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AMC Repair Parts Supply Chain

The Department of Defense (DOD) operates 11 primary logistics and acquisition management centers to equip and sustain its global operations. The Army and Air Force each operate three of these centers, while the Navy and Marine Corps operate one apiece. The remaining three centers are elements of the Defense Logistics Agency (DLA), which manages inventory items common to multiple military services. The dollar value of the repair parts inventories that the 11 centers manage is over $80 billion. The inventories are constantly in motion, flowing from manufacturers to storage locations, to military units, to repair facilities, and then finally to disposal activities. This large and expensive network of personnel, facilities, and repair parts is DOD’s logistics supply chain, and it is critical to the operational success of the U.S. military.

In 1990, the Government Accountability Office (GAO) declared that DOD’s supply chain transformation (SCT) was a high-risk endeavor. GAO deems a program high risk if at least $1 billion is at risk, if national security is at stake, and if major agency assets could be lost, stolen, damaged, wasted, or underutilized. DOD’s bottom-line goal for SCT is to provide better support to its customers at reduced total operating costs. “Providing better support” means accurately forecasting the customers’ needs and ensuring that a quality product or service is available when the customer needs it. “At reduced operating costs” alludes to shrinking the $150 billion that DOD spends annually on its supply chain overhead.

GAO has accurately identified DOD SCT as a high-risk endeavor for several reasons. The first is the large dollar value ($42 billion) and the large number of contracts (over 253,000) for DOD repair parts procurement (based on fiscal year 2005 data). Another is that the mammoth bureaucracies operating each of DOD’s services are slow to embrace new ways of doing business. Probably the biggest reason that SCT is high risk is that it is just one of many large and interconnected modernization efforts underway in DOD. The good news is that the private sector has proven that large-scale SCT is possible, it leads to improved customer support, and it makes the business enterprise more efficient..

Repair Parts Management at AMC

The Army Materiel Command’s (AMC’s) portion of the $80 billion DOD repair parts inventory is valued at about $22 billion. The inventory primarily comprises class IX repair parts, as categorized by the Federal Supply Catalog System. Supply logisticians divide the class IX inventory into consumable repair parts and reparable (spare) parts, but in this article, class IX parts will include both consumable and reparable items. Class IX items are the parts and assemblies required to maintain the trucks, radios, helicopters, missiles, armaments, and other weapon systems that AMC manages.

AMC is headquartered at Fort Belvior, Virginia, and operates several life cycle management commands (LCMCs) and five primary maintenance depots. The chart above provides an abbreviated overview of AMC’s extensive global operations and focuses on the LCMCs that have the greatest impact on the class IX supply chain.

AMC assigns a group of repair parts to one employee called an item manager (IM). Each group of items is usually unique to one weapon system, and the IM is responsible for maintaining adequate stock levels to fill any worldwide demand for his assigned items. The number of items each IM oversees varies from fewer than 100 to several thousand, depending on the IM’s experience and the complexity of the assigned items. The IMs at AMC manage 108,818 items, about a third of which are routinely procured, repaired, and issued. These “active” items are the ones that consume the bulk of the IM’s workday. The remainder of the AMC inventory comprises low-demand, insurance, war reserve, and other “inactive” items that are relatively less time-consuming for an IM to manage.

The inventory pipeline illustrated in the chart above explains both the life cycle of a repair part and the echelons of AMC’s supply and maintenance operations. New parts are procured from industry using the Army Working Capital Fund (AWCF). They enter the DOD supply system when they arrive at one of DLA’s strategic (or forward) distribution depots. The bulk of AMC’s national-level repair parts inventory is stored at this echelon of supply.

The next echelon in the supply pipeline comprises a global network of hundreds of supply support activity (SSA) warehouses that are colocated with the Army theater, brigade, battalion, and regimental units that they support. The strategic distribution depot and SSA echelons have one source of funds (the AWCF), designated managers for worldwide procurement and repair actions (the LCMC IMs), and one point of sale (when issued from the SSA).

The third echelon of supply comprises thousands of prescribed load lists (PLLs) that are owned and maintained at the unit level. While some SSA inventories can be deployed, all PLLs are intended to be mobile and thus are restricted to the minimum essential items required to support near-term tactical and training operations. Repair parts that are in use and become unserviceable are processed through the supply pipeline to the appropriate echelon of repair. When the item can no longer be fixed, the IM will issue a disposal order to remove it from the supply chain.

Like other military components, AMC is in the process of replacing its legacy LCMC repair parts management system with a commercial enterprise resource planning (ERP) system. AMC’s effort is called the Logistics Modernization Program (LMP) and is managed by the Army’s Program Executive Office for Enterprise Information Systems. The LMP is operational at the Army Communications-Electronic Command (CECOM) and Tobyhanna Army Depot, Pennsylvania. The Army Aviation and Missile Command (AMCOM) and its two depots are currently fielding the LMP. The Army TACOM LCMC and its two depots will begin using LMP after 2009.

