oversight

Defense Inventory: Navy Logistics Strategy and Initiatives Need to Address Spare Parts Shortages

Published by the Government Accountability Office on 2003-06-27.

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

             United States General Accounting Office

GAO          Report to the Chairman, Subcommittee
             on Defense, Committee on
             Appropriations, House of
             Representatives

June 2003
             DEFENSE
             INVENTORY
             Navy Logistics
             Strategy and
             Initiatives Need to
             Address Spare Parts
             Shortages




GAO-03-708
                                                 June 2003


                                                 DEFENSE INVENTORY

                                                 Navy Logistics Strategy and Initiatives
Highlights of GAO-03-708, a report to the        Need to Address Spare Parts Shortages
Subcommittee on Defense, Committee on
Appropriations, House of Representatives.




Since 1990, GAO has identified                   The Navy’s servicewide strategic plan does not specifically address means to
DOD inventory management as                      mitigate critical spare parts shortages. Its 2001 plan contained strategic
high risk because of long-standing               goals, objectives, and performance measures, but the service did not use it to
management weaknesses. In fiscal                 systematically manage implementation of logistics reform initiatives. The
years 2001 and 2002, Congress                    Navy is developing a new logistics strategic plan, but this document has not
provided the Navy with more than
$8 billion in operations and
                                                 yet been published. Consequently, the service presently lacks an effective
maintenance funds to purchase                    top-level plan that integrates a specific focus on mitigating spare parts
spare parts in support of the                    shortages into its logistics transformation initiatives. Without such a plan,
service’s operations. Nevertheless,              the Navy lacks guidance necessary to ensure its logistics initiatives mitigate
spare parts availability has fallen              critical spare parts shortages.
short of the Navy’s goals in recent
years. GAO examined the extent to                GAO examined six of the key initiatives that the Navy has undertaken to
which Navy strategic plans address               improve the economy and efficiency of its supply system. While some of
mitigation of critical spare parts               these initiatives have increased availability of select spare parts, GAO cannot
shortages, the likelihood that key               determine their potential to mitigate critical spare parts shortages because
supply system improvement
                                                 they were not designed specifically to remedy this problem. For example,
initiatives will help mitigate spare
parts shortages and enhance                      the Performance Based Logistics initiative aims to improve supply support at
readiness, and the Navy’s ability to             equal or lower cost by outsourcing a broad range of services. Though the
identify the impact on readiness of              initiative has increased availability of certain items, GAO could not measure
increased spare parts investments.               the extent to which Performance Based Logistics contracts have mitigated
                                                 critical spare parts shortages.

                                                 The Navy has determined that an additional investment of $1.2 billion would
GAO recommends that the
                                                 be necessary to achieve supply availability levels that support the service’s
Secretary of Defense
                                                 readiness objectives. However, the Navy did not ask for this funding in its
• develop a framework for
                                                 fiscal year 2004 budget request, nor did it report linkages between resource
    mitigating critical spare parts
    shortages as part of either the              levels and readiness rates for individual weapon systems, as recommended
    Sea Enterprise Strategy or the               by the Office of the Secretary of Defense in 2002. The Navy did provide
    Naval Supply Systems                         aggregate readiness data to the Office of the Secretary of Defense, but
    Command Strategic Plan, and                  officials stated that they lacked information technology necessary to link
• implement, with a specific                     readiness rates by weapon system to budget categories. DOD has an 85
    completion milestone, the                    percent supply availability goal, which means that 85 percent of the
    Office of the Secretary of                   requisitions sent to wholesale supply system managers can be immediately
    Defense’s recommendation to                  filled from on-hand inventories. Navy supply system models are focused on
    report the impact of funding on              achieving this goal in the aggregate. However, the Navy’s overall wholesale
    weapon system readiness.                     supply system performance has fallen short of expectations in each of the
                                                 last 3 fiscal years for both aviation- and ship-related repairable spare parts.
In written comments, DOD                         Supply availability ranged between approximately 69 percent and 71 percent
generally concurred with the intent              for aviation-related items, and between 79 percent and 84 percent for ship-
of our recommendations, but not                  related parts.
with the specific actions.

www.gao.gov/cgi-bin/getrpt?GAO-03-708.

To view the full report, including the scope
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                                                                          3
             Background                                                                                5
             Navy Logistics Strategic Plans Do Not Specifically Focus on
               Mitigating Spare Parts Shortages                                                         8
             Several Key Initiatives Show Potential for Improved Spare Parts
               Support                                                                                 10
             Impact of Additional Spare Parts Funding on Supply Availability
               and Readiness Estimated but Not Reported                                                21
             Conclusions                                                                               22
             Recommendations                                                                           23
             Agency Comments and Our Evaluation                                                        23
             Scope and Methodology                                                                     25

Appendix I   Comments from the Department of Defense                                                   27



Figure
             Figure 1: Investment Criteria and Funding Trends for Logistics
                      Engineering Change Proposals                                                     17




             This is a work of the U.S. Government and is not subject to copyright protection in the
             United States. It may be reproduced and distributed in its entirety without further
             permission from GAO. It may contain copyrighted graphics, images or other materials.
             Permission from the copyright holder may be necessary should you wish to reproduce
             copyrighted materials separately from GAO’s product.




