DOD has recently begun to increase its use
of innovative concepts, such as "quick response," but progress in
implementing them has been slow. In particular, DLA has yet to
explore the possibility of using prime vendors to supply high volume
C&T items, even though they appear particularly suited to the
operations of the recruit induction centers.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
DOD'S LOGISTICS SYSTEM LEADS
TO LARGE INVENTORIES
-------------------------------------------------------- Chapter 0:4.1
DLA clearly holds larger C&T stocks for longer periods of time than
the private sector firms GAO visited, as shown in table 1.
Table 1
Average Performance Measures for DLA and
Private Sector Uniform Providers
Performance measure DLA Commercial
------------------------ -------------- ------------------
Wholesale supply on hand 2-10 years 60-120 days
Retail supply on hand 90-180 days 0 days
Yearly stock turnover 0.5 times 1.8-4.0 times
rate
Procurement lead time 400 days 2-60 days
------------------------------------------------------------
These inventory differences largely reflect contrasting approaches to
meeting customers' needs. DOD's system, which operates with
wholesale and retail inventory storage levels, attempts to satisfy
customer demands by having large stocks readily available.
Commercial firms, on the other hand, rely on quick order and delivery
systems to satisfy customer demands, relieving the need for large
inventories and helping to avoid items deteriorating or becoming
obsolete before they are used.
As of September 30, 1993, DLA depots held C&T inventory valued at
more than $1.8 billion--over a quarter of which represents 10 or more
years of supply and a half of which represents 2 or more years of
supply--often resulting in large inventories of aged and obsolete
items. For example, at one depot, GAO identified 7,680 pairs of size
8-wide combat boots with packing dates between 1953 and 1958. In
another case, of the eight sizes in brown undershirts stocked, DLA
carried a 21-year supply of the largest size, and a 25-year supply of
the smallest size.
PRIVATE SECTOR USES
LEADING-EDGE PRACTICES
-------------------------------------------------------- Chapter 0:4.2
Although the private sector used a system similar to DLA's in the
past, it now meets customer needs while holding minimal inventory
levels. Competition has forced companies to cut costs by managing
less inventory and by exploiting technological advances. For
example, to save money, companies store more unfinished than finished
products, and by doing so, it allows them to minimize inventory
levels. When clothing is stored in pieces, it can be assembled to
fit a range of sizes, meaning that total fewer pieces are needed, and
fewer pieces are wasted at the end of the product's life. Better
computer and communication systems help inventory managers obtain an
item's status at any time, including its demand history, thus
enabling them to better forecast requirements, accurately plan the
reorder of replenishment stock, and tightly control inventories.
Many private sector firms whose employees wear uniforms and other
clothing items are turning to prime vendors who provide a range of
services, including purchasing, storing, and distributing uniform
items and managing employee uniform allowance programs. One prime
vendor GAO visited managed an agency's employee uniform allowances
and profiles through a central data base, which enabled order
information to be transmitted directly to a distribution point and
issued to customers in a few days. The cost was automatically
deducted from the employee's allowance. The agency using this prime
vendor estimated it had saved at least 15 percent of the amount it
had allocated for clothing items over the previous year.
DLA IS PURSUING COMMERCIAL
PRACTICES, BUT PROGRESS IS
SLOW
-------------------------------------------------------- Chapter 0:4.3
The Office of the Secretary of Defense has called for improved
business practices to be implemented quickly to achieve $1.3 billion
in cost reductions envisioned by current defense management review
initiatives. DLA has, in some cases, started to adopt commercial
practices as a way to reduce its substantial C&T inventory and
associated holding costs, but the overall success of the commercial
initiatives is unknown at this time.
DLA's success will hinge, in part, on its ability to enhance its
computer and program capabilities between and within the services.
Few of the
14 recruit induction centers have bar code scanning equipment
necessary for vendors that use electronic data interchange and direct
delivery to achieve quick response objectives. DLA also must
overcome government procurement requirements that officials believe
inhibit the use of commercial practices in DOD's logistics
operations. These requirements, some of which are based on federal
laws, serve a variety of objectives, including providing equal
opportunity to all potential contractors and promoting social and
economic programs.
Despite the additional burdens these requirements might create, DOD
has begun to incorporate commercial practices in its operations.
There are several legislative proposals to reform the government
procurement system which, if enacted, could make it easier for DOD to
implement commercial practices. There are opportunities to expand
its application of these practices to C&T inventory management. For
example, DLA is not considering the use of prime vendors to supply
high volume C&T items to the services' 14 induction centers, where
new recruits are issued standard clothing, future demand is fairly
predictable, and volume is high. Instead, DLA has recently started a
limited prime vendor pilot project to provide expensive and low
demand and special order items.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5
GAO recommends that, in addition to modified prime vendor
demonstration efforts to obtain low volume and special order items,
the Secretary of Defense direct the Director of DLA to conduct a
pilot project to demonstrate whether the prime vendor concept is
beneficial in providing high usage uniform items, such as items that
are currently a part of DPSC's quick response initiatives, to recruit
induction centers. GAO further recommends that the Director (1)
determine the number of prime vendors, items, military services, and
recruit induction centers to include in the project in a manner to
best measure the cost benefit potential of the concept and (2) use
the pilot project as an opportunity for testing ways to overcome
impediments such as software and hardware incompatibilities within
DOD and difficulties in government procurement practices in
implementing commercial practices.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
DOD generally agreed with the findings and recommendations, but
stated that greater recognition should be given to DOD's initiatives
to use commercial practices. It stated that DLA has already begun
testing prime vendor arrangements for difficult-to-obtain C&T items,
such as low usage, high cost skirts and slacks for Navy and Marine
Corps recruits as well as dress coats and special measurement
clothing. DOD felt that the results of these tests should be
evaluated before it expands those programs to high-volume items and
that the evaluation include an assessment of costs, benefits, and the
impact on readiness. GAO agrees that such an approach can provide
lessons learned regarding the mechanics and evaluative techniques for
testing the prime vendor concept on high-volume items. GAO cautions,
however, that the results of the low-volume item tests should not be
used as a basis for abandoning future tests. GAO maintains that the
cost-benefits possible from adopting a prime vendor arrangement for
items where volume is high and demand is more predictable appears to
be substantial.
INTRODUCTION
============================================================ Chapter 1
In fiscal year 1992, the Department of Defense (DOD) purchased about
$650 million of clothing and textile (C&T) items for its forces
worldwide. DOD provides C&T stocks to its military customers through
a large logistics system managed by the Defense Logistics Agency
(DLA). The system is comprised of a network of depots and warehouses
that receive, store, and distribute C&T stocks.
DOD'S LOGISTICS SYSTEM
---------------------------------------------------------- Chapter 1:1
The Defense Personnel Support Center (DPSC), an activity of DLA,
acquires and manages C&T inventory needed for the military services.
Overall, the Center maintains stock for about 17,000\1
items when size ranges for generic items such as shirts and trousers
are considered. DPSC purchases C&T stocks from a variety of clothing
manufacturers and fabric mills that deliver their goods to designated
DLA depots. These depots are large warehouse facilities that store a
variety of consumable items,\2 including clothing, food, and medical
supplies, as well as common items such as nuts, screws, fuses, and
batteries. The depot system for C&T stock includes six distribution
depots that store the full range of C&T items and two specialized
support points located within the continental United States that
store a single commodity or support a single service. The depot
system is considered the wholesale level of supply. Figure 1.1 shows
the location of the depots and facilities.
Figure 1.1: Distribution
System for Clothing and Textile
Supplies
(See figure in printed
edition.)
During fiscal year 1992, DPSC charged its approximately 20,000
customers over $1.3 billion for C&T items. Customers included the
services' 14 recruit induction centers (RIC) and over 300 military
exchange stores, as well as Army, Air Force, and Marine Corps bases,
Navy air stations and shipyards, and Reserve and National Guard
Units. These retail locations usually store C&T items until the
items are needed by service personnel, who are the final consumers.
Upon receipt of a customer's requisition, DPSC validates the
information, identifies the DLA depot storing the materiel, and
issues a materiel release order to the depot to ship the item. The
depot processes the order, picks the item from storage, packs it, and
ships it to the customer. The timeliness of this service depends on
the priority that the customer assigns to a requisition and the need
for priority transportation.
