Eighth Report - Improving Defence Inventory Management

The MoD’s inventory management systems remain outdated, and the quality of its data limits its ability to understand its inventory.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 2022.1 However, in late 2020 the MoD signed a five-year contract extension worth £515 million called “Bridging the Gap”,2 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”.3 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 1 WMS 3 December 2010 cc95WS-96WS 2 Q27 3 Tenders Electronic Daily, Ministry of Defence, ISTAR, SCIS, 11 December 2020 6 Improving Defence Inventory Management 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

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 Improving Defence Inventory Management 7 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

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.4 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”.5 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.6 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 me

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 inventory overall and in particular areas. Improving Defence Inventory Management 9 1 The structure and organisation of inventory management

On the basis of a report by the Comptroller and Auditor General, we took evidence from the Ministry of Defence (MoD) about its inventory management, with witnesses from MoD centre, Defence Support, and Defence Equipment and Support (DE&S).7

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. Each Command has its own core inventory management system, and there are other systems used across the Support function for managing other types of inventory, as well as aspects such as engineering. Whilst the MoD has reduced the number of Support systems from around 250 in 2010 to 89 today, two of its base inventory management systems (SS3 and CRISP, used by the Army and Royal Navy respectively) are nearly 40 years old.15

We remain concerned about the quality of the MoD’s inventory data; the MoD stated 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.16 The MoD’s short- term plan (known as ‘Bridging the Gap’, see below) is to move the Army and Royal Navy onto an upgraded version of the Royal Air Force’s inventory system, which is a more modern inventory management system with greater functionality. For example, the Royal Air Force inventory system has a much greater ability to recognise in more detail the repair status of individual items.17 12 Qq 4–5; C&AG’s Report para 1.12 13 Qq 4, 6, 10–11 14 Qq 5–6, 10–11, 20 15 Qq 12–13 ; C&AG’s Report para 9 16 Qq 24, 34–36 17 Qq 24–25, 34–36, 64 Improving Defence Inventory Management 11

However, we do not see how this step alone will address the existing gaps in the MoD’s data. For instance, when new systems were introduced in DE&S’s central warehouses through the Team Leidos contract, DE&S stated that it had to engage a private company to do a lot of work on the data for them.18 We were also concerned to hear that the contract for the Bridging the Gap programme, valued at £515 million, was awarded to a large defence prime contractor without a competitive tendering process.19 The Bridging the Gap contract was a five-year contract extension with the same supplier—Boeing Defence UK—of the £800 million Future Logistics Information Services (FLIS) that was signed in 2010 and due to run until 2022.20 The MoD explained that the contract extension 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”.21 The MoD told us that it intended to competitively procure the suite of contracts relating to its larger future transformation of its legacy IT systems, with its contract for engineering support and asset management software currently out to tender.22 Transformation plans

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.23 It has also put in place the Future Defence Support Services (FDSS) transformation programme, which aims to find the best commercial arrangements for inventory management from

The MoD’s track record in delivering business and digital transformation is patchy; when we reported on The Defence Digital Strategy in 2022, we found that the MoD was struggling to deliver its largest and most transformational digital programmes. We also observed that the MoD faced challenges recruiting all the digital skills it needed, and as a result, the Committee is concerned about the level of skills and personnel available to MoD to manage these programmes.25 The MoD stated that it has been pragmatic and incremental in its approach to the BMfS programme, with the first phase focused on stabilising and modernising its systems. The programme is also divided into thematic areas so that the MoD can acquire commercial off-the-shelf software for each one.26

Nonetheless, the MoD acknowledged it faces staffing gaps of around 25% across both BMfS and FDSS. For BMfS, the MoD has contracted a delivery support partner and is looking to bring in a digital non-executive director to provide advice. CDLS himself also 18 Q 34 19 Q 27 20 WMS 3 December 2010 cc95WS-96WS 21 Tenders Electronic Daily, Ministry of Defence, ISTAR, SCIS, 11 December 2020 22 Qq 16, 29, 37–38, 43 23 Q13; C&AG’s Report para 17 24 Q 44, C&AG’s Report para 17 25 Qq 14–16, 46; Committee of Public Accounts, The Defence Digital Strategy, Thirty-Sixth Report of Session 2022–23, HC 727, 3 February 2023, paras 3–4 26 Qq 15, 17 12 Improving Defence Inventory Management took a four-month secondment in digital industry. The MoD acknowledged, however, that the staffing gaps created risks for FDSS, although it was confident it could still meet the 2028 target delivery date through sensible prioritisation.27 27 Qq 15, 17, 104–105 Improving Defence Inventory Management 13 2 Engagement with industry Building resilience into the supply chain

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 banner28 through the Logistics and Commodities Services Transformation (LCST) contract in 2015. Managed through DE&S, this has been a successful contract overall, and as of May 2023, the MoD forecast that it would achieve financial efficiencies of £403 million by 2028, when the contract is due to come to an end.29 Through the contract, DE&S told us it has increased the agility of its supply operations, gaining greater efficiency in transporting inventory across the UK and Europe, reductions in its carbon footprint of around 28%, and reductions in commodity purchases through better forecasting. DE&S told us that this agility has also been useful in mobilising stocks for Ukraine.30

