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Friday, 28 November 1986
Page: 3028

Senator MAGUIRE —I present the 263rd report of the Joint Committee of Public Accounts.

Ordered that the report be printed.

Senator MAGUIRE —by leave-This report represents the findings of the inquiry of the Joint Committee of Public Accounts into two aspects of defence equipment support. The first is the supply of spares and ammunition, and the second is the provision of technical documentation for equipment operators and maintenance personnel. The report has been presented in two volumes, the first of which is on spares and ammunition, and the second of which is on technical documentation. Because of the extended time taken to obtain certain evidence relating to technical documentation, the tabling of volume 2 has been deferred until early in the 1987 autumn sitting.

The inquiry uncovered some serious examples of overcharging for spare parts. In one instance the total price paid to a defence contractor was a staggering 13 times the price for apparently identical spare parts at retail shops. There have been cases where private defence contractors have marked up spare parts by as much as 600 per cent just for the certification that parts will meet specifications. Mark-ups of over 300 per cent are commonplace. The Committee considered that the size of these mark-ups warrants serious investigation. The report also reveals that of the 1 1/2 million items in the Defence Force warehouse inventory, half a million were domestic items, such as mops, brooms, frying pans and tea urns. The Committee recommended the rationalisation of Defence Force inventories by purchasing domestic items from local hardware shops as required. I seek leave to have the balance of my remarks incorporated in Hansard.

Leave granted.

The remainder of the speech read as follows-

The inquiry was begun in April 1986 as a follow-on investigation to the Committee's earlier Review of Defence Project Management. The Report on Defence Project Management, tabled in February 1986, noted shortcomings in the provision of initial spares and technical documentation and in equipment handover procedures in a number of major Defence projects. These findings suggested significant deficiencies in the ability of the Services to support equipment after it had been introduced into service.

The Committee sought to ascertain:

(1) Whether current stockholdings of spares and ammunition were sufficient to support present approved levels of operations and training;

(2) The scope for improving the supply of spares and ammunition; and

(3) The opportunities for achieving greater economy or efficiency in supply by:

(a) reducing inventory holding costs; and

(b) reducing the costs of purchasing spares and ammunition.

The Committee was disappointed to find that existing Defence statistics did not allow an adequate measurement of the overall impact of spares shortages on military operations and training. It was not possible also to assess the adequacy of existing spares and ammunition stocks to support the increased activity levels required to deal with the credible short-term contingencies envisaged by Defence planners.

Within these constraints the Committee found that stockholdings of spares were generally sufficient to support current authorised operations and training levels. However, operations and training had been restricted on occasions by spares shortages. The Committee doubted whether current stocks would be sufficient to support increased activity levels for some equipment items.

Stocks of ammunition on the other hand were not sufficient to meet current practices and training allowances.

Although all Services had experienced shortages of spares and ammunition, Navy suffered substantially greater shortages than the other services. Army had experienced the least shortages.

The evidence of spares and ammunition shortages indicated considerable scope for improving the effectiveness of supply support.

The Committee believed that an essential first step was to develop better supply performance monitoring. It was pleased to note that the Department of Defence had recently commenced two major studies, a supply performance measurement study and a study to assess the ability of the Defence Force to meet current contingencies. However, the Committee believed these measures needed to be supplemented by specific exercises in the field to test the effectiveness of the Service's supply systems.

The causes of spares and ammunition shortages also had to be addressed. The Committee found that shortages of spares and ammunition were generally the result of inadequate assessments of initial requirements, problems in forecasting demand, funding restraints, the failure to apply appropriate provisioning policies and procedures and procurement and delivery delays.

Despite the difficulties inherent in forecasting the demand for spares, the Committee found there was considerable scope for improving the accuracy of demand forecasting by better initial spares assessment procedures and better maintenance planning.

Shortages of funds for spares support reflect cost pressures on capital equipment budgets and Defence priorities. The Committee discussed capital cost overruns in its Report on Defence Project Management. Although the Committee did not see its role extending to questioning budget priorities, it was concerned to note that budgetary decisions on spares support had been taken on the basis of inadequate information. The Committee believed that false economies had been made in some cases as a result of the imposition of tight financial constraints.