--------------------
\1 When non-stocked items and locally purchased items are included,
DPSC manages a total of 32,540 items.
\2 Consumable items are not intended for repair and should be
disposed of once they become inoperative.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:2
We previously reported that the value of DOD's secondary inventory,
which includes C&T stocks, increased by $60 billion between 1980 and
1988.\3 Concerned about identifying ways DOD can address wasteful
inventory management practices, the Chairman, Subcommittee on
Oversight of Government Management, Senate Committee on Governmental
Affairs, asked us to conduct additional work comparing DOD's
logistics practices with private sector practices. This report, the
fifth in a series,\4 addresses (1) inventory problems and other
inefficiencies in the DLA C&T logistics system, (2) commercial
practices used in the private sector to reduce inventory holding and
distribution costs, and (3) DOD's progress in improving C&T inventory
management. We selected C&T stocks as the fifth topic in our series
because they represented a large investment--over $1.8 billion in
fiscal year 1993--and are sold by commercial clothing and apparel
firms that serve large organizations. Our specific objectives were
to (1) compare DOD's inventory practices for C&T items with those
used by leading-edge private sector firms and (2) identify new or
innovative commercial practices DOD could adopt to reduce its
inventory levels.
For our comparison, we focused on clothing, which represented about
35 percent of the inventory managed by DPSC, because these items are
more likely to have commercial counterparts. More specifically, we
looked at initial issue clothing items, such as uniforms, shirts,
trousers, hats, socks, and shoes, that are distributed to new
recruits. To a lesser extent, we analyzed organizational items such
as tents, mattresses, body armor, flags, insignias, and other special
purpose items, which accounted for the remaining 65 percent of
DPSC-managed items.
To obtain information on DOD's logistics system for C&T inventory, we
interviewed officials from the following organizations:
Headquarters, DLA, Cameron Station, Alexandria, Virginia;
DPSC, Philadelphia, Pennsylvania;
Defense Distribution Depot, Memphis, Tennessee;
Defense Distribution Depot, Columbus, Ohio;
Defense Distribution Depot, Susquehanna, Pennsylvania,
Mechanicsburg, Pennsylvania Facility; and
DLA Supply Depot, Kelly Air Force Base, San Antonio, Texas.
At these locations, we discussed the practices DOD uses to provide
its military customers with required C&T inventory; the processes DLA
depots use to store, handle, ship, and dispose of C&T inventory; and
the constraints DOD believes hamper commercial practices from being
adopted more rapidly. We also obtained trend data on the volume of
C&T inventory and excesses and developed case studies of specific C&T
items. We did not test or otherwise validate DOD inventory data.
We were unable to obtain actual cost information because DOD's
accounting system does not gather the data in sufficient detail to
isolate the actual cost of storing inventories. DOD does use a C&T
holding cost rate of 18 percent to help determine order quantities.
We found this rate useful in demonstrating the potential costs of
holding inventories for long periods of time.
To examine each military service's system for supplying new recruits
with their initial issue clothing items, we visited the following
locations:
U.S. Marine Corps Headquarters, Installations and Logistics,
Arlington, Virginia;
Marine Corps Recruitment Depot, Parris Island, South Carolina;
Naval Supply Systems Command, Arlington, Virginia;
U.S. Naval Training Center, Orlando, Florida;
Headquarters, U.S. Army Training and Doctrine Command, Fort
Monroe, Virginia;
U.S. Army Training Center, Fort Jackson, South Carolina;
Department of the Air Force, Deputy Chief of Staff, Logistics,
Washington, D.C.;
U.S. Air Force, Lackland Air Force Base Training Center, San
Antonio, Texas; and
U.S. Coast Guard Training Center, Cape May, New Jersey.
At these locations, we discussed the process RICs followed in issuing
clothing to new recruits, the volume of clothing inventory stored at
the centers, the turnaround time for ordering replenishment supplies
from DLA, and the forecasted number of new recruits each center
anticipated in future years.
To assess the difference between DLA's logistics practices and the
practices followed by the Air Force, Army, and Navy exchange stores,
we visited the following locations:
Army and Air Force Exchange Service, Military Clothing Store, Fort
Dix, New Jersey;
Army and Air Force Exchange Service, Military Clothing Sales Store,
Fort Jackson, South Carolina;
Navy Exchange Service Command, Staten Island, New York;
Army and Air Force Exchange Service, Lackland Air Force Base, San
Antonio, Texas;
Retail Clothing Outlet, Marine Corps Recruiting Depot, Parris
Island, South Carolina; and
Exchange Service, U.S. Coast Guard Training Center, Cape May, New
Jersey.
At these locations, we discussed the processes military service
exchange stores followed to order, store, and issue C&T items.
Through discussions and literature searches, we identified companies
that were thought to be using unique and leading-edge commercial
practices. To identify current inventory practices for C&T items in
the private sector, we interviewed officials from these companies:
R & R Uniforms, Inc., Nashville, Tennessee;
Lion Apparel, Inc., Mount Sterling, Kentucky;
The Limited, Inc., Columbus, Ohio;
Federal Express Corporation, Memphis, Tennessee;
United Parcel Service, Atlanta, Georgia;
Riverside Manufacturing Company, Moultrie, Georgia;
Cintas Corporation, Cincinnati, Ohio;
Greif Companies, Allentown, Pennsylvania;
American Apparel, Inc., Selma, Alabama;
Cass Logistics, Inc., St. Louis, Missouri;
Wrangler Division of Vanity Fair Corporation, Greensboro, North
Carolina; and
Strawbridge and Clothier, Philadelphia, Pennsylvania.
Our discussions with officials from these firms focused on the
variety of methods companies use to minimize clothing inventory
levels, fill customer orders quickly, and establish closer working
relationships with vendors. We also conducted a detailed search of
academic and professional publications to identify other innovative
practices used in the clothing and apparel industry.
In addition, we interviewed officials from the following federal
agencies on the ability of government agencies to use prime vendors:
U. S. Department of Agriculture Forest Service, Rosslyn,
Virginia;
U. S. Department of the Interior, Bureau of Land Management,
Washington, D.C.;
U. S. Department of Justice, Immigration and Naturalization
Service, Washington, D.C.;
U. S. Department of Agriculture, Animal and Plant Health
Inspection Service, Hyattsville, Maryland; and
United States Postal Service, Washington, D.C.
We conducted our review from May 1992 to October 1993 in accordance
with generally accepted government auditing standards.
--------------------
\3 Defense Inventory: Top Management Attention Is Crucial (GAO/NSIAD
90-145, Mar. 26, 1990).
\4 See Related GAO Products.
REPORT PRESENTATION
---------------------------------------------------------- Chapter 1:3
In chapter 2 of this report, we focus on DOD's multilayered C&T
logistics system and its effect on inventory growth. In chapters 3
and 4, we contrast DOD's system with our findings of the private
sector's initiatives and examine their potential application to the
military clothing logistical environment.
DOD'S LOGISTICS SYSTEM CONTRIBUTES
TO INVENTORY BUILDUP AND OTHER
INEFFICIENCIES
============================================================ Chapter 2
DOD maintains a logistics system that stores duplicate C&T
inventories throughout the DLA and military service supply system.
Our review indicated that DOD's system is characterized by (1)
inventories that turn over slowly and (2) high costs for holding some
excessive inventories. In some cases, items are held in depots for
years or even decades before being sent to a customer or becoming
eligible for disposal. A number of factors have contributed to the
inventory buildup, including DLA's lack of visibility of retail
assets and the lengthy procurement process that results in receiving
inventory before it is actually needed.
MULTILAYERED SUPPLY SYSTEM
LEADS TO LARGE C&T INVENTORIES
---------------------------------------------------------- Chapter 2:1
DOD stores large amounts of C&T inventory at a number of wholesale
and retail activities. As of September 30, 1993, DLA reported that
it stored $1.8 billion worth of C&T items in various depots and
warehouses located throughout the United States.\1 In terms of days
of supply, 4,360 items, or 26 percent of the C&T items DLA stocks,
had enough inventory on hand to last 10 years or more based on
current demand. Another 11 percent had between 5 and 10 years of
supply on hand. Figure 2.1 shows that, in total, 52 percent of all
C&T items had over 2 years of supply.
Figure 2.1: Wholesale Stock of
C&T Items
(See figure in printed
edition.)
