Background

1. The Standard Defence Supply System (SDSS) is the key logistics management system for the Australian Defence Force (ADF) and has been in operation since the early 1990s. SDSS was implemented in 1993 for Army, 1994 for the Royal Australian Navy (RAN), and in 1995 for the Royal Australian Air Force (RAAF). The system underwent a major upgrade starting November 2000, which resulted with the release in July 2003 of SDSS version 4. Following that upgrade, the Defence Materiel Organisation (DMO) initiated a Get Well Programme, and subsequently, other related programmes to remediate outstanding issues relating to system performance.

2. This report reviewed the effectiveness of the remediated SDSS system in supporting ADF capability. This involved examining the SDSS Get Well Programme, which was an intermediate step in improving the functionality of the Defence Supply System, and some of the other supporting initiatives that serve to enhance, and maintain the effectiveness of the ADF supply chain.

3. SDSS is an inventory management system that controls those items of supply that support the ADF and its operational capability. The system is used to manage over 1.6 million items in General Stores Inventory, worth some $1.29 billion. In association with other supporting systems, SDSS manages transactions to support some $2.72 billion of Repairable Items.

4. Prior to the rollout of the initial SDSS inventory management system in the early 1990s, Defence lacked a joint ADF logistics business management process¹. The core software is MIMS (provided by MINCOM Ltd) and is complemented by interfaced applications that include the Defence-built Central Catalogue (CENCAT, the North Atlantic Treaty Organisation system for Cataloguing and Codification), Navy Allowance Management (NAVALLOW), Cargo Visibility System (CVS) and commercial systems, including: Advanced Inventory Management System (AIMS), which is inventory optimisation software and SLIMS/AMPS (shipboard inventory management systems). As an integrated system, SDSS manages: identification, procurement, requirements determination, warehousing, requisitioning and demand fulfilment, entitlement management and cargo tracking.

5. SDSS functionality is required to enable the management of Defence's end to end supply chain from supplier through Defence warehousing down to unit level holdings within the three Service's logistics operations. The system supports all operational platforms and the units that use them in the area of operations.

SDSS Get Well Programme

6. Throughout its life, SDSS has been progressively modified and updated. In July 2003 a Project (SDSS Upgrade Project) was completed that sought to upgrade SDSS to version 4 with the intent of delivering a Standard Supply Chain System across the whole Defence user base, introducing tighter controls over data integrity and transaction processing, and improved finance functions.

7. The ANAO tabled a report into the Management of the SDSS Upgrade in August 2004 and found that the Project did not deliver value for money to Defence. The report also noted that the Project exhibited extensive scope reduction and, based on scheduled final deliverables being accepted in June 2004, operated with an extended schedule in excess of 200 per cent of the planned schedule. The audit concluded that the Project had failed to materially deliver many of the outcomes for which it was funded.

8. In 2004, Defence identified several key areas that needed to be addressed to improve the performance of SDSS. The key areas addressed by the Get Well Programme included: system performance, addressing areas such as client response times; batch job execution times; printing delays and system stability currently affecting productivity and user confidence in SDSS; business processes, to improve user compliance with business procedures against which all parties execute their business within the Defence Single Supply Chain; data quality, to address the legacy of non-compliance with business procedures, and thus reduce the amount of data within the system of questionable integrity; financial capability gaps, with specific attention to the sub-optimal capability for SDSS to report financial data to ROMAN² (Defences' General Ledger); and bug fixes, which were to be addressed as part of the daily operation of the support arrangements for SDSS to address system deficiencies.

9. The DMO advised the ANAO that, following the Get Well Programme, further improvement of SDSS has been focussed in two areas: remediating identified shortfalls in current performance; and continuing the future development path and introducing greater functionality, through a major Project, Joint Project 2077³, the main component of which is expected to be delivered in 2008.

10. To complement the SDSS Get Well Programme, Defence and the DMO are running parallel initiatives, which aim to improve the overall SDSS performance. The majority of these changes come under the Department's Remediation Plans and include work that addresses: stores and equipment that are Not In Catalogue; Stores Accuracy; General Stores Inventory Pricing and Accounting; Supply Customer Accounts; and Stock Holding Controls. Additionally Defence has undertaken to rectify a Julian Date⁴ issue associated with SDSS.

