oversight

Defense Inventory: Overall Inventory and Requirements Are Increasing, but Some Reductions in Navy Requirements Are Possible

Published by the Government Accountability Office on 2003-05-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to the Honorable Tom Harkin,
             U.S. Senate



May 2003
             DEFENSE
             INVENTORY
             Overall Inventory
             and Requirements
             Are Increasing, but
             Some Reductions in
             Navy Requirements
             Are Possible




GAO-03-355
                                                 May 2003


                                                 DEFENSE INVENTORY

                                                 Overall Inventory and Requirements Are
Highlights of GAO-03-355, a report to the        Increasing, but Some Reductions in Navy
Honorable Tom Harkin, U.S. Senate
                                                 Requirements Are Possible



Changes in the Department of                     DOD reported a $5.6 billion increase in inventory on hand and a $1.7 billion
Defense’s (DOD) mission can                      increase in inventory on order between September 30, 1999, and September
lead to changes in inventory                     30, 2001. The reported inventory increases were primarily due to the Navy
requirements, which, in turn,                    reporting aviation parts held by ships and air squadrons that were previously
determine the size of DOD’s                      not reported and to overall DOD inventory requirements increases. In
inventory. Since 1990, GAO has
identified DOD’s management of
                                                 addition, GAO identified large imbalances in the department’s inventory; as
inventory as a high-risk area                    of September 30, 2001, over 1.7 million items had $38 billion of inventory
because levels of inventory were                 that exceeded the items’ current inventory operating requirements of
too high and management systems                  $24.9 billion (see table below). At the same time, there were 523,000 items
and procedures were ineffective.                 that needed an additional $10.4 billion of inventory to meet the items’
Furthermore, DOD has attributed                  current inventory operating requirements.
readiness problems to parts
shortages. In this report, GAO                   Generally, inventory increases are the result of increases in inventory
(1) provides information on                      requirements. DOD’s overall inventory requirements increased by
changes in and make up of the                    $10.6 billion, or 26 percent, between the end of fiscal years 1999 and 2001,
department’s inventory and                       with some of the Navy’s requirements being overstated. The Navy was
(2) analyzes changes in inventory
requirements, focusing on the
                                                 responsible for the largest dollar increase, $4.7 billion of the $10.6 billion
Navy.                                            increase. A large part of the Navy increase, $3.4 billion, was attributable to a
                                                 change in the way the Navy accounted for aviation parts held by ships and
                                                 air squadrons. The remaining Navy increase was attributable to a variety of
                                                 reasons, such as price increases; increased demand and item wear-out rates;
Because the long-standing                        and, in some cases, inaccurate data. Also, since 1997 the Navy has reduced
logistical problems associated with              the amount of administrative lead time it takes to place inventory orders (the
inventory excesses and shortages                 period between when the need to replenish an item through a purchase is
have been addressed in prior                     identified and when a contract is let), yet it has not formally updated the
reports as well as in GAO’s                      data used to compute those requirements. For example, the Navy reduced
Performance and Accountability                   the administrative lead time for medium-sized sole-source contracts for
Series reports, GAO is not making
                                                 repairable items from 200 days to 130 days, but it did not recognize the
any additional recommendations in
regard to those issues. However, to              reduction in its requirements computations. As a result, those requirements
improve the accuracy of the Navy’s               are inaccurate and overstated.
inventory requirements, GAO
recommends that the Secretary of
Defense require the Navy to ensure               Value of DOD’s Inventory On Hand and On Order for Items That Had Too Much Inventory by
that the most current data available             Military Component as of September 30, 2001
for computing its administrative
lead time requirements are being                 Dollars in billions
                                                                                   Inventory                      Inventory
used. DOD generally concurred
                                                  Military component       satisfying requirements          exceeding requirements
with GAO’s report, and stated that
the Navy formally updated its                     Army                            $2.8                             $3.7
system to begin using the most                    Navy                             7.3                              8.8
current data available to compute                 Air Force                       10.5                             19.4
administrative lead time                          Defense Logistics
                                                  Agency                           4.3                              6.1
www.gao.gov/cgi-bin/getrpt?GAO-03-355.
                                                  Total                          $24.9                            $38.0
To view the full report, including the scope     Source: DOD.
and methodology, click on the link above.
For more information, contact William M. Solis
at (202) 512-8365 or solisw@gao.gov.
Contents


Letter                                                                                  1
               Results in Brief                                                        2
               Background                                                              4
               Inventory Growth Reverses Past Reductions                               5
               Requirements Are Increasing, but Some of Navy’s Are Overstated         12
               Conclusions                                                            18
               Recommendation for Executive Action                                    19
               Agency Comments                                                        19

Appendix I     Scope and Methodology                                                   21



Appendix II    GAO Reports and Open Recommendations Relating
               to DOD’s Inventory Management Problems                                  22



Appendix III   DOD and Military Component Inventory Requirements
               at the End of Fiscal Years 1999 and 2001          31



Appendix IV    Reasons for Requirements Increasing between
               September 30, 1999, and September 30, 2001, for
               90 Sample Items                                                         36



Appendix V     Comments from the Department of Defense                                 38



Appendix VI    Staff Acknowledgments                                                   40




               Page i                                        GAO-03-355 Defense Inventory
Tables
          Table 1: Value of DOD’s Inventory On Hand and On Order for Items
                   That Had Too Much Inventory by Military Component as
                   of September 30, 2001                                            9
          Table 2: Comparison of Inventory Requirements by
                   Military Component as of September 30, 1999, and
                   September 30, 2001                                             12
          Table 3: Comparison of Requirements for 279,000 Items Managed
                   by the Navy at the End of Fiscal Years 1999 and 2001           15
          Table 4: Reasons for Navy Requirements Increases for Items
                   Reviewed                                                       17
          Table 5: Comparison of Inventory Requirements for the
                   Department of Defense at the End of Fiscal Years 1999
                   and 2001                                                       31
          Table 6: Comparison of Inventory Requirements for the Defense
                   Logistics Agency at the End of Fiscal Years 1999 and 2001      32
          Table 7: Comparison of Inventory Requirements for the Army at
                   the End of Fiscal Years 1999 and 2001                          33
          Table 8: Comparison of Inventory Requirements for the Navy at the
                   End of Fiscal Years 1999 and 2001                              34
          Table 9: Comparison of Inventory Requirements for the Air Force
                   at the End of Fiscal Years 1999 and 2001                       35


Figures
          Figure 1: DOD’s Reported Inventory On Hand at the End of
                   Fiscal Years 1996 through 2001                                   6
          Figure 2: DOD’s Reported Inventory On Order at the End of
                   Fiscal Years 1996 through 2001                                   7
          Figure 3: DOD Inventory On Order and On Hand and Needed
                   Purchases for Items That Did Not Have Enough Inventory
                   as of September 30, 2001                                       10
          Figure 4: Changes in Navy Inventory Requirements between
                   September 30, 1999, and September 30, 2001                     14




          Page ii                                        GAO-03-355 Defense Inventory
Abbreviations

DOD               Department of Defense
GAO               General Accounting Office



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Page iii                                                   GAO-03-355 Defense Inventory
United States General Accounting Office
Washington, DC 20548




                                   May 8, 2003

                                   Dear Senator Harkin:

                                   The Department of Defense maintains a supply of spare and repair parts in
                                   order to keep its equipment operational for war- and peace-time missions.
                                   The management of this inventory is especially critical as the department
                                   and the services are called upon for new missions relating to combating
                                   terrorism worldwide and protecting the homeland. Such changes in
                                   missions can lead to changes in inventory requirements, which, in turn,
                                   determine the size of the inventory.

                                   This report, in response to your interest in the Department of Defense’s
                                   inventory management, is one in a series on the department’s management
                                   of secondary inventory—that is, spare and repair parts, clothing, medical,
                                   and other items that support the military’s operating forces. Since 1990, we
                                   have identified the department’s management of secondary inventory as a
                                   high-risk area because levels of inventory were too high and management
                                   systems and procedures were ineffective. While some improvements have
                                   been made, in January 2003 we reported that these conditions still existed
                                   and that over half of the department’s inventory is not needed to satisfy
                                   current operating requirements.1 Nevertheless, the department has
                                   attributed readiness problems to parts shortages. In response to your
                                   request, this report (1) provides information on changes in and make up
                                   of the department’s inventory and (2) analyzes changes in inventory
                                   requirements, with a focus on causes of requirements changes derived
                                   from a sample of Navy inventory items.

                                   To accomplish this review, we expanded on previously reported analyses2
                                   to cover inventory data from fiscal year 1996 through 2001 for the Army,
                                   the Navy, the Air Force, and the Defense Logistics Agency. We also
                                   analyzed inventory data as of September 30, 2001, to show the number of
                                   items that had more than or less than enough inventory to satisfy



                                   1
                                    U.S. General Accounting Office, Major Management Challenges and Program Risks:
                                   Department of Defense, GAO-03-98 (Washington, D.C.: Jan. 30, 2003).
                                   2
                                    U.S. General Accounting Office, Defense Inventory: Status of Inventory and Purchases
                                   and Their Relationship to Current Needs, GAO/NSIAD-99-60 (Washington, D.C.:
                                   Apr. 16, 1999).