At the retail level, RICs we visited had stock on hand for initial
issue items to new recruits generally ranging from 90 to 180 days
based on current demand. For example, the Navy RIC in Orlando,
Florida, held C&T items such as shirts, trousers, and boots to
accommodate 180 days of supply. Yet, for some of these Navy items,
DLA held as much as 10 years of additional supply at its depots.
A considerable amount of C&T inventory held in DLA depots and at RICs
is further duplicated by inventories held at military service
exchange stores. This stock is service owned and is purchased with
appropriated funds; the exchanges in turn charge the services a fee
for carrying these inventories. For example, the Naval Exchange
Service Command stocks 4 to 6 months of clothing items at 133
military clothing stores, including initial issue items for which DLA
and the Navy also hold substantial inventory.
Lastly, the wholesale and retail warehouses store additional
inventories of some clothing items categorized as war reserve stock.
For example, the Parris Island Marine Corps RIC holds the equivalent
of $4 million of selected items in contingency to meet a sudden
mobilization surge requirement. Similarly, the Army stores about
$450 million of C&T items at DLA depots, over 90 percent of which are
war reserve stocks. In contrast, the Navy and the Air Force do not
hold war reserve C&T stock at either the wholesale or retail levels.
In commenting on a draft of this report, DOD stated that the
requirement to maintain contingency stocks makes its operations
substantially different than commercial firms. According to DOD,
commercial firms have no requirement to keep such stocks in wartime.
While we agree, we included the data on war reserve stock because it
represents an additional layer of similar items maintained at the
wholesale and retail levels.
DOD estimates the value of C&T retail inventory to be between $100
million and $200 million. Based on our analysis, this estimate of
retail level stocks may be understated. Table 2.1 shows individual
components' retail inventories of initial issue clothing items.
Table 2.1
Retail Inventories of Initial Issue
Items
(Dollars in millions)
Army $28.4
-------------------------------------------------- --------
Navy 15.2
Marines 15.8\a
Air Force 7.8
Army National Guard 45.3
Naval Exchange Service Command 17.5
Army & Air Force Exchange Service 51.2
============================================================
Total $181.2
------------------------------------------------------------
\a Includes $4 million in war reserve stocks.
The total of $181.2 million represents only initial issue clothing
inventory and does not include non-initial issue items, such as
chemical protective wear, which account for 65 percent of the
different types of items that DLA stocks. For example, out of Fort
Jackson's total C&T inventory of $25.6 million, $12.3 million, or 48
percent, was organizational clothing and equipment stocks.
In commenting on a draft of this report, DOD stated that, due to
changes in threat and reduction in the size of its military forces,
it was drawing down inventory levels by taking such actions as
deferring follow-on acquisitions and disposing of excess inventory.
--------------------
\1 The reported value of DLA's C&T inventories includes the cost of
each item plus a surcharge to cover various operating expenses.
DLA SYSTEM CHARACTERIZED BY
LARGE ITEM BUILDUP AND AGING
CLOTHING STOCK
---------------------------------------------------------- Chapter 2:2
DLA's turnover of C&T stocks is slow. The turnover rate is expressed
as the ratio of sales to average inventory and is a measure of how
efficiently a business uses its inventory investment. In 1992, DLA
sold approximately
$1 of inventory for each $2 of on-hand stock, which means its
wholesale inventory turns over once every 2 years. As a result of
this slow inventory turnover, DLA has built up unnecessarily large
stocks of many items it currently issues to its customers.
For example, the Army carries 33 sizes of a cotton/polyester, green
Army mens' shirt (NSN 8405-01-311-9719). DLA forecasts usage and
replenishes supply for this shirt on a size-by-size basis to control
stocks of individual sizes. This shirt, however, had a lot of excess
stock in some sizes. Based on an average of the past 12 months'
demand, we estimated that 9 out of 33 sizes had over a 6- year
supply. Of those nine sizes, six sizes had stocks exceeding 10
years' demand, and one size had a 19.5-year supply.
Similarly, DLA had substantial stocks of an Army men's brown
undershirt available in eight sizes. The largest size shirt (NSN
8420-01-112-1479) had a 21-year supply, and the smallest size (NSN
8420-01-112-1472) had a 25-year supply. Army war reserve assets for
these slower moving sizes further compounded the large amounts of
supply. For example, the Army owns, in addition to DLA's 31,500
undershirts, 23,236 undershirts in the smallest size that are
warehoused with the DLA-owned stocks. At current rates of demand,
the combined Army and DLA supply for this size constitutes a 43-year
supply. In the case of the largest size, adding the Army's 12,128
undershirts to DLA's inventory increases the total amount of stock on
hand from 21 to 27 years.
In addition, DLA's inventory includes many phaseout and low-demand
items that have been in the DOD supply system for decades. DLA
categorized 1,992 C&T items, or about one-fourth of its 8,817 generic
C&T items, as no longer procurable, or phaseout items. An additional
500 C&T items have had no demand for the past 5 years. We identified
numerous examples of old and obsolete stocks in the depots we
visited. Old and seldom-used clothing inventory represents a burden
to the supply system because it wastes warehousing resources, often
in the absence of any substantial requirements by end users. For
example, at the Defense Distribution Depot, Memphis, Tennessee, we
identified stocks of an obsolete cold weather undershirt (NSN
8415-00-197-2887) packed in 1952. (See fig. 2.2.)
Figure 2.2: Excess Stock of
Cold Weather Undershirts From
1952
(See figure in printed
edition.)
According to DLA inventory records, 2,930 units of this item were on
hand. DLA categorized this as a phaseout item in 1981. Although DLA
officials said that customers could still requisition this
undershirt, records indicate that only 1 requisition for 12 cold
weather undershirts was received from February 1992 to 1993. Despite
this low utilization, the inventory manager indicated that there has
been no effort to dispose of this item.
In another instance, we identified 64 pallets, or approximately 7,680
pairs of size 8-wide obsolete combat boots that show packing dates
between 1953 and 1958. (See fig. 2.3.)
Figure 2.3: Excess Stock of
Obsolete Combat Boots From 1953
to 1958
(See figure in printed
edition.)
According to DLA records, these boots were valued at $68,600. This
particular size had not been requisitioned since November 1991. DLA
subsequently disposed of these stocks.
The Defense Distribution Depot, Columbus, Ohio, has stocks of wool
cold weather shirts several decades old. The large size
(NSN 8415-00-188-3798) has stock that was packed in the 1950s, 1980s,
and 1990s. Based on average demand during 1992, this item had over
9-1/2 years of stock on hand. (See fig. 2.4.)
Figure 2.4: Excess Stock of
Cold Weather Shirts Packed in
the 1950s, 1980s, and 1990s
(See figure in printed
edition.)
DLA is in the process of disposing of most of these wool shirts as
they have been preserved with dichloro-diphenyl-trichloroethane (DDT)
and are potentially unsafe to wear.
FACTORS CONTRIBUTING TO LARGE
INVENTORIES
---------------------------------------------------------- Chapter 2:3
DOD's C&T logistics system reflects its overall inventory management
philosophy of holding sufficient levels of inventory to meet expected
future needs. However, a range of factors causes DOD to hold larger
than adequate inventories. DOD accumulates large inventories because
it lacks visibility of retail-level assets and its procurement lead
times are excessive. Additional contributing factors to inventory
buildup include DOD's overly liberal retention policies, its practice
of awarding short-term contracts, and its practice of issuing new
clothing items before adequately depleting phaseout stocks.
Because DLA's inventory managers only have visibility of
wholesale-level stocks, they do not include retail-level assets when
calculating clothing and textile requirements. Consequently, they
can determine a shortage exists and order new stock, even though the
retail level may have excess stock.
DLA also takes an inordinately long time to buy replenishment C&T
stocks. At the time of our review, DLA averaged almost 400 days lead
time to acquire C&T stocks--97 days to determine requirements and
negotiate a contract with a vendor and 294 days for the manufacturer
to produce and deliver the materiel. To compensate for the long
delivery time, DLA inventory managers order stock well before it is
actually needed. If the expected demand for these items decreases or
does not materialize, inventories may not be needed. DLA officials
told us that it has been recently successful in reducing C&T lead
times and has reduced the time it takes to establish a contract by 50
days.
