Summary

The Department of Defense (DOD) operates a worldwide supply system, with the vast majority of the items being managed by the Defense Logistics Agency (DLA). Media reports in October 2005 raised concerns about the use of the prime vendor concept and the prices that DLA was paying for items acquired through a prime vendor, and the House Armed Services Committee held a hearing on the matter on November 9, 2005. As a result of the hearing, DLA officials recognized the need to improve management oversight and internal controls over the program, and they proposed a series of corrective actions. Under the prime vendor concept, DOD relies on a distributor of a commercial product line, who provides that product line and incidental services to customers in an assigned region or area of responsibility. Products or services are to be delivered within a specified period of time after order placement. The prime vendor provides the product either at the cost paid to obtain it or at a price agreed upon in advance with DLA plus a handling fee. The use of prime vendor contracts is governed by the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement. DLA manages the program and the Director of DLA reports to the Under Secretary of Defense for Acquisition, Technology, and Logistics through the Deputy Under Secretary of Defense for Logistics and Materiel Readiness. The Defense Supply Center Philadelphia (DSCP), a field activity of DLA, is the lead center for managing prime vendor contracts for three major supply chains: medical materiel, subsistence/garrison feeding, and construction and equipment. In June 2006, we summarized the main findings of DLA internal reviews, and an external review conducted by the Defense Contract Management Agency at DLA's request, of DLA's prime vendor programs. The findings highlighted five deficiencies, as follows: (1) management metrics that were too narrowly focused on sales; (2) a prime vendor concept that was not suitable for all commodities; (3) a lack of management oversight; (4) inadequate pricing reviews; (5) a lack of knowledge or skills in the workforce. We also reported that DLA had experienced persistent problems in overseeing prime vendor contracts, despite the existence of oversight policies and procedures and the identification of corrective actions prior to November 2005. Those problems persisted because DLA and DSCP management had not provided the oversight needed to ensure that the policies, procedures, and corrective actions were implemented. We therefore recommended that the Secretary of Defense ensure that the Director of the DLA provide continual management oversight of the corrective actions DLA was taking to address the problems in its prime vendor program. A House Armed Services Committee report accompanying the fiscal year 2007 Defense Authorization bill directed GAO to review DLA's actions and submit a report to the defense committees no later than March 1, 2007. Our objective was to determine the extent to which DLA's corrective actions have addressed the main deficiencies in the prime vendor program.

DLA has made progress in identifying and implementing a series of corrective actions to address the five main deficiencies we indicated earlier in the management of its prime vendor program, but it has not yet completed all the actions, and some deficiencies remain. Until DLA completes all the actions, we cannot fully assess whether they will be effective in correcting all the deficiencies and sustaining the improvements. DLA has effectively rectified two of the deficiencies by completing actions to broaden its management metrics and adjust its acquisition strategy for commodities that were not suitable for the prime vendor concept. However, it is still in the process of implementing corrective actions to remedy the three remaining deficiencies noted in our June 2006 report--those relating to management oversight, pricing reviews, and workforce knowledge and skills. To address these three deficiencies, DLA has issued a new policy and DSCP has developed implementing procedures that prescribe oversight for prime vendor contractors; authorized additional positions to enhance oversight and developed training requirements for its staff; and introduced specific requirements for supply chains to conduct price reasonableness determinations and more price reviews. Nevertheless, these improvements are still a work in progress. For example, a new division at DSCP, established to ensure that supply chains are following procedures, is still in the process of hiring and training staff and has recently revised its procedures. Further, personnel responsible for one commodity within the construction and equipment supply chain had not conducted price reasonableness determinations as required by the new policy, resulting in a backlog of 11,260 items that needed review, representing an estimated value of $96 million. As of January 2007, DSCP personnel had reduced the backlog to 480 items that needed additional research. Finally, some supply chains have not yet been able to meet their staffing requirements. The shortage of personnel in the supply chains has led to heavier workloads for current staff as well as to delays in completing contract actions. Until DLA completes all the corrective actions that are still in process, it remains at risk of being overcharged for the products it is purchasing. DLA faces further challenges in sustaining the improvements it has made because of impending leadership changes and by virtue of its history of not following through on correcting deficiencies. Our prior work has shown that one of the elements needed for sustaining management improvement initiatives is demonstrated leadership commitment. While the current leadership at DLA and DSCP have demonstrated their commitment to implementing the corrective actions, personnel turnover can be expected in a large organization such as DLA--for example, the Commander of DSCP will reach the end of his 2-year term in mid-2007--and future leaders may not necessarily complete the corrective actions. DLA's history reflects the vulnerability of the prime vendor program to systemic pricing problems, because management has not always provided the oversight necessary to ensure that corrective actions were implemented. Because of these factors, and to mitigate its risk of being overcharged for its purchased products, DLA needs to ensure that the course of corrective actions is completed and the actions are working as intended and the improvements in oversight are sustained.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Implemented" or "Not implemented" based on our follow up work.

Recommendations for Executive Action