             Page i                                                     GAO-03-708 Defense Inventory
United States General Accounting Office
Washington, DC 20548




                                   June 27, 2003

                                   The Honorable Jerry Lewis
                                   Chairman, Subcommittee on Defense
                                   Committee on Appropriations
                                   House of Representatives

                                   Dear Mr. Chairman:

                                   In fiscal years 2001 and 2002, the Navy spent $8.1 billion from operations
                                   and maintenance appropriations for spare parts.1 At the end of fiscal year
                                   2002, the Navy maintained inventories of spare parts with an estimated
                                   value of $30 billion.2 However, the Navy continues to report that its parts
                                   availability level is below the 85 percent goal. While recognizing that spare
                                   parts shortages may never be eliminated, it is reasonable to expect the
                                   services to place a priority on efforts to mitigate (reduce) those shortages
                                   that adversely affect readiness. This priority should be inherent in the
                                   service’s overall planning and stewardship of funds they request from
                                   Congress, and in their accountability for making spare parts investment
                                   decisions that provide a good readiness return. Since 1990, we have
                                   identified the Department of Defense’s (DOD) inventory management as
                                   high risk because of long-standing management weaknesses. In our
                                   January 2003 High Risk Series Report, we wrote that DOD was
                                   experiencing equipment readiness problems because of a lack of key spare
                                   parts, and we recommended that DOD take actions to address those
                                   shortages.3 As recently as August 2002, DOD recognized the need to




                                   1
                                    These figures are based on the Navy’s OP-31 Budget exhibits, about which we recently
                                   reported concerns. See U.S. General Accounting Office, Defense Inventory: Better
                                   Reporting on Spare Parts Spending Will Enhance Congressional Oversight, GAO-03-18
                                   (Washington, D.C.: Oct. 24, 2002).
                                   2
                                     This figure includes investments of about $21 billion in wholesale-level inventories and
                                   about $9 billion in retail-level inventories kept at Navy shore stations and aboard ship. The
                                   figure does not include the value of government-owned spare parts and equipment
                                   purchased by program sponsors and kept at end-use sites, such as naval warfare centers,
                                   maintenance depots, and naval contractors.
                                   3
                                    U.S. General Accounting Office, Major Management Challenges and Program Risks:
                                   Department of Defense, GAO-03-98 (Washington, D.C.: Jan. 2003).



                                   Page 1                                                       GAO-03-708 Defense Inventory
overcome critical spare parts shortages and recommended changes to
improve weapon system readiness.4

This is one in a series of reports that respond to your request that we
identify ways to improve the availability of spare parts for aircraft, ships,
vehicles, and weapon systems.5 As agreed with your office, this report
addresses the following questions:

•   Does the Navy’s strategic plan for logistics address the mitigation of
    critical spare parts shortages—those that adversely affect readiness? 6

•   Will key Navy logistics initiatives likely mitigate spare parts shortages
    that affect readiness?

•   Does the Navy have the ability to identify the impact on readiness of
    increased investments for spare parts?

To accomplish these objectives, we analyzed plans and initiatives
applicable to the management of the Navy’s inventory management
system. We interviewed officials and obtained information on inventory
management practices at Navy headquarters, the Naval Supply Systems
Command, the Naval Inventory Control Point, the Naval Sea Systems
Command, and the Naval Air Systems Command. We reviewed project
plans, implementation status, and performance measures for six supply
system improvement initiatives that Navy headquarters and Supply
Systems Command officials highlighted as key efforts for mitigating future
spare parts shortages and enhancing equipment readiness. We used the



4
 Office of the Secretary of Defense, Inventory Management Study (Washington, D.C.: Aug.
2002).
5
 U.S. General Accounting Office, Defense Inventory: The Department Needs a Focused
Effort to Overcome Critical Spare Parts Shortages, GAO-03-707 (Washington, D.C.: June
27, 2003); Defense Inventory: Air Force Plans and Initiatives to Mitigate Spare Parts
Shortages Need Better Implementation, GAO-03-706 (Washington, D.C.: June 27, 2003);
Defense Inventory: The Army Needs a Plan to Overcome Critical Spare Parts Shortages,
GAO-03-705 (Washington, D.C.: June 27, 2003); Defense Inventory: Several Actions Are
Needed to Further DLA’s Efforts to Mitigate Shortages of Critical Parts, GAO-03-709
(forthcoming); Defense Inventory: Air Force Item Manager Views of Repair Parts Issues
Consistent With Issues Reported in the Past, GAO-03-684R (Washington, D.C.: May 21,
2003).
6
 For this report, critical spare parts are defined as those parts that directly affect the
readiness of weapon systems. For example, the Navy periodically identifies parts such as
nose landing gear for the F-18 aircraft as “top degraders” of weapon system readiness.




Page 2                                                     GAO-03-708 Defense Inventory
                   Government Performance and Results Act of 1993, prior GAO reports, and
                   other key DOD documents as criteria to evaluate the Navy’s strategic plans
                   and initiatives.7 More details on our scope and methodology may be found
                   on page 25.