New Military Integrated Logistic Information System – Joint Project 2077

11. Defence and the DMO have noted that the current Logistics Information System, of which SDSS is a core component, does not adequately fulfil the logistic information requirements, to integrate data to support effective decision making. Defence also notes that it does not effectively support operational and corporate requirements and is overly complex, inflexible, inefficient and costly to run.

12. Planning for the new Military Integrated Logistics Information System envisages a modern, responsive and agile system, capable of delivering meaningful information as a component of a joint logistics support system for the support of base, lines of communication and areas of operations. The system is expected to be highly automated, intuitive, interactive, and predictive, to deliver timely, accurate information as required, and on demand to support decision making, planning, and routine operations. Defence advised the ANAO that the new system will provide improved in-transit visibility, an improved deployable capability and a radio frequency identification capability.

13. The objective of the report is to review the effectiveness of remediation activities put in place by Defence and the DMO to improve the performance of SDSS following the delivery in July 2003 of the SDSS Upgrade Project, with specific attention to the SDSS Get Well Programme. The audit reviewed the outcomes of the Get Well Programme, and assessed how effectively a segment of the Defence supply chain (of which SDSS is one key component) was meeting selected maritime end user capability and reporting requirements. In order to achieve this, the audit reviewed three key maritime combatant forces: COLLINS Class submarines; Adelaide Class Guided Missile Frigates (FFGs); and ANZAC Class Frigates. The ANAO notes that these three capabilities account for some 50 per cent of the Navy's total forecast expenditure for 2006–07.

Overall audit conclusions

14. SDSS is a key contributor to the ability of Defence to provide the necessary logistics support for operational capabilities. It is necessarily a large scale, high volume transaction system with interfaces to many other Defence systems. There are both technical, and personnel dimensions that affect the performance of SDSS, which pose ongoing challenges to the delivery of effective service by the system to the ADF.

15. At a technical level, SDSS is now some two decades old, and although it has been expanded and upgraded, it remains dated. This, in turn, has had an adverse affect on user acceptance, and the integrity of data input and maintenance, which ultimately contributes to a degraded supply chain capacity.

16. Notwithstanding increased operational deployments and subsequent increased equipment use rates, the ANAO's audit testing identified material deficiencies in the ability of the Defence supply chain to provide consumable and replacement parts to end users in Navy, as required to support specified ADF operational Demand Satisfaction Rates. The ANAO reviewed the Demand Satisfaction Rates associated with meeting the operational expectations of three major maritime capabilities, namely for the COLLINS Class submarines, ANZAC Class ships, and the remaining FFGs⁵. Information obtained indicates that the performance of the Defence Supply Chain, which incorporates, but is not wholly reliant on SDSS, shows a steady decline in its ability to support specified, and agreed operational Demand Satisfaction Rate requirements for consumable and repairable stores, in support of operational commitments. The DMO advised the ANAO that, for the classes of ships mentioned in the audit report, the required operational availability for all three classes was met in the period under review by the ANAO, despite an increased operational tempo.

17. The ANAO also reviewed a sample of high value items that had been placed in quarantined storage because there was doubt over their status, requiring further investigation. The ANAO found that 63 per cent were placed in quarantined storage because the required documentation relating to test information had not been provided at the time of required use. SDSS does not flag when an item could be remediated under warranty. The DMO would benefit by actively managing the reasons, value and amount of stock that is returned to warehouses for storage under quarantine. In doing so, eligible warranty claims could be exercised, as and when appropriate.

18. The ANAO noted that, inter alia, some items were being placed in quarantine storage as a result of unauthorised purchase orders⁶. Additionally around 10 per cent of items were listed with an in-transit time of over two years, with the longest date listed as nearly nine years. Some of these items constituted valuable and attractive goods. Both Defence and the DMO should periodically review the underlying reasons for stock that has been in transit for extended periods.