Successful use of LMP requires both organizational realignment and rigid data management. Both of these changes will benefit SCT efforts. Another SCT benefit that LMP offers is more accurate repair parts forecasting through the use of the ERP materiel requirements planning module. LMP-induced organizational, operational, and data management changes continue to be developed, tested, and refined at CECOM for eventual use by the rest of AMC.

Supply Chain Models

In the chart above, the pipeline depiction of the supply chain omits important events that must happen before AMC obtains the repair part and after it issues the part. The pipeline focuses primarily on what happens within the command and gives little emphasis to the effects of AMC operations on its suppliers and customers. Until recently, this was standard practice at all 11 primary DOD logistics and acquisition management centers, but AMC is modifying this to take a more holistic approach to managing its repair parts supply chains.

The Supply Chain Council developed the industry standard Supply Chain Operations Reference (SCOR) model, which uses an enterprise-wide approach to analyzing supply networks. The model is divided into five level-1 processes: plan, source, make, deliver, and return. Any entity operating a supply chain must perform each of the level-1 processes to some degree. The chart above converts the myopic, AMC-centric Army repair parts pipeline in the chart second from the top to one based on the construct of the SCOR model. The most important feature in the illustration is that each major link in the overall supply chain (suppliers, AMC, and Army customers) has its own internal supply chain to manage. However each of the three separate supply chains is inexorably linked into one larger supply chain that extends from the “factory to the foxhole.” This symbolizes that actions taken (or not taken) by one of the three major links will eventually impact the other two.

AMC’s Spare Parts Planning Process

At AMC, the IM performs the SCOR model sustainment planning function through the automated requirements determination and budget stratification processes. The AMC legacy and LMP systems compute requirements levels for each repair part based on historical demand rates, management parameters, preplanned demands, and various mathematical models that compute war reserve, safety stock, retention, and economic order quantities. When the sum of on-hand, on-order, and due-in inventory breaches reorder points that are computed uniquely for each repair part, the IM initiates procurement or repair requests for the appropriate quantity of stock.

The chart below shows the cumulative financial impact of this planning process for the entire AMC AWCF repair parts inventory. The net result is that the current planning process is very expensive (total requirements of $23.7 billion) and is slow to react to changing customer requirements because of the reliance on historical demand rates and lengthy procurement leadtimes. A safety level requirement of $1.9 billion is calculated to achieve an overall stock availability rate of 85 percent for all active weapon systems. This means that Army Soldiers have their repair parts requisitions filled about 85 percent of the time. The remaining 15 percent of requisitions will generally be placed on backorder status. Some weapon systems attain a higher stock availability rate, but it is cost prohibitive for AMC to attempt to attain a customer service level above 85 percent using its current planning processes because the safety level investment would have to be much larger.

Improvements to the AMC Planning Process

When an AMC IM initiates a purchase request, the documentation flows through engineering, acquisition, legal, small business, and other offices within each LCMC. The purchase request process includes assembling a technical data package, developing an acquisition strategy, soliciting proposals from industry, negotiating (if applicable), reviewing, and finally awarding the contract or purchase order. This administrative processing overhead is called administrative lead time (ALT) and is the source of the $1.4 billion ALT component of the AMC requirements objective in the chart above.

Streamlining ALTs was one of the first dedicated, command-wide efforts to improve AMC supply chain planning procedures. AMC used integrated teams, value stream analysis, kaizen events, new data management systems, and other continuous process improvement efforts to reduce ALTs. [Kaizen is a Japanese philosophy aimed at continuously improving all aspects of life or business.] However, most of the reductions can be attributed to ALT preplanning and the use of long-term contracts.

Preplanning involves doing much of the ALT processing steps before the IM generates a purchase request rather than afterward. This saves time because preplanning the ALT is a one-time investment that will be reused for future procurements. Long-term contracts cover timeframes of up to 5 years and have minimum and maximum total quantities. After a contract is established, successive purchase requests from the IM are quickly placed on delivery orders to the established long-term contract. Early success with this ALT reduction effort has led to the award of even larger long-term contracts that consolidate multiple repair parts procurements (from a few to hundreds) into single contracts.

Reducing procurement ALT brings multiple benefits to AMC’s repair parts planning process. For one, it allows the command to provide better support to the Army by quickly acquiring new repair parts and depot-level repair services. Reducing ALT also lowers LCMC administrative overhead costs, which in turn helps to lower the AWCF surcharge paid by AMC customers. ALT reduction also provides a multibillion-dollar cost avoidance to the Federal Government.

