Defense Logistics: too much unwanted inventory, not enough of what is needed.

• Author: Erwin, Sandra I.

The Defense Department has stocks of supplies the military doesn't use and sometimes not enough of what it really needs. While the military will never be as efficient as Wal-Mart in managing its supply chain, experts said, there is much it could do to cut waste and anticipate customer demands.

The Pentagon spends about $1 billion a year on unneeded or unused inventories of spare parts and other goods, a recent study found. The unwanted inventory, managed by the Defense Logistics Agency, is a consequence of not being able to accurately predict customer demand, said a Pentagon-funded study by The Rand Corp. The customers, in this case, are the military branches that rely on the Defense Logistics Agency to deliver supplies to installations in the United States and around the world. Consumers pay the agency for the items as well as a surcharge for its services.

Not being able to predict demand has been a long-standing problem in defense logistics, said Eric Peltz, one of the authors of the study who is associate director of Rand's national security research division.

When demand for an item unexpectedly declines, excess inventory is likely to develop. Similarly, when requests for an item surges without sufficient warning, supplies might not be available in a timely fashion, he said.

The Pentagon has in recent years sought to curb inefficiency by investing in costly information systems to better manage its supplies. Improvements have been made, the study said, but the Defense Department is still way behind the private sector. "Supply chain agility," which in business-speak means the ability to respond quickly and efficiently to changes in demand and supply, is what is needed to reduce costs and provide better customer service, the study said.

"DLA and the Defense Department have made strides in inventory management and forecasting," Peltz told National Defense. "But they have taken it as far as you can go with a technical solution in inventory management. Now they have to take the next step which is more difficult." That will require a change in culture and business practices, he added. "It takes a lot of collaboration with suppliers and customers." The Defense Logistics Agency has been working on its "internal processes," said Peltz. "Supplier management is the next horizon. It's a more difficult problem." The agency needs to better "understand volatile field demand."

The estimated billion dollars worth of excess inventory is a fraction of the...