                   The Navy’s servicewide strategic plan does not specifically address means
Results in Brief   to mitigate critical spare parts shortages. As a result, the Navy lacks
                   overarching guidance on how to systematically reduce these shortages and
                   assess progress toward improving related readiness. In fiscal year 2001,
                   the Navy published its High Yield Logistics Transformation Plan, which
                   was aimed at improving Navy logistics overall. This plan contained
                   attributes of an effective strategic plan, such as goals, objectives, and
                   performance measures, but it did not specifically address the mitigation of
                   spare parts shortages. Similarly, while a key subordinate plan the Naval
                   Supply Systems Command’s strategic plan—has a strategy to ensure that
                   the availability of spare parts meets required performance levels, its
                   objectives do not specifically focus on mitigating critical spare parts
                   shortages. This plan also did not incorporate strategic objectives identified
                   in the Navy’s High Yield Logistics Transformation Plan. Furthermore, after
                   DOD published a new strategic plan, called the Future Logistics
                   Enterprise, in June 2002, which outlined several new transformation
                   strategies and goals, the Navy stopped tracking and reporting its progress
                   in implementing the High Yield Logistics Transformation Plan initiatives.
                   In October 2002, the Navy embarked on a new strategic planning effort,
                   referred to as Sea Enterprise.8 The Navy expects the Sea Enterprise
                   strategy to address how it will improve the efficiency and effectiveness of
                   all aspects of its business operations, including organizational alignments,
                   logistics requirements, and reinvestment of savings, to purchase new
                   weapon systems and enhance combat capability. However, the Sea
                   Enterprise strategy has not been published, and as a result, the service
                   presently lacks an effective top-level plan that integrates a specific focus
                   on mitigating spare parts shortages into its logistics transformation
                   initiatives. Without such a plan, the Navy lacks guidance necessary to
                   ensure its logistics initiatives mitigate critical spare parts shortages.



                   7
                       Pub. L. No. 103-62, Aug. 3, 1993.
                   8
                    The Sea Enterprise plan is part of the Navy’s Sea Power 21 initiative that defines
                   capabilities of naval forces in the 21st century. The vision for the 21st century will be
                   achieved through a triad of new organizational processes called Sea Trial, Sea Warrior, and
                   Sea Enterprise.



                   Page 3                                                     GAO-03-708 Defense Inventory
We reviewed six initiatives that Navy officials identified as key to
improving the economy and efficiency of supply support. While some of
these initiatives have improved the overall supply availability of some
spare parts, we cannot determine their potential for mitigating critical
parts shortages because they were not designed to specifically address this
problem. 9 For example, through the Performance Based Logistics
initiative, the Navy aims to improve supply support at equal or reduced
cost by outsourcing various logistics services, such as spare parts
warehousing, repair, and inventory requirements analysis. The Total Asset
Visibility initiative was undertaken to ensure full accountability of items in
the Navy’s spare parts inventories and to facilitate redistribution of parts
between Navy customers. Lastly, the Logistics Engineering Change
Proposals initiative provides funding to improve the reliability of spare
parts. These initiatives have a potential for improving the efficiency of the
Navy’s supply system. However, in the absence of an overarching plan that
specifically addresses critical spare parts shortages, we cannot measure
the impact of each initiative on critical spare parts availability, nor can we
assess any related effects on weapon system readiness.

The Navy has analyzed the impact of additional funding on the availability
of spare parts and equipment readiness, but has not reported this
information as part of its budget documentation. For example, it has
determined that an additional $1.2 billion would be necessary to support
the Chief of Naval Operations’ readiness objectives. The Navy’s analysis
shows that constraints in repair pipeline requirement models accounted
for a 6 to 8 percent decline in supply availability, which equates to an
estimated 5 to 6 percent decline in fully mission capable rates for naval
aircraft.10 However, the service did not ask for this funding as part of its
fiscal year 2004 budget request, but may do so for fiscal year 2005. Also, its
fiscal year 2004 budget materials did not report the link between resource
levels and readiness for individual weapons, as recommended by the
Office of the Secretary of Defense in an August 2002 study. While the
service provided aggregate readiness information to the Office of the
Secretary of Defense, Navy officials said that the service cannot directly
link funding to readiness data by weapon system and budget category until



9
 Supply availability refers to the percentage of time that a fleet-requisitioned item is
immediately available from the Navy’s wholesale supply system. These data include both
consumable and repairable items for maritime and aviation weapon systems.
10
  Fully mission capable rates measure the ability of an aircraft to perform all of its
assigned missions.




Page 4                                                       GAO-03-708 Defense Inventory
             better information technology becomes available. Information linking
             parts availability and individual weapon system readiness would be
             valuable information to DOD in making inventory investment decisions
             and to Congress when deciding how best to allocate resources to reduce
             shortages and improve readiness.

             To ensure that Navy customers have an adequate supply of critical spare
             parts when and where they are needed, we are recommending the
             Secretary of Defense direct the Secretary of the Navy to include as a part
             of ongoing and anticipated updates to the Navy strategic planning process,
             a framework for mitigating critical spare parts shortages that include long-
             term goals; measurable, outcome-related objectives; implementation goals;
             and performance measures. We also recommend the Navy provide
             decision makers with information that links investments in spare parts
             inventories to weapon system readiness targets. In written comments on a
             draft of this report, DOD generally concurred with the intent of our
             recommendations, but not all suggested actions. DOD said the Navy
             would address spare parts shortages by improving its overall supply
             support processes. However, they stated that the Navy would not be
             modifying the Naval Supply Systems Command Strategic Plan or the
             higher-level Sea Enterprise strategy to include a specific focus on the
             mitigation of spare parts shortages. They also cited several key process
             improvements that are designed to lessen the overall need for spare parts.
             We endorse the Navy’s efforts to pursue the planned process
             improvements, but disagree that these process improvements alone are
             sufficient to satisfy our recommendation. We continue to believe that the
             effectiveness of the service’s efforts would be enhanced if its strategic
             plans and initiatives included goals, objectives, and milestones for
             mitigating critical spare parts shortages. DOD also stated that the Navy
             would be linking spare parts investments to individual weapon system
             readiness in future budget submissions when the required data becomes
             available. However, we remain concerned that the Navy has not specified
             a time frame for developing information systems that link readiness and
             spare parts budget data, and have modified our second recommendation
             accordingly. The Department’s comments and our evaluation are on pages
             23-25 of this report.