                                   Page 1                                                  GAO-03-355 Defense Inventory
                   requirements. We compared September 30, 1999, inventory requirements
                   to September 30, 2001, inventory requirements for the military services3
                   and the Defense Logistics Agency. We used data as of September 30, 2001,
                   because that was the most recent end of fiscal year data available when
                   we began our examination. We did not revalue the inventory that needs to
                   be repaired to recognize the repair cost, and we did not value inventory
                   that is to be disposed of at salvage prices. Also, our analyses did not
                   include fuel, certain inventories held by units, and Marine Corps inventory.
                   Fuel and inventories held by units are not stratified by requirement, and
                   the Marine Corps inventory represents a small part of the universe.
                   Because the Navy had the largest increase in inventory requirements
                   during the period, we analyzed a sample of selected Navy inventory items
                   to identify key causes of increased inventory requirements. We conducted
                   our review from June 2002 through March 2003 in accordance with
                   generally accepted government auditing standards. We provide the details
                   of our scope and methodology in appendix I.


                   The Department of Defense reported a $5.64 billion and a $1.7 billion
Results in Brief   increase in inventory on hand and on order, respectively, between
                   September 30, 1999, and September 30, 2001. The on-hand and on-order
                   inventories had increased to $69.8 billion and $9.9 billion, respectively.
                   The reported inventory increases were primarily due to the Navy reporting
                   aviation parts held by ships and air squadrons that were previously not
                   reported and to overall Department of Defense inventory requirements
                   increases. In addition, large imbalances in the department’s inventory
                   continue to exist. As of September 30, 2001, over 1.7 million items had
                   $38 billion of inventory on hand or on order that exceeded the items’
                   current inventory operating requirements of $24.9 billion. At the same
                   time, 523,000 items needed an additional $10.4 billion of inventory to meet
                   the items’ current inventory operating requirements. In 1997, we reported
                   that requirements decreases contributed to items having inventory on
                   hand that exceeded current requirements.5 Similarly, in 2000, we reported



                   3
                     In this report, we refer to the Army, the Navy, and the Air Force as military services; when
                   referring to the Army, the Navy, and the Air Force, and the Defense Logistics Agency, we
                   use military components.
                   4
                    In this report, all numbers over 1,000 are rounded. Inventory and requirement values are
                   in current dollars.
                   5
                    U.S. General Accounting Office, Defense Logistics: Much of the Inventory Exceeds
                   Current Needs, GAO/NSIAD-97-71 (Washington, D.C.: Feb. 28, 1997).




                   Page 2                                                      GAO-03-355 Defense Inventory
that while inventory managers made inventory purchases that were
supported by requirements, subsequent requirement decreases resulted in
the purchases being in excess of requirements.6 The current data indicate
that many of these long-standing and systemic inventory management
problems—which have been consistently identified as a high-risk area in
our Performance and Accountability Series reports—continue to exist.
Although the services are implementing management changes—initiatives
to transfer the management and oversight of some of the department’s
inventory to parts contractors and to implement new inventory
management systems—that will reduce the size of the department’s
reported inventory, these changes do not address the long-standing and
systemic problems.

The department’s overall inventory requirements increased by
$10.6 billion, or 267 percent, between the end of fiscal years 1999 and 2001,
with some of the Navy’s requirements being overstated. The Navy was
responsible for the largest dollar increase, $4.7 billion of the $10.6 billion
increase. A large part of the Navy increase, $3.4 billion, corresponded to
its reporting of requirements associated with aviation parts held by ships
and air squadrons that were not previously reported. The remaining Navy
increase was due to a variety of reasons, such as price increases; increased
demand, inventory lead time,8 and item wear-out rates that increased
safety levels; and, in some cases, inaccurate data. Also, since 1997 the
Navy has reduced the amount of administrative lead time it takes to place
inventory orders, yet it has not formally updated the data used to compute
those requirements. For example, the Navy reduced the administrative
lead time for medium-sized sole-source contracts for repairable items from
200 days to 130 days, but it did not recognize the reduction in its
requirements computations. As a result, those Navy requirements are
inaccurate and overstated.

Many of the long-standing and systemic logistical problems associated
with having both too much inventory for some items and not enough
inventory for others have been addressed in our prior reports as well as in
our Performance and Accountability Series, and we therefore are not


6
 U.S. General Accounting Office, Defense Inventory: Process for Canceling Inventory
Orders Needs Improvement, GAO/NSIAD-00-160 (Washington, D.C.: June 30, 2000).
7
    In this report, percentages are rounded to the nearest whole number.
8
 The inventory lead time refers to the time elapsed between when the need to replenish
inventory through a purchase is identified and when the order is received.




Page 3                                                       GAO-03-355 Defense Inventory
                 making any new recommendations in regard to those issues. We provide a
                 list of those reports and past recommendations in appendix II. However,
                 to improve the accuracy of the Navy’s inventory requirements, we are
                 recommending that the Secretary of Defense require the Navy to use the
                 most current data available for computing its administrative lead time
                 requirements. In commenting on a draft of the report, the department
                 generally concurred with the report. With regard to our recommendation,
                 the department noted that item managers use the most current data
                 available to manually compute administrative lead time requirements
                 when making management decisions for individual items and that in
                 March 2003, the Navy formally updated its automated inventory system to
                 begin using the most current data available to compute administrative lead
                 time requirements for all items. This action to update the Navy’s
                 automated inventory system responds to our recommendation.


                 The Department of Defense (DOD) refers to the amount of secondary
Background       inventory that it needs to have on hand or on order to support current
                 operations as the requirements objective. The requirements objective
                 includes inventory requirements for a reorder point and an economic
                 order quantity. The reorder point is the point at which inventory
                 replenishment will normally prevent out-of-stock situations from
                 occurring. The economic order quantity is the amount of inventory that,
                 when ordered and received, results in the lowest total cost for ordering
                 and holding inventory.

                 When the combined total of on-hand and on-order inventories falls to or
                 below the reorder point, an item manager generally places an order for
                 additional inventory so that the total of on-hand and on-order inventories
                 is equal to the requirements objective. Subsequently, on-hand inventory is
                 used to satisfy customer requisitions that are received after the item
                 manager orders new inventory, and thus the total of on-hand and on-order
                 inventories is generally less than the requirements objective. Furthermore,
                 an item’s reorder point can move up or down over time and—depending
                 on the item—may include one or more of the following:

             •   war reserves,9
             •   unfilled requisitions,



                 9
                  War reserves are authorized to be purchased to facilitate fast mobilization in the event
                 of war.




                 Page 4                                                      GAO-03-355 Defense Inventory
                   •   a safety level to be on hand in case of minor interruptions in the resupply
                       process or unpredictable fluctuations in demand,
                   •   minimum quantities for essential items for which demand is not normally
                       predicted (also referred to as insurance items),
                   •   inventory to satisfy demands while broken items are being repaired,
                   •   inventory to satisfy demands during the period between when the need to
                       replenish an item through a purchase is identified and when a contract is
                       let (also referred to as administrative lead time), and
                   •   inventory to satisfy demands during the period between when a contract
                       for inventory is let and when the inventory is received (also referred to as
                       production lead time).

                       Because the reorder point provides for inventory to be used during
                       the time needed to order and receive inventory and for a safety level,
                       item managers are able to place orders so that the orders arrive before
                       out-of-stock situations occur. Generally, an item manager orders an
                       amount of inventory needed to satisfy both the reorder point requirement
                       and the economic order quantity.


                       Between September 30, 1999, and September 30, 2001, DOD’s inventory
Inventory Growth       on hand increased by $5.6 billion and inventory on order increased by
Reverses Past          $1.7 billion, reversing past inventory reductions. These inventory increases
                       were primarily due to the Navy reporting aviation parts held by ships and
Reductions             air squadrons that were previously not reported and to overall DOD
                       inventory requirements increases. In addition, large imbalances in the
                       inventory continue to exist. As of September 30, 2001, over 1.7 million
                       items had $38 billion of inventory on hand or on order that exceeded the
                       items’ current inventory operating requirements of $24.9 billion. We also
                       identified 523,000 items that did not have enough inventory on hand or
                       on order to meet the items’ current inventory operating requirements.
                       While the services are implementing management changes that will
                       reduce the size of DOD’s inventory, long-standing and systemic inventory
                       management problems continue to exist.




                       Page 5                                           GAO-03-355 Defense Inventory
Inventory On Hand and   As of September 30, 2001, DOD’s on-hand inventory was $69.8 billion, up
On Order Has Begun      $5.6 billion, or 9 percent, since September 30, 1999, and on-order inventory
to Increase             was $9.9 billion, up $1.7 billion, or 21 percent (see figs. 1 and 2).

                        Figure 1: DOD’s Reported Inventory On Hand at the End of Fiscal Years 1996
                        through 2001




                        Page 6                                              GAO-03-355 Defense Inventory
                           Figure 2: DOD’s Reported Inventory On Order at the End of Fiscal Years 1996
                           through 2001




                           As indicated in figures 1 and 2, the period September 30, 1996, to
                           September 30, 1999, shows a decline in on-hand and on-order inventories.
                           During this period, inventory on hand dropped $5.5 billion and inventory
                           on order dropped $0.7 billion.


