DLA forward stocking: an economic analysis

Air Force Journal of Logistics,  Fall, 2007  by John A. Flory,  Douglas A. Blazer,  Gale Bowman

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For a particular item and criteria, there are four possible outcomes (refer to Figure 2). The first outcome is that the item is economical and forward stocked. This is a correct decision resulting in savings.

[FIGURE 1 OMITTED]

The second outcome is that the item is economical but not forward stocked. This is called alpha-error and the potential savings from forward stocking the item is lost.

Next, an uneconomical item can be forward stocked, resulting in beta-error and extra expense.

Finally, an uneconomical item that is correctly not forward stocked has no effect on savings or expense. We seek a rule that minimizes incorrect decisions (alpha and beta error). However, beta error actually incurs costs (as opposed to a lost opportunity for savings), so it is considered the more egregious error.

Proposed Criteria

Recall that DLA currently uses a demand-only criterion of four-or-more demands in a year. The following modified criteria were developed:

Forward Stock If: Unit Price < Some Threshold-and-Demand [greater than or equal to] Some Threshold

The modified criteria ensure that items forward stocked are not only high demand but inexpensive, thereby eliminating excessive pipeline inventory costs. Possession of a model, performance measures, and prospective criteria is not sufficient to conduct an analysis. A list of the items demanded in-theater is also required. DLA views theater-wide demand levels; that is, aggregate demand from a number of bases in the theater. Although actual DLA data indicating demand levels were not available, three representative aggregate pipeline inventory levels were constructed for USCENTAF. The first combined demands from five USCENTAF bases: Al Dhafra, Ali Al Salem, Al Udeid, Baghram, and Baled, and represented combined Middle Eastern theater demands. The second consisted of items not currently forward stocked because of insufficient storage space. The third dataset consisted of items currently forward stocked. In summary, the process is as follows for a particular dataset:

* Select cost and demand thresholds

* Compute whether each item is economically feasible to forward stock with cost and demand threshold

* Compare simple rule performance to optimal performance

* Evaluate performance

Results

Analysis was conducted on the combined USCENTAF demands, items currently not forward stocked because of insufficient storage space, and items that are currently forward stocked. Several different sets of criteria are applied to the demand data, and their performance is discussed.

Combined USCENTAF Theater Demands

The combined USCENTAF demands consisted of 24,589 items at Al Dharfa, Ali Al Salem, Al Udeid, Baghram, and Baled as of 30 June 2006. The performance of the current DLA criterion (four-or-more demands in a year) is shown in Table 3.

[FIGURE 2 OMITTED]

The current DLA criteria would forward stock 2,483 (1,682+801) items (10 percent of the 24,589). Using this criteria results in a net loss of approximately $675K ($723K-$1.388M) over a 5-year period because of excessive pipeline inventory costs. (Note that the $688K is an opportunity cost and does not actually incur a monetary expenditure. Thus, it does not factor into the net savings or loss.) This is evident by the 801 items forward stocked that are not economical to stock (beta-error) and the associated cost of-$1.40M that overwhelms the transportation savings of $723K. The total net loss of $675K is over a 5-year period.