Ever wonder how the Army, Navy, Air Force, and Marine Corps get the essential supplies they need to do their jobs — food, fuel, medical supplies, uniforms, repair parts, and more? Tony Poleo knows. As CFO of the Defense Department’s Defense Logistics Agency (DLA), the 47-year-old Poleo runs the finances of what is arguably the world’s biggest supply-chain operation. Even Wal-Mart might be impressed by some of the numbers he deals with: 23,000 employees; eight global supply chains; 100,000 orders a day for matériel and services; 11,000 contract actions a day; and 15 million gallons of fuel purchased daily. In fiscal 2008, the agency conducted some $42 billion worth of business, which Poleo says would put DLA “around No. 56” on the Fortune 100. “We are a military organization,” he says, “but in our day-to-day operations, we think and operate like a business where we can.”
Supplying military personnel in various and often dangerous locations is a tall order, to put it mildly, yet DLA cites “perfect order fulfillment” as a goal. Can you explain that?
The idea is that the customer gets exactly what he wants, the quality he needs, in the time frame he needs it. If all that happens, that’s a perfect order. But DLA owns only segments of that [process]. We can try to influence the other segments, but we don’t control the entire supply system.
How close do you come to the goal of perfect order fulfillment?
We’re just starting to talk in terms of perfect order fulfillment. Previously, we talked about availability of materials, which wasn’t quite as rigorous, but that number has always ranged somewhere between 85 and 95 percent. And I would contend that that means 10 or 15 percent of the time we are not satisfying our customers. Let’s remember what these customers are doing. Not to put too fine a point on it, but what we do in some cases is literally life or death. So my point is that being off 10 or 15 percent of the time is unacceptable. There’s plenty of room for improvement.
Aren’t there some things that will always get in the way of overall improvement — for example, the fact that your inventory turns only every 18 months?
Even when you consider that some things are unique to the military — such as the fact that we support weapons systems, like the B-52, which is more than 50 years old now — we still need to get better at our inventory management. That’s no secret. There are two costs involved. One is the carrying cost to have inventory that we’re not using. Two, there’s an opportunity cost from the standpoint that if we could turn that inventory back into cash, we could buy more of what we actually need.
Does improving inventory management run contrary to the troops’ need for readiness?
There’s our challenge. Obviously, folks in financial positions like mine [might] take a little more risk in this area than, say, the operators do. The operators put a premium on having too much [rather than too little]. So there’s kind of a constant friction, or rather a professional tension. And we’re trying to use our supply- and operations-planning governance to mediate that tension. Obviously, when we’re fighting two wars, as we are right now, the pendulum is going to swing more toward having too much.
President Obama recently announced that we’re going to be getting out of Iraq by August 2010 and redeploying troops in Afghanistan. How will DLA respond to that strategy?
In regard to repositioning troops, which is obviously fairly public knowledge at an aggregate level, we are very engaged with the combatant commanders. We have DLA personnel physically in place at the operating commands. We have people physically sitting with the Joint Chiefs of Staff in the Pentagon. Their role is to make sure that those military planners understand the capabilities that DLA can bring to the table when they’re putting their plans together. After all, if you look at military history, a lot of times success or failure was based on logistics. Did they have fuel or not? Did they have food or not?
DLA was the first military agency to roll out a fully operational enterprise-resource-planning system, starting about 10 years ago. What has that system done for you?
Our systems integrators believe we have the largest single implementation of SAP anywhere, private or public. [It has allowed us to] go from just managing a lot of inventory to managing end-to-end supply chains and customer relationships. Financially, we’ve gone from not even being able to close our books, technically, to closing the books at the end of the year in two weeks. In terms of change management, we went from 1,100 job-position descriptions to 167. That tells you we’re doing things in a much more standardized way.
Can you give an example of a particular benefit to finance?
In our troop-support business, we buy a lot of everyday food, just like you do at the grocery store. To do that, we adopted the commercial supply-chain [model] instead of keeping inventory, which from a logistics standpoint was pretty groundbreaking. But when we inserted compliance into the payment process — which says that for the vendor to get paid, the order, the contract, and the customer receipt must all be in the system and match at the peas-and-carrots level, not the grocery-bill level — suddenly we had huge numbers of error invoices popping out of the system. Just to give you some context, this is a DoD grocery bill, and there are a million lines a month on it.
It wasn’t a lot of fun at the time. But it showed us we needed to fix some of our business processes to make sure we were getting what we paid for.
Another motive for improving DLA’s information technology was to become compliant with the CFO Act of 1990. That still hasn’t happened. What is your prognosis?
I would say we’re at least four or five years away. It’s still a long road, but I think we’re taking the right approach to it now. Really, what is being audited are the processes and the controls and how the numbers got to the financial statements, not the numbers per se. So what I would say is, short of getting that clean opinion, if we can be better tomorrow than we are today, that will be a good day for the customer and for the taxpayer. That will say something about how we run our organization, even as we work to get that ultimate Good Housekeeping seal.