The U.S. military upgrades logistics systems.
The War on Terror is real and will continue at an intense level for the next five to eight years. What does this mean to the material handling distributor? Vendors to the military who have been put off by the onerous requirements of military contracting will have near-term increased opportunities to serve the military market place. There soon will be more, but smaller, distribution facilities located closer to the military end-user. These new distribution centers will be state-of-the-art to allow for very-high velocity product throughput.
|Inventory draw-down requirements determine reduction, and IT and business process improvements could reduce inventory by as much as 45-60%.|
Effective with this fiscal year, the Defense Authorization Bill stripped Federal Prison Industries, also known as Unicor, of its mandatory source status with the Defense Department. Unicor employs more than 21,000 inmates to make rack, shelving, safety glasses, earplugs and file cabinets, and had in excess of $546 million in sales last year. Unicor is still the default provider of certain products to all federal agencies, but the challenge of competing against such extended labor hour competition no longer exists at Defense.
Additionally, a substantial amount of maintenance outsourcing is currently contemplated. This could mean increased opportunities for the distributor’s service department. Allow me to explain why I am so convinced that increased military opportunities will drive part of an economic recovery impacting our industry.
A major refit is a necessity when one considers the neglect of the past eight years. Examples of that neglect include:
- Weapons systems, spare parts, ammunition and consumables that have not been replenished.
- The number of vehicles located throughout various bases in Germany, for which there are no replacement batteries.
- A lack of sufficient ammunition forcing many units to limit range firing to an annual practice drill.
In addition to a military refit, a build up of technology for the purpose of intelligence gathering and monitoring will require increased expenditures for imaging systems, computers, software, and real-time graphics transmission and communications capability.
Modernized Logistics and Supply Systems
Logistics and supply systems will be modernized. Each branch of the military will examine multiple unintegrated legacy logistics systems. An illustration of this examination of current systems, and the steps required for improvement, is depicted by the U.S. Marine Corps and its emulation of Wal-Mart’s supply chain methodology. In the near future, the military will stock far less product while increasing its readiness by several orders of magnitude.
|In the near future, the military will stock far less product while increasing its readiness by several orders of magnitude.|
Acquisition and Distribution
While working as a sales executive for Systems Material Handling of Olathe, Kansas during the early 1990s, I visited the Defense Logistics Agency (DLA), the defense construction supply center located in Columbus, Ohio. My visit concerned a contract for rebuilt starters and illustrates the military’s procedures for acquisition and distribution. The item was readily available from nearly every auto parts store in the country. Yet, the DLA purchased this item under a complex contract covering the needs of all branches of the service throughout the world. Consider that the DLA purchases thousands of national stock numbers representing both standard and military-specified items and it is easy to understand that the system could be responsive to the “using unit” (translation: “customer”) only by maintaining enormous inventory levels.
Draw downs beginning in 1989, and accelerating after the Gulf War concluded in 1991, reached a torrid pace during the Clinton administration. It was clear that something had to be done if our forces were to maintain their warfighting capability.
Joint Chiefs of Staff Plan for Focused Logistics
The Joint Chiefs of Staff constructed a plan initially titled Joint Vision 2010, now supplemented by Joint Vision 2020. In this plan, four pillars for military success in the new century were identified:
- Information Dominance
- Precision Strike
- Precision Maneuver
- Focused Logistics
It is appropriate that the U.S. Marine Corps is the test bed for the logistics initiative. U.S. Marine Corps veterans will confirm that for the past half-century, the Corps has been treated as the poor stepchild insofar as supply and logistics funding and support is concerned. Additionally, the USMC is the ideal laboratory pilot for the application of 21st Century logistics concepts and applications, due to its enormous structure, missions and size.