DLA further compounds the problem of lengthy lead times by awarding
short-term contracts. Because DLA wants to have short-term control
over contracts, most of DLA's contracts have a duration of 1 year or
less, forcing DLA to frequently repeat both the contract cycle and
the long administrative lead times associated with soliciting bids
and selecting a supplier. Further, because DLA cannot guarantee
suppliers a steady level of business, suppliers are disinclined to
maintain their production capacity after meeting contract
requirements. As a result, suppliers must re-establish production
capability each time they renew a contract, thus increasing
production lead times.
Although DLA frequently introduces new versions of clothing items, it
does not always adequately deplete stocks of the replaced and
obsolete items. As previously discussed, almost 25 percent of DLA's
C&T items are phaseout items that have become obsolete or replaced by
newer items. In some instances, unnecessary inventory remains
because the services start issuing replacement stocks before
depleting phaseout stocks. In commenting on a draft of this report,
DOD stated that this situation can occur when one size of old stock
is depleted and the service decides that new stock will be issued in
all sizes to maintain uniformity. DOD also noted that when a new
clothing item represents an improvement in life support equipment, it
will be fielded quickly.
Further compounding inventories is DLA's policy of retaining stocks
in excess of 5 years supply. DPSC officials noted that once
inventory reduction goals were achieved, they could support service
requirements with $230 million of active stock. However, adherence
to DLA's current retention policy would require DPSC to hold a total
of $800 million in stock on hand.
HOLDING COSTS FOR C&T ITEMS ARE
HIGH
---------------------------------------------------------- Chapter 2:4
DOD incurs large costs to maintain inventory, particularly items with
low demand or years of supply on hand. Because its accounting
systems cannot track the cost to hold inventory in depots, DLA is
unable to estimate the actual costs associated with holding C&T
stock. However, DOD has developed annual estimated holding cost
rates for each commodity to use in calculating appropriate quantities
to buy.
Holding costs include investment cost, or the cost of having funds
tied up in inventory; storage costs; and obsolescence costs. DOD
sets the holding cost rate for C&T items at 18 percent of the
purchase price--investment at 10 percent, storage at 1 percent, and
obsolescence at 7 percent. DPSC officials indicated that the
18-percent rate was very conservative and that the actual cost to
hold depot stocks was probably much higher.
Applying this rate to DLA's C&T inventory at the end of fiscal year
1993 yields an annual carrying cost of $291 million. Since DLA turns
C&T inventory only once every 2 years, the effective holding rate for
an item moving through the wholesale system is actually double the
annual rate, or 36 percent.
Even using the conservative 18-percent rate formulated by DOD, the
cost to hold these items beyond 5 years exceeds the purchase price.
For example, DLA has been holding 81,500 mattress covers (NSN
7210-00-171-1089) since 1987 without a known demand. The original
purchase price was $9.44 per mattress cover, while the storage cost
since 1987 has been $10.20. We estimate that 37 percent of the C&T
inventory items have incurred holding costs over the purchase price.
To recover part of its operating costs, DLA charges users the cost of
an item plus a surcharge, which covers supply center and depot
operating expenses, inflation, and material-related expenses. In
fiscal year 1992, DLA customers paid $250 million in surcharges to
cover these costs for C&T items. DLA's fiscal year 1993
surcharge--added to the cost of the item when sold--was 26.8 percent
for initial issue items and 19.6 percent for other items.
DLA TAKING STEPS TO REVERSE
INVENTORY GROWTH
---------------------------------------------------------- Chapter 2:5
In 1989, DLA started studying how to reverse the trend in inventory
growth and achieve savings. In November 1989, DOD announced Defense
Management Report Decision 903, "Change Clothing and Textile
Policies," with a goal of offsetting prior years' DLA C&T inventory
growth by reducing future years' funding authority. In the January
1993 status report for the 903 decision, DOD stressed a one-time
opportunity to use on-hand assets to satisfy peacetime customers'
demands without replacing those assets as a way to achieve a large
segment of the savings envisioned. One area of opportunity centered
on making war reserve assets available for immediate use. Figure 2.5
shows the changes for these categories over the past 5 years.
Figure 2.5: C&T Inventory
Stock Levels
(See figure in printed
edition.)
DLA reduced the value of its reported stock level from $2.5 billion
at the end of fiscal year 1992 to $1.8 billion by September 1993.
Much C&T stock was shifted from mobilization stock to peacetime
stock. For example, mobilization stock worth $538 million
represented almost 25 percent of the $2.2 billion of C&T stocks in
1989 but only about 7 percent of the $1.8 billion C&T stocks in
September 1993. As a result, peacetime stock available for immediate
issue without replacement increased from 64 percent in 1989 to 74
percent in September 1993.
In addition, DLA reported an increase in the amount of its inventory
available for disposal. In 1989, only $51 million, or 2.4 percent,
of the $2.2-billion inventory was categorized as excess stock. By
the end of fiscal year 1992, $187 million, or 8 percent of the $2.4
billion was classified as excess. As of September 1993, DLA reported
that it had reduced its 1992 excess by 80 percent to $37 million.
USE OF PRIVATE SECTOR PRACTICES
COULD BENEFIT DOD
============================================================ Chapter 3
Unlike DLA's complex multilayered supply system, private sector firms
have streamlined their inventory management operations by adopting
leading-edge strategies that emphasize the efficient flow of goods
from manufacturer to consumer. Some key techniques include
establishing closer, longer-term relationships with suppliers;
centralized distribution; and electronic communication with suppliers
and customers. As a result, private sector firms that remain
competitive in today's marketplace are able to hold less inventory,
fill orders more quickly, turn over stock more frequently, and obtain
replenishment supplies significantly faster than DLA's inventory
system.
In addition, many commercial firms and federal agencies whose
employees wear uniforms and other standard clothing items are using
prime vendors to eliminate inefficiencies in their in-house inventory
management systems or retail networks. Prime vendors assume the
inventory management functions of their clients. The 14 RICs are an
area of DOD's operations that appears to be highly compatible with
this practice.
DLA AND PRIVATE SECTOR MANAGE
INVENTORY AND DISTRIBUTION
DIFFERENTLY
---------------------------------------------------------- Chapter 3:1
The private sector offers a sharp contrast to DLA's methods of
managing and distributing clothing inventories. Private sector
companies have modified their management philosophy to reflect an
increasingly competitive business environment and new technologies.
Distributors procure more frequently, process orders faster, and
deliver goods more quickly to consumers, while maintaining lower
inventory and a higher turnover rate. In contrast, DLA's outmoded
system results in added procurement and distribution time and
increased inventory held.
Figure 3.1 compares DLA's normal movement of standard C&T items to a
RIC with a typical prime vendor's flow of standard issue clothing
items to a client. This flow of items shows that private sector
distributors, or prime vendors maintain low inventories because they
depend on suppliers delivering goods when they are needed.
Figure 3.1: How DLA and Prime
Vendors Provide C&T Stocks to
Users
(See figure in printed
edition.)
Factors such as military-unique items and the size of the military
make it difficult to make a direct comparison between DLA and the
private sector. Another factor, as stated previously, is that DLA is
unable to provide an estimate of the actual costs associated with
holding C&T inventory.
Table 3.1 contrasts prime vendors and DLA on several performance
factors.
Table 3.1
DOD and Prime Vendor Inventory
Performance Measures
Key performance
measures DOD Prime vendor
------------------ ------------------ --------------------
Wholesale stock on 2-10 years 60-120 days
hand
Retail stock held 90-180 days 0 days
by clients
Stock turnover 1 x every 2 years 1.8-4 x every year
Standard order 24-28 days 1-3 days
fill time
Percent of items 8 0.5-1
declared excess
Procurement lead 400 days 2-60 days
time
Asset visibility Wholesale Wholesale and retail
(partial) (100 percent)
------------------------------------------------------------
PRIVATE SECTOR FIRMS ADOPT NEW
INVENTORY PRACTICES TO STAY
COMPETITIVE
---------------------------------------------------------- Chapter 3:2
An intensely competitive national and international business
environment has forced private sector firms to pursue new
technologies and new business concepts to cut costs while competing
to provide superior customer service. In performance terms,
companies have to fill orders faster while lowering capital
investment and reducing inventory levels. Certain private sector
firms have done this by adopting leading-edge inventory management
strategies.
