The Defense Logistics Agency faces about $1 billion in inventory obsolescence cost each year due primarily to the high dynamism in demand that it faces. This report examines how to mitigate this cost by improving supply chain agility, focusing on reducing lead times, optimizing order quantities, and mitigating the effects of demand shifts through improved customer information flow and utilization.
Improving DLA Supply Chain Agility
Lead Times, Order Quantities, and Information Flow
- How can the Defense Logistics Agency reduce the risk of excess inventory, and thus reduce disposals and material costs, and improve customer support by reducing the length of stockouts from surprise demand increases?
The Defense Logistics Agency (DLA) supplies common military items to the armed services and other organizations while seeking to achieve customer service goals and minimize cost. When demand for an item rises unexpectedly, providing effective customer service is challenging, and when demand for an item falls unexpectedly, DLA can be left with the sunk cost of excess inventory that it then disposes. The more quickly and efficiently DLA can respond to changes in demand — that is, the more agile the DLA supply chain — the more it can minimize such impacts. This report examines DLA supply chain agility and ways to improve it. Specifically, it focuses on the value of and the approaches DLA could take for reducing lead times, optimizing order quantities, and improving information flow from customers. The overarching recommendation is to increase enterprisewide emphasis on supply chain agility, with involvement from the most-senior management levels across the DoD supply chain management enterprise and flowing downward to all levels. Continuous attention to supply chain agility should become part of the supply chain DNA. More-specific business practice recommendations are also provided in the report.
- To fulfill its mission, DLA must maintain inventories of items for which demand can increase or decrease dramatically on short notice.
- DLA has maintained sufficient inventory to generally meet aggregate-level customer service goals.
- Meeting these goals has come in tandem with about $1 billion per year (2005–2013) in disposals — reflecting obsolescence, which is the biggest component of DLA's inventory holding costs — and extended stockouts for items with sudden demand increases.
- The buildup of excess inventory stems from inherent large errors when forecasting over long lead-time horizons and is exacerbated by sometimes suboptimal, large order quantities and delayed notification from customers of planned changes that will affect demand.
- Given its environment, the best remaining path to improved supply chain efficiency and effectiveness is for DLA to improve supply chain agility, which is the ability to effectively respond to changes in demand and supply.
- The initial emphasis should be on being alert to and improving response to changes in demand by reducing lead-times, right-sizing order quantities, and improving customer information flow and utilization of the information by DLA.
- Increase enterprisewide emphasis on supply chain agility, with involvement from the most-senior management levels across the DoD supply chain management enterprise and flowing downward to all levels. Continuous attention to supply chain agility should become part of the supply chain DNA.
- Continue to broaden efforts to shorten administrative and production lead times by working collaboratively with suppliers, incorporating production lead time into bid and supplier selection, and developing a best value tool to account for price, lead time, and order quantity trade-offs.
- Optimize order quantities by basing them on economic order quantities with an inventory holding cost that closely approximates the estimated DLA holding cost, avoiding manual adjustments.
- Continue expanding the use of long-term contracts, especially with guaranteed minimums and longer lengths, and where low-demand and high-demand items can be combined.
- Pursue efforts with the armed services to improve the flow of information about upcoming item changes from customers to DLA.
Table of Contents
The Need for Increased Supply Chain Agility
Increased Enterprisewide Emphasis on Supply Chain Agility
Order Quantities and Agility
Conclusions and Recommendations
Estimating DLA Holding Costs
Economic Order Quantity Formulation
Order Quantity and Safety Stock
Private-Sector Practices to Reduce Lead Time
Department of Defense and Defense Logistics Agency Policy
Selecting NIIN Candidates for Long-Term Contracts