DLA Wants Buyers, Sellers To Share More Information.

Outdated contracting techniques and lack of communication between Defense Department purchasing agencies and private-sector vendors are among the reasons why military customers often wait longer for deliveries and pay higher prices than commercial buyers.

The organization that manages military supplies, the Defense Logistics Agency (DLA), has introduced plans to modernize its business practices in order to keep up with advances in commercial logistics systems. Last month, the agency kicked off a five-year $400 million modernization effort, aimed at updating computer systems.

But, in reality, the agency's attempts to improve its performance have been hampered by its inability to predict demand trends and to buy supplies accordingly, officials said. DLA's 40,000 employees oversee the distribution of nearly $90 billion worth of inventory for the military services.

Most recently, DLA announced it would set up "strategic supplier alliances" with major vendors. These arrangements, restricted to vendors that have sole-source contracts worth $100 million or more with DLA, are designed to enable the agency to predict the demand for specific items and take advantage of commercial vendors' buying clout in their respective markets.

Rear Adm. Dan Stone, Navy supply corps officer and DLA director of logistics, told reporters last December that the supplier alliances will "reduce the number of actual contract and pricing actions from thousands to literally a handful a year; rely on agreed-upon cost and price baselines, performance commitments, information sharing, long-term price commitments and reductions and much more.

The results, he said, "will include decreased response times, lower administrative costs and much better service for DLA's customers."

The military services, the DLA customers, could end up saving half the amount that they will pay for supplies during the next decade, Stone said.

Brig. Gen. Darryl Scott, deputy assistant secretary of the Air Force for contracting, also touted the advantages of these supplier alliances. The Air Force, he said, will be able to lower costs by reducing the amount of inventory that typically is needed under the traditional business model. One of the suppliers that will be setting up an alliance with DLA, Honeywell Corp., will help the Air Force reduce lead time on spare parts from an average of 90 days to about 25 days, said Scott.

One industry official who spoke with National Defense on condition that he not be quoted by name said that DLA's efforts in this arena are "steps in the right direction," but that the agency still has a long way to go before it can regain credibility with its customers. "Most of those programs they come up with [at DLA], focus on the symptoms, rather than the problem," said the industry source, who works for a large defense contractor. "They are not capturing all the demand, and they are not getting a good forecast for that demand. And they are not supplying to the demand."

Initiatives such as prime-vendor programs and strategic-supplier alliances still fall short of being able to predict aggregate global demand trends for military supplies, he said. "They are looking at historical demand patterns [on which] to base their forecasts."

Because manufacturers produce on a demand pattern, when there are peaks and valleys in the demand curve, somebody may lose out. Certain items may not be available when needed. "We heard [DLA] talk about this for quite a long time," said the industry official. "If they start aggregating the demand from all the services, for every item, that is a good thing."

The military customers, he added, are "totally unhappy. You could call anybody at any of the repair agencies, the depots, and they are totally fed up with DLA."

DLA was created so that there would be a centralized supply management operation, versus separate purchasing activities within each service. "The concept was correct," said the source, "but they never implemented it properly. Instead of aggregating the demand at the highest level, forecasting and meeting that demand, it's first come first serve.

"If demand surges unexpectedly and DLA is not notified, someone is going to come up short. Sometimes, you can't repair something, because of the 10-cent item that you didn't get."

DLA workers, he stressed, have every intention to satisfy the needs of the Army, the Navy and the Air Force. "But their hands are tied" by antiquated business practices.

The strategic supplier alliances are expected to provide some initial fixes to these problems, officials said. In a briefing to reporters last December, DLA's Stone and Stan Soloway, former defense acquisition reform chief, explained how the alliances would work with companies such as Honeywell, Hamilton Sundstrand and Sarnoff Corp.

At the core of these alliances is "information sharing," said Soloway. "That has not typically marked our business processes." The current business model, he said, is "crazy. ... It's crazy from the standpoint that I'm ordering thousands of things from you a year, and every time, I have to go through this whole series of steps. It's crazy that we don't get the delivery times that we need, partially because we don't give [the vendors] the information that [they] need or we're not accessing [their] supply system."

Scott, deputy assistant secretary of the Air Force for contracting, agreed. "The information sharing back and forth between the department and Honeywell allows Honeywell in many cases to anticipate our needs and they build the right stuff. And they have the right stuff on the shelves when we place an order. ... The price advantages are marvelous."

The Defense Department, for example, has contracts for tens of thousands of parts spread across many purchasing agreements with Honeywell, and annually executes thousands of contracts and pricing actions, said Soloway. Under the strategic supplier alliance, the number of contract and pricing actions could be reduced from thousands to a handful a year. The plan is for buyers and sellers to establish--over a long-term contract--cost and price baselines, performance commitments and provisions for information sharing.

"Among other things, the results will include decreased response times, lower administrative costs and much better service for DLA's customers," Soloway said.

Based on potential price reductions established by Honeywell and DLA, DLA will be paying, in real dollars, less for parts in 10 years than it paid for some of those parts last year, he said. A similar agreement was reached with Hamilton Sundstrand, which is a DLA prime vendor for C-130 aircraft propellers, a $20 million-a-year business.

Commercial Technology

Strategic supplier alliances, however, "are not the answer to all of the Defense Department's support needs," said Stone. "I think one of the real strengths of the alliance is the recognition that no one solution really hits every need."