Inventory Growth Caused    A Navy inventory reporting change and increased DOD inventory
by Reporting Changes and   requirements contributed significantly to the growth in DOD’s inventory.
Requirements Increases     In 1996, the Navy began including aviation inventories held by ships and
                           air squadrons in its inventory reports. Most of the change occurred in 1999
                           when the Navy began reporting parts held by aircraft carriers. Previously,
                           the Navy considered these inventories as having been sold to ships and
                           installations and not as reported inventory. Based on Navy records, we
                           estimate that parts valued at about $3.3 billion10 were added to the
                           reported inventory as a result of the accounting change. A similar change
                           by the Army resulted in an inventory increase of $0.3 billion between


                           10
                            While requirements increased by $3.4 billion, on-hand inventory increased by $3.3 billion.
                           On-order inventory also increased.




                           Page 7                                                     GAO-03-355 Defense Inventory
                         September 30, 1999, and September 30, 2001. These Navy and Army
                         inventory reporting changes correspond to the reporting methods already
                         in use by the Air Force.

                         In addition, overall DOD inventory requirements increased from
                         $40.6 billion as of September 30, 1999, to $51.2 billion as of September 30,
                         2001. Increased requirements can affect an item’s reorder point and
                         economic order quantity. Consequently, an increase in requirements can
                         affect when item managers place orders and the amount of inventory they
                         purchase and can affect how much inventory is on hand. For example, if
                         the requirements increase and enough inventory is not on hand or on
                         order to satisfy the requirements, an item manager will place an order for
                         additional inventory. When the additional inventory is received, inventory
                         levels will also be increased.


Large Inventory          Since 1995 we have reported on imbalances in DOD’s inventory, and
Imbalances Still Exist   our current work shows that these imbalances continue to exist.11 Our
                         comparison of September 30, 2001, on-hand and on-order inventories to
                         the requirements objectives for 2.4 million items showed that 1.7 million
                         items, or 70 percent, had inventory on hand or on order that exceeded the
                         requirements, and 523,000 items, or 21 percent, did not have enough
                         inventory on hand or on order to satisfy all of the requirements. The
                         remaining 209,000 items, or 9 percent, had the right amount of inventory
                         on hand and/or on order to satisfy all requirements.

                         The 1.7 million items had $22.1 billion of inventory on hand and
                         $2.8 billion of inventory on order that satisfied requirements and an
                         additional $36 billion of inventory on hand and $2.0 billion12 on order that
                         exceeded requirements (see table 1).




                         11
                           U.S. General Accounting Office, Defense Inventory: Shortages Are Recurring, but Not a
                         Problem, GAO/NSIAD-95-137 (Washington, D.C.: Aug. 7, 1995); GAO/NSIAD-97-71; and
                         GAO/NSIAD-00-160.
                         12
                           Based on Defense Logistics Agency data, we estimate that this amount includes
                         about $400 million of Defense Logistics Agency inventory that was in transit. Files
                         provided by the Defense Logistics Agency did not distinguish between on-order and
                         in-transit inventories.




                         Page 8                                                    GAO-03-355 Defense Inventory
Table 1: Value of DOD’s Inventory On Hand and On Order for Items That Had Too
Much Inventory by Military Component as of September 30, 2001

    Dollars in billions
                               Inventory satisfying                Inventory exceeding
                                  requirements                        requirements
    Military
    component                   On hand         On order            On hand             On order
                                                                                                 a
    Army                            $2.6            $0.2                $3.7                $0.0
    Navy                             7.0             0.3                 8.8                 0.0a
    Air Force                       10.1             0.4                18.8                 0.6
    Defense
    Logistics
                                                          b
    Agency                            2.4              1.9                4.7                 1.4b
    Total                           $22.1             $2.8              $36.0                $2.0
Source: DOD.
a
    The amount is less than $50 million.
b
 The data provided by the Defense Logistics Agency did not distinguish between inventory on order
and inventory that was in transit. We estimate that $400 million was in-transit inventory.


Overall, the amount of DOD’s inventory that exceeds current operating
requirements has decreased since 1996. On-hand inventory that
exceeds current operating requirements decreased from $41.3 billion, or
59 percent, of on-hand inventory on September 30, 1996, to $36.1 billion,
or 52 percent, of the $69.8 billion inventory on hand on September 30,
2001. During the same period, DOD’s inventory on order that exceeds
requirements decreased from $1.7 billion, or 19 percent, of on-order
inventory to $1.6 billion, or 16 percent, of the $9.9 billion inventory on
order. In 1997, we reported that requirement decreases contributed to
items having inventory on hand that exceeded current requirements.
Similarly, in 2000, we reported that while inventory managers made
inventory purchases that were supported by requirements, subsequent
requirement decreases resulted in the purchases being in excess
of requirements.13

We identified 523,000 items that did not have enough inventory on hand or
on order to satisfy all of the requirements that make up the requirements
objective. The items had requirements valued at $23.4 billion that were
partially satisfied by $7.7 billion of inventory on hand and $5.3 billion of




13
     GAO/NSIAD-00-160.




Page 9                                                          GAO-03-355 Defense Inventory
inventory that was on order (see fig. 3). The remaining $10.4 billion of
requirements could be satisfied by purchases.

Figure 3: DOD Inventory On Order and On Hand and Needed Purchases for Items
That Did Not Have Enough Inventory as of September 30, 2001




The amount of inventory exceeding or failing to meet inventory
requirements indicates that many of the long-standing and systemic
inventory management problems previously identified in our Performance
and Accountability Series still exist.14 We recommended in these reports
that DOD address the long-standing weaknesses that limit the economy
and efficiency of its logistics operations, including having too much
inventory on hand and on order and shortages of key spare parts.
Appendix II lists past reports and recommendations relating to DOD’s
long-standing inventory management problems.




14
     GAO-03-98.




Page 10                                           GAO-03-355 Defense Inventory
Management Changes Will   The services are implementing management changes that will reduce
Reduce the Size of the    the size of DOD’s reported inventory and the amount of inventory that
Department’s Inventory    satisfies requirements. These changes include an initiative to transfer
                          the traditional DOD inventory and technical support function to parts
                          contractors and initiatives to implement new inventory management
                          systems.

                          The services have initiatives that will transfer the traditional DOD
                          inventory and technical support function to parts contractors. For
                          example, as of September 30, 2001, the Navy had about 22,000 items
                          that were managed by contractors. In some cases, Navy-owned inventory
                          is being replaced by contractor-owned inventory. The Navy was paying
                          $330 million for contractors to manage the 22,000 items, and the Navy
                          planned to increase that amount to over $700 million for the next fiscal
                          year. According to an official from the Office of the Secretary of Defense,
                          contractor-owned inventories used to support military operations are
                          not included in its inventory report. Consequently, the use of contractor-
                          owned inventories will decrease the growth of DOD’s inventory.

                          In addition, new inventory management systems that the military
                          components are implementing may also affect the amount of DOD’s
                          reported inventory. For example, the Air Force’s requirements for
                          insurance items15 decreased by $600 million between 1999 and 2001.
                          According to the Air Force, the requirements decreased as a result of
                          implementing a new requirements determination system that changed
                          the way in which it computed those requirements. The Army, the Navy,
                          and the Defense Logistics Agency are also in the process of developing
                          new inventory management systems. However, the impact of the
                          implementation of these new inventory management systems on the size
                          of DOD’s inventory is not yet known.

                          Although the initiatives described above will reduce the size of
                          DOD’s inventory, they do not address the long-standing and systemic
                          problems that are limiting the economy and efficiency of the department’s
                          logistics operations.




                          15
                            Insurance items are minimum quantities for essential items for which demand is not
                          normally predicted.




                          Page 11                                                  GAO-03-355 Defense Inventory
                        DOD’s overall inventory requirements increased by $10.6 billion, or
Requirements Are        26 percent, between the end of fiscal years 1999 and 2001, with some of
Increasing, but Some    the Navy’s requirements being overstated. The Navy was responsible for
                        $4.7 billion of the overall $10.6 billion increase. A large part of the Navy
of Navy’s Are           increase, $3.4 billion, was due to the Navy reporting change we discussed
Overstated              in the previous section—that is, reporting aviation parts held by ships
                        and air squadrons as inventory that were previously not reported.
                        Consequently, the Navy also began reporting the associated requirements.
                        The remaining $1.3 billion Navy increase was due to a variety of reasons
                        related to inventory cost and usage. However, some Navy increases were
                        caused by inaccurate data used to compute administrative lead time
                        requirements, and as a result, those requirements are overstated.


Overall DOD Inventory   DOD’s overall inventory requirements increased from $40.6 billion as of
Requirements Are        September 30, 1999, to $51.2 billion as of September 30, 2001, an increase
Increasing              of $10.6 billion, or 26 percent. Army, Navy, and Defense Logistics Agency
                        inventory requirements increased significantly while the Air Force’s
                        requirements decreased (see table 2). The Navy was responsible for the
                        largest share of DOD’s overall inventory requirements increase, with
                        $4.7 billion of the $10.6 billion inventory change.