In addition to developing new strategies, more private sector firms
are centralizing distribution to take advantage of increased speed,
reliability, and economy of truck and rail transportation. Other
inventory initiatives include on-line inventory management, storage
of unfinished products, and made-to-order clothing. Advancements in
both computers and communication technology have also played a
crucial role in the clothing industry's successful adoption of these
leading-edge practices.
MANAGEMENT ADVANCES
-------------------------------------------------------- Chapter 3:2.1
Just-in-time and quick response are similar business strategies.
Both feature tightly integrated supply chains and seek to streamline
operations while improving quality and delivering the right product
to the right place at the right time. Information is shared
throughout the chain, sometimes extending all the way to suppliers
and carriers. The success of companies using these philosophies
depends on the responsiveness of both their suppliers and carriers.
This pushes them to develop closer, longer term, and, to some extent,
interdependent relationships with suppliers. These relationships
become more like partnerships than traditional buyer-seller
arrangements.
The just-in-time concept was introduced in the manufacturing field,
where supplier delivery to assembly lines replaced inventory and
on-time delivery was essential to production. Supplies are delivered
just as they are needed and not before. The quick response concept
originated as a link between manufacturers and the retail sector,
where stores wanted to stock their shelves with just enough of the
right item, in the right quantity. Quick response relies heavily on
the efficiency resulting from electronic communication between
retailers, wholesalers, and suppliers. Quick response is, to a great
extent, a combination of the just-in-time philosophy and electronic
technology. Both concepts have expanded to include the entire supply
chain and are used as elements of comprehensive strategies to improve
the management and flow of goods between manufacturers, retailers,
and consumers.
From a technical standpoint, successful quick response programs use
essential elements such as product codes and scanning devices
throughout the distribution chain, including points-of-sale and
distribution outlets, and, increasingly, electronic data interchange
with carriers. From a management standpoint, key elements of a
successful quick response program include cooperation by top-level
managers from partnering firms and close partnerships with fewer
numbers of suppliers.
Where high levels of inventory allowed departments and companies to
operate independent of one another, low inventory levels have created
interdependence between buyers and suppliers. This interdependence
has led to the rapid flow of information, including sales
information, between trading partners and within companies.
Companies consider more than just low bids to select vendors. Their
emphasis has shifted from using a large pool of suppliers as a
bargaining tool to developing long-term mutually beneficial
relationships with a few suppliers.
For example, Kmart's quick response program with suppliers is called
"Partners in Merchandise Flow." Kmart considers this program a
success because it unites buyers and suppliers and results in better
customer service. Kmart executives meet with "supplier partners" to
plan long-term strategy. As a result of this strategy, typical order
ship time was reduced from 5 to 7 days to between 24 and 48 hours and
stock turnover rates with one supplier increased from 5 to 25 times
per year; some departments turn stock 40 or more times. The company
is experiencing a 99-percent stock availability rate, with increasing
sales and customer satisfaction.
Private sector companies are also shifting from multiple,
geographically dispersed distribution centers to centralized
distribution points. This shift resulted from deregulation of the
trucking and rail industries in the 1980s, which has yielded lower
prices and more reliable transportation. These transportation
improvements have not only increased the efficiency of transporting
goods over long distances, but have also allowed managers to hold
less inventory. Companies making the transition to centralized
distribution have reported lower inventory, overhead, and personnel
costs. They have also indicated that existing inventory is better
managed and controlled. For example, Lane Bryant, a division of The
Limited, Inc., recently closed five of its six warehouses and
centralized inventory and stock management in Columbus, Ohio.
Company officials reported that this shift has enabled them to hold
the lowest possible inventory and to maintain better control over
existing inventory. The company is able to ship to customers within
a 500-mile radius overnight. It can ship to anywhere in the country,
except west of the Rocky Mountains, in 2 days.
TECHNOLOGICAL ADVANCES
-------------------------------------------------------- Chapter 3:2.2
Better computer and communication systems offer inventory managers
total visibility of products as they flow from supplier to consumer.
Inventory managers have 100 percent visibility of stock held in
warehouses, to and from warehouses, and at the retail level up to the
point of sale. Staff ranging from order-entry clerks to company
executives can obtain an item's status at any time. This capability
enables them to forecast requirements, accurately plan the reorder of
replenishment stock, and tightly manage and control inventory.
Electronic data interchange speeds purchase orders, bill payment, and
shipping documents, as well as the rate at which inventory flows
through distribution centers. For example, existing technology, such
as bar codes and scanners, make the electronic transmission of
point-of-sale information to inventory managers possible. These
managers are then able to monitor goods passing through distribution
centers. Accurate bar code systems help inventory managers locate
goods in warehouses and eliminate the need to physically count
inventory or manually keypunch inventory data. Point-of-sale
information may also be shared with suppliers and carriers to enable
them to better forecast their own requirements. Together, total
asset visibility and electronic data interchange virtually eliminate
the situation in which additional stock is ordered at the wholesale
level while excess inventory is held at the retail level.
EMERGING USE OF PRIME VENDORS
---------------------------------------------------------- Chapter 3:3
Many commercial firms and federal agencies are turning to prime
vendors to address inefficiencies in their uniform programs. A prime
vendor is a company that manufactures or procures, warehouses, and
distributes clothing and apparel for a client company. Some prime
vendors also manage employee uniform allowance programs. In these
cases, employees obtain uniforms directly from prime vendors.
Prime vendors have instituted unique and leading-edge practices that
emphasize efficient flow of goods from manufacturer to consumer.
They distinguish themselves from DLA's operation by storing as little
inventory as possible, and turning it over quickly without keeping
the customer waiting long periods to receive their order. Unlike
DLA, companies acting as prime vendors store more unfinished products
than finished products to save money, and by doing so, minimize their
inventory levels.
When clothing is stored in pieces, it can be assembled to fit a range
of sizes, meaning that total fewer pieces are needed, and fewer
pieces are wasted at the end of the product's life. By maintaining
lower inventory levels with less waste, companies are able to avoid
higher upfront investment and additional cash outlays. DLA's
outmoded system, on the other hand, keeps multiple items of finished
merchandise on the shelf that might otherwise not be used or even
needed--a practice that has proven very costly.
Advanced computer and communication systems help prime vendors obtain
an item's status at any time, including the actual demand history for
each individual, thus enabling them to better forecast requirements,
accurately plan the reorder of replenishment stock, and tightly
control inventories. Prime vendors generally use a centralized
distribution point and take advantage of speedy, reliable, and
economical transportation resources in getting its product to the
customer in a timely manner.
For both commercial firms and federal agencies we contacted, the use
of prime vendors has solved in-house inventory management or uniform
program management problems. Commercial firms who use prime vendors
found that they saved money, increased efficiency, and improved
service. Federal agencies that shifted to prime vendors generally
reported improved management and efficiency, but were, for the most
part, unable to quantify specific cost savings.
Two commercial firms we visited, with over 100,000 uniformed
employees between them, experienced in-house uniform program
management problems. These problems included numerous items on
backorder, poor inventory management, inaccurate demand forecasting,
inconsistent quality, inadequate customer service, and unreliable
vendors. Both companies are so impressed with the success of their
prime vendor clothing programs that they are considering expanding
the prime vendor concept to other commodities. The following case
studies show examples where two private sector firms and one federal
agency successfully implemented prime vendor programs.
CASE STUDY: FEDERAL EXPRESS
AND R&R UNIFORM
-------------------------------------------------------- Chapter 3:3.1
Prior to 1988, Federal Express operated its own uniform program.
Federal Express managed uniform production from design to
distribution and issued uniforms from a central distribution center
to its 20,000 employees at a cost of about $6 million a year. As the
company grew, its uniform program became cumbersome. An internal
study of Federal Express' in-house uniform program identified several
problems, including unreliable demand forecasting, growing inventory
levels, and slow order and delivery times. It filled only about 80
to 85 percent of orders from stock and took about 10 days from data
entry to shipping to fill an order.
Local Federal Express centers reacted to the unreliable service by
holding inventory that was "invisible" to the central distribution
center. Inventory data used to project needs did not incorporate
this "invisible" inventory and thus skewed needs estimates, resulting
in unnecessary purchases. In addition, Federal Express determined
that the internal management of its uniform inventory program
diverted significantly from the company's mission. These findings
led Federal Express to seek better services from an outside
contractor.
Federal Express selected R&R Uniforms, Inc., as its prime vendor.