19. The ANAO noted that, for the key roles associated with: purchasing; inventory management; asset management; and information and security; there was a high degree of non-compliance with required controls. This had contributed to the qualification of the audit opinion on the Department of Defence's financial statements for 2004–05.⁷ To improve upon the high degree of non-compliance, the DMO is currently in the process of enhancing information technology controls, and plans to conduct additional reviews and audit processes.

20. The ANAO conducted an assurance review into the information technology controls in mid 2006 which demonstrated significant levels of non-compliance with system controls. DMO units subsequently conducted further self-assessment compliance checks in August 2006. The DMO advised that this self-assessment provided Defence with a baseline of compliance which will serve to inform the future direction of work to develop and implement the required controls.⁸ The ANAO will review the level of compliance with system controls during the 2006–07 financial year as an element of its financial statement audit coverage.

21. The improvements already advanced by the SDSS remediation programme (the Get Well Programme), underpinned by effective training, will be central to the ongoing immediate operability of SDSS, and to assure the integrity of system information⁹. It will be some time for the full effects of the outcomes of the Get Well Programme to be realised, a process that will require continuing emphasis on training, and reinforcement of the use of appropriate business processes through quality assurance initiatives. In view of shortcomings in the functionality and performance of SDSS, Defence is now in the early stages of introducing a new Military Integrated Logistics Information System (which is anticipated to be operational in 2008).

Key findings

Remediation requirements (Chapter 2)

22. The September 2004 DMO SDSS Get Well business case noted that the poor system performance was capable of seriously degrading the efficiency and effectiveness of the supply chain, and that performance issues have a major impact on SDSS operations. The business case for the SDSS Get Well Programme Management Activities highlighted shortfalls associated with the availability of suitably skilled DMO staff, in that there were insufficient staff with the necessary skills or expertise to fully staff the proposed SDSS Get Well Project Integrated Project Team, required to be in place from 1 July 2004. To combat this shortfall, the DMO assessed that an additional $9.8 million was required to undertake activities to address the requirements of the Get Well Programme.

23. In addition to the Get Well Programme, the DMO and Defence were progressing a series of separate remediation activities that were designed to improve the capability of the Defence supply chain, and these impacted on SDSS operability. Of those Projects covered by this report, it is of note that the DMO addressed: a major system deficiency when the system modifications for the Julian Date Issue were delivered in April 2006, with the assistance of the software developer for SDSS; as well as developing a framework to manage its ongoing information technology access control requirements.

SDSS Get Well activities (Chapter 3)

24. Following the study undertaken by the DMO to identify the contributing factors associated with negative operational aspects of SDSS and the integrity of financial management information available from the system, a Business Process Compliance Project (a component of the Get Well Programme) was initiated that specified a requirement to review high priority business processes of the SDSS operating environment.

25. Those processes of high importance were identified as processes associated with acquiring a capability, and sustaining a capability.¹¹ The DMO sought to ensure, in a broad sense, the Defence Supply Chain business processes were capable of supporting the supply chain as designed via a Business Process Compliance activity. The outcomes included reports providing recommendations for system management improvement requirements.¹² Implementation of the recommendations following from those reports did not constitute an element of the Get Well Programme. DMO documentation indicates that all 118 recommendations adopted for implementation following the Business Process Compliance review were completed by July 2006.

26. Key areas in which the DMO has improved systems performance during the Get Well Programme include data quality controls, improved system financial capability and systems performance (mainframe and infrastructure). This work has been complemented through a structured approach to change management and user communication.

27. The DMO has also sought to improve performance and compliance through a parallel activity, associated with improving the SDSS information technology controls framework, specifically for the key roles associated with purchasing, inventory management, asset management, and information and security. Notwithstanding these control framework improvements, the ANAO provided assurance against a June 2006 Defence Joint Logistics Command report, which identified non-compliance with the required controls (controls not in place) that ranged from 11 per cent for information security,¹³ to 44 per cent for asset management. Defence has advised that subsequent to the ANAO financial statement review into the information technology controls, DMO units conducted further self-assessment compliance checks which provided Defence with a baseline of compliance which will serve to inform the future direction of work to develop and implement the required controls.