                        Table 2: Comparison of Inventory Requirements by Military Component as of
                        September 30, 1999, and September 30, 2001

                         Dollars in billions
                         Military                                                 Dollar         Percent
                         component                    1999           2001        change          change
                         Navy                         $10.5          $15.2          $4.7              44
                         Defense
                         Logistics
                         Agency                         9.1           12.4           3.3              36
                         Army                           6.0            9.1           3.1              52
                         Air Force                     14.9           14.5           -.5              -3
                         Total                        $40.6          $51.2         $10.6              26
                        Source: DOD.

                        Note: Numbers may not add due to rounding.


                        All requirements that comprise DOD’s requirements objective increased
                        except for unfilled requisitions and nonrecurring lead time requirements
                        used by the Air Force. Requirements for safety levels, items held as
                        insurance against outages; economic order quantities; and production lead
                        time increased most significantly. Appendix III provides a detailed



                        Page 12                                              GAO-03-355 Defense Inventory
                                  comparison of the military components’ inventory requirements as of
                                  September 30, 1999, and September 30, 2001.

                                  Table 2 shows a decrease in the Air Force’s requirements. According to an
                                  Air Force Materiel Command official:

                              •   Higher congressional funding levels allowed the Air Force to buy and
                                  repair more of the items that were needed and reduce requirements for
                                  unfilled requisitions.
                              •   Requirements for items held as insurance against outages decreased as a
                                  result of implementing a new requirements determination system that
                                  changed the way in which the Air Force computed those requirements.
                              •   Requirements for war reserves decreased as a result of decreased need for
                                  F-16 fuel tanks.


Navy Inventory                    Navy requirements increased $4.7 billion between September 30, 1999,
Requirements Increased            and September 30, 2001, primarily due to a change in how the Navy
for a Variety of Reasons          accounts for aviation inventory requirements. The remaining Navy
                                  increase was due to such reasons as price increases and increased usage
                                  of items. Also, because the Navy has not updated the data used to compute
                                  administrative lead time requirements for some aviation items, those
                                  requirements are overstated.

Navy Requirements Increased       The Navy’s $4.7 billion increase was not uniform across all requirements.
$4.7 Billion                      Safety level, repair cycle, production lead time, economic order quantity,
                                  and insurance items requirements all increased by approximately
                                  $5.0 billion. However, requirements for Navy war reserves, unfilled
                                  requisitions, and administrative lead time actually decreased during this
                                  period, by $331 million (see fig. 4).




                                  Page 13                                          GAO-03-355 Defense Inventory
Figure 4: Changes in Navy Inventory Requirements between September 30, 1999,
and September 30, 2001




A large part of the Navy’s increase was due to a change in the way the
Navy accounts for aviation inventory requirements for parts held by ships
and air squadrons. According to the Navy, prior to 1996, aviation items
that inventory control points16 sold to customers onboard ships and at
installations were not accounted for in its inventory. In 1996, the Navy
began accounting for aviation items held by ships and installations by
recognizing these requirements and assets in its inventory system and
recording them as insurance item requirements. The Navy made the
change in order to provide item managers visibility of the inventory and
associated requirements and assets. Most of the increase in requirements
and inventory occurred after 1999 when the Navy began to include
aviation parts held on aircraft carriers. Generally, the change in
accounting for these requirements resulted in a $3.4 billion increase in



16
  An inventory control point is responsible for the management of a group of items,
including the computation of requirements and the purchase of inventory.




Page 14                                                   GAO-03-355 Defense Inventory
Navy insurance item requirements,17 from $2.4 billion on September 30,
1999, to $5.8 billion on September 30, 2001.

To gain insight into why increases in the Navy’s inventory requirements
occurred, we compared the 307,000 items the Navy managed as of
September 30, 1999, to the 309,000 items managed as of September 30,
2001, and identified 279,000 items that were managed in both years.18
Overall, the value of the 279,000 items increased $4.2 billion between
September 30, 1999, and September 30, 2001 (see table 3). Of this amount,
$3.1 billion was the result of increased inventory requirement quantities
and $1.1 billion was due to price changes. About 37,000 items accounted
for $4.3 billion in inventory requirements increases, and another 37,000
items accounted for a $1.2 billion decrease in inventory requirements
decreases. There was no change in inventory requirement quantities for
the remaining 205,000 items during the same period of review.

Table 3: Comparison of Requirements for 279,000 Items Managed by the Navy at the
End of Fiscal Years 1999 and 2001

 Dollars in billions
 Status of                                 Change in
 requirement                             requirement          Change in
 quantity                        Items       quantity             price       Total change
 Increased                      37,000          $4.3               $0.8                $5.1
 Stayed the
 same                          205,000             NA                 0.2               0.2
 Decreased                      37,000            -1.2                0.2              -1.0
 Total                         279,000            $3.1               $1.1              $4.2
Source: DOD.

Legend: NA = Not Applicable.

Notes: GAO’s analysis of DOD data.

Totals do not add due to rounding.


We also reviewed in more detail 90 of the 279,000 items. We selected the
90 items because they had large increases in requirements and accounted
for $1.1 billion of the $4.2 billion of the requirements increase associated


17
  While the aviation items held by ships and installations are not insurance items, the Navy
began reporting them as such in order to retain their visibility to item managers.
18
   About 28,000 items that the Navy managed as of September 30, 1999, were
discontinued by September 30, 2001; however, the Navy added about 30,000 new
items after September 30, 1999.




Page 15                                                    GAO-03-355 Defense Inventory
with the 279,000 items. For 37 of the 90 items, insurance requirements
increases accounted for $454 million of the 90 items’ $1.1 billion total
requirements increase between 1999 and 2001. Of the $454 million,
$428 million of the increase was attributable to including existing
aviation requirements and $26 million was attributable to new aviation
requirements. For example, the insurance requirement for an aviation
radar transmitter, valued at $446,000 each and used on the F-18 and the
AV-8B aircraft, increased from 44 transmitters on September 30, 1999, to
196 on September 30, 2001. The requirement caused an increase of
128 transmitters by recognizing existing aviation requirements in the
Navy’s inventory and an increase of another 24 transmitters as a result of
new requirements for these transmitters in newer versions of the
F-18 aircraft.

In addition to the $454 million increase in insurance item requirements,
our analysis of the 90-item sample identified a wide variety of additional
reasons for the increases in requirements. For example, increased usage
of items resulted in requirements increasing by $294 million for 46 items.
Increased usage was often the result of changes in demand for an item,
defective parts needing to be replaced, and items wearing out at a faster
rate than expected. Changes in the Navy’s stock, overhaul, or operational
policies; the inability to find a commercial source for an item; and the
unavailability of material needed to manufacture items were among the
other reasons for requirements increases. Table 4 summarizes the reasons
identified for the requirements increases. Additional information and
examples are discussed in more detail in appendix IV.




Page 16                                          GAO-03-355 Defense Inventory
                                Table 4: Reasons for Navy Requirements Increases for Items Reviewed

                                 Dollars in millions
                                                                               Number of items                   Increase in
                                 Reason for increase                                  affected                 requirements
                                 Increase in insurance item
                                 requirements                                                  37                        $454
                                 Usage of the item increased                                   46                         294
                                 Navy changed stock, overhaul, or
                                 operational policies                                          36                          126
                                 Source or repair issues                                       29                          137
                                 Uncertainty of demand, lead time
                                 or wear-out rate increased safety
                                 levels                                                        22                           72
                                 Increases were not valid                                       7                           98
                                 Data anomalies                                                 2                            2
                                Source: DOD.

                                Notes: GAO’s analysis of DOD data.

                                Because some items had more than one reason for requirements increases, the number of items and
                                value of the increased requirements exceeds 90 and $1.1 billion, respectively.


Navy Administrative Lead Time   The Navy has not formally updated the data it uses to project
Requirements Are Not            administrative lead time19 requirements for aviation parts since 1999, and
Accurately Computed and Are     thus these requirements are overstated. Before 1999, the Navy used the
Overstated                      actual administrative lead time from an item’s previous procurement as a
                                basis for projecting its future administrative lead time requirements for
                                aviation parts. In 1999, the Navy began using an administrative lead time
                                matrix for computing the requirements. Under this approach, the Navy
                                places aviation items into matrix cells based on the type of item being
                                purchased, the size of the potential purchase, and the type of contract to
                                be used to purchase the item. The Navy believes that items that are similar
                                and are purchased in a similar manner will have similar lead times. As of
                                September 30, 2001, the Navy had computed $895 million of administrative
                                lead time requirements for its 101,000 aviation parts.

                                When the Navy implemented the matrix approach for computing
                                administrative lead time requirements in 1999, it based the requirements
                                on actual fiscal year 1997 lead time data. Since 1997 the Navy has generally
                                reduced its actual administrative lead time. While the Navy has
                                recomputed its administrative lead times using statistical techniques


                                19
                                  Administrative lead time is the time between when the need to buy an item is identified
                                and when a contract is let.