Integrated Logistics Capability
For warfighters to maintain a lean and lethal combat capability, a mission of bringing Marine Corps Logistics operations in line with “Best Practices” in the business and commercial world was established. This mission, the “Integrated Logistics Capability Initiative” (ILC), required the development of state-of-the-art logistics products and services.
|A build up of technology for the purpose of intelligence gathering and monitoring will require increased expenditures for imaging systems, computers, software, and real-time graphics transmission and communications capability.|
Two major outside resources worked together to educate and assist the Marine Corps in identifying, structuring, and implementing the tasks of the ILC initiative. The USMC tapped into the research and educational capabilities of Penn State University and designated it the Marine Corps Research University (MCRU). To assist in the ILC research and development efforts, Penn State’s Center for Supply Chain Research, located in the Smeal College of Business, partnered with Sapient Corporation.
The ILC team of TRW, Sapient Corporation, LABBLEE Corporation and Penn State Center for Supply Chain Research (formerly the Center for Logistics Research) was selected for its strong experience in Department of Defense and USMC logistics programs, private sector experience, contemporary system design and development, and experience in documenting potential migration strategies.
A four-week Best Practices Seminar, conducted by Sapient and Penn State, studied the practices of various companies including Wal-Mart, UPS, Sears, Nabisco, CSX, and Proctor and Gamble.
A six-week Solutions Definition Workshop utilized the information gleaned during the Best Practices Seminar to document and analyze core logistics functions and frame several alternative courses of action.
The final two weeks of the program were devoted to Action Planning. The team documented a series of immediate next steps consisting of high-impact, low-cost changes which quickly could be implemented.
This entire effort was entered into with the objective of going no further than substituting Information Technology (IT) for inventory. This seemed an excellent approach to the problem. The Marine Corps had over 162 mission essential logistics information systems. These systems were developed independently, not interoperable, and in most cases used outdated business rules and technology. This set of logistics systems was large, costly, and did not support operational requirements.
Going in, the group expected that the Marine Corps would be at about 70-75% “Commercial Best Practices,” and was astonished to discover that the Corps was only about 35% best practice in the most optimistic view. The Colonels, Lieutenant Colonels and General Officers who participated knew that it could only get better if they did something radical and well beyond just fixing the IT situation.
It was at this point that the commitment was made to develop what Jim Forrest, the senior Sapient director and facilitator for the initiative, called the “Marine Corps Future State Concept of Operations,” a militarized Commercial Best Practices and the application of a set of High Level Business Rules. One of the more critical decisions was to make all of these changes optimized for deployment. In the past, logistics and procurement had been more optimized for garrison than the deployed state. (Note: Benefits of these changes are being realized very clearly in the current deployment to Afghanistan.)
The ILC strategy directed itself toward integration, reengineering and modernization of legacy systems based on a common operating environment. The ILC teamed with Marine Corps Systems Command to assure that future systems will be flexible, scalable, and will share relevant data among all functional areas.
|The Defense Department spends $10,000,000 an hour on logistics, transportation and supply chain operations.” — Roger W. Kallock
former Deputy Undersecretary of Defense
Despite the best efforts of the ILC team, it was near impossible to determine the profile of the total inventory. During a span of over six weeks, numerous data calls in addition to many personal telephone calls produced a working number of approximately 1.2 billion dollars worth of Marine Corps-owned materials exclusive of ammunition, sundry and personal demand items, and principal end items (including trucks, tanks, etc.) for which the USMC administers primary or secondary inventory control. Fortuitously for America and American tax-payers, the team was empowered to make a course correction with the knowledge that leveraging industry best practices required re-examination of Marine Corps logistics business processes to support the following objectives:
- Reduce the “iron mountain” mentality of commanders who are responsible for ensuring material readiness.
- Enable operational commanders to focus on their mission and to do what they do best, thereby freeing scarce resources (people and systems) to concentrate on battle.
The ILC decided to spend more time developing a desired future state for the Marine Corps rather than focusing on the application of technology to existing business processes.
Better Processes Result In Huge Savings
The impact of this seemingly small decision is beyond huge. The potential for savings in the Marine Corps alone approaches a billion dollars. Lead times on many items can be reduced from months and even years, to days or hours. Applied across the entire Department of Defense, unnumbered billions of dollars can be saved and redirected to the other three pillars of the Joint Chiefs of Staff plan, resulting in a safer America, a stronger economy, and ultimately, a safer and better world.
