Right Price, Fair Credit: Criteria to Improve Financial Incentives for Army Logistics Decisions

Under the Army’s financial management system for spare parts, logistics customers receive budgets to buy spare parts from the supply system and receive credits for returning parts to the supply system, either for repair or because they are no longer needed in local inventories. The Army’s wholesale inventories of spare parts are financed by a stock fund, which uses its income from the sale of parts, net of credits issued to customers, to pay for repairs and procurement of replacement parts. Some installation-level, or retail, inventories are also financed by stock funds. During fiscal year 2001, the Army’s stock funds were in a period of transition from separate wholesale and retail components to a Single Stock Fund (SSF). As part of this change, the Army implemented new price and credit policies for spare parts. In this document, the authors introduce a set of criteria to assess price and credit policy changes in terms of their effectiveness in meeting the overall objective of maintaining the logistics customer’s ability to meet mission requirements while keeping weapon systems in operating condition at the lowest total cost to the Army. The authors then use these criteria to compare and evaluate pre-SSF, SSF, and proposed future price and credit policies, and define the characteristics of an optimal Army price and credit policy.