             In prior reports, we have identified major risks associated with DOD’s
Background   spare parts inventory management practices. In 1996, and then again in




             Page 5                                           GAO-03-708 Defense Inventory
1998, we reported that the Navy’s logistics system often could not provide
fleet customers with necessary parts in a timely manner, despite billions of
dollars invested in inventory.11 In 2001, we found that chronic spare parts
shortages had degraded combat readiness for selected Navy weapon
platforms and had also contributed to problems in retaining skilled
maintenance personnel.12 Navy item managers interviewed for the 2001
report indicated that spare parts shortages resulted from inaccurate spare
parts requirements forecasts, as well as contracting problems with private
companies and repair delays at military and privately owned facilities.
Most recently, in our January 2003 report on major management
challenges and program risks, we recommended that DOD take action to
address key spare parts shortages as part of a long-range strategic vision
and a department wide, coordinated approach for improving logistics
management processes.13

In addition to the risk associated with ineffective spare parts management
practices, DOD recently voiced concerns over the adverse impact spare
parts shortages have on readiness of weapon systems. In its August 2002
report on its inventory management practices, DOD said that the models it
uses to determine inventory purchases are generally biased towards the
purchase of low-cost items with high demands, not necessarily the items
that would improve readiness the most.14 The report recommended that
the services improve their ability to make inventory purchase decisions
based on weapon system readiness. Furthermore, the report
recommended that the services’ requests for funds to increase inventory
investments be justified on the basis of the corresponding increase in
weapon system readiness.




11
  U.S. General Accounting Office, Inventory Management: Adopting Best Practices Could
Enhance Navy Efforts to Achieve Efficiencies and Savings, GAO/NSIAD-96-156
(Washington, D.C.: July 12, 1996), and Inventory Management: DOD Can Build on
Progress by Using Best Practices for Reparable Parts, GAO/NSIAD-98-97 (Washington,
D.C.: Feb. 27, 1998).
12
 U.S. General Accounting Office, Navy Inventory: Parts Shortages Are Impacting
Operations and Maintenance Effectiveness, GAO-01-771 (Washington, D.C.: July 31, 2001).
13
  U.S. General Accounting Office, Performance and Accountability Series: Major
Management Challenges and Program Risks: Department of Defense, GAO-03-98
(Washington, D.C.: Jan. 2003).
14
 Office of the Secretary of Defense, Inventory Management Study (Washington, D.C.:
Aug. 2002).




Page 6                                                  GAO-03-708 Defense Inventory
The Navy provides the fleet with spare parts through a multitiered
inventory system.

•     Retail inventory refers to spare parts that are stored shipside or
      planeside in accordance with standardized spare parts allowance lists.
      Retail level spare parts are funded by the Navy’s procurement and
      operations accounts. Funding for initial outfitting parts is provided by
      procurement appropriations, while funding for replenishment parts is
      provided by operations and maintenance appropriations.

•     Wholesale inventory refers to spare parts the Navy buys to replenish
      retail inventory. Initially Navy program managers tasked with
      developing weapon systems purchase parts directly from vendors using
      money from the procurement accounts. However, once a weapon
      system is fully developed and integrated into the fleet, the Naval Supply
      Systems Command assumes full responsibility for supporting that
      system through funding provided by the Navy Working Capital Fund.15
      At this point, fleet customers use funding from outfitting procurement
      and operations accounts to purchase parts from the Navy’s wholesale
      inventory. The wholesale system functions as a middleman by
      purchasing spare parts from vendors with Navy Working Capital Fund
      dollars, and then reselling these parts to fleet customers. In order to
      avoid inventory shortages, the wholesale system must accurately
      forecast demand for spare parts and factor in lead times for
      procurement and repair actions to mitigate delays in delivery of parts
      to the fleet. Furthermore, the wholesale system must maintain a cash
      balance in the Navy Working Capital Fund that approximates 7 to 10
      days and, consequently, cannot stock more parts than it expects to
      resell to the fleet.

•     Sponsor-owned inventory refers to items that program managers
      purchase with appropriated funds to develop, test, and sustain weapon
      systems. Program managers store sponsor-owned materials to support
      work conducted at various locations, including air and sea warfare
      centers. DOD guidance provides, in part, that when items are no longer
      needed, they may be returned to the wholesale supply system or
      reissued to other fleet customers.16




15
     The Navy refers to this weapons development milestone as the Material Support Date.
16
     Department of Defense, Materiel Management Regulation, DOD 4140.1-R, May 1998.




Page 7                                                      GAO-03-708 Defense Inventory
                        The Deputy Chief of Naval Operations for Fleet Readiness and Logistics is
                        responsible for strategic planning of logistics functions and ensures that
                        the logistics system supports the Navy’s readiness objectives. The Naval
                        Supply Systems Command develops inventory management policies,
                        determines spare parts requirements, and formulates the Navy Working
                        Capital Fund budget. Within the Naval Supply Systems Command, the
                        Naval Inventory Control Point is assigned primary responsibility for
                        material management tasks, such as computing requirements and
                        providing procurement, distribution, disposal, and rebuild direction. The
                        Naval Air Systems Command, the Naval Sea Systems Command, and the
                        Space and Naval Warfare Systems Command, collectively referred to as
                        the hardware systems commands, interact with the wholesale supply
                        system to ensure that it procures sufficient quantities of spare parts to
                        satisfy the fleet’s allowance requirements.