The military classifies supply in 9 or 10 classes. Many years ago, there were only five official classes, which resulted in the post or base liquor outlet being dubbed the Class VI store. It’s still the Class VI store because the description of this class is “Sundry/Personal Demand Items.”
The ILC initiative has implications for all classes. The potential for the most improvement concerns Classes II, VIII, and particularly IX. A collapse of levels has occurred in item supply and in maintenance, attributable to the Corps embrace of the Quadrant Model.
The Quadrant Model
The Quadrant Model is a type of supply segmentation which takes into consideration both value and risk. The basic use of the Quadrant Model is to categorize or classify inventory items. Rather than treating all products the same, the Quadrant Model implies different approaches to managing inventory, supply chains and vendor relationships. The Quadrant Model is essentially a two-by-two matrix with four major “cells.” The horizontal axis indicates the value continuum of the particular item to the organization, and the vertical axis identifies the risk or uniqueness of the item.
In the private sector, value is usually defined in terms of profit contribution; in the military, value is best determined by the item’s contribution to the accomplishment of the mission. The four cells of the Model are usually labeled routine, leveraged, bottleneck, and critical.
The obvious first cut on the Model indicates that the Marine Corps should carry very little inventory that falls in the routine quadrant. Items such as paper clips, copy paper, etc. should be purchased at the lowest level possible and stocked as close to the consumer as possible. In the past, these items were purchased by contract.
High-cost, high-risk items are indicated in the upper-right quadrant of the matrix. One can consider each of the quadrants to be a sub-matrix with higher risk/cost ratio being upper right. Whether in the military or in commercial application, management efforts are best applied when focusing on always pushing items from upper right to lower left.
An in-depth and clear explanation of the Quadrant Model can be accessed on the Marine Corps ILC office website at www.hqmc.usmc.mil/lpi.nsf.
Positive Early Indicators
The Marine Corps has embraced the initiative and is continuing to do item and process analysis utilizing the Quadrant Model. Information Systems are being rationalized and integrated.
What are some of the results promised by this tremendous change of culture and modernized logistics paradigm? And does the feedback from the proof of concept fielding verify those promises? The total investment in the process is forecasted to be $150-200 million over a five-year period. The annual recurring benefit is expected to grow to a number between $143-187 million per year, by year five. The total non-recurring benefit is expected to be between $561-738 million by year five.
At the outset of the Integrated Logistics Capability Initiative, the order ship time from a Defense Logistics Agency was 45 days. The objective is to reduce the order ship time to an average of 10-15 days. Inventory draw-down requirements determine reduction, and IT and business process improvements could reduce inventory by as much as 45-60%.
An analysis was performed assuming that zero inventories existed, using Fiscal Year ’98 operational tempo. Very conservative assumptions were made for safety stock, operating level, order ship time, and war reserves on the magnitude of twice our current assumptions. The analysis concluded that an inventory investment of about $400 million was all that was required. Compare that number to the probable current inventory of about $1.2 billion and we have corroborated a forecasted savings of 45-60%.
The collapse of the levels of maintenance results in the freeing of 2,584 Marines who can be reassigned to warfighting tasks. Additionally, the savings in overhead costs for tools are staggering. Each infantry battalion has $660,000 worth of tools, totaling in excess of $60 million in each Marine Division. The organizational level technical manuals in the Marine Expeditionary Force total over 500 cubic feet, or 71 tons, requiring the lift capacity of five C-141 missions.
Other Service Branches Will Soon Adopt New Procedures
ILC has had enough early success and buzz to prompt Dr. William L. (Skip) Grenoble of Penn State’s Center for Supply Chain Research to comment, “Both the Army and the Defense Logistics Agency have asked us to begin projects in this area for them.”
This is an exciting turn of events for an “old tanker” who quite often spent much more time locating repair parts for his tanks than maneuvering them. The military logistics establishment is changing in a way that will really help the warfighters. Hopefully, with these improvements in military material handling and logistics, my successors will spend more of their time honing their core warfighting skills, rather than having to chase down various parts in order to maintain necessary equipment.