                                Page 17                                                      GAO-03-355 Defense Inventory
              aimed at reducing fluctuations from year to year, it has not formally
              updated the administrative lead time matrix used to compute requirements
              to reflect the most current, lower data. However, in response to our
              inquiries, the Navy, in December 2002, reviewed the administrative lead
              time data used to compute requirements and found that the data had been
              revised. Item manager reviews and the purchase of items that had not
              recently been purchased led to changes to the lead time data in the files.

              Our analysis of the changes showed that the revised data had lowered the
              administrative lead times for most of the matrix cells and that the
              Navy-computed lead times would be further reduced for most matrix
              cells. For example, revised data reduced the lead time from 200 days to
              183 days for medium-sized sole-source contracts for repairable items. The
              Navy-computed lead time further reduced the lead time to 130 days. In
              contrast, for large-sized sole-source contracts for repairable items, the
              revised data reduced the lead time from 280 days to 183 days while the
              Navy-computed lead time set it at 195 days.

              Navy officials responsible for aviation parts have been reluctant to use
              the lower Navy-computed lead time data. Even though the Navy uses a
              technique to reduce fluctuations in its computed lead time from year to
              year, the officials believe that annual changes in the lead time will result in
              terminating contracts for parts in 1 year and possibly having to repurchase
              the same items the next year.


              The Navy is overstating its administrative lead time requirements for
Conclusions   aviation items by not using the most current data available for computing
              those requirements. Because the most current data reflects the Navy’s
              reduced administrative lead time, using old data unnecessarily results in
              inaccurate and overstated requirements that can lead to unnecessary
              purchases. The Navy is concerned that using the most current data
              will result in cycles of ordering inventory, canceling the orders, and
              subsequently reordering the items. We believe that using the most current
              data that is based on statistical techniques aimed at reducing potential
              fluctuations in the requirements will result in stable and more accurate
              administrative lead time requirements and help the Navy avoid
              unnecessary purchases.




              Page 18                                            GAO-03-355 Defense Inventory
                     To improve the accuracy of the Navy’s secondary inventory requirements,
Recommendation for   we recommend that the Secretary of Defense direct the Secretary of the
Executive Action     Navy to require the Commander, Naval Supply Systems Command,
                     require its inventory managers to use the most current data available for
                     computing administrative lead time requirements.


                     In commenting on a draft of the report, DOD generally concurred with
Agency Comments      the report. With regard to our recommendation, DOD noted that item
                     managers use the most current data available to manually compute
                     administrative lead time requirements when making management
                     decisions for individual items and that in March 2003, the Navy formally
                     updated its automated inventory system to begin using the most current
                     data available to compute administrative lead time requirements for all
                     items. This action to update the Navy’s automated inventory system
                     responds to our recommendation.

                     DOD’s comments can be found in appendix V.


                     As arranged with your office, unless you publicly announce its contents
                     earlier, we plan no further distribution of this report until 30 days from the
                     issue date. At that time, we will send copies of this report to the Secretary
                     of Defense; the Secretaries of the Army, the Navy, and the Air Force; the
                     Director, Defense Logistics Agency; the Director, Office of Management
                     and Budget; and other interested congressional committees. We will also
                     make copies available to others upon request. In addition, the report will
                     be available at no charge on the GAO Web site at http://www.gao.gov/.




                     Page 19                                           GAO-03-355 Defense Inventory
Please contact me on (202) 512-8365, if you or your staff have any
questions concerning this report. Staff acknowledgments are listed in
appendix VI.

Sincerely yours,




William M. Solis, Director
Defense Capabilities and Management




Page 20                                         GAO-03-355 Defense Inventory
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             To identify changes in the Department of Defense’s (DOD) on-hand and
             on-order inventories for fiscal years 1996 through 2001, we used data
             developed in prior reviews and inventory stratification reports. We
             analyzed on-hand and on-order inventories as they related to the military
             components’ requirements objectives. We held meetings to discuss these
             observations with officials from the Army Materiel Command, Alexandria,
             Virginia; the Naval Supply Systems Command, Mechanicsburg,
             Pennsylvania; the Air Force Materiel Command, Dayton, Ohio; and the
             headquarters of Defense Logistics Agency, Alexandria, Virginia. To
             determine the number of items that had more than or less than enough
             inventory to satisfy requirements, we obtained computerized inventory
             records from the military components as of September 30, 2001, the most
             recent end of fiscal year data at the time we began our examination. We
             did not test the reliability of the data. We used the computerized records to
             compare on-hand and on-order inventories to requirements on an item-by-
             item basis to determine if items had sufficient inventory available to
             satisfy requirements. DOD reported that its secondary inventory was
             valued at $63.3 billion in its September 30, 2001, Supply System Inventory
             Report. For our analyses, we used inventory stratification files and reports.
             We did not revalue the inventory that needs to be repaired to recognize the
             repair cost, and we did not value inventory that is to be disposed of at
             salvage prices. Also, our analyses did not include fuel, certain inventories
             held by units, and Marine Corps inventory. Fuel and inventories held by
             units are not stratified by requirement, and the Marine Corps inventory
             represents a small part of the universe.

             To ascertain the causes for increases in inventory requirements, we
             compared September 30, 1999, inventory requirements to September 30,
             2001, inventory requirements for the military components. Because the
             Navy had the largest dollar increase in requirements, we analyzed the Navy
             requirements in more detail. For items that the Navy managed in both 1999
             and 2001, we compared the requirements to determine if the requirements
             increased, stayed the same, or decreased. We selected 90 items for
             detailed review based on how much their requirements increased between
             1999 and 2001. The 90 items accounted for about $1.1 billion of the Navy’s
             $4.7 billion increase in requirements. We met with appropriate personnel
             from the Philadelphia and Mechanicsburg, Pennsylvania, offices of the
             Naval Inventory Control Point to identify the specific reasons for the
             items’ increase in requirements.




             Page 21                                          GAO-03-355 Defense Inventory
                                Appendix II: GAO Reports and Open
Appendix II: GAO Reports and Open
                                Recommendations Relating to DOD’s
                                Inventory Management Problems


Recommendations Relating to DOD’s
Inventory Management Problems
Defense Inventory: Better       DOD’s reports on spare parts spending—called Exhibit OP-31, Spares and
Reporting on Spare Parts        Repair Parts, and submitted as part of the President’s annual budget
Spending Will Enhance           submission—do not provide an accurate and complete picture of spare
                                parts funding as required by financial management regulation. As a result,
Congressional Oversight,        the reports do not provide Congress with reasonable assurance about the
GAO-03-18, Oct. 24, 2002        amount of funds being spent on spare parts. Furthermore, the reports did
                                not always contain actual expenditure data: all of the Army’s annual
                                operations and maintenance appropriations data and most of the services’
                                commodity amounts were shown as estimates. Without actual data, the
                                reports are of limited use to Congress as it makes decisions on how best to
                                spend resources to reduce spare parts shortages and improve military
                                readiness.

                                Open Recommendations

                                We recommended that the Secretary of Defense:

                            •   issue additional guidance on how the services are to identify, compile, and
                                report on actual and complete spare parts spending information, including
                                supplemental funding, in total and by commodity, as specified by Exhibit
                                OP-31; and
                            •   direct the Secretaries of the military departments to comply with Exhibit
                                OP-31 reporting guidance to ensure that complete information is provided
                                to Congress on the quantities of spare parts purchased and explanations of
                                deviations between programmed and actual spending.



Defense Inventory:              The Army, in its approach for assessing wartime spare parts industrial
Improved Industrial Base        base capability, still does not use current data from industry. Instead, the
Assessments for Army            Army uses historical parts procurement data because its prior efforts to
                                collect current data from industry were not successful due to poor
War Reserve Spares Could        response rates. The Army’s assessments depend on historical data and
Save Money, GAO-02-650,         resulting lead-time factors to project industry’s contribution to satisfying
July 12, 2002                   wartime spare parts requirements. Without current data on industry’s
                                capability, assessments could be unreliable, resulting in reduced readiness
                                due to critical spare parts shortfalls in wartime or inflated and costly war
                                reserve spare parts inventories in peacetime. Moreover, the Army’s budget
                                requests to Congress for war reserve spare parts risk being inaccurate.

                                We identified a program in the Defense Logistics Agency that has several
                                attributes reflecting sound management practices that are required for
                                reliable industrial base capability assessments. Our analysis of the



                                Page 22                                          GAO-03-355 Defense Inventory
                               Appendix II: GAO Reports and Open
                               Recommendations Relating to DOD’s
                               Inventory Management Problems




                               approach used by the Army compared to the Defense Logistics Agency’s
                               spare parts industrial base assessment program revealed that the Army’s
                               approach can be improved in three areas—data collection, data analysis,
                               and management strategies.

                               Open Recommendations

                               We recommended that the Secretary of Defense direct the Army to:

                           •   establish an overarching industrial base capability assessment process that
                               considers the attributes in this report;
                           •   develop a method to efficiently collect current industrial base capability
                               data directly from industry itself;
                           •   create analytical tools that identify potential production capability
                               problems such as those due to surge in wartime spare parts demand; and
                           •   create management strategies for resolving spare parts availability
                               problems, for example, by changing acquisition procedures or by targeting
                               investments in material and technology resources to reduce production
                               lead times.


