Effectively Sustaining Forces Overseas While Minimizing Supply Chain Costs Targeted Theater Inventory

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This product is part of the RAND Corporation documented briefing series. RAND documented briefings are based on research briefed to a client, sponsor, or targeted au- dience and provide additional information on a specific topic. Although documented briefings have been peer reviewed, they are not expected to be comprehensive and may present preliminary findings. Effectively Sustaining Forces Overseas While Minimizing Supply Chain Costs Targeted Theater Inventory Eric Peltz, Kenneth J. Girardini, Marc Robbins, Patricia Boren Prepared for the United States Army and the Defense Logistics Agency Approved for public release; distribution unlimited NATIONAL DEFENSE RESEARCH INSTITUTE and ARROYO CENTER The research described in this report was cosponsored by the United States Army under Contract No. W74V8H-06-C-0001 and the Defense Logistics Agency under Contract No. W74V8H-06-C-0002. ISBN: 978-0-8330-4308-5 The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. R® is a registered trademark. © Copyright 2008 RAND Corporation All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2008 by the RAND Corporation 1776 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 4570 Fifth Avenue, Suite 600, Pittsburgh, PA 15213-2665 RAND URL: http://www.rand.org To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: [email protected] - iii - Preface Airlift or sealift can be used to ship supplies for military forces overseas with differential speed and cost. This documented briefing lays out a construct for designing a distribution network that divorces these transportation speeds from overall distribution speed and takes advantage of their respective strengths to meet combatant command needs while minimizing total distribution costs. In doing so, it provides recommendations for when and how the two transportation modes should be employed in concert with inventory management and positioning policies as part of an overall distribution network design. The briefing that serves as the basis for this document represents a compilation of research sponsored by the Assistant Deputy Chief of Staff, G-4 (Project: Implementing the Ideal Supply Chain Structure) and the Commanding General, Defense Distribution Center (Project: Analytical Support for Strategic Planning). These projects have been conducted jointly within RAND Arroyo Center’s Logistics Program and the Forces and Resources Policy Center of the RAND National Defense Research Institute (NDRI), respectively. RAND Arroyo Center, part of the RAND Corporation, is the Army’s federally funded research and development center for studies and policy analyses, and RAND NDRI is a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the Unified Combatant Commands, the Department of the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community. This document should be of interest to those engaged in supply chain management throughout the Department of Defense. The Project Unique Identification Code (PUIC) for the Arroyo project that produced this document is DAPRR06016. For more information on RAND’s Forces and Resources Policy Center, contact the Director, Dr. James Hosek. He can be reached by email at [email protected]. Please contact the author and Director of RAND Arroyo Center’s Logistics Program, Eric Peltz at [email protected], if you have any questions or comments about this research. More information about RAND is available at www.rand.org. - iv - For more information on RAND Arroyo Center, contact the Director of Operations (telephone 310-393-0411, extension 6419; email [email protected]), or visit Arroyo’s web site at http://www.rand.org/ard/. - v - Contents Preface............................................................................................................. iii Summary.........................................................................................................vii Acknowledgments ...........................................................................................xv Glossary ........................................................................................................xvii 1. INTRODUCTION AND BACKGROUND ......................................... 1 2. DISTRIBUTION SYSTEM DESIGN TRADEOFFS .......................... 13 3. TARGETED THEATER INVENTORY INVESTMENTS................. 31 4. POLICY CHANGES TO LEVERAGE FORWARD DISTRIBUTION DEPOTS ................................................................. 47 5. SUMMARY OF RECOMMENDATIONS .......................................... 52 Bibliography................................................................................................... 55 - vii - Summary During Operation Iraqi Freedom (OIF), the costs of air shipments have garnered attention at different points for several reasons. These reasons include: shortfalls in overall funding—with transportation then becoming one of the reduction targets due to a perception of it being a discretionary cost with an ability to switch to lower-cost options, rising cost trends, and examples or anecdotes of what seem to be relatively unimportant items going by air. Regardless of the reason, each time these circumstances have arisen the first action has been to push for more items to be shipped via sealift. This type of reaction should not be needed, though. With effective distribution network design, continually monitored and updated, items will be shipped via the ideal mode that meets customer response needs at the lowest total distribution cost possible—not lowest transportation cost. Thus, we recommend that Department of Defense (DoD) supply chain managers design the distribution system to meet customer needs driven by their operational requirements in a way that minimizes total costs, with continuous monitoring and adjustment. In doing so it will become clear that for the lowest total distribution costs to meet customer needs, some items should be sent overseas by air and some should be sent by surface but usually to intermediate theater- level inventory, not directly to units. Thus, the modal choice must be coordinated with global inventory management and stock positioning. This document builds on a previous report Leveraging Complementary Distribution Channels for an Effective, Efficient Global Supply Chain by examining in more depth how judicious overseas inventory positioning can reduce total supply chain costs and better align the use of air and sea lift with their ideal uses.1 Distribution System Tradeoffs and Implications for Network Design What are the cost and performance tradeoffs that should be considered in distribution network design? The first factor to consider is the tradeoff between __________ 1 Eric Peltz and Marc L. Robbins, Leveraging Complementary Distribution Channels for an Effective, Efficient Global Supply Chain, Santa Monica, CA: RAND Corporation, DB-515-A, 2007. - viii - replenishment or delivery time and the inventory needed to provide a desired level of customer service. As replenishment time increases, lead-time demand and lead-time variability increase, requiring more inventory for the same level of service. So this creates a cost tradeoff among supply chain options if different lead times have different costs. Another factor that affects costs is how many times something is handled, which increases with echelons of inventory. Thus, there are three costs to trade off—transportation, inventory, and materiel handling—in distribution system design. Performance can also be traded off against

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