R&R Uniforms issues about 70 different clothing items, including
uniform coats, shirts, pants, ties, and hats to Federal Express
employees. Approximately 1 million uniform items and accessories are
issued to its 60,000 employees each year. Of these, 25 percent are
initial, full uniforms for new employees and 75 percent are
replacement items. R&R Uniform assumes the burden of forecasting
demand and maintains a fill rate of over 98 percent. R&R also works
with suppliers and customers in the design and development of new
fabrics and uniforms.
With the help of an automated order-entry system and rapid deliveries
to local centers where uniforms are distributed to employees, R&R can
fill domestic orders within 24 hours. In addition, the increased
level of customer service means that local Federal Express centers no
longer find it necessary to hold their own safety levels of
inventory. R&R does hold contingency stock for Federal Express in
the event of a disaster or labor interruption. R&R currently
distributes from four warehouses, but plans to reduce the number to
two.
Federal Express and R&R jointly plan which new items to buy. During
phaseout periods, which begin when stock levels for the replacement
items are low, new and phaseout items are available to employees
concurrently. At the end of a phaseout period, Federal Express, not
R&R, is liable for any phaseout items remaining in inventory.
R&R is also responsible for such quality control activities as
inspecting finished clothing items. Goods damaged in shipping can be
returned for credit or replacement. Goods produced and held in
inventory are R&R's responsibility until purchased by Federal
Express.
The contract between Federal Express and R&R Uniforms is currently in
its second 5-year period. According to R&R officials, up-front
investments in a contract like this preclude profit in the first
year, which is why long-term contracts are critical. For example,
R&R invested about $100,000 in the first year of the contract to make
its computer system compatible with Federal Express' system. R&R
prices were frozen during the first 2 years of the first 5-year
contract period. After the second year of the contract, each item
was reviewed annually, and two price increases have been approved.
According to Federal Express, using R&R Uniforms as its prime vendor
for the past 6 years has reduced its employee uniform costs by about
10 percent. Additional savings were realized when the company
reduced personnel involved with uniform distribution from 18 to 1.
CASE STUDY: UNITED PARCEL
SERVICE AND RIVERSIDE AND
CINTAS
-------------------------------------------------------- Chapter 3:3.2
Until 1987, the United Parcel Service (UPS) outfitted its 60,000
uniformed drivers from geographically dispersed UPS-managed
warehouses. Vendors supplied goods that were made with UPS-mandated
fabric but used their own manufacturing specifications. Uniform
items went out for bid annually. The company reported that vendors
did not adhere to delivery schedules and quality was inconsistent.
Warehouses were responsible for forecasting their own demand. In
1987, UPS warehouses held about $12 million worth of finished uniform
items, of which $3.5 million was in sizes such as extra large and
extra small. Communication and coordination among the depots were
poor. Demand was forecasted according to what was purchased in the
previous year as opposed to what was actually used. Because the
computer system was antiquated, warehouses had no on-line visibility
of inventories, nor were they able to see turnover on line.
Because UPS considered the supply of uniforms and other standard
issues of clothing critical, the company decided to contract out its
uniform program to two prime vendors--Cintas and Riverside-- that
would provide overlapping services. The use of two vendors, each
with two warehouses, guarantees the flow of uniforms if one company
fails for some reason, such as fire, labor strike, or other
catastrophe. These prime vendors operate differently, but both have
been successful. Riverside is moving toward manufacturing all of its
UPS items, while Cintas manufactures or subcontracts for all items it
provides.
Initially, UPS required prime vendors to keep 90 days of stock on
hand. However, when the prime vendors proved their ability to
successfully provide uniforms and other clothing items, the required
stock level was reduced to 60 days. Most customers focus on
performance measures, such as backorder rates, not inventory levels,
and allow vendors to determine inventory levels on their own. UPS
stock in vendor warehouses turns eight times every 2 years. Because
Riverside and Cintas own goods until they are ordered, it is in their
interest to hold as little as possible.
A UPS official estimated that the transition to prime vendors saved
UPS about $1 million in the first year and continues to save the
company a significant, but undetermined amount. The UPS official
believes that the use of prime vendors helped reduce capital
investment, recycle used uniforms more efficiently, provide better
quality control, increase customer satisfaction, and reduce excess
inventory. The shift to prime vendors allowed UPS to close three of
its seven warehouses.
CASE STUDY: U.S.
DEPARTMENT OF AGRICULTURE
FOREST SERVICE AND LION
APPAREL, INC.
-------------------------------------------------------- Chapter 3:3.3
Prior to 1986, uniformed employees of the U.S. Department of
Agriculture's Forest Service were given annual allowances to purchase
uniform items from an informal network of agency-approved retailers
and manufacturers. Uniforms lacked consistency of appearance and
quality. No internal controls existed to ensure that employees spent
annual allowances on uniform items.
Dissatisfied with its uniform program, the Forest Service decided to
contract its uniform program. After reviewing and analyzing several
proposals, the Forest Service awarded a contract to Lion Apparel,
Inc., to perform centralized manufacturing, warehousing, and
distribution of its uniform program. The company supplies a total of
80 individual items to about 21,000 full-time and part-time uniformed
Forest Service employees. The company manages or manufactures a
total of about 5,000 individual items, or 46,000 total items when
size ranges are considered.
Forest Service employees place orders directly. Employee allowances
and profiles are currently managed by headquarters personnel through
a central data base housed at their national finance center. Lion
Apparel, Inc., receives up-to-date uniform allowance information on
line from the Forest Service nightly. When an employee calls to
order clothing items, order-entry clerks pull the employee's profile
on screen and their order information is transmitted directly to the
distribution center, where items are picked, packed, and sent within
3 days, if in stock. The cost of the item is automatically deducted
from the employee's established allowance. Order-entry clerks have
visibility of all stock in the distribution center as well as the
status of stock due in.
Lion Apparel holds inventory in a single warehouse in Kentucky. Lion
officials told us that due to advances in communication and
transportation, efficiencies can be better realized with a single
distribution center. According to Lion officials, this shift has
improved customer service, lowered inventory management costs, and
increased efficiency. Thus, the Forest Service's relationship with
Lion Apparel takes advantage of both the prime vendor and centralized
distribution concepts.
Lion Apparel owns all inventory until it is purchased by Forest
Service employees. This creates an incentive for the company to
accurately assess demand and hold just enough inventory. The
turnover rate for government customers is 1.8 times per year. This
rate is lower than that of commercial customers because government
contracts require Lion to hold approximately 90 days of stock on
hand. Lion and its clients work together when phasing out items.
After completing a phaseout, Lion Apparel is liable for the remaining
inventory.
Forest Service contracts are 1 year with 4 option-to-extend years.
Although this presents a risk for Lion Apparel, Lion officials said
they are confident that their service is good enough to keep
contracts through the option years. The initial 1987 uniform
contract was for $1.7 million. Based on the $2 million allocated for
uniforms the previous year, Forest Service officials estimated
savings to be at least $300,000, or 15 percent of the total
allocated. DOD spent $650 million on C&T contracts in fiscal year
1992. If DOD was able to achieve savings similar to the Forest
Service's by using a prime vendor, the savings would be substantial.
DOD PURSUING COMMERCIAL PRACTICES,
BUT PROGRESS IS SLOW
============================================================ Chapter 4
DLA is seeking ways to adopt effective practices used in the private
sector and has several promising initiatives underway or starting up.
However, progress has been slow, and, ultimately, DLA's success will
hinge, in part, on its ability to (1) enhance its automation
capabilities, (2) overcome government procurement requirements that
DOD officials believe inhibit the use of commercial practices, and
(3) more consistently align its procurement policies and practices
with the private sector. Nonetheless, there are opportunities for
DLA to expand its application of commercial practices to C&T
inventory management, such as using prime vendors.
DOD'S IMPLEMENTATION OF
COMMERCIAL PRACTICES HAS BEEN
LIMITED
---------------------------------------------------------- Chapter 4:1
DOD has directed the full-scale implementation of commercial business
practices to reduce C&T inventories. In keeping with this directive,
DLA is seeking ways to adopt commercial practices for its C&T items.
In May 1990, the Under Secretary of Defense for Acquisition
established a 10-point inventory reduction plan. One of the 10
points required DOD to actively seek out commercial initiatives,
including direct vendor delivery, to reduce inventory and associated
holding costs.