28. Even though the Business Process Compliance recommendations were completed during the period of audit fieldwork, many of the potential gains from these initiatives will not be fully realised for some time. Training, and process reinforcement activities will be required to embed the new processes. The ANAO observed continuing shortfalls associated with meeting both financial management compliance, and data quality targets.

29. The DMO advised the ANAO in August 2006 that, following the implementation of the new Information Technology Controls Framework and the Business Process Compliance recommendations, the focus of activity is in two areas. The first is to ensure end user compliance with the process and controls by training, expert assistance, ongoing exception reporting and investigation, and enhanced compliance and review activity. The second is to address the issue of data quality on the system by relying on enhanced compliance to reduce the incidence of poor quality data entering the system, and by reviewing and amending existing data through stocktaking activities.

Supply Chain outcomes for capability (Chapter 4)

30. The ANAO reviewed the delivered performance of the Defence supply chain in managing quarantined, high value stores used by Navy. SDSS is a key system used to manage these items. Using the information Defence had to hand in Western Australia, the ANAO sampled 19 high value items, held in quarantine storage.¹⁴ The ANAO noted that of these items, 63 per cent were being held because they had been issued without the necessary documentation (known as Objective Quality Evidence (OQE)). This information is required to demonstrate that they had been tested as being fit for purpose. Of the sample undertaken, 67 per cent of the stores had been held in quarantine storage, without any remediation action being undertaken, for a period in excess of three years.

31. The DMO is currently reviewing the requirements associated with OQE for stores issued to the COLLINS Class submarines, which may serve to reduce the incidences associated with holding stores in quarantine in Western Australia. Notwithstanding, the ANAO considers that the DMO would benefit from reviewing stores held in quarantine to ensure items supplied under warranty without the necessary documentation are returned to the supplier within the warranty period for testing and certification, at the respective contractor's cost.

32. Stores listed as being In-Transit constitute a value within the SDSS system of some $61.13 million. The ANAO reviewed the management of those items, and noted that the average time this equipment spends In-Transit was 104 days, with some elements remaining In-Transit for periods of up to nine years. Many of these items constitute valuable, and attractive items, such as radio frequency tuners, tents, and underwater equipment. Defence would benefit from frequent reviews of equipment classified as being In-Transit, with particular emphasis on identifying potential losses from the system of equipment that is never delivered following dispatch.

33. In order to assess the effectiveness of the Defence supply chain, the ANAO reviewed the Demand Satisfaction Rates¹⁵ associated with supplying stores to three Royal Australian Navy capability elements: COLLINS Class Submarines; ANZAC Class frigates; and the FFGs. The provision of spare parts is not the only element impacting on Operational Availability.¹⁶ However, there is a strong correlation between the materiel availability for these vessels to undertake their intended roles, and the ability for the Defence supply chain to support the platforms with stores required to address issues with defective equipment. ¹⁷

Agency response

34. The Department of Defence provided a response (see Appendix 1) on behalf of the DMO and Defence. Defence agreed with both recommendations made in this report. The Defence response stated that:

Defence notes the overall positive assessment of the SDSS Remediation Program. Identified shortfalls in performance have been addressed through the Get Well Program; remediation of a date processing problem; enhanced business processes; and the introduction of an enhanced information technology controls framework, with full compliance expected to be achieved by October 2006.

SDSS has been deployed with ADF units and has proven very effective in supporting operational forces.

The Military Logistics Information System will continue its development path through Joint Project 2077. The next phases of this project will deliver new core software, increased financial functionality; improved in-transit visibility, an improved deployable capability and a radio frequency identification capability.

To improve user compliance with the system, Defence is devoting additional resources to training, expert assistance, ongoing exception reporting and investigation, and enhanced compliance and review activity. This will ensure the quality of new data entering the system. The existing data on the system is being progressively reviewed and amended through normal stocktaking processes.