Defense Inventory: Air         We reported that Air Force and contractor personnel had largely not
Force Needs to Improve         complied with DOD and Air Force inventory control procedures designed
Control of Shipments to        to safeguard material shipped to contractors, placing items worth billions
                               of dollars at risk of fraud, waste, and abuse.
Repair Contractors,
GAO-02-617, July 1, 2002       Open Recommendations

                               We recommended that the Secretary of Defense direct the Air Force to:

                           •   Improve processes for providing contractor access to government-
                               furnished material by
                               • listing specific stock numbers and quantities of material in repair
                                  contracts (as they are modified or newly written) that the inventory
                                  control points have agreed to furnish contractors;
                               • demonstrating that automated internal control systems for loading and
                                  screening stock numbers and quantities against contractor requisitions
                                  perform as designed;




                               Page 23                                         GAO-03-355 Defense Inventory
                              Appendix II: GAO Reports and Open
                              Recommendations Relating to DOD’s
                              Inventory Management Problems




                              •  loading stock numbers and quantities that the inventory control points
                                 have agreed to furnish to contractors into the control systems manually
                                 until the automated systems have been shown to perform as designed;
                                 and
                              • requiring that waivers to loading stock numbers and quantities
                                 manually are adequately justified and documented based on cost-
                                 effective and/or mission-critical needs.
                          •   Revise Air Force supply procedures to include explicit responsibility and
                              accountability for
                              • generating quarterly reports of all shipments of Air Force material to
                                 contractors, and
                              • distributing the reports to Defense Contractor Management Agency
                                 property administrators.
                          •   Determine, for the contractors in our review, what actions are needed to
                              correct problems in posting material receipts.
                          •   Determine, for the contractors in our review, what actions are needed to
                              correct problems in reporting shipment discrepancies.
                          •   Establish interim procedures to reconcile records of material shipped to
                              contractors with records of material received by them, until the Air Force
                              completed the transition to its Commercial Asset Visibility system in fiscal
                              year 2004.
                          •   Comply with exiting procedures to request, collect, and analyze contractor
                              shipment discrepancy data to reduce the vulnerability of shipped
                              inventory to undetected loss, misplacement, or theft.



Military Aircraft: Services   All the military services extensively use cannibalization—that is,
Need Strategies to Reduce     removing serviceable parts from one piece of equipment and installing
Cannibalizations,             them in another—as a routine aircraft maintenance practice. In fiscal
                              years 1996 through 2000, the Navy and the Air Force reported about
GAO-02-86,                    850,000 cannibalizations, requiring about 5.3 million additional
November 21, 2001             maintenance hours. Cannibalizations have several adverse impacts. They
                              increase maintenance costs by increasing mechanics’ workloads, affect
                              morale and personnel retention, and sometimes take expensive aircraft
                              out of service for long periods of time. Cannibalizations can also create
                              additional mechanical problems. The services have many reasons for
                              cannibalizing aircraft and strong incentives for continuing to do so.
                              However, with the exception of the Navy, they do not consistently track
                              the specific reasons for cannibalizations. As a result, much of the
                              information on causes is anecdotal. In the broadest sense, cannibalizations
                              are done because of pressures to meet readiness and operational needs
                              and because of shortcomings in the supply system.



                              Page 24                                          GAO-03-355 Defense Inventory
                           Appendix II: GAO Reports and Open
                           Recommendations Relating to DOD’s
                           Inventory Management Problems




                           Open Recommendations

                           We recommended that the Secretary of Defense direct the Army, the Navy
                           and the Air Force to take the following actions:

                       •   Establish standardized, comprehensive, and reliable cannibalization data-
                           collection procedures and systems for cannibalizations.
                       •   Measure and report the number of maintenance hours associated with
                           cannibalizations.
                       •   Develop strategies to reduce the number of maintenance hours spent on
                           cannibalization, ensure that cannibalized aircraft do not remain grounded
                           for long periods of time, and reduce the adverse effects of cannibalizations
                           on maintenance costs and personnel. At a minimum, the strategies should
                           include criteria to determine (1) which cannibalizations are appropriate,
                           (2) cannibalization-reduction goals, and (3) the actions to be taken to meet
                           those goals. The services must assign responsibility for ensuring that goals
                           are being met and allocate resources for this purpose.



Defense Inventory: Navy    The Navy’s Product Quality Deficiency Reporting Program has been
Spare Parts Quality        largely ineffective in gathering the data needed for analyses so that Navy
Deficiency Reporting       managers can determine the full extent of spare parts quality deficiencies
                           affecting maintenance activities. Without these data, managers lose
Program Needs              opportunities to initiate important corrective and preventive action with
Improvement, GAO-01-923,   parts and suppliers.
August 16, 2001
                           Open Recommendations

                           We recommended that the Secretary of Defense direct the Secretary of the
                           Navy to:

                       •   increase the program’s levels of (1) training, describing what quality
                           deficiencies to report, how to report them, and why it is important to the
                           Navy; (2) incentives, including financial credits back to the reporting unit
                           where appropriate to encourage participation; (3) automation support, to
                           simplify and streamline reporting and analysis; and (4) management
                           emphasis provided to the program, as necessary, to determine the causes,
                           trends, and responsibilities for parts failures and achieve greater
                           compliance with joint-service requirements, including reporting on parts
                           that fail before the end of their design life; and
                       •   require program officials to measure and periodically report to the
                           appropriate Defense and Navy managers the results of the program in such
                           areas as actions taken to correct parts quality deficiencies, prevent


                           Page 25                                          GAO-03-355 Defense Inventory
                             Appendix II: GAO Reports and Open
                             Recommendations Relating to DOD’s
                             Inventory Management Problems




                             recurrences, and obtain credits or reimbursements from suppliers for
                             deficient products.


Navy Inventory: Parts        Spare parts shortages for the EA-6B and the F-14 aircraft adversely
Shortages Are Impacting      impacted the Navy’s readiness to perform assigned missions and the
Operations and               economy and efficiency of its maintenance activities. The shortages also
                             contributed to problems retaining personnel. The primary reasons for
Maintenance                  spare parts shortages were that more parts were required than the Navy
Effectiveness, GAO-01-771,   originally anticipated and problems in identifying, qualifying, or
July 31, 2001                contracting with a private company to produce or repair the parts.

                             We did not make any recommendations in this report because of our prior
                             recommendations on improving the Navy’s management framework for
                             implementing commercial practices and DOD’s efforts to develop an
                             overarching integration plan.


Army Inventory: Parts        Aviation spare parts shortages for the Apache, Blackhawk, and Chinook
Shortages Are Impacting      helicopters adversely affected operations and led to inefficient
Operations and               maintenance practices that have lowered morale of maintenance
                             personnel. Specifically, while the helicopters generally met their mission-
Maintenance                  capable goals, indicating that parts shortages have not affected their
Effectiveness, GAO-01-772,   mission capability, supply availability rates and cannibalization of parts
July 31, 2001                from one aircraft to another indicate that spare parts shortages have
                             indeed been a problem. The reasons for the unavailability of the 90 parts
                             we reviewed included actual demands for parts that were greater than
                             anticipated, delays in obtaining parts from a contractor, and problems
                             concerning overhaul and maintenance. For example, because a cracked
                             gear in a Chinook transmission was discovered during an overhaul, the
                             entire fleet was grounded in August 1999. As a result, the demand for the
                             part has been much greater than anticipated. The Army and the Defense
                             Logistics Agency have initiatives under way or planned that are designed
                             to improve the availability of aviation parts. The initiatives generally
                             address the reasons we identified for spare parts shortages. Additionally,
                             the Army has developed a Strategic Logistics Plan that is designed to
                             change its current approach to one that is more effective, efficient, and
                             responsive. The plan’s initiatives for resolving spare parts shortages are
                             linked to the asset management process under the Army’s planned change
                             in approach. Some of these initiatives are new or in the planning stages.
                             Once the initiatives are more fully developed, we plan to review them to
                             determine whether there are opportunities to enhance them.




                             Page 26                                          GAO-03-355 Defense Inventory
                             Appendix II: GAO Reports and Open
                             Recommendations Relating to DOD’s
                             Inventory Management Problems




                             Because we previously reported problems with the way the Army has
                             implemented its logistics initiatives and recommended that it develop a
                             management framework for its initiatives, to include a comprehensive
                             strategy and performance plan, we did not make recommendations in
                             this report.


