Integrating the Department of Defense Supply Chain: Techincial Report

By Eric Peltz; Marc Robbins | Go to book overview

CHAPTER TEN
Integrating Financial Policy with Network Design and Inventory
Planning

All DoD field, retail, and tactical organizations generate serviceable returns through one of two general categories. The first is that sometimes end users order materiel they determine later that they do not need, which they return to their supporting tactical or retail supply activity (or sometimes they cancel the order too late, after it has been shipped from the wholesale provider). This could have been from a maintenance misdiagnosis, ordering some things in anticipation of a need that does not develop, mistakes, and the like. The second general category is inventory requirement changes at the tactical or retail level due to changes in operations, supported equipment, unit configuration, or other factors. This can result in some items in inventory no longer being needed. Thus, customer returns and local inventory changes both create local excess conditions at tactical or retail warehouses. While improving processes to reduce returns and inventory churn should always be pursued, some level will be a natural course of doing business. So then the question becomes, how can serviceable returns be managed most effectively? In the DoD case, financial management methods in combination with information integration shortfalls are inhibiting supply chain performance.

Up to a point, it makes sense to keep actively demanded local excess in place to be drawn down. Otherwise, it should be sent back to a central point for reuse. For DLA-managed items though, the services transfer money to DLA when they receive this materiel. They can get credit for returning it, but the average level of credit is low—or more accurately, credit is offered on a low percentage of potential returns. When a service has an item that is excess to its inventory needs, in accordance with service-specific business rules, it offers it for return to DLA. DLA then responds with an offer of credit equal to the latest acquisition cost of the item (or the standard price less the cost recovery rate—commonly called the surcharge), an offer to take back the item without credit (but paying the transportation charge), or refuses the return. If a service keeps an item, it can hold it or dispose of it. Credit is offered when the DLA inventory position is at or below the maximum inventory level for an item.1 When DLA’s inventory position is beyond a specified level, then the offer of return is refused. In the case when credit is given and the service has to order the same item again, the service in effect pays the surcharge a second time. So the magnitude of the surcharge could affect the service decision to return the item for credit, even when “full” credit is given, because for some items the surcharge can be substantial. If the service returns an item for no credit (or if it disposes of an item after a return denial) and then someone else in the service orders the same item later, the service has to pay the full price again. Instead, if the service keeps the item in its inventory accounts, it can reissue

1 This is defined as the approved acquisition objective.

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