Cover: Evaluation of Alternative Price and Credit Policies for Spare Parts

Evaluation of Alternative Price and Credit Policies for Spare Parts

Addressing Price Changes and Reliance on Credits

Published Feb 13, 2024

by Ellen M. Pint, Adam C. Resnick, Marygail K. Brauner, Aisha Najera Chesler, Kenneth J. Girardini, Erin N. Leidy, Candice Miller

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Research Questions

  1. Are credits needed to incentivize units to return DLR carcasses to the supply system?
  2. Could alternative price and credit policies reduce the financial management workload in Army units?

Under current policies, Army units purchase depot-level reparable parts (DLRs) from the Army Working Capital Fund (AWCF) and receive credits for returning unserviceable DLR carcasses. During fiscal year 2021, Army leaders decided to stop issuing credits to help the AWCF recover from a cash shortage caused by declining sales during the coronavirus disease 2019 pandemic. However, units continued to return DLR carcasses to the supply system even though they no longer had a financial incentive to do so. This raised the question of whether the AWCF's price and credit policies could be modified to reduce reliance on credits and the financial uncertainty associated with price changes on back-ordered repair parts.

U.S. Army Forces Command (FORSCOM) asked the RAND Arroyo Center to evaluate alternative price and credit policies, including single price, under which units would pay the standard price net of the credit for DLRs, and born-on pricing, which would set the price at the time the unit orders the part instead of updating it when the part is issued. In coordination with the sponsor, the research team developed additional courses of action and a set of evaluation criteria, including effects on unit buying power, financial management workload, DLR demands and returns, financial stability of the AWCF, and Army reserve components and other services. Researchers also examined required approvals, changes to enterprise resource planning (ERP) systems, and changes to budgeting and funds distribution.

Key Findings

  • There was no evidence that units held back returns of DLR carcasses while credits were shut off, suggesting that single price is a feasible alternative.
  • Absorbing price changes for all transactions that pass through the AWCF would require a small increase in the supply management surcharge but would eliminate 95 percent of FORSCOM's unmatched transactions and 98 percent of the associated costs. However, this policy is less effective for other Army commands where fewer transactions pass through the AWCF, particularly for the Army National Guard and Army Reserve.
  • Raising the threshold for automatic reconciliation of transactions with price changes up to $750 would cover 90 percent of transactions but would still require financial managers to ensure that prior-year funding is available to pay for them.

Recommendations

  • Implement single price or exchange pricing (which charges units a delta bill if they fail to return DLR carcasses) to address reliance on credits. Single price would be easier to implement in existing ERP systems, but exchange pricing addresses possible concerns about retaining financial incentives to return DLR carcasses.
  • In the short term, raise the threshold for automatic processing of unmatched transactions to address price changes; in the longer term, implement ERP changes to absorb price changes for all transactions that pass through the AWCF.

Research conducted by

This research was prepared for the United States Army and conducted within RAND Arroyo Center’s Forces and Logistics Program.

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