                        The Navy’s servicewide strategic plans do not specifically address means
Navy Logistics          to mitigate critical spare parts shortages. The Navy’s fiscal year 2001 High
Strategic Plans Do      Yield Logistics Transformation Plan focused on improving logistics
                        overall, but did not state how the Navy expects to reduce spare parts
Not Specifically        shortages. Also, while a key subordinate plan developed by the Naval
Focus on Mitigating     Supply Systems Command has a strategy to ensure the availability of spare
                        parts meets required performance levels; its objectives do not specifically
Spare Parts Shortages   focus on mitigating critical spare parts shortages. This subordinate plan
                        does focus on improving supply availability and reducing customer wait
                        time, but does not specifically address mitigation of spare parts shortages.
                        Although the Navy is developing a new strategy, the Sea Enterprise plan, it
                        has not been published, and therefore we do not know whether it will
                        address ways to mitigate critical spare parts shortages.

                        In fiscal year 2001, the Navy published a servicewide strategic plan—the
                        High Yield Logistics Transformation Plan—that identified initiatives
                        undertaken by its major support commands to improve the service’s
                        logistics overall and to address objectives listed in DOD’s Fiscal Year 2000
                        Logistics Strategic Plan. While the High Yield Plan contained attributes of
                        an effective strategic plan consistent with the Government Performance
                        and Results Act of 1993 (GPRA), such as long-term goals, objectives, and
                        performance measures, it did not specifically address key objectives for




                        Page 8                                           GAO-03-708 Defense Inventory
mitigating critical spare parts shortages.17 The High Yield Plan identified
nine major goals, six of which are linked to DOD’s fiscal year 2000
Logistics Strategic Plan, and three that are unique to the Navy. The plan
served as a compendium of initiatives undertaken by Navy commands and
program offices to improve overall logistics support processes. In total,
the plan identified 80 individual initiatives; however, the plan did not
contain information that highlighted specific efforts to mitigate spare parts
shortages. Navy headquarters officials told us they stopped efforts to
report to DOD on the status of the 80 initiatives after DOD published a
new logistics strategic plan in June 2002, entitled the Future Logistics
Enterprise, that contained several new transformation strategies.

The Naval Supply Systems Command Strategic Plan has a strategy to
ensure that the availability of spare parts meets required performance
levels and includes numerous goals, objectives, and initiatives to improve
supply availability. However, this strategy does not specifically focus on
mitigating spare parts shortages, nor does it incorporate the objectives of
the Navy’s High Yield Transformation Plan. In November 2001, the Naval
Supply Systems Command updated its 1999 strategic plan to deliver
combat capability through delivery of quality supplies and services on a
timely basis. The plan identified 5 major goals, 16 implementation
strategies, and 63 individual initiatives. Implementation status of each
initiative is recorded in an automated tracking system and briefed to
command leadership several times each year. Under its third goal—to
achieve and demand the highest quality of service—one of the Command’s
strategies is to ensure the availability of spare parts meets required
performance levels, but its objectives do not specifically focus on
mitigating critical spare parts shortages, nor does the strategy link directly
to higher-level DOD and Navy strategic plans. Navy officials told us they
expect to start updating the plan during the summer of 2003. Without a
focus on mitigating spare parts shortages and linkage to the higher-level
plans, the Navy may lack assurance that its overall strategic goals and
objectives will be effectively addressed and that its key initiatives will
systematically address spare parts shortages.

In October 2002, the Navy embarked on a new servicewide strategic
planning effort, referred to as the Sea Enterprise, that seeks to improve the


17
  GPRA requires establishment of a strategic plan for program activities by each agency
that includes, among other things, a mission statement covering major functions and
operations, outcome-related goals and objectives, and a description of how these goals and
objectives are to be achieved.




Page 9                                                    GAO-03-708 Defense Inventory
                           efficiency and effectiveness of all aspects of the service’s business
                           operations, including organizational alignments, refining logistics
                           requirements, and reinvesting savings to purchase new weapon systems
                           and enhance combat capability.18 As of March 2003, the Sea Enterprise
                           plan had not been published, and the extent to which the new plan will
                           address the mitigation of critical spare parts shortages is unclear. Navy
                           documents indicate that officials were reviewing hundreds of ongoing and
                           planned initiatives for improving business operations, and that they
                           planned to select projects with the highest potential savings. The Navy
                           expects to have preliminary project plans and savings estimates available
                           for consideration in the fiscal year 2005 budget deliberations. Once key
                           initiatives are identified for the Sea Enterprise plan, a board of directors
                           will oversee development of implementation plans and monitor progress
                           toward achieving anticipated savings.


                           We reviewed six initiatives that the Navy has undertaken to improve the
Several Key Initiatives    economy and efficiency of supply support. While some of these initiatives
Show Potential for         have improved the overall supply availability and reliability of some spare
                           parts, we cannot measure their potential for mitigating critical parts
Improved Spare Parts       shortages and their impact on weapon system readiness because they
Support                    were not designed to specifically address this problem. The initiatives
                           included projects to (1) obtain more cost effective and timely support
                           from contractors, (2) improve the efficiency of inventory management
                           practices, and (3) increase the reliability of parts provided to military
                           customers.