The MoD is looking at incorporating the learning from the LCST contract into its Future Defence Support Services (FDSS) programme, which aims to find the best inventory management arrangements when the LCST contract comes to an end.31 Recent events such as the war in Ukraine and the impact of covid-19 have also brought about a reassessment of how the MoD should manage its inventory.32 In its 2022 Supply Chain strategy, it set out that its previous approaches prioritised cost efficiency, which was appropriate for an environment of relative stability, but that these approaches are vulnerable when sudden shocks emerge.33 It is now seeking to ensure greater resilience in its inventory management, which may involve holding greater amounts of inventory in some instances. Ukraine and previous conflicts have also demonstrated the importance of protecting support networks and lines of communication. For example, the MoD stated that throughout its recent operations in Afghanistan, 60% of casualties were among personnel involved in force protection of communication lines.34

Future conflicts may require sudden surges in demand and industrial capacity, which industry may then need support to provide. The MoD told us that the United Kingdom and other North Atlantic Treaty Organisation (NATO) members have put together a NATO defence production action plan. This was designed to create a clearer signal to all of industry about the demand from across NATO, through which the UK’s contribution was the development of an overall munitions strategy. In doing so, it involved industry in classified discussions to give them a clearer understanding of demand and the issues they are planning to. The MoD told us that it plans to invest around £2.4 billion over the next couple of years to strengthen the supply chain through a combination of orders and improvement of resilience. In the longer term it intends to create an “always-on” demand pattern to create a more robust supply chain.35 The MoD accepted that it might need to pay for the increase in resilience in terms of production capacity and future surge capacity.36 28 Team Leidos is a consortium composed principally of Leidos Europe, Leidos Supply, Kuehne and Nagel and TVS Supply Chain Solutions. 29 Qq 73–74 ; C&AG’s Report para 10 30 Q74 31 Qq 75–77 32 Qq 60, 100–103 ; C&AG’s Report para 3 33 Ministry of Defence, Defence Supply Chain Strategy, 15 November 2022 34 Qq 60, 100, 103 35 Q 103 36 Q 102 14 Improving Defence Inventory Management Medical inventory

Despite the broader success of the LCST contract, since it began the 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. This has meant that, in some instances, units have carried increased operational risk because they have had to proceed without the capability to test for and treat certain medical conditions. In 2022, the Royal Navy assessed that, if unresolved, the situation presented a significant risk to life for its personnel.37

This issue arose because the contract applied a general target across all commodity supply.38 However, this meant that lower performance in supplying medical inventory (which generally requires higher performance than other commodities) was masked by better performance elsewhere. In addition, best practice for other commodities is to bring forward stock with low shelf lives to minimise wastage, but this approach is not appropriate when deploying on a ship for three or six months. The MoD told us it has now adjusted the management software to account for the shelf-life issue.39

The MoD explained that the incentives for the LCST contract were intended to prioritise efficiency, but that medical supplies are a difficult area in which to achieve efficiencies. From 2019, the MoD changed the contract’s incentivisation by taking back a portion of the fee and returning it only if Team Leidos hit time targets and was able to deliver new projects and equipment faster. This did yield improvements; for example, the number of new medical equipment projects increased from six a year to around 36.40 However, performance for medical had still not improved to the required level, and in 2023, the MoD approved further improvement initiatives which will ultimately require it to pay the supplier a further £13.2 million.41 This includes bringing in 35 more people with medical experience into the Team Leidos and the introduction of a specific performance target for fast-moving commodity medical items, which the MoD stated Team Leidos was now reaching on a regular basis.42 Excess and unserviceable stock

When we last examined the MoD’s inventory management, we found that it was not consistently disposing of inventory it no longer needed and was purchasing items for which it already held sufficient stock.43 The MoD told us that from 2011 to 2023, it achieved a 25% reduction in the net book value of its inventory, which it reduced from £16 billion to £12 billion. It has also removed the financial incentives which encouraged Front Line Commands to over-purchase consumable commodities. However, it is still holding substantial amounts of inventory that is unserviceable, overstocked or beyond the service date of its related platform.44 37 Q 92; C&AG’s report para 2.5 38 Q 86; C&AG’s report para 11 39 Q 91 40 Qq 86–88 41 Qq 88, 97, C&AG’s report para 2.7 42 Qq 88, 97 43 Committee of Public Accounts, Managing the Defence Inventory, Thirty-Second Report of Session 2012–13, HC 745, 28 February 2013, Part Two para 7 44 Q 58 ; C&AG’s Report paras 12, 14 Improving Defence Inventory Management 15

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 may be being held because the manufacturer no longer makes these items, or because a certain amount may be needed before a repair contractor will take them. Other items appear as excess stock, but are deliberately overstocked for contingency scenarios, for example, anthrax vaccines or other critical medical supplies. Items beyond their service date may be useable on other platforms or have sale opportunities to other governments, so will be held until other governments confirm they no longer wish to buy them.45 The MoD 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, the MoD acknowledged that its decision-making needs to be informed by better data; for example, missing data within its Navy base inventory system on why inventory is unserviceable makes it difficult to understand what should be disposed of. The MoD would like to reach a situation in which it better understands what unserviceable stock is repairable and what may be overstocked but is worth keeping for contingencies.46 The MoD has now put in place another set of projects to target disposals, but these are disparate and some areas, particularly the Royal Air Force, have achieved more than others. DE&S intends to place all the resource associated with disposals under one owner to ensure that a consistent pace is achieved across all areas.47 45 Qq 59–66, 68 46 Qq 64, 71–72 47 Q 67 16 Improving Defence Inventory Management