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The Defense Logistics Agency is a $26bn enterprise that would rank near the middle of the Fortune 100 if it were a private business. In the late 1990s, the agency began a massive re-engineering project aimed at transforming its internally focused, transaction-based business model to one that is externally focused on customers and suppliers and based on collaborative partnerships. Driving this change were outmoded legacy systems and demands for improved support from the military services that were also in the process of re-invention. For the last two years, this massive effort has been coordinated by Allan A. Banghart, who bears the descriptive and lofty title of director of enterprise transformation.
Q: Tell us what is behind DLA's enterprise transformation initiative and how you came to the project.
Banghart: I spent a little over 30 years in the Navy, most of it in logistics. About a week after I retired, 9/11 came along and I was asked to serve as a consultant to the Joint Chiefs of Staff for ordnance inventory management for our military operations in Afghanistan: Operation Enduring Freedom. After serving there for about seven months, this job opened up. It was one of those job opportunities that logistics professionals dream of. DLA is an agency that is really doing a lot of great things, staffed by a truly great team of professionals at every level of the organization. I consider myself truly blessed to be a member of the DLA team.
I have been here for about two years, but the conversations that led the agency to this transformation began back in 1998 and, as you might guess, it started with our aging legacy systems. We had six instances of our material management system, four instances of our procurement system. These were all COBOL based, mainframe, batch processing, time-late systems. They had all the problems you would expect from systems that were designed in the 1960s and built in the 1970s. We modified and Band-Aided them together for the last 30 years or so, but by the late '90s it had simply reached the point where we knew those systems could not carry us effectively and efficiently into the 21st century or give us the capabilities that we needed. Plus, obviously, having the people to maintain a COBOL system looked like it was going to be an "iffy" proposition in the future.
Our senior leaders also recognized that changes were occurring with our customers - the war fighters and the military services were becoming more demanding. They wanted and deserved higher material supply availability, they wanted quicker turnaround times, they simply wanted a more responsive and agile agency. In addition to that, our partners in the services - the other logistics activities - were evolving their capabilities. Our partners on the supply side also were evolving, and we needed to stay with, or ahead of them, in terms of our evolution.
Finally, there were new opportunities out there. Even in the mid-1990s, the available commercial off-the-shelf software (COTS) simply did not appear to be up to the task of handling the incredibly complex web of functions that major DOD logistics activities require.
DLA, for example, is about a $26bn to $27bn per year business. If we were ranked in the Fortune 500, we would be number 65. We handle about 8,200 contract actions a day, every day of the year. We fill 40,000 to 45,000 requisitions every day of the year. And COTS software that could handle deploying units and different war-fighting activities just simply didn't exist at that time.
But by the late 1990s, when our transformation conversations started, COTS had evolved and matured to the point where it looked like the agency would be able to embrace commercial processes and use COTS software as the backbone for our transformation, and we in fact have done that.
Q: Who are your software partners?
Banghart: We have an SAP backbone, which performs the material management and financial functions, and we have a Manugistics bolt-on for our planning functions.
Q: What has been the most difficult part of this process?
Banghart: There is no silver bullet that has made us successful, nor is there any challenge that proved to be a show stopper. When we looked at transforming DLA, our core business model, we knew we had to attack that challenge on a lot of different fronts.
A key part of what we have done as part of our core business model change is to become partners with both our customers - to get a profound understanding of what their future requirements are - and with our supplier community - to manage and fully integrate those supply chains to meet the war fighters' and the services' future requirements. We want to give them what they need, when they need it at the best possible cost. So we are going from being a very traditional wholesaler to being a fully integrated partner in the entire supply chain.
As we have gone through this transformation process, we have been very conscious of the needs of our customers. Every time we deployed an internal process change, which means changing our systems, we did everything possible to make sure our internal change was absolutely transparent to our customers. So, while we may be changing the way we process a requisition or the way we handle the information, the customer really doesn't see that change - other than that he gets his material a lot faster and gets a higher supply material availability.
Q: What has been the response of your suppliers?
Banghart: We went live with release one on July 31, 2002, so we are about 18 months operations. As I mentioned, DLA manages 4.6 million different line items. This first release was designed to teach us what we did right and what we needed to improve upon. We used our first release to wring out the inevitable bugs that you come across in very complex ERP deployments. To mitigate the risk of the unknowns, we only had about 170,000 line items, or a little less than 5 percent or the total number of line items we manage, included in Release 1.0, and we had about 400 users. Given that, we really didn't impact a lot of our suppliers all that much. There were some start-up hiccups, but our team and our suppliers rallied to overcome them as quickly as possible. Just 45 days ago, on Nov. 30th 2003 we went live with release 1.1. With that release we began a 120-day roll-out that will increase our ERP sales volume tenfold, from $300m a year up to approximately $3bn per year. We will be tripling the number of system users and also substantially increasing the number of line items managed in the ERP environment. This first phases of this release are for subsistence items which involves adding a significantly larger number of vendors that deal with the system on a regular basis.
One of the things that we have done, which I think is very positive, is that we have proactively engaged each of those vendors well in advance and let them know exactly what was coming so they could do all the things they needed to do on their end to adjust their processes.
Q: What is the timeline for further rollout?
Banghart: Between now and March or so, we will finish going from this $300m a year to $3bn a year in sales and we will finish adding all the subsistence vendors, a substantial part of our clothing and textile business and around 1,000 more users. Then we are going to have another big functional IT upgrade in the July timeframe. Then we are going to begin rolling in the remainder of our 4.6 million line items and all the rest of the 4500 people between fall of this year and the first quarter of 2006.
Q: What benefits are you seeing?
Banghart: DLA is embracing a customer driven business model to achieve a profound understanding of the military services future requirements for our products. This will allow us to make a lot better procurement decisions in the future, and by that I mean we buy more of what the services are going to ask for and buy a lot less of what they are not going to ask for later on. We have developed what I think are conservative estimates of what our inventory savings will be as a result of full-scale deployment of Business Systems Modernization (BSM). The inventory savings alone exceed the entire cost of the program. We are looking at about a $750m reduction in DLA-owned inventory.
Q: How do you feel about where the project is today?
Banghart: I feel great about the fact that we got through Release 1.0 and stabilized the system so that it is supporting the mission for those initial 170,000 items I spoke of earlier. That we are comfortable enough with our progress to commit a substantially larger portion of the agency's business - and this isn't business where you can fail - is also great news. When we made the decision to commit this added business to the program, we had to be comfortable that we were going to be successful because we simply cannot come up short in terms of supporting America's war fighter. Our commitment to move forward and to commit a substantially greater portion of the business to BSM is probably the best indicator of the confidence we have in what we have done so far and in the way ahead. We are on track, we have a schedule and we are marching down that path. We also have a Customer Relationship management (CRM) program that is coming along rapidly and is close aligned with Business Systems Modernization. And we have a Supplier Relationship Management (SRM) program that is also tied closely to BSM and, finally, a dynamic material positioning program. These four programs are the pillars of our transformation. They are all well under way.
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