The year the DOD tuned into MRP; a year of hearings and investigation tempers MRP's bad name in the Pentagon - includes related article on inventory commingling - material requirements planning

Software Magazine, March, 1988 by John Desmond

THE YEAR THE DOD TUNED INTO MRP

1987 MAY GO DOWN IN SOFTWARE ANNALS as the year the federal government and the Department of Defense tuned into MRP.

Six Congressional hearings were held to investigate allegations that defense contractors had collected more than $1 billion in unwarranted fees in recent years, by using MRP systems to double bill, inflate prices and commingle inventories.

In short, MRP had a bad name at the Pentagon.

Since then, the drama has been played out between defense subcontractors using MRP systems, software vendors of MRP systems, the Defense Contract Auditing Agency (DCAA), and a Congressional committee which cnducted hearings over the matter last summer.

"It has been a tremendous educational process for officials in government about MRP," said James Johnson, vice president and general manager of the Manufacturing Software Business Unit of McCormack & Dodge. "DOD has become much more aware of the problems facing industry, and of industry's efforts to solve the problems."

In what one software industry observer called "the low water mark" of the affair, DCAA executive officer Phillip Rogers was quoted in the May 5, 1987, Wall Street Journal as saying, "If we can't rely on computerized systems, I don't know of any alternative but to require manual systems."

The DCAA had found, in an audit of some 20 contractors, that their records were unreliable because of shortcomings in the data processing systems. The DCAA sent letters to 300 major defense contractors describing the shortcomings and asking the companies to report back.

Rogers' statement led to fears that the government, lacking an understanding of the role of MRP software, would produce regulations that would essentially reverse the efficiency gains realized by manufacturers using MRP systems.

Since defense contractors began to use MRP systems around 1982, implementation has quickened. Many were attracted by the competition for major contracts such as the B-1 bomber, the M-1 tank and the Patriot missile system.

Carl Kilmer, a Boston-based partner in charge of aerospace and defense industry consulting for Arthur Andersen, said, "Today we deal with 19 of the 20 top defense contractors. Eight years ago, we were only dealing with one or two of them."

The use of MRP by the defense industry is consistent with the recommendations of the Packard Commission, which advised in 1986 that the defense industry use more commercially-available production techniques to lower costs.

The DOD's difficulty with MRP systems arose from the differing ways that costs are accounted for in the worlds of commercial vs. defense manufacturing. Commercial manufacturers typically commingle the common parts of different products, while closely tracking overall levels of inventory.

Defense contractors must account for every part in a contract, and for every contract separately. And the defense contractors who use MRP software have had limited freedom to mix the inventory of different contracts.

"Do they need to physically separate the parts of each contract? Can they put them all in one bin and keep track of them in the computer?" are concerns, Kilmer said.

The questions may not be important for a shipyard building two ships, but for an electronics company with 1,000 contracts with many common parts, "To physically separate the parts for each contract may be very expensive if not impossible," Kilmer said.

In a competitive industry, defense contractors who use MRP have been faced with a dilemma. "From a productivity viewpoint, you want to use the inventory across all contracts. But that flies in the face of separating costs by contracts," Kilmer said.

HORROR STORIES

Following published horror stories connecting spending abuses with MRP systems, Congress got interested in the issue. The Readiness Subcommittee of the House armed Services Committee held six hearings during the summer. Representatives of MRP software vendors Cullinet Software, Inc., McCormack & Dodge, Western Data and Management Science America all testified.

Chuck Nedell, director of aerospace and defense products for Cullinet, summed up the software vendor point of view: "MRP was being looked at as the culprit in the discrepancies found by the DCAA audit. The message we brought was that MRP was not the problem."

He added, "The culprit seemed to be the lack of a clear-cut definition for how the material planning system was to work in conjunction with the cost accounting system."

M&D's Johnson told the committee, "DCAA has stated that the very features that make MRP systems efficient--and also the implementation of these systems--may cause the contractor to be in noncompliance with government regulations."

Johnson added, "There is a direct correlation between the extent of allowed commingling and the capability to efficiently manage inventories."

At the conclusion of the hearings, the subcommittee drafted a bill which includes guidelines for what an MRP system should contain. The bill was approved in committee but action before the full House was not scheduled.