Footnotes

1 The JCPAA Report 317 ‘A champagne appetite but only a beer income-Defence's Supply Systems Redevelopment Project', of 1992 covered the development of the original SDSS product.

2 Resource and Output Management and Accounting Network

3 Joint Project 2077 has been created to provide Defence with a single strategy to achieve a new Military Integrated Logistics Information System in a controlled, multistage process.

4 The Julian Date issue represents a problem with the way in which SDSS manages dates within the system. The original system provided for a system life of 9 999 days from the time it was implemented, after which an internal counter would effectively roll over to four zeros.

5 The ANAO reviewed and correlated repairable and consumable item's Demand Satisfaction Rates with Platform Mission Capability measures for the period from August 2005 until April 2006. This assessment includes the ability for platform classes to rectify urgent defects, which are those with the potential to significantly impact on the operational capability of the vessel in a specified time frame. During the period reviewed, the DMO could not provide Mission Capability information for the months of September 2005 and December 2005. Of the months where information was made available, one platform class reported satisfactory performance in terms of the supply of consumable stores in only one month, and did not report an acceptable ability to supply repairable items in any months. Also, that platform class reported an inability to satisfactorily rectify urgent defects in the required time period for any of the months in the reporting period.

6 Reasons for items being quarantined include a lack of required certification documentation, and equipment not being recognised as the required part.

7 The 2004–05 ANAO audit opinion on the financial statements for the Department of Defence noted that, due to inadequacies in the department's General Stores Inventory management practices, the General Stores Inventory component of $1.294 billion of the reported Inventory balance totalling $3.387 billion could not be validated. This is as a result of material weaknesses in the internal controls over the accurate recording and stocktaking of the inventory quantities, and a lack of documentation and systems controls to confirm and safeguard the accuracy of pricing data. At the date of preparation of this report, the audit opinion on the Department's financial statements for 2005–06 had not been issued.

8 Subsequent to the ANAO assurance review of the SDSS Information Technology Control Framework June 2006 report (see Table 3.2) Defence units conducted further self assessment compliance checks and the DMO advised that a contracted review of those compliance checks was undertaken across the 50 key units they assessed as ‘material', based on value and volume (see Table 3.3). The DMO advice is that this provided Defence with a baseline of compliance in relation to practices associated with: inventory, asset, purchasing and security management.

9 In addition, Defence has planned to implement an audit and monitoring capability with the provision of an additional 178 staff to assist with remediating the shortfalls with current business practices.

11 The Business Process Compliance Project was to review two high priority SDSS-related operating segments within several major functional areas of Defence, to identify the underlying issues that were impacting on process compliance and affecting the integrity of financial reporting data.

12 Specific business processes earmarked for improvement included: stocktaking, codification (both stocktaking and codification business process reviews were completed prior to the submission of the Get Well Business Case), repair, Planning Approval/Work in Process, Deliverables/Closure, Install/Uninstall, Ordering Goods, Receipt of Assets, Receipting Stock, Vendor Payment, Issue/Consume, Requisitioning Stock, Disposal of Stock, Stock Level-Lifecycle, Contract Maintenance.

13 The DMO report notes that there is a lack of awareness of control requirements.

14 Where there is any doubt over an item's operational status, the item is placed in quarantined storage awaiting further investigation.

15 The individual Systems Programme Offices have agreed levels of Demand Satisfaction with the corresponding Force Element Groups, in which they set out acceptable time frames for receiving spare parts.

16 Many elements contribute to supply chain effectiveness, including: timings of placements of orders; decisions on funding and prioritisation of purchases based on acceptable risk; unexpected events or incidents; operational requirements; availability of supplies; delivery time of supplies; and receipt and data entry of supplies.

17 The DMO advised the ANAO in August 2006 that while Demand Satisfaction Rates can represent a potential impact on Operational Availability, it is only one of many factors that impact on Operational Availability, and does not necessarily translate into a real impact on Operational Availability. The DMO advised the ANAO in August 2006 that Navy and the DMO are in the process developing a replacement Key Performance Indicator for Demand Satisfaction Rate for Navy units.