Another benefit is that the expanded use of long-term contracts has helped to link AMC’s repair parts supply chain to that of its suppliers. This is because long-term contracts give suppliers better visibility of AMC’s future demands, thus allowing them to plan and source their future production levels.

AMC Spare Parts Sourcing Processes

Sourcing is the procurement and transfer of raw materials, products, and services. AMC IMs have several options for sourcing repair parts. The first option is always to repair unserviceable assets if they are available in adequate quantities. Repair programs are continuously underway at organic AMC depots, other military service depots, and commercial repair facilities. The chart above shows that the revolving dollar value of the depot repair requirement is about $1.8 billion. In urgent situations, the IM has the option of tasking AMC maintenance depots to fabricate a part or cannibalize it from a next-higher assembly. Outside of the IM’s sphere of control, and on an exception basis, AMC maintenance depots are authorized to procure repair parts locally from commercial sources in order to keep depot production lines flowing.

When the above sourcing options have been exhausted, the IM procures new repair parts from industry by initiating a purchase request. In fiscal year 2008, AMC obligated about $4.4 billion from the AWCF to buy new repair parts from industry to meet the Army’s daily weapon system sustainment needs. Most of AMC’s repair parts are procured through traditional tactical processes. These procurements are termed “tactical” because purchase requests are generated one-at-a-time and are processed as stand-alone and independent entities. The introduction of long-term contracts was the first step in AMC’s migration from tactical to “strategic” sourcing.

Strategic Sourcing

In May 2005, the Office of Management and Budget (OMB) directed all Federal agencies to develop and implement strategic sourcing capabilities. The TACOM, CECOM, and AMCOM acquisition centers all used rudimentary strategic sourcing procurement methods before the OMB directive, but these local efforts were not standardized, integrated, or measured across AMC. To comply with the OMB guidance and develop more sophisticated strategic sourcing capabilities for the entire command, AMC launched a 1-year purchasing and supply management pilot program at AMCOM in September 2006.

The RAND Arroyo Center recommended beginning the purchasing and supply management pilot by first conducting a “spend analysis” to rationalize consolidating future contracts. A spend analysis reviews how procurement funds were spent in the past. For example, RAND reviewed how the Army spent $60.5 billion on goods and services in fiscal year 2003 and found the following:

  • The purchases were made by 244 procurement offices.
  • 88,013 contracts were awarded to 35,517 companies.
  • One in three companies had multiple Army contracts.
  • Many of the Army’s procurement offices had multiple contracts with one company.
  • Forty-two percent of the dollars spent (and 35 percent of the contracts awarded) were restricted to 1 company.

These data suggest that there were opportunities to reduce prices, ALT, and production leadtime and that current tactical sourcing processes were not exploiting these opportunities. The spend analysis data highlighted which repair parts were the best candidates for consolidation into fewer larger-dollar-value contracts in the future and which vendors were likely to compete for those contracts.

Analyzing past procurement spending data to rationalize future contract obligations can also reduce administrative costs to both the Army and its vendors because purchase request solicitation processing and the contract administration workload will be reduced. This is especially true when contracts are consolidated for multiple repair parts from multiple weapon systems and from multiple AMC acquisition centers. The Defense Base Closure and Realignment (BRAC) Commission aims to maximize this consolidation of repair parts sourcing across DOD. The 2005 BRAC Report directs the military components to better manage DOD’s spending by consolidating Army, Navy, Air Force, and Marine Corps depot-level reparable item procurements.

After analyzing procurement and rationalizing the supplier base, RAND recommends establishing long-term partnerships with the best suppliers. The goal of the partnerships is to help vendors improve quality, cost, and services by integrating them into the AMC spare parts management supply chain. The AMCOM acquisition center has implemented the RAND guidance by forming strategic relationships with about a dozen of its key vendors. AMCOM hosts semiannual conferences with these suppliers and tracks their performance with a supplier management scorecard. The scorecard measures progress toward attainment of key metrics, such as reducing ALT, production leadtime, shipment delinquencies, proposal turnaround time, and the number of spare parts in a critical supply posture. AMCOM targets contracts with these key firms for delivery, capacity, cost, performance, and other incentives.

Caterpillar Corporation SCT

In 1925, Benjamin Holt and Daniel Best consolidated their respective tractor and earthmoving equipment companies to form the Caterpillar Corporation. Today, the company operates 50 U.S. and 60 foreign manufacturing facilities and has annual sales of over $45 billion. Caterpillar Logistics Services, Inc. (Cat Logistics), supplies a network of 186 dealers and 1,755 rental stores with spare parts from 22 distribution centers located around the world.

The company’s spare parts logistics operations have a number of similarities to AMC’s. For example, Cat Logistics’ spare parts mantra is the same as AMC’s: The right part to the right place at the right time. The company offers over 100,000 parts, the majority of which are nonstocked because of low demand rates and the age of the equipment they are designed to repair. When ordered by dealers, these nonstocked items are procured or fabricated as required (AMC provides similar services to its customers). Like AMC, Cat Logistics is converting from using a proprietary legacy inventory management system to commercial ERP products.