In January 1993, DOD issued a status report on the implementation of
Defense Management Report Decision 903, which provided detailed
recommendations to DLA and the services for saving $1.3 billion by
fiscal year 1997. For example, the report estimated that between 45
percent and 65 percent of C&T orders could be filled by direct vendor
delivery by the end of fiscal year 1997. The report also proposed
more use of multiyear contracts, indefinite delivery and indefinite
quantity contracts, and consideration of single contracts for
non-sized C&T items. In March 1993, the Assistant Secretary of
Defense for Production and Logistics endorsed the January 1993 status
report recommendations and directed DLA and the services to implement
the new business practices at a pace that will permit accomplishing
the projected savings.
In April 1993, the Logistics Management Institute, under a contract
with DOD, reported that based on its analysis of the revised Defense
Management Report Decision 903, DLA could achieve the targeted $1.3
billion in savings by fully and expeditiously implementing the
directed action and the improved business practices. The Institute
reported that the improved business practices held the greatest
potential for achieving the cost reductions envisioned by the report.
At present, DLA has at least 10 separate commercial initiatives
underway or in the process of starting. These include procurement
initiatives such as best value contracting, commercial specifications
development, long-term contracting, shared production agreements, and
quick response initiatives, which, according to DPSC's definition,
include electronic commerce/electronic data interchange and direct
vendor delivery. DPSC is the pilot site for quick response.
Best value contracting, which involves selecting contractors on
factors other than low bid, is the furthest advanced initiative,
comprising 25 percent of C&T contracts in fiscal year 1992. Reducing
the cost associated with military specifications is another promising
area. As of October 1993, a working group had identified 400
separate C&T items currently procured using military specifications
that could be procured commercially.
Fewer than 10 contracts (approximately 900 C&T contracts were awarded
in fiscal year 1992) have been awarded for most of the remaining
initiatives. The inventory reduction and cost savings associated
with these and other initiatives remain to be seen. To date, under
the Industrial Preparedness Demonstration Program (a shared
production agreement initiative), 3 contracts have been awarded, and
16 proposals are being evaluated.
As of October 1993, DPSC reported six quick response contracts
underway and plans eventually to award a majority of quick response
contracts. However, requisitions under these contracts were still
flowing in the traditional manner from RIC to DPSC, where they were
transmitted electronically to one of the six pilot vendors who
shipped directly to RIC. In our opinion, this system is not yet
quick response. The length of time from requisition to delivery--
over 20 days--is still too long and the continued dependence on the
old requisition system, as opposed to point-of-sale data, prevents
the six pilot contracts from being fully functional quick response
contracts.
In commenting on a draft of this report, DOD stated that it had
initiatives underway that will permit RICs to reduce the size of
their clothing inventory. For example, DOD stated that the Lackland
Air Force Base RIC, which currently maintains a 90-day supply of
stock on hand, has installed a quick response system in which it will
receive uniform items directly from three vendors. As a result, it
expects to reduce delivery time from 8 days to 3 days. Also, DOD
stated that DPSC is implementing an interim program to gain
visibility of stock maintained at RICs. DOD anticipated that
hardware and software supporting this program will be in place at all
Army, Air Force, and Marine Corps RICs by the spring of 1994.
PRIME VENDOR CONCEPT COULD BE
APPLIED TO RICS
---------------------------------------------------------- Chapter 4:2
One commercial practice for supplying C&T items that has a high
potential application in DOD is the use of prime vendors. In
particular, the military service RICs share many similarities with
private sector firms and federal agencies that use prime vendors.
Like these businesses and agencies, the RICs issue a standard set of
clothing items to new recruits. Like the RICs, many private
companies have groups or classes of new employees who are outfitted
and trained together.
Currently, the 14 RICs have a continuous flow of high volume clothing
inventory needs for new recruits. The Army has seven RICs; the Navy
has three; the Marine Corps has two; and the Air Force has one. In
addition, the Coast Guard, under the Department of Transportation,
trains new recruits at its Cape May, New Jersey, RIC. Figure 4.1
shows the locations of the various RICs.
Figure 4.1: Locations of RICs
(See figure in printed
edition.)
Note: The Defense Base Closure
and Realignment Commission
recommended, and Congress
approved, closure of the naval
training stations in Orlando
and San Diego.
(See figure in printed
edition.)
A number of prime vendors we met with that provide standard clothing
items to private sector firms and federal agencies expressed interest
in demonstrating the potential advantages of applying the prime
vendor concept to RICs. However, DLA is not considering the use of
prime vendors to provide high volume items to new recruits. Instead,
DPSC recently initiated a modified version of the prime vendor
concept to provide expensive low demand and special order items, such
as dress coats and Navy and Marine Corps skirts and slacks.
AUTOMATION LIMITATIONS IMPAIR
DOD'S USE OF COMMERCIAL
PRACTICES
---------------------------------------------------------- Chapter 4:3
Shortcomings in automation capability currently limit the extent to
which DOD can apply commercial practices to C&T inventory management.
Specifically, little computer and program compatibility exists
between services and some basic capability is lacking within
services. Few of the
14 RICs have bar code scanning equipment necessary for vendors that
use electronic data interchange and direct delivery to achieve quick
response objectives. In fact, the use of manual inventory management
systems is not at all uncommon at the retail level.
As of October 1993, DPSC planned to install bar code scanners and
software in the subsequent 6 months to transmit point-of-sale data to
them and to vendors. Even when this equipment is installed, however,
DPSC will not have visibility of the retail level stock on hand.
Because the scanners will not be integrated with RIC inventory
management systems, DPSC will not be any closer to having 100 percent
asset visibility. In commenting on a draft of this report, DOD
stated that, under the prime vendor demonstration project, the use of
electronic data interchange transactions will enable it to obtain
visibility of retail assets. DOD expects the initial results of this
effort by the end of fiscal year 1994.
CONSTRAINTS IN DOD'S ABILITY TO
ADOPT COMMERCIAL PRACTICES
---------------------------------------------------------- Chapter 4:4
The success of DOD's initiatives to improve inventory practices will
depend, in part, on DOD's ability to overcome government procurement
requirements that inhibit the use of commercial practices and to
align its procurement process and practices with those of the private
sector. There are several differences between private sector and
government contracting requirements that may limit DOD's ability to
adopt commercial practices. Current DOD initiatives, however,
demonstrate that government procurement requirements can be satisfied
while establishing new and more efficient commercial practices.
In part, DOD's difficulty stems from the government's procurement
requirements, some of which are based on federal laws, that are
intended to serve a variety of objectives, including support of
social and economic programs, full and open competition, and the
purchase of items at the lowest unit cost. The private sector places
few, if any, restrictions on the sources a firm may use. For
example, a commercial firm is not required to conduct competitions
for its contracts and, if it does so, it may use whatever process it
deems appropriate. The government, on the other hand, must compete
all contracts unless restrictions on competition have been justified.
The government generally follows a formal, complex, and
time-consuming process with which commercial firms are not familiar.
DOD's Advisory Panel on Streamlining and Codifying Acquisition Laws,
known as the Section 800 Panel, identified more than 600 such laws
affecting defense procurement. Although many of these laws,
regulations, and policies were developed to ensure fairness in the
procurement system and protect the government's interest in response
to past abuses, many may be inconsistent with private sector
practices, and therefore, may be barriers for commercial firms that
want to do business with the government.
Despite the additional burdens these requirements sometimes create,
DOD has begun to incorporate commercial practices in its operations.
For example, DOD has established a prime vendor program for medical
supplies at over 40 military hospitals that closely emulates
practices pioneered by the private sector. DPSC developed a business
plan, including a study of existing government procurement
requirements, to determine how a prime vendor arrangement could work
for medical supplies. This effort suggests that DOD can satisfy
government procurement requirements as it establishes new and more
efficient inventory management practices.
In addition, there are currently a number of legislative proposals
pending to reform the government procurement system. A major
objective of these proposals is to enhance the acquisition of
commercial items and make the government more accessible to the
commercial marketplace by alleviating some of the inconsistencies
between government and commercial contracting. Enactment of
legislation addressing these objectives could make it easier for DLA
to implement commercial practices.