Performance Based          Performance based logistics contracts have generally improved supply
Logistics Contracts Have   support to the fleet, but the Navy does not assess the extent to which
Improved Availability of   better supply availability mitigates critical spare parts shortages or
                           enhances the fleet’s combat readiness. Through performance based
Spare Parts                logistics contracts, the Navy has outsourced a broad range of supply
                           support activities that have traditionally been carried out by the Navy’s
                           organic supply system, such as warehousing, repairing and distributing
                           parts, and determining spare parts requirements. According to Navy and
                           interim DOD guidance, the primary objective of performance based
                           logistics is to improve supply support while maintaining or reducing


                           18
                             The Sea Enterprise plan is part of the Navy’s Sea Power 21 initiative, which defines
                           capabilities of naval forces in the 21st century. The vision for the 21st century will be
                           achieved through a triad of new organizational processes called Sea Trial, Sea Warrior, and
                           Sea Enterprise.




                           Page 10                                                    GAO-03-708 Defense Inventory
costs.19 Under more extensive partnerships, contractors may redesign
weapon system configurations to optimize system performance, and may
also reengineer or replace spare parts to mitigate the effects of scarcity or
obsolescence. In the most advanced partnerships, contractors provide
technical and engineering support to fleet customers, perform weapon
system overhauls, and guarantee timely delivery of quality spare parts to
fleet customers.

Our review of Navy aggregate and individual program statistics indicated
that performance based logistics arrangements have generally improved
supply support to the fleet. From January 2001 to July 2002, the Navy’s
quarterly supply availability averaged 79.6 percent through a combination
of organic and contractor supply support. Without performance based
logistics contracts factored in to these data, quarterly supply availability
averaged 71.5 percent. We judgmentally examined 10 of 118 active
performance based logistics contracts, and found that one contract had no
specific vendor performance standards.20 In 7 of the 9 remaining contracts,
we found that vendors either satisfied or exceeded supply support goals.
Moreover, for select cases in which data were available for comparison
with baseline data, we found that performance based logistics
partnerships improved supply support. For instance, one vendor increased
availability of parts for an aviation computer system 21 from pre-contract
levels of 61 percent to current levels of 100 percent, and filled all 489
outstanding backorders within 13 months after the contract was awarded.
Similarly, another vendor increased overall supply availability for the ARC-
210 radio assembly from pre-contract levels of 60 to 70 percent to a
current average of 91 percent.

Despite positive supply availability effects attributed to performance
based logistics contracting, we could not measure the initiative’s overall
impact on spare parts shortages. These contracts vary widely in scope and,
according to Navy policy, are intended to improve logistics support while


19
  Department of the Navy, Office of the Assistant Secretary, Research, Development and
Acquisition: Performance Based Logistics Guidance Document, Jan. 27, 2003; Deputy
Secretary of Defense: Interim Guidance Regarding Defense Acquisitions, Oct. 30, 2002.
20
  This contract, initiated in 1994, was for a commercial off-the-shelf item that the Naval
Inventory Control Point had not managed organically. Consequently, the Naval Inventory
Control Point lacked baseline inventory management data necessary to establish vendor
performance standards.
21
 The stores management system is a computer interface installed on aircraft that
monitors, selects, launches, and jettisons weapons.




Page 11                                                    GAO-03-708 Defense Inventory
                                 maintaining or reducing costs. Consequently, these contracts do not aim
                                 specifically to increase the availability of spare parts that experience
                                 chronic shortages, and are generally approved only if they can generate
                                 savings for the Navy’s wholesale supply system. While Navy officials
                                 stated that improved supply support is linked to enhanced equipment
                                 readiness, we could not determine whether performance based logistics
                                 contracts have mitigated the readiness effects of spare parts shortages.

                                 The Navy’s inability to quantify cost savings—or losses—generated by
                                 individual contracts impedes the service’s ability to prove the initiative is
                                 achieving its objective. Navy and interim DOD guidance specify that each
                                 performance based logistics contract is to improve supply support to the
                                 warfighter without increasing cost; however, the Navy does not track
                                 individual contract savings. Instead, Navy officials approximate aggregate
                                 savings attributable to performance based logistics contracting. Although
                                 the Navy reports that it has reduced estimated expenditures for spare
                                 parts and labor by approximately $100 million for the fiscal year 2000-2005
                                 period, it does not have the information that its leadership and other
                                 decision makers may likely need in order to determine whether individual
                                 contracts satisfy the initiative’s cost saving objective.


The Potential for Total          Under the Total Asset Visibility initiative, the Naval Supply Systems
Asset Visibility Initiative to   Command has established asset visibility over a large portion of the
Improve Inventory                service’s spare parts inventories. However, changing completion milestone
                                 dates, difficulties in linking data contained in numerous nonstandard
Management Practices             automated data systems, and concerns over the lack of top-level
Hindered by                      management emphasis—including effective business rules and incentives
Implementation                   that encourage customers to share parts—have hindered the initiative’s
Challenges                       timely and effective implementation. Because of these limitations, the
                                 extent to which this initiative will help mitigate critical spare parts
                                 shortages and improve weapon system readiness is uncertain. The Supply
                                 Systems Command has recognized these difficulties and prepared a long-
                                 term plan to centrally manage supply, but the Navy has not yet approved
                                 the plan for implementation.