Service spares provisioning policies attempt to set stockholdings at levels sufficient to cover expected consumption in the re-supply period. Shortages of stock can arise when forecasts of demand and re-supply times prove inaccurate. Random variations in demand and lead times should be covered by a supply margin. Unfortunately, the Services have not been able always to apply fully these provisioning policies because of funding constraints and the limitations of their computerised supply management systems. The Committee's assessment of the situation was complicated by the significant differences in provisioning policies and procedures among the Services.

The Committee was concerned at the very lengthy administrative lead times associated with provisioning spares and ammunition within the Defence organisation. These lead times also added to the cost of spares and ammunition to which I shall turn shortly.

Delivery delays by and large reflected procurement problems over which the Services had little short-term control. However, the Committee was concerned to note that the delivery performance of the Government munitions factories, which supply the Services with most of their high use ammunition, was not good. The Committee considered that the Department of Defence should take major steps to improve the quality of factory management and factory management systems generally. Also, the co-operation of the Services was required to improve the planning of factory work loads and to overcome inefficient quality assurance procedures.

The Committee believed that the effectiveness of supply support could be improved considerably by better spares assessment procedures and maintenance planning, the introduction of improved inventory management systems and the provision of additional computer support.

Notwithstanding significant supply shortages, the committee found substantial opportunities for reducing the size and cost of the Services' stores inventories.

The Services' inventories contained high levels of inactive stocks which should be more closely monitored for possible disposal action. They also contained high levels of domestic items which would be better purchased by units themselves.

The Committee also found that inventory holding costs could be significantly reduced. Staffing levels at stores depots could be decreased and labour productivity increased by the introduction of modern warehousing technologies. Productivity could be improved also by better computer support, particularly at Navy depots. There were substantial opportunities to reduce labour costs by substituting civilian for service personnel thereby freeing more service personnel for military tasks. There appeared to be considerable savings to be achieved by introducing single-Service managed warehousing in major urban centres.

The costs of procurement could be reduced also, particularly by pursuing more competitive sources of supply and by reducing administrative lead times and other costs associated with Defence purchasing.

The Committee found that some Defence suppliers were charging excessive prices. Unfortunately, the Services were not adequately monitoring spare parts prices, especially the prices they were paying for the assurance of conformance with specifications. Also the Services had not, until recently, given sufficient attention to identifying lower-cost commercial substitutes. Navy relied too much on prime contractors for spares support rather than purchasing directly from the actual manufacturer.

There was room for all Services to extend the application of economic order quantity principles. Navy's failure to apply economic order quantity principles at all was a serious shortcoming.

Lengthy purchasing lead times add greatly to the costs of supply support. There was considerable scope for reducing contracting lead times associated with the public tendering process. The overall costs of purchasing could be reduced by extending the use of local purchasing and improving payment arrangements for minor purchasing.

The Department of Defence generally acknowledged the scope which existed for improving the effectiveness and efficiency of supply support and advised the Committee of a number of major measures it had taken in recent years to improve the performance of the three Service supply systems.

Although the Committee believed many of these measures would improve the effectiveness and efficiency of supply support, it had serious doubts about the underlying strategy of the Department's major initiative, the Supply Systems Redevelopment Project. The Supply systems Redevelopment project aims to redevelop each of the Service supply systems on an integrated basis to improve supply management at all levels. However, the project is very ambitious and its promised benefits lie well into the future. The Committee was particularly concerned with the unsatisfactory performance of the Navy supply system and considered urgent remedial action was required.

The inquiry revealed the need for greater commonality in policies and procedures for supply support and for significant improvements in the effectiveness and efficiency of the single-Service supply systems. Responsibility for overseeing these changes rests with the Defence Logistics Organisation of the Department of Defence.

Because of what it considered to be the limited achievements of the Defence Logistics Organisation so far, the Committee had doubts about the ability of the Organisation to achieve the necessary changes.

The Committee believed there was a need to review the effectiveness of the present organisational arrangements for supply support. It believed that the effectiveness of the Defence Logistics Organisation could be improved by a closer relationship between the Organisation and the Services.

In all the Committee made twenty-nine recommendations aimed at improving the effectiveness and efficiency of supply support.

A large number of people contributed to this Report. I would like to thank my colleagues on the Sectional Committee, the Committee's specialist advisers and the members of the Secretariat for their unstinting support.

The Committee is particularly grateful to the Department of Defence for the extensive co-operation and assistance given to us during the inquiry.

We look forward to the response to our Report.

I commend the report to honourable senators.