In commenting on a draft of this report, DOD stated that, as part of
a pilot program authorized by the fiscal year 1991 Defense
Authorization Act, Congress may waive or limit the applicability of
existing laws to pilot program acquisitions. DOD added that DPSC's
participation in the pilot would allow it to demonstrate how
statutory and regulatory waivers could provide further benefits and
lead to increased efficiency.
CONCLUSIONS
---------------------------------------------------------- Chapter 4:5
DOD has begun to pursue commercial business practices as a way to
reduce its inventory levels and minimize its logistics costs. DOD
has implemented several initiatives involving best value contracting,
quick response, direct vendor delivery, and, just recently, started a
limited prime vendor pilot project to provide expensive and low
demand and special order items. DOD's plans are commendable and will
help reduce depot inventory levels. DOD faces a variety of
impediments to applying commercial practices to its management of C&T
items. Some of these, such as procurement laws and regulations, are
not entirely within DOD's control and will understandably take longer
to work out. Other impediments, such as hardware and software
shortcomings, are controllable and will respond to DOD's immediate
attention.
DOD has not adequately pursued other leading-edge commercial
initiatives. In particular, DOD has not sought to use prime vendors
to supply high volume C&T items. RICs, where new recruits are issued
standard clothing items, seem especially suited to benefit from this
use of a prime vendor, and the agency could miss an opportunity to
provide high volume items more easily at a lower cost. Private
sector firms and other federal agencies have found that this concept
improves inventory management significantly, and several prime
vendors have expressed interest in working with DOD.
In spite of this demonstrated commercial success, DLA has modified
the concept, and is, instead, limiting its prime vendor pilot to
expensive, low demand items and special order items. Because of this
modification from the commercial norm, the agency misses an
opportunity to obtain these items more easily at a lower cost.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 4:6
In addition to current modified prime vendor demonstration efforts to
obtain low volume and special order items, we recommend that the
Secretary of Defense direct the Director of DLA to conduct a pilot
project to demonstrate whether the prime vendor concept is beneficial
in providing high usage uniform items, such as items that are
currently a part of DPSC's quick response initiatives, to RICs. We
further recommend that the Secretary of Defense direct the Director
of DLA to (1) determine the number of prime vendors, items, military
services, and RICs to include in the project to measure the cost
benefit potential and (2) use the pilot project as an opportunity for
testing ways to overcome other impediments such as software and
hardware incompatibilities within DOD and inconsistencies between DOD
and commercial sector procurement practices.
AGENCY COMMENTS AND OUR
EVALUATION
---------------------------------------------------------- Chapter 4:7
In commenting on a draft of this report, DOD officials generally
agreed with the findings and recommendations and stated that DLA has
already begun testing prime vendor arrangements for
difficult-to-obtain C&T items, such as low-usage, high-cost skirts
and slacks for Navy and Marine Corps recruits as well as dress coats
and special measurement clothing. DOD stated that, by June 1994, it
will direct DLA to take the recommended action. DOD felt that the
results of these tests need to be evaluated before it expands these
programs to high-volume items and that the evaluation include an
assessment of costs, benefits, and impact on readiness.
We agree that such an approach can provide lessons learned regarding
the mechanics and evaluative techniques for testing the prime vendor
concept on high-volume items. We believe, however, if DOD's
evaluation shows that the modified prime vendor project is not
cost-beneficial, DOD should not abandon future tests of the
cost-benefits that could be gained by adopting a prime vendor
arrangement for other items, particularly high usage uniform items
provided to RICs. We continue to maintain that the use of prime
vendors could be particularly suitable for items, such as battle
dress uniforms, where volume is high and demand is more predictable.
DOD also commented, while it agreed with most of the report, greater
recognition should be given to the extent that DOD has initiated the
use of commercial practices in business operations. DOD mentioned it
has already implemented a wide range of business strategies, such as
electronic commerce, shared production, and the prime vendor concept,
that are providing significant benefits. It stated further, that it
has initiatives underway or planned that are intended to reduce
procurement lead time, assess storage costs as a component of
distribution costs, and improve visibility of stock maintained at
RICs. DOD stated that it expected the total C&T inventory to be
reduced from $1.8 billion to about $800 million by 1997.
We have modified our report to address some of DOD's concerns.
However, we still believe that progress in adopting commercial
practices, as it relates to clothing and textile items, has been slow
up to this point. Although we commend DOD for the initiatives it has
developed and encourage it to pursue them further, most of the
initiatives are in the early stages of development, and therefore, it
is too soon to evaluate whether they will have the desired outcomes.
(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================ Chapter 4
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the Department of Defense's (DOD)
letter dated February 14, 1994.
GAO COMMENTS
---------------------------------------------------------- Chapter 4:8
1. DOD did not agree that it was unable to compute the cost to hold
clothing and textile (C&T) items. We continue to be convinced that
DOD's accounting system is unable to capture holding costs. After we
completed our work, the Defense Logistics Agency (DLA) determined
that it cost about $44.5 million annually to store C&T inventories
based on a cost per square foot of occupied storage space. However,
these costs, in our opinion, reflect only those costs associated with
actual depot storage. Holding costs involve other additional
expenditures in managing inventories, such as administrative,
delivery, and handling costs. The 18-percent rate is considered to
be a conservative estimate by some private sector firms that stated
such costs can range from 25 percent and up. We merely used DOD's
rate as a rough approximation of its costs.
2. DOD stated that it currently takes an average of 8 days and a
maximum of 15 days from the time the Defense Personnel Support Center
(DPSC) places an order with the vendor until the material is
received. We disagree with DOD's analysis. Assuming that the 8-day
and 15-day figures are accurate, DOD's analysis only measures the
time from when DPSC places an order with the vendor to delivery to
the customer. It does not measure the time required for the customer
to initiate the requisition, transmit it to DPSC, and then for DPSC
to process the requisition and issue a material release order to the
vendor. We believe that this requisitioning process time should be
included as part of DOD's analysis.
Further, DOD stated that it has reduced delivery times for quick
response contracts from 26 days to 8 days. However, DOD's 26-day
estimate measures the interval from the receipt of a requisition at
DPSC to the release of the material from the depot, whereas the 8-day
estimate measures the time from when a vendor receives an order to
when the customer receives the material. In our opinion, these
estimates reflect entirely different segments of the ordering and
shipping process, and therefore, are not comparable. While DOD seems
to be reducing the time for the requisitioning and delivery
processes, it is difficult to ascertain the actual progress being
made from the data included in DOD's comments.
3. The type of quick response system we believe DLA should begin
moving toward would not require a requisitioning intermediary--that
is, an additional level where material requests flow--a role DPSC
currently has. Under "pure" quick response, the vendor keeps track
of the customer's needs and responds to those needs directly,
primarily through electronic communication systems. This process
works even better when vendors and users develop close, long-term
business relationships with one another. We agree that even under
this kind of quick response arrangement, DPSC would still maintain
oversight of certain functions, such as centralized bill paying
authority and contract administration. DOD stated that achieving
pure quick response is not a realistic expectation due to the manner
in which customer funds must be controlled under applicable
regulations.
However, DPSC seemed to overcome this problem under the prime vendor
program for medical supplies. For example, when a hospital places an
order with the prime vendor, the hospital electronically notifies
DPSC of the dollar value and order number. Once the prime vendor
sends an invoice to DPSC electronically, DPSC automatically transfers
funds to the prime vendor's account--a completely paperless process
from order to payment.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
-------------------------------------------------------- Appendix II:1
David R. Warren, Associate Director
Kenneth R. Knouse, Jr., Assistant Director
PHILADELPHIA REGIONAL OFFICE
-------------------------------------------------------- Appendix II:2
Edward J. Rotz, Evaluator-in-Charge
Lydia A. Martin, Evaluator
G. Bruce Eveland, Evaluator
James D. Kurtz, Evaluator
RELATED GAO PRODUCTS
Commercial Practices: Opportunities Exist To Reduce Aircraft Engine
Support Costs (GAO/NSIAD-91-240, June 28, 1991).
DOD Medical Inventory: Reductions Can Be Made Through the Use of
Commercial Practices (GAO/NSIAD-92-58, Dec. 5, 1991).
DOD Food Inventory: Using Private Sector Practices Can Reduce Costs
and Eliminate Problems (GAO/NSIAD-93-110, June 6, 1993).
Commercial Practices: DOD Could Save Millions by Reducing
Maintenance and Repair Inventories (GAO/NSIAD-93-155, June 7, 1993).