Each alliance will be different, Soloway explained, depending on the business line, the product and the technology. "What we're looking for in these alliances is the ability to access high-quality, state-of-the-art performance distribution capabilities...Today, we have trouble getting parts in a reasonable amount of time. We are doing still an awful lot of build-to-order stuff"

Stone added that the DLA supplier alliance model could be expanded in the future. "We're looking to look across our whole supplier base and see where the best opportunities are. I believe that once we gain a lot of knowledge and lessons learned through the initial three, we are already looking at where we can expand this to our other suppliers."

The alliance with Sarnoff Corp. is somewhat unconventional, because it is designed to expand the Pentagon's access to commercial technologies and research capabilities in the private sector.

Bob Barrolini, from Sarnoff Corp., explained that the Princeton, N.J.-based firm--which used to be called RCA laboratories--develops technologies in the areas of information, biotech and semiconductors.

Sarnoff has started 20 new corporations in the last five years, said Bartolini. "And several of these companies have just gone public." In the semiconductor arena, he said, "we've been involved with the Defense Logistics Agency for over 13 years--taking new technology and providing a new family of integrated circuits ... used to support military platforms that have had obsolete parts on them for many years.

The firm currently is working with the Defense Advanced Research Projects Agency on how to develop commercial-type contracts for government research.

The alliance with Sarnoff, said Soloway, is one vehicle for the Defense Department to reach sources of commercial technology and save government R&D dollars.

In 2000, for example, corporations spent about $185 billion in research and development, while the government spent about $50 billion.

"The problem we face again is a communications and collaborative one," said Soloway. "Typically, we're not at the table with companies that are doing cutting-edge R&D, helping them understand our needs, our obsolescence concerns, our long-term military outlook."

The partnership between DLA and Sarnoff, he added, "speaks to one of the biggest challenges we have in the technology community."

The alliance with Honeywell, meanwhile, covers three categories. The first are catalogue items, where there is a stable demand base, so the vendor can reduce prices based on assured demand. The second category is replenishment, where one dominant customer has more than 50 percent of the demand.

"We can predict what that demand's going to look like ... so that Honeywell can anticipate what those quantities are going to be ... and be able to move those items out, said Stone.

The third category is "one that has always been the challenge--where there is not a stable demand," he said. These items often fill in the "obsolete" category, but are needed to fix older weapons systems.

"It's very crucial that we have good information," said Bill Sylvestri, from Hamilton Sundstrand. "With the right information, we can establish long-term agreements with our suppliers to lock-in prices."

The government will be able to get lower prices once it begins to provide more information to vendors about expected demand, said Soloway. The idea is to "give the supplier some preparation time and be able to maybe anticipate that that need could be coming, as opposed to [trying to] produce it in a very short time frame. It doesn't matter whether you're talking inside the government or outside the government--if you want something yesterday, the cost is going to go up."

DLA prime vendors are responsible for managing the inventory. If they overstock, they lose money, explained Hugo B. Poza, vice president and general manager for strategic systems at Raytheon Co., in Falls Church, Va. The company currently has four contracts at six locations to provide supply chain management services, he said in an interview.

"We actually buy the parts, deliver them on time and provide warehousing services," said Poza. "The key is contracting with the vendors. ... It's all information that goes back and forth. It allows them to buy on time."

Before DLA began using prime vendors to manage various categories of inventory, the traditional way of doing business was to request an item when it was needed. Under the prime vendor system, "the contractor pushes the material to the bins in advance of the customer asking for it," explained Neil Kovnat, a DLA manager at the Defense Supply Center, in Philadelphia.

The center provides nearly $5 billion worth of food, clothing, textiles, medicines, medical equipment, general and industrial supplies and services to military personnel and other non-Defense Department customers worldwide.

Prime vendors are contractors responsible for supplying a specific commodity. DLA, for example, has prime vendors for metals, facilities maintenance, lumber, fire fighting and marine and diving equipment. Separate contracts are awarded for each commodity.

The industrial prime vendor (IPV) program, he said, is "innovative and different from the way we traditionally do business. Typically, an item is ordered when customers realize that they need it right away or to replenish inventory. Under IPV, the contractor is responsible for keeping the bins filled with hardware, so military customers have adequate supplies to repair and overhaul equipment.

"It's more than just filling bins. It's a range of services such as material management. ...The customer does not call asking for a item to be shipped. The customer says, 'Here are my bins, manage them, keep them filled. ...Once a month, we get a bill from the contractor with all the items that were consumed."

The key to the success of this program, said Kovnat, is to have as much material as possible priced commercially. "In the next generation of contracts for IPV, we will provide the worldwide demand to the IPV contractor, where it makes sense, so they can get the same prices we get." When the prime vendors are set up for individual sites, "they don't get the worldwide demand that allows them to get [lower] prices."

IPVs do not put government employees out of work, Kovnat cautioned. It allows active-duty military staff, for example, to focus on their operational duties, rather than inventory management.

The prime vendors generally have five-year contracts--two-year base periods with three one-year options. The program has been around for several years. DLA has had prime vendors for medical and food services for decades. "Only in the past several years have we been taking the same approach to the industrial-commodity industry," Kovnar said. DLA has awarded hundreds of primevendor contracts.

He acknowledged that DLA has had difficulties forecasting the demand for supplies and spare parts. "The repair and overhaul business is not like a car production line, where you have fixed runs every month and you can predict orders.

"In our industry, the ability to project requirements is so difficult. It changes. It's a moving target. That is why the government has maintained inventories over the years. Inventories represent the ability to not project demand accurately. So to maintain readiness, we buy a comfort level so that we have material when that demand materializes."

But the Pentagon can no longer afford to do that. "We can't keep throwing stuff in the depot just in case you need it, because the military services can't project their requirements," Kovnat said. "So we have to rely on commercial entities that can be more agile in getting their hands on items or manufacturing those items."