Risks for armed forces caused by MoD inventory failures

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The Ministry of Defence (MoD) does not have the powers needed to deal with the fragmentation of its inventory management, it has been claimed.

In a report, the Public Accounts Committee (PAC) warns that long-standing weaknesses remain in the management of the UK armed forces’ supplies and spares for immediate and potential use (collectively described as ‘inventory’).

Problems with inventory management can have serious knock-on consequences for those serving in the armed forces. For example, the PAC’s report highlights that the MoD failed to consider the needs of its medical operations as part of outsourcing commodity procurement to the ‘Team Leidos’ consortium.

“Units faced poor availability of medical inventory as a result and were supplied with items without the shelf life for longer deployments. The Royal Navy in 2022 assessed the situation as presenting a significant risk to life for its personnel if left unresolved, and in 2023 performance for medical had still not improved to the required level.”

The report highlights serious issues with the MoD’s outdated inventory management systems, some of which are nearly forty years old. For instance, the Royal Navy’s base inventory system can record that an item is unserviceable, but not for what reason, meaning the MoD will not know what degree of repair it may need to be useful. The report calls for updates on measures the MoD is undertaking to improve the quality of its inventory data.

The PAC is concerned that new posts established by the MoD to bring coherence to inventory management do not have the powers needed to deal with the fragmented system, instead relying on influencing to improve the situation. While a £2.5bn project aimed at resolving historic issues faced in managing inventory is in place, the PAC is sceptical about MoD’s ability to realise these complex and ambitious plans in time, given both its patchy track record and staffing gaps of around 25% in the relevant programmes.

Given that future conflicts may require sudden surges in demand and industrial capacity, which industry may need support to provide, the report also seeks information on how the Government intends to work with industry to ensure greater resilience in its inventory management.

Dame Meg Hillier MP, Chair of the Committee, said:

“Our brave armed forces personnel put themselves in harm’s way in defence of our nation, and deserve to expect that the equipment they require to do so will be there when they need it. Our Committee warned over a decade ago of waste and fragmentation in the MoD’s supply systems, and our report finds that many of those problems remain unresolved and without the right powers to address them. We were also concerned to hear as part of our inquiry that a contract for a £515 million programme to address data gaps was awarded to a large defence prime contractor without a competitive tendering process. The MoD must of course continue to do everything in its power to address these issues at pace while ensuring value for money. Blind spots in the system must be brought into sharp focus, and lessons from the war in Ukraine and the pandemic urgently implemented to ensure resilient supply. We live in an increasingly volatile and unpredictable world. The future must not find us under-prepared.”

PAC report conclusions and recommendations

The MoD’s Chief of Defence Logistics and Support does not have the powers needed to deal with the fragmentation of its inventory management.

Front Line Commands historically managed their own inventories, while Defence Equipment and Support (DE&S) manage the MoD’s central warehousing and the procurement of much of its inventory. This has created a complex organisational set-up with inefficient working practices. The MoD established the post of Chief of Defence Logistics and Support (CDLS) and the Defence Support function in 2019 to cohere MoD’s inventory management, with the aim of implementing strategy, policies and standards across the MoD and its defence organisations. We are concerned, however, that CDLS does not have the power to direct these organisations, instead relying on influencing to improve inventory management. A recent internal review found that Defence Support and DE&S need to be much more integrated, and DE&S’s past behaviours have not been conducive to collaboration and external challenge. The MoD considers that the behaviours and culture across defence have already started to become more integrated, though it accepts that the change needed may take years, and is looking at how to grant CDLS the power of authority to direct the single services to take action or not.

Recommendation – In its Treasury Minute response, the MoD should set out the steps it has taken to provide CDLS and the Support function with the right levers and authority to implement its Support Strategy to achieve the 2025 strategic outcome “waypoints” (towards the 2035 goals).

 The MoD’s inventory management systems remain outdated, and the quality of its data limits its ability to understand its inventory.

MoD’s inventory management has faced long-standing issues with its many legacy IT systems, which have limited functionality and reinforce the fragmentation of its inventory management. While it has reduced the number of Support systems from around 250 in 2010 to 89 today, the two base inventory management systems used by the Army and Royal Navy respectively are nearly 40 years old. The MoD acknowledges that, while its visibility of its inventory is generally good, its system functionality can prevent staff from having a deeper understanding of it. For example, the Royal Navy’s base inventory system can record that an item is unserviceable, but not for what reason, meaning the MoD will not know what degree of repair it may need. In 2010, the MoD entered into a £800 million contract with Boeing Defence UK called Future Logistics Information Services (FLIS) that was due to run until 2022. However, in late 2020 the MoD signed a five-year contract extension worth £515 million called “Bridging the Gap”, which the MoD explained at the time would “provide capability that Bridges the Gap between the FLIS contract and the future long-term strategic solution, known as the Business Modernisation for Support (BMfS) project”. The MoD’s short-term plan for Bridging the Gap is to move the Army and Royal Navy onto an upgraded version of the Royal Air Force’s more modern inventory system. We do not see, however, how this step alone will address the existing gaps in its data. We are also concerned to hear that the MoD awarded the contract for this £515 million programme to a large defence prime contractor without a competitive tendering process.

Recommendation – Within six months, the MoD should provide an update to us setting out progress against its plans for the Bridging the Gap project, as well as any other measures it is undertaking to improve the quality of its inventory data. This should specifically address the likelihood that a further contract extension will be required to complete the Future Logistics Information Services work, and the expected cost and duration of any such extension.

The MoD’s transformation plans are complex and ambitious, but its track record means we are sceptical about its ability to achieve them.