Air Force Inventory: Parts   Spare parts shortages on the E-3 and C-5 aircraft and F-100-220 engines
Shortages Are Impacting      have adversely affected the performance of assigned missions and the
Operations and               economy and efficiency of maintenance activities. Specifically, the Air
                             Force did not meet its mission-capable goals for the E-3 or C-5 during
Maintenance                  fiscal years 1996-2000, nor did it meet its goal to have enough F-100-220
Effectiveness, GAO-01-587,   engines to meet peacetime and wartime goals during that period. The
June 27, 2001                majority of reasons cited by item managers at the maintenance facilities
                             for spare parts shortages were most often related to more spares being
                             required than were anticipated by the inventory management system and
                             delays in the Air Force’s repair process as a result of the consolidation of
                             repair facilities. Other reasons included (1) difficulties with producing or
                             repairing parts, (2) reliability of spare parts, and (3) contracting issues.
                             The Air Force and the Defense Logistics Agency have numerous overall
                             initiatives under way or planned that may alleviate shortages of the spare
                             parts for the three aircraft systems we reviewed. The initiatives generally
                             address the reasons we identified for the shortages. To ensure that the
                             initiatives are achieving the goals of increasing efficiencies in the supply
                             system, the Air Force has developed a Supply Strategic Plan that contains
                             specific goals and outcome-oriented measures for the initiatives.

                             Because the Air Force’s plan is in keeping with our previous
                             recommendations to improve overall logistics planning, we did not make
                             recommendations in this report. We will separately review the overall
                             approach and initiatives, once they are more fully developed, to determine
                             whether there are opportunities to enhance these efforts.


Defense Inventory:           DOD’s components do not have sound analytical support for determining
Approach for Deciding        when it is economical to retain or dispose of the $9.4 billion in inventory
Whether to Retain or         the department is holding for economic reasons. The components’
                             decision-making approaches for retaining economic retention inventory
Dispose of Items Needs       have evolved from the use of economic models to the use of judgmentally
Improvement, GAO-01-475,     determined levels. In addition, the department did not have sound
May 25, 2001                 analytical support for the maximum levels they selected. Also, although
                             the department requires annual reviews of the analyses supporting
                             economic retention decisions, the components have generally not done


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                              Recommendations Relating to DOD’s
                              Inventory Management Problems




                              such reviews. As a result of these weaknesses, the department is
                              vulnerable to retaining some items when it is uneconomical to do so and
                              disposing of others when it is economical to retain them.

                              Open Recommendations

                              We recommended that the Secretary of Defense direct the Secretaries of
                              the Army, the Navy, and Air Force and the Director of the Defense
                              Logistics Agency to:

                          •   establish milestones for reviewing current and recently used approaches
                              for making decisions on whether to hold or dispose of economic retention
                              inventory to identify actions needed to develop and implement appropriate
                              approaches to economic retention decisions; and
                          •   annually review their approaches to meet department regulations to
                              ensure that they have sound support for determining economic retention
                              inventory levels.


Defense Inventory: Army       In the October-December 2000 time frame, the Army reported that it had
War Reserve Spare Parts       about 35 percent of its prepositioned spare parts on hand and a $1-billion
Requirements Are              shortfall in required spare parts for its war reserves. Notwithstanding the
                              reported shortages, we identified uncertainties about the accuracy of the
Uncertain, GAO-01-425,        Army’s requirements. For example, we identified a potential mismatch
May 10, 2001                  between the Army’s methodology for determining parts requirements and
                              the Army’s planned battlefield maintenance practices.

                              Open Recommendations

                              We recommended that the Secretary of Defense:

                          •   Assess the priority and level of risk associated with the Army’s plans for
                              addressing the reported shortfall in Army war reserve spare parts.
                          •   Direct the Army to provide accurate calculations of the Army’s war
                              reserve spare parts requirements by
                              • developing and using the best available consumption factors in
                                 calculating all spare parts requirements for the Army’s war reserves;
                              • eliminating potential mismatches in how the Army calculates its war
                                 reserve spare parts requirements and the Army’s planned battlefield
                                 maintenance practices; and
                              • developing fact-based estimates of industrial base capacity to provide
                                 the needed spare parts in the two major theater war scenarios time
                                 frames.



                              Page 28                                          GAO-03-355 Defense Inventory
                             Appendix II: GAO Reports and Open
                             Recommendations Relating to DOD’s
                             Inventory Management Problems




                         •   Include in future industrial capabilities reports more comprehensive
                             assessments on industry’s ability to supply critical spare parts for two
                             major theater wars.


Defense Inventory:           Requirements for the 490 items we reviewed often changed after the
Process for Canceling        orders were placed, which caused the items to exceed requirements.
Inventory Orders Needs       Further, because of inaccurate inventory records, 182 of the 490 items
                             (valued at $170 million) were reported as excess, but were not actually
Improvement,                 excess to requirements. Because of the large number of inaccurate
GAO/NSIAD-00-160,            records, neither DOD nor the military components know whether
June 30, 2000                managers are efficiently focusing their efforts to cancel excess inventory
                             on order, and the department does not have an accurate view of the total
                             value of its excess inventory on order. Each component’s process for
                             canceling orders that exceeded requirements differs and cannot be relied
                             on to consistently identify orders to be considered for cancellation or to
                             terminate orders when economical.

                             Specifically:

                         •   The components use different criteria for the amount of excess inventory
                             on order they consider for cancellation.
                         •   Only the Defense Logistics Agency consistently uses its computer model to
                             determine whether it is more economical to cancel orders or not.
                             However, of the $696 million its model referred for consideration during a
                             3-month period in 1999, less than $11 million in orders were canceled.
                         •   The military components’ frequency in reviewing orders of excess
                             inventory for cancellation ranges from monthly to quarterly. The longer
                             components wait to consider an item for cancellation, the less likely
                             cancellation will be cost-effective because they have to pay the contractor
                             for costs incurred until the order is canceled.
                         •   The components’ goals for reducing excess inventory on order vary and
                             are not comparable. Thus, the department cannot evaluate the
                             components’ progress in reducing excess inventory on order in a
                             consistent way.

                             Open Recommendations

                             We recommended that the Secretary of Defense, in conjunction with the
                             Secretaries of the Army, the Navy, and the Air Force, and the Director of
                             the Defense Logistics Agency review and improve the processes for
                             identifying and canceling orders, focusing on areas such as




                             Page 29                                           GAO-03-355 Defense Inventory
    Appendix II: GAO Reports and Open
    Recommendations Relating to DOD’s
    Inventory Management Problems




•   the accuracy of inventory management records;
•   the level at which the services and the Defense Logistics Agency identify
    excess inventory on order that is subject to cancellation review, including
    low-dollar excess inventory on order that is excluded from cancellation
    review;
•   the timeliness and frequency of reviews for identifying excess items on-
    order; and
•   the validity and use of the military components’ termination models in
    making economic analyses.

    We also recommended that the Secretary of Defense require the
    Secretaries of the Army, the Navy, and the Air Force, and the Director of
    the Defense Logistics Agency to report on the amount of all excess
    inventory on order, identifying inventory on order that exceeds both the
    requirements objective and the approved acquisition objective.




    Page 30                                          GAO-03-355 Defense Inventory
              Appendix III: DOD and Military Component
Appendix III: DOD and Military Component
              Inventory Requirements at the End of Fiscal
              Years 1999 and 2001


Inventory Requirements at the End of
Fiscal Years 1999 and 2001
              Table 5: Comparison of Inventory Requirements for the Department of Defense at
              the End of Fiscal Years 1999 and 2001

                  Dollars in billions
                                                                              Increase/                  Percent
                                          Fiscal year       Fiscal year decrease since             change since
                                                1999              2001      fiscal year               fiscal year
                  Requirement           requirements      requirements             1999                     1999
                  War reserves                   $2.9              $3.3            $0.4                        13
                                                     a                                                               b
                  Depot                                             0.3              0.3
                  requirements
                  objective
                  Unfilled                        3.2                  3.1                -0.1                      -3
                  requisitions
                  Safety level                    5.9                  8.2                 2.3                     39
                  Insurance items                 4.6                  7.4                 2.8                     62
                  Repair cycle                    3.6                  4.2                 0.6                     18
                  Production lead                 6.1                  8.1                 2.0                     32
                  time
                  Administrative                  3.5                  4.4                 0.9                     26
                  lead time
                  Lead time                       2.7                  1.6                -1.1                     -39
                  nonrecurring
                           c
                  demand
                  Economic order                  8.1                10.5                  2.4                     30
                  quantity
                  Total                        $40.6                $51.2               $10.6                      26
              Source: DOD.
              a
               The Army is the only component that uses this requirement for reporting retail level requirements
              and inventory. It began its use in fiscal year 2000.
              b
               This percentage calculation is not meaningful since comparable data were not available for fiscal
              year 1999.
              c
               The Air Force is the only component that reports lead time nonrecurring demand as a separate
              requirement.




              Page 31                                                           GAO-03-355 Defense Inventory
Appendix III: DOD and Military Component
Inventory Requirements at the End of Fiscal
Years 1999 and 2001




Table 6: Comparison of Inventory Requirements for the Defense Logistics Agency
at the End of Fiscal Years 1999 and 2001

 Dollars in billions
                                                               Increase/            Percent
                         Fiscal year         Fiscal year decrease since       change since
                               1999                2001      fiscal year         fiscal year
 Requirement           requirements        requirements             1999               1999
 Unfilled
 requisitions                     $0.8                  $1.0          $0.2               21
 Safety level                      1.0                   1.6           0.6               62
 Production lead
 time                              2.9                   3.5           0.6               21
 Administrative
 lead time                         1.9                   2.6           0.7               39
 Economic order
 quantity                          2.6                   3.8           1.2               46
 Total                            $9.1                 $12.4          $3.3               36
Source: DOD.