However, unlike AMC, Caterpillar’s fill rate for active, fast-moving parts (defined as 350 or more demands per year) is 98 percent. As an example of the company’s spare parts velocity, the flagship 2.2-million-square-foot distribution center in Morton, Illinois, stocks about 430,000 individual parts and ships around 60,000 parts per day. This includes roughly 7,500 lines (individual item counts) on emergency orders for which delivery is guaranteed within 24 hours.

Things were not always rosy at Caterpillar. The company faced union unrest and financial losses throughout the 1980s. In 1990, the company changed its overall corporate structure from a “functional bureaucratic” organization to a “profit center” organization. Decisionmaking authority was pushed downward, and new customer-focused performance metrics were introduced. In 2001, Caterpillar introduced its workforce to the Lean Six Sigma tenets of defining, measuring, analyzing, and controlling factory and administrative processes. The company now employs a cadre of full-time “black belt” and “master black belt” process analysts who focus on improving interfunctional business operations.

Conversion to Lean production process techniques began in 2004 to reduce waste and improve the flow of inventory and information. The company has named the culmination of these efforts the Caterpillar Production System (CPS). The results are impressive. For example, at its Morton factory, the company can produce and ship up to 14 high-quality, multi­ton, $2 million-plus earthmovers per day. The finished-goods inventory is nonexistent because each machine is sold before it is produced. Part and component inventories are minimized by scheduling factory receipt just 1 day prior to induction to the moving assembly line.

DOD can benefit from studying Caterpillar’s transformation and adopting some of its successful change management strategies. Like DOD, Caterpillar has a large workforce: over 94,000 employees. Also like DOD, Caterpillar was a stodgy, inefficient, industrial bureaucracy. Yet in just 15 years, the company has morphed into an efficient, lean, and customer-focused organization.

Status of AMC’s Transformation

The command is currently transforming on multiple fronts. Large organizational changes have been underway with the Army Sustainment Command, the Military Surface Deployment and Distribution Command, and the Army Contracting Command. Under the 2005 BRAC report, CECOM will relocate to Aberdeen, Maryland, AMC will move to Huntsville, Alabama, and TACOM will relocate some of its employees from Rock Island, Illinois, to Detroit, Michigan.

AMC is also actively implementing Lean manufacturing and Six Sigma quality processes throughout the command. In fact, in just the past 3 years, AMC depots have been awarded 17 public sector Shingo Prizes for Operational Excellence by Utah State University. The conversion from legacy automated systems to the LMP is another large-scale transformation underway in AMC. This systemic change both requires and enables additional organizational and process change.

Multiple efforts are underway to transform AMC’s spare parts supply chain. These include the projects mentioned in this article as well as performance-based logistics, contractor logistics support, depot partnering, and other initiatives. It is true that spare parts support is just one area of the command’s extensive global operations in support of the Army. However, changes to the spare parts supply chain have ripple effects that affect the command’s other major areas of operation. Therefore, SCT must be accomplished as a carefully planned and integrated component of the command’s overall materiel enterprise transformation efforts.

Recommendations for AMC SCT

Many of Caterpillar Corporation’s successful transformation efforts are currently being emulated in AMC, but not in a focused and holistic manner. Multiple initiatives are underway, but they are not focused on a unified and clearly articulated command-wide vision or SCT objective.

AMC is currently staffing a dedicated team of logistics and acquisition personnel to focus and coordinate its SCT activities. Following the example set by Caterpillar, the command should metaphorically assume the V-formation used by geese and ducks in flight. Command leadership will form the tip of the “V,” clearly communicating, enforcing, and measuring AMC’s journey toward achieving its long-term SCT vision and mission. The dedicated SCT team will focus on the operational attainment of program goals and objectives. Current AMC SCT efforts—leadtime reduction, purchasing and supply management, performance-based logistics, the SCOR model, BRAC consolidations, and depot partnerships—will form the two wings of the V-formation.

Synchronizing these efforts within the command and with suppliers, customers, and other DOD components will create synergistic benefits and unity of purpose. It will also enable SCT actions to be more uniformly integrated with overarching DOD transformation efforts, such as conversion to ERP systems and Lean Six Sigma process improvements. Aspiring to operate under transformed supply chain operations will result in all of these benefits, but most importantly, it will result in improved repair parts support to the Army and its Soldiers.
ALOG

John T. LaFalce is the chief of the Supply Chain Branch of the Army Materiel Command. He has a B.S. degree in management from the University of Kentucky, an M.S. degree in management from Texas A&M University, and an M.S. degree in national industrial strategy from the Industrial College of the Armed Forces.