The MoD has put in place the £2.5 billion Business Modernisation for Support (BMfS) programme to upgrade its legacy IT infrastructure and introduce aligned business processes across its bodies. This programme is intended to resolve many of the historic issues the MoD has faced in managing its inventory, however it is highly complex: transforming services for around 65,000 users across Defence whilst maintaining operations throughout. The MoD’s track record in delivering business and digital transformation is patchy, and the Committee is concerned about the level of skills and personnel available to MoD to manage these programmes. The MoD faces staffing gaps of around 25% across both BMfS and its Future Defence Support Services (FDSS) programme, which aims to find the best commercial arrangements for inventory management from 2028. While the MoD told us it has brought in digital skills for BMfS, it acknowledged that the staffing gaps create risks for FDSS, though it is confident it can still meet the 2028 target delivery date through sensible prioritisation.

Recommendation – In its Treasury Minute response, the MoD should write to us setting out progress on its Support transformation programmes, how it is ensuring it has the right skills and experience to deliver them, and how it will engage with industry in doing so.

 MoD will need to work closely with industry to ensure resilience in its supply chains.

The MoD outsourced its central warehousing and the procurement of some of its commodities – food, clothing, general and medical supplies – to a consortium under the “Team Leidos” banner through the Logistics Commodities and Services Transformation (LCST) contract in 2015. This has been successful overall, forecast to generate financial efficiencies of £403 million over the life of the contract and has increased the agility of MoD’s supply operations. The MoD is looking at incorporating the learning from the LCST contract into its £1.8 billion FDSS programme for future contracts which will replace LCST in 2028. The CDLS admits FDSS is a large, complex piece of work which he is expecting will require external advice. FDSS provides a once in a generation opportunity to merge important inventory-related software contracts into a single programme. Recent events, such as the war in Ukraine and covid-19, have brought about a reassessment of how the MoD should manage its inventory, away from prioritising efficiency to ensuring greater resilience. Ukraine and previous conflicts have also highlighted the importance of protecting support networks. For example, the MoD stated that throughout its recent operations in Afghanistan, 60% of casualties were among personnel involved in force protection of lines of communication, such as convoys of fuel or stores. Future conflicts may require sudden surges in demand and industrial capacity, which industry may need support to provide. MoD told us it helped develop a North Atlantic Treaty Organisation (NATO) defence production action plan to signal demand clearly to industry and the MoD plans to invest around £2.4 billion in strengthening supply chains. In the longer term it intends to create an “always-on” demand pattern to create a more robust supply chain.

Recommendation – In its Treasury Minute response, the MoD should update on its plans for how it intends to work with industry ensure greater resilience in its inventory management, including its £2.4 billion of investment in supply chains.

  • Within six months, the MoD should inform the Committee by letter of the lessons learned from its review of the LCST contract and how it will implement these.
  • Within twelve months the MoD should provide a progress report to the Committee on its plans for merging the LCST contract and a number of similar contracts into FDCC  programme. In particular, the MoD should set out how well the IT software programmes are being developed to support the logistics consolidation.

The MoD failed to consider the needs of its medical operations in outsourcing commodity procurement to Team Leidos and this has created significant risks for front-line personnel.

Since the LCST contract began, the inventory needs of front-line medical personnel have not been well served. In particular, units have faced poor availability of medical inventory and been supplied with items without sufficient shelf life for longer deployments. In 2022, the Royal Navy assessed that, if unresolved, the situation would present a significant risk to life for its personnel. This issue arose because the contract applied a general target across all commodity supply. This meant that lower performance in supplying medical inventory (which generally requires higher performance than other commodities) was masked by better performance elsewhere. Furthermore, there is granularity within what is needed for certain elements of medical inventory: the MoD cited 90%, 95% and 98% inventory level requirements for different medical equipment.  For the average inventory of “fast-moving commodity type medical items”, the MoD told us that Team Leidos was now achieving the 92% level “on a regular basis”.  From 2019, the MoD changed the incentivisation in the contract to hit time targets and deliver new projects and equipment faster, which improved the situation but still not to the required level. However, in 2023 because performance for medical had still not improved to the required level, the MoD approved further improvement initiatives which will ultimately require it to pay the supplier a further £13.2 million.

Recommendation – In its Treasury Minute response, the MoD should write to us setting out how it will ensure that the requirements of medical personnel will be properly addressed in its future inventory management arrangements, and how it will resolve risks more quickly in future. This should include providing data on a quarterly or monthly basis of how performance in the supply of medical inventory has changed over the life of the LCST contract, including performance against target inventory level requirements for different sub-sectors of medical equipment as well as the overall medical equipment inventory target. Alongside this, the MoD should set when it expects to consistently achieve each of these targets.

While the MoD has reduced the amount of stock it holds, it still holds large amounts of excess and unserviceable inventory.

From 2011 to 2023, the MoD told us it achieved a 25% reduction in the net book value of its inventory, which it reduced from £16 billion to £12 billion. However, it is still holding substantial amounts of inventory that is unserviceable, overstocked or beyond the service date of its related platform. The MoD argues that there are many complex reasons for these build-ups of stock. For example, unserviceable inventory may still be useful if repaired, and other items are overstocked for contingency scenarios. It also stated that activity supporting the front line will always take priority over managing disposals, and the move towards building resilience will increase the level of inventory being held in future. Nonetheless, it acknowledged that its decision-making needs to be informed by better data; for example, missing data on why inventory is unserviceable makes it difficult to understand what should be disposed of. The MoD has now put in place projects to target disposals, but these are disparate and some areas, particularly the Royal Air Force, have achieved more than others.

Recommendation – In its Treasury Minute response, the MoD should set out how it is improving its ability to understand which inventory items need disposing of, and ensuring this is done so consistently. It should also set out details of any targets it has to reduce the amount of the overall inventory and particular areas.

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