                                 The Total Asset Visibility initiative is intended to facilitate redistribution of
                                 materials between Navy customers by allowing Navy supply managers to
                                 fill critical orders from excess or unneeded stocks held by other Navy
                                 customers. DOD’s Material Management Regulation, issued in May 1998,
                                 requires the services to provide timely and accurate information on the
                                 location, movement, and status of all material assets. The regulation
                                 stipulates that wholesale-level inventory managers should have visibility of


                                 Page 12                                             GAO-03-708 Defense Inventory
all in-storage materials, including assets held by military units,
maintenance depots, and shipyards. Item managers may use this
information to mitigate critical spare parts shortages by redistributing
items from one customer’s storage facility to another customer with more
urgent needs. In our October 1999 report, we stated that the Navy
characterized its Total Asset Visibility program as a “mature” initiative that
would be fully implemented by September 2002.22 To improve the potential
for timely and effective implementation, in our October 1999 report we
recommended that the Navy establish clearly defined goals, quantifiable
performance measures, and implementation milestones to better assess
the initiative’s impact on supply system effectiveness. However, the Navy
has yet to establish such a plan.

At the end of fiscal year 2002, Navy data indicated that the Navy had
established asset visibility over 96 percent of the $42 billion inventory that
the service had targeted for inclusion under the program. In May 2003, a
Navy official stated that this data collection did not target the full range of
government-owned materials kept at naval shipyards, aviation repair
depots, and commercial contractor facilities. Our work shows that while
the Navy supply managers currently have visibility over Navy-managed
items held at naval retail storage facilities and most sponsor-owned
inventories kept at naval warfare centers, access to unneeded materials
held at these locations must be arranged on a case-by-case basis. For
example, the Navy has implemented an inventory management visibility
system for its retail-level spare parts inventories held aboard ship and at
major shore stations. However, these assets are “owned” by the operating
fleet commands, and in practice are not subject to redistribution outside
the command. An official at the Naval Inventory Control Pointthe
activity responsible for management of wholesale level inventories and
processing customer requisitionsstated that while they have visibility
over retail level inventories held aboard ship and at shore stations
controlled by the fleet operational commands, they rarely ask for a part,
even though the retail–level inventories may have accumulated parts in
excess of local needs. The use of the asset visibility system as a tool for
mitigating spare parts shortages between Navy commands could benefit
from the development of business rules and management incentives that




22
  U.S. General Accounting Office, Defense Inventory: Improved Management Framework
Needed to Guide Navy Best Practice Initiatives, GAO/NSIAD-00-1 (Washington, D.C.: Oct.
21, 1999).




Page 13                                                 GAO-03-708 Defense Inventory
encourage Navy customers to relinquish control and ownership of
unneeded supplies.

Progress toward achieving total asset visibility and accountability at some
storage locations has been hampered by difficulties in linking data
contained in numerous nonstandard information systems. For example,
after a 5-year test, the Naval Sea Systems Command terminated efforts to
establish centralized visibility and accountability over an estimated $4.3
billion in government-furnished materials provided to commercial
shipbuilders. The test was terminated for a variety of reasons, including
the lack of common information systems that would allow the transfer of
data between commands, the lack of coordinated management emphasis,
and difficulties changing legacy contractual reporting requirements.
Moreover, at the Naval Air Systems Command, officials stated that their
subordinate activities currently record inventory data on four different
management information systems.

Recognizing current Navy supply system inefficiencies, the Naval Supply
Systems Command has proposed a single worldwide inventory
management system whereby a national inventory manager would
determine requirements for all wholesale inventories, retail ashore, and
afloat allowances. The national inventory manager would direct the
distribution of materials and maintain day-to-day visibility and control of
spare parts inventories regardless of location or funding source. The
national inventory manager would also retain ownership of the material
until the items were consumed, at which time the stock fund would
receive a reimbursement to finance the cost of stock replenishment. At the
time of our review, the Navy had not approved the plan. Naval Supply
Systems Command representatives believe this concept would eliminate
many of the redundancies and inefficiencies in the current inventory
management framework. In addition, they said effectiveness of the
concept would be dependent upon the full and timely implementation of a
common information system shared by all Navy customers regardless of
location, or their place in the command hierarchy. Navy officials are
planning to replace many of their nonstandard information systems within
the next 5 to 10 years.




Page 14                                          GAO-03-708 Defense Inventory
Logistics Engineering       The Navy’s Logistics Engineering Change Proposal initiative has
Change Proposals Provide    demonstrated potential to enhance equipment readiness by improving the
More Reliable Spare Parts   quality of spare parts, and thus reducing the frequency of maintenance
                            actions. However, our work shows that the initiative’s impact may be
at Lower Cost, but          limited by criteria that require rapid return on investment in spare parts
Investment Criteria Limit   engineering projects and discourage large investments in such projects. By
the Initiative’s Scope      reducing expenditures on low-quality items, this initiative has generated
                            measurable savings for the Navy supply system, and could yield further
                            savings if expanded to include more types of spare parts.

                            The Navy undertook the Logistics Engineering Change Proposal initiative
                            to systematically provide Navy customers with more reliable and less
                            costly spare parts. This initiative’s primary objective is to make up-front
                            investments in high-quality replacement parts as a means of avoiding
                            higher long-term material and labor costs associated with frequent
                            replacement of low-quality items. Through the engineering change
                            proposal process, the Navy identifies items with high failure or turnover
                            rates, and then conducts a logistics and engineering assessment to
                            determine how the quality of these items could be improved. In some
                            instances, parts are reengineered; in other cases, alternative parts are
                            tested for reliability and system compatibility, and then installed to replace
                            lower quality items. To ensure that engineering change proposals offer a
                            cost-effective alternative to standard components, the Navy conducts a
                            cost analysis for each project. To be approved, projects must be expected
                            to realize a 2-to-1 return on investment over the first 5 years after the
                            redesigned part is initially installed in the fleet.

