On September 10, 2001, U.S. Secretary of Defense Donald Rumsfeld warned in a speech to Pentagon officials of an adversary that poses a “serious threat” to the United States — one that is far more “subtle and implacable” than was the former Soviet Union. He referred not to Al Qaeda, the terrorist group which the very next day reshaped the course of American military policy with devastating attacks on New York City and Washington D.C., but to an enemy within.

Rumsfeld was targeting the Pentagon’s own bureaucratic inefficiencies — long the butt of jokes about $700 toilet seats and $400 hammers. In his speech he noted that half of Department of Defense’s (DoD) resources go to supporting its infrastructure and overhead using “costly and outdated” systems and procedures that stifle innovation and drain resources from war-fighters.

After the attacks on September 11, 2001, the imperative to streamline the military’s supply-chain system, harness information technology and cut costs by adopting practices from the corporate world, gained urgency.

The Pentagon’s bureaucracy might indeed have the department tangled in an “anchor chain” but on closer inspection, the picture of military logistics is not as bleak as depicted. At the same time, the idealized images of the super-efficient corporate supply-chain and business procedures also fall short in practice. In reality, both worlds have an opportunity to learn from each other’s mistakes and successes.

“There is a back and forth,” says Morris Cohen, a professor in the Operations and Information Management Department at Wharton. “People in the military ask, ‘Why can’t we be as efficient as Wal-Mart?’ and people like myself who work on both sides say, ‘Why can’t the commercial world recognize the lessons that have been learned over decades in the military world?” To study the cross-pollination, Worldwide Business Research is holding a Defense Logistics 2003 conference from December 9 to 11. [Cohen’s company, MCA Solutions, is one of the sponsors of the conference.]

Specialized Supply-Chains

U.S. military logistics have no parallel in the commercial world — from its size and scope to the deadly seriousness of the term “mission-critical” during wars. In this world, the soldier is the customer waiting for products like ammunition, food, water, medicine and fuel for tanks and other combat vehicles.

“Soldiers can be killed if they run out of fuel in their tanks or ammo,” says William Pagonis, a retired Army Lt. General who oversaw logistics in the Persian Gulf War. For the past 10 years, he has been the senior vice president of Sears’ supply-chain and the president of Sears Logistics Services, a subsidiary of Sears. “If I run out of dresses in the store, I have time to react.”

The military supply-chain can be divided into three distinct chains, note military logistics experts. One chain, fast but low volume, moves commodities like food, medicine and clothing – the commercial world equivalent of a Wal-Mart or Sears. The second chain transports major components like weapons systems that require maintenance and repair over extended periods. Boeing and Caterpillar would be their commercial equivalents. The third is the deployment chain in which the military must move large number of troops and material in a short period in trying conditions. There is, of course, no commercial equivalent to this chain. “You can’t hire UPS to do that,” says Cohen. “They’ve never done that and wouldn’t know what to do — especially when someone is shooting at you.”

Another major difference that raises the level of complexity of the military supply-chain is that not only does it have a forward pipeline — like most commercial ones — but it also has reverse and lateral pipelines, points out Rick Eden, a military logistics analyst at RAND Corp., a think-tank based in Santa Monica, Calif.

When the military provides a soldier with any equipment, it continues to own that product. The military needs to service and maintain the product. If the equipment outlives its usefulness, the military will need to pull it back through its reverse supply-chain and dispose of the item. Even if the equipment is transferred to another soldier, the military retains responsibility for it.

The DoD also deals with a wider range of products than retailers like Dell, Sears or Wal-Mart — all companies renowned for elevating supply-chain management to an advanced science. Eden underscores the complexity of the military’s extensive inventory. “I can’t build a house with what I buy at Wal-Mart, much less a town. But the army has to do just that – and then live in that town and run it – when it moves into deployed environments.”

Directing this vast effort is the DoD’s Defense Logistics Agency (DLA) which in fiscal year 2003 carried $80 billion in inventory, provided about $25 billion in sales and services, and ran 22 depots worldwide. “When you look at the Fortune 500 and use sales as a metric, we’re at No. 78 — one ahead of Lockheed Martin,” says Al Banghart, the director of Enterprise Transformation at the DLA. “Talk about orders of magnitude: not counting ordnances, we manage more than 90% of the military’s supply-chain.”