Note: Percentages were calculated prior to rounding.




Page 32                                                        GAO-03-355 Defense Inventory
Appendix III: DOD and Military Component
Inventory Requirements at the End of Fiscal
Years 1999 and 2001




Table 7: Comparison of Inventory Requirements for the Army at the End of
Fiscal Years 1999 and 2001

    Dollars in billions
                                                                   Increase/                Percent
                            Fiscal year          Fiscal year decrease since           change since
                                  1999                 2001      fiscal year             fiscal year
    Requirement           requirements         requirements             1999                   1999
    War reserves                   $0.9                 $1.1            $0.2                      20
    Depot
    requirements
                                          a                                                        b
    objective                                               0.3               0.3
    Unfilled
    requisitions                        0.8                0.9              0.2c                 23
    Safety level                        0.3                0.9               0.6                203
    Insurance items                    0.0d                0.0d             0.0d                 67d
    Repair cycle                        0.6                0.9               0.3                 52
    Production lead
    time                                1.0                 1.6               0.6                59
    Administrative
    lead time                           0.3                 0.4              0.2c                64
    Economic order
    quantity                            2.1                2.9               0.8                 35
    Total                              $6.0               $9.1              $3.1                 52
Source: DOD.

Note: Percentages were calculated prior to rounding.
a
    The Army did not use this requirement for fiscal year 1999.
b
    Because there was no data for fiscal year 1999, this percentage could not be computed.
c
    Differences are due to rounding.
d
    The Army reported insurance items valued at less than $50 million.




Page 33                                                             GAO-03-355 Defense Inventory
Appendix III: DOD and Military Component
Inventory Requirements at the End of Fiscal
Years 1999 and 2001




Table 8: Comparison of Inventory Requirements for the Navy at the End of
Fiscal Years 1999 and 2001

    Dollars in billions
                                                                  Increase/              Percent
                            Fiscal year         Fiscal year decrease since         change since
                                  1999                2001      fiscal year           fiscal year
    Requirement           requirements        requirements             1999                 1999
                 a
    War reserves                   $0.0                $0.0             $0.0                  -32
    Unfilled
                                                                               b
    requisitions                       0.7                0.5              -0.3              -35
    Safety level                       0.6                0.8                0.2              35
    Insurance items                    2.4                5.8               3.4              142
    Repair cycle                       1.2                1.6               0.4               30
    Production lead
    time                               1.1                1.6               0.5               50
    Administrative
    lead time                          1.1                1.0              -0.1                -6
    Economic order
                                                                               b
    quantity                         3.4                  3.8               0.5               14
    Total                          $10.5                $15.2              $4.7               44
Source: DOD.

Note: Percentages were calculated prior to rounding.
a
    The Navy reported war reserve items valued at less than $50 million.
b
    Differences are due to rounding.




Page 34                                                            GAO-03-355 Defense Inventory
Appendix III: DOD and Military Component
Inventory Requirements at the End of Fiscal
Years 1999 and 2001




Table 9: Comparison of Inventory Requirements for the Air Force at the End of
Fiscal Years 1999 and 2001

    Dollars in billions
                                                                 Increase/           Percent
                            Fiscal year        Fiscal year decrease since      change since
                                  1999               2001      fiscal year        fiscal year
    Requirement           requirements       requirements             1999              1999
    War reserves                   $2.0               $2.2             $0.2                11
    Unfilled
    requisitions                       0.9               0.7           -0.2              -22
    Safety level                       4.1               5.0            0.9               22
                                                                           a
    Insurance items                    2.2               1.5          -0.6               -28
                                                                           a
    Repair cycle                       1.8               1.7           0.0                -2
    Production lead
    time                               1.1               1.4           0.2a               20
    Administrative
    lead time                          0.3               0.4            0.1               29
    Lead time
    nonrecurring
    demand                           2.7                 1.6           -1.1              -39
    Total                          $14.9               $14.5         $-0.5a               -3
Source: DOD.

Note: Percentages were calculated prior to rounding.
a
    Differences are due to rounding.




Page 35                                                        GAO-03-355 Defense Inventory
                               Appendix IV: Reasons for Requirements
Appendix IV: Reasons for Requirements
                               Increasing between September 30, 1999, and
                               September 30, 2001, for 90 Sample Items


Increasing between September 30, 1999, and
September 30, 2001, for 90 Sample Items
Navy Usage Increased           Increased usage resulted in requirements increasing by $294 million for
                               46 items. Usage of the items increased for a variety of reasons, including

                           •   recurring demand for items increased,
                           •   defective parts needing to be replaced,
                           •   demands being received for items that are not normally stocked,
                           •   increases in the number of ships or aircraft using items,
                           •   items reaching the end of their useful life,
                           •   unplanned foreign military sales,
                           •   usage shifting from other items,
                           •   items wearing out at a faster rate than expected, and
                           •   items being new to the inventory system.

                               For example, unfilled requisitions, safety level, repair cycle, and
                               production and administrative lead time requirements for the hub used on
                               the AH-1W (Cobra) helicopter increased from 24 on September 30, 1999, to
                               48 on September 30, 2001. During that time, many of the hubs reached the
                               end of their 1,100-hour life and had to be replaced. As a result, demand for
                               the $275,000 hub increased from 31 a year in 1999 to 74 a year in 2001.


Navy Changed Stock,            Changes in stock, overhaul, or operational policies resulted in
Overhaul, or Operational       requirements increases of $126 million for 36 items. For example, repair
Policies                       cycle requirements for a radio transmitter modulator increased from 10 in
                               September 1999 to 22 in September 2001. The increase was a result of the
                               Navy requiring that the transmitter modulator, valued at $136,000 each, be
                               operational 100 percent of the time. Previously, ships were permitted to
                               operate in a degraded status with the modulator not operational.


Source or Repair Issues        Source and repair issues for 29 items resulted in requirements increases of
                               $137 million. A wide variety of reasons fell into this category, including
                               entering requirements for an item that would no longer be available to
                               provide support for a weapon system for its remaining life, difficulties in
                               identifying a commercial source for an item, unavailability of material
                               needed to manufacture items, and increased time needed to repair or buy
                               an item. For example, economic order quantity requirements for a data
                               module used in a submarine control panel increased from 75 in September
                               1999 to 410 in September 2001. The item manager explained that the
                               manufacturing source of supply for the data module was being lost, and
                               the requirement was increased to protect the 419 on-hand modules from
                               being subject to disposal. In August 2002, the Navy had 229 of the $10,000
                               modules on hand.



                               Page 36                                          GAO-03-355 Defense Inventory
                           Appendix IV: Reasons for Requirements
                           Increasing between September 30, 1999, and
                           September 30, 2001, for 90 Sample Items




Uncertainty of Demand,     Uncertainty of demand, lead time, and the rate at which items wear out for
Lead Time, or Wear-Out     22 items resulted in safety level requirements increasing by $72 million.
Rate                       Safety level requirements are intended to compensate for unplanned
                           increases in demand, lead times, and the rate at which items wear out. For
                           example, the safety level requirement for an inertial navigational unit used
                           on several aircraft such as the AV-8B, the F-14D, and several versions of
                           the F-18 increased from 2 in September 1999 to 15 in September 2001. The
                           increased requirement was the result of demands for the $170,000 unit
                           increasing from 155 to 205 a year.


Increases Were Not Valid   Requirements increases, valued at $98 million, were not valid for seven
                           items. The reasons for the invalid requirements included overstating the
                           2001 requirement, understating the 1999 requirement, and inappropriately
                           recording nonrecurring requirements. For example, the September 2001
                           requirements requiring replacement for an electron tube for a transmitter
                           used on the EA-6B aircraft were overstated because the requirements were
                           inappropriately based on demand for the tube instead of the rate at which
                           the tube was failing and needed to be replaced. As a result, safety level,
                           repair cycle, administrative and production lead times and economic order
                           quantity requirements were overstated by 2,124 tubes for the $57,500 item.


Data Anomalies             Data anomalies for two items resulted in a requirement increase of
                           $2 million. For both of the items, requirements increased for unfilled
                           requisitions. The item manager for the items explained that the items’
                           requirements, as of September 30, 2001, reflected back orders as of that
                           date and that the back orders were not the result of any particular
                           reason—just the status as of that date. The item manager explained that
                           the back orders went away when material was shipped a few days after
                           September 30th.




                           Page 37                                          GAO-03-355 Defense Inventory
             Appendix V: Comments from the Department of Defense
Appendix V: Comments from the Department
of Defense




             Page 38                                               GAO-03-355 Defense Inventory
Appendix V: Comments from the Department of Defense




Page 39                                               GAO-03-355 Defense Inventory
                        Appendix VI: Staff Acknowledgments
Appendix VI: Staff Acknowledgments


             Key contributors to this report were Lawson Gist, Jr., Louis Modliszewski,
             David Epstein, and R.K. Wild.




(350227)
             Page 40                                         GAO-03-355 Defense Inventory
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