                            We reviewed 21 projects in which reengineered parts had been fully
                            installed in operational equipment. All 13 projects for which comparative
                            performance data were available demonstrated gains in reliability.23 These
                            reliability improvements implicitly mitigate spare parts shortages and
                            enhance fleet readiness by reducing the frequency of maintenance actions.
                            The Replacement Inertial Navigation Unit—a navigation component
                            installed on P-3 aircraft—illustrates this point.24 According to Navy
                            documents, the original item was no longer in production, and was costly
                            to maintain due to high failure rates. The replacement model, however,
                            boosted the part’s mean time between failure from 56 to 5,375 hours, and




                            23
                                 Eight projects lacked data necessary to measure reliability improvements.
                            24
                                 The P-3 is a long-range maritime surveillance aircraft.



                            Page 15                                                        GAO-03-708 Defense Inventory
is expected to save the Navy approximately $69.4 million in spare parts
expenditures over the lifetime of the project.

While material quality improvements resulting from engineering change
projects implicitly enhance fleet readiness, we believe that this initiative’s
scope and overall impact are limited because of restrictive return on
investment criteria.25 Navy officials told us several potential projects had
been rejected in recent years due to insufficient projected return on
investment. For example, officials said that a reengineered F-18 navigation
component that offered superior reliability over the existing component
was rejected because its predicted return on investment would fall
substantially below the return on investment threshold. Moreover, they
stated that the Navy considered the project’s anticipated first year
investment of approximately $155 million unaffordable. Figure 1 illustrates
the changes in investment criteria and funding since the inception of the
engineering change initiative. As shown, the return on investment
expectation ranged from break even in 5 years to the current criterion,
which requires a 2-to-1 return on investment over the first 5 years after the
redesigned part is initially installed. In addition, the amount of available
investment funding declined from more than $100 million in fiscal years
1997 and 1998 to a current total of about $40 million.




25
  Navy officials told us that the Navy is reviewing plans to facilitate project approval by
relaxing current return on investment criteria.




Page 16                                                      GAO-03-708 Defense Inventory
Figure 1: Investment Criteria and Funding Trends for Logistics Engineering Change
Proposals




Because of the long-term nature of these investments, they typically do not
yield savings in the early years while initial costs are being incurred.
According to the Navy’s most recent assessment, 62 approved aviation
projects yielded about $2 million in net savings from fiscal year 1997
through fiscal year 2002. These projects, along with 11 forthcoming ones,
are expected to generate additional savings of approximately $785 million
from fiscal year 2003 to fiscal year 2010.26 In addition, Navy officials noted
that unmeasured savings may accrue through cost avoidance resulting
from reduced maintenance, processing, and transportation of broken or
defective items. Navy officials told us that the service is reviewing plans to
facilitate project approval by relaxing current return on investment
criteria. Management attention to the investment criteria could expand the
number of eligible parts, help mitigate spare parts shortages, and increase
the readiness return on investment.




26
  Ten projects are scheduled to begin during fiscal year 2003, and one project is scheduled
for fiscal year 2004.




Page 17                                                    GAO-03-708 Defense Inventory
The Serial Number         The Navy’s Serial Number Tracking initiative shows potential to improve
Tracking Initiative Is    supply support, as well as increase fleet readiness, by strengthening
Expected to Reduce Part   controls over in-transit items and facilitating weapons system
                          maintenance. Furthermore, according to preliminary Navy estimates, the
Loss and Facilitate       Serial Number Tracking initiative will likely generate savings that exceed
Maintenance               the costs of program implementation. However, we could not assess its
                          impact on spare parts shortages because the initiative will not be fully
                          implemented until May 2004, and because the initiative’s performance
                          metrics are not designed to measure its impact on spare parts shortages.

                          The Naval Supply Systems Command undertook this initiative in response
                          to the Navy’s Aviation Maintenance Supply Review, which recommended
                          that specific actions be taken to reduce overall maintenance and supply
                          costs, increase readiness, and make systemic improvements in support of
                          naval aviation forces. Since 1990, we have regarded DOD inventory
                          management as a high-risk area because of vulnerabilities to waste, fraud,
                          abuse, and mismanagement. In 1999, we reported that the Navy was
                          unable to account for over $3 billion in inventory that was in-transit within
                          and between storage facilities, repair facilities, and end-users.27 A business
                          case analysis commissioned by the Naval Supply Systems Command in
                          support of the Serial Number Tracking initiative found that improper
                          accounting of in-transit repair items generates considerable material
                          losses, as well as additional labor costs associated with lost maintenance
                          history data and reconciling records for lost or missing parts.

                          The Navy’s Serial Number Tracking program has potential to enhance the
                          efficiency of maintenance and repair processing in a number of ways.
                          Once the program is fully implemented, parts transferred between Navy
                          customers, storage facilities, and repair sites will be marked with bar
                          codes, which maintenance and supply personnel will scan at every transfer
                          point to record each item’s transit history. Navy customers will then be
                          able to access this information by logging in to a centralized database. The
                          Navy expects this process to minimize the risk of in-transit part loss, as
                          well as the chance of maintenance record errors resulting from manual
                          data entry. In addition to bar coding, the Serial Number Tracking initiative
                          provides for select aviation components to be outfitted with computer
                          chips, called contact memory buttons, that store critical maintenance



                          27
                            U.S. General Accounting Office, Defense Inventory: Navy’s Procedures for Controlling
                          In-Transit Items Are Not Being Followed, GAO/NSIAD-99-61 