Lessons from the Business World

For decades, the DoD has enlisted armies of PhDs and funded major research to improve logistics. But over the past 15 years, the commercial world has developed several innovations in supply-chain management, including harnessing information technology systems to streamline and monitor business processes. The military has taken note.

“At one time, the DoD was the leader in IT technology, but that is no longer the case,” says Pagonis. “IT technology has jumped so dramatically in the last 20 years and particularly in the past five years that the DoD is finding it better to go out and get technology from the civilian sector.”

The DoD, with its jumble of internally developed software and legacy systems that aren’t compatible between each military wing, may have no other option to tame their disparate systems. Major technology companies like IBM, BEA Systems and SAP and smaller ones like Manugistics and MatrixOne are implementing systems to help bridge the divide.

The DLA’s Banghart says that the Pentagon is in the midst of a major overhaul that began in 1998. The effort involves implementing new Customer Relations Management, Supplier Management and Enterprise Resource Planning systems. “If you add up all the initiatives, it comes to more than $1 billion in investments,” says Banghart.

The transformation has also spurred a cottage industry dedicated to draining the DoD’s IT quagmire. MCA Solutions is one such company. Launched in 1999 by Wharton’s Cohen, MCA has developed commercial off-the-shelf software systems that build on the existing strengths of military logistics. Cohen notes that while the military has developed logistics tools that go far beyond what the commercial world has, it is lagging behind in terms of the basic capabilities that the corporate world now demands such as compatible Web-based systems.

The military has also modified its supply-chain by adopting some simple commercial distribution processes. Just as retailers routinely have goods delivered by manufacturers to regional depots, where they are packed into containers to meet the demographic needs of individual stores, the DoD has regional hubs that distribute containers for different bases. “The DLA sets up truck routes for its bases that are very much like Wal-Mart’s truck routes for its stores,” says Eden. “In that sense, they have adopted distribution efficiencies of the Wal-Mart model.”

In an effort to study other methods of gaining business efficiencies, Rumsfeld in 2001 established the Defense Business Practice Implementation Board. The organization comprises some 20 executives from the corporate world, including Mortimer Zuckerman, the CEO of US News and World Report; James Kimsey, the founding CEO of America Online; and Denis Bovin, the vice chairman of Bear Stearns. “We review DoD projects to see if there are any civilian best practices that can be used by the Pentagon,” says Sears’ Pagonis, who serves as the board’s chairman.

Room for Commercial Progress

Historically, technologies first enlisted by the DoD eventually filtered down to commercial applications — from transplanting sophisticated jet-fighter materials to designing sleeker cars to the historic evolution of the Internet from a cloistered defense communication network into a mainstream web of digital shopping and entertainment outlets.

At the cutting-edge, the military can still teach business a trick or two. The DoD is turning to autonomic — or sense and response — logistics technology for its next-generation Joint Strike Fighter aircrafts. The concept builds on IBM’s autonomic computing initiative in which machines monitor, diagnose and repair problems. In the case of autonomic logistics, sensors on the aircraft can detect potential problems or something that requires maintenance and alert its maker, Lockheed Martin and its suppliers. “This information is passed on electronically to the supply-chain which initiates the procurement process,” says Robert Luby, a partner at IBM Business Consulting Services who leads its defense supply-chain practice. The combat aircraft is not expected to go into production until 2005 at the earliest.

The business world, however, need not turn to the distant future to adapt military supply-chain techniques to improve performance. Cohen suggests the military manages its logistics with the performance metric of availability — of having what is needed, where it is needed, precisely when it is needed — for its end-customer, the soldier. The commercial world, however, manages its logistics with internal performance metrics and not from the perspective of the end-customer.

“In the military there are no excuses — the consequences of not being at the right place at the right time can be disastrous,” says Cohen. Therefore the military always focuses on customer-centric performance metric. “I think the commercial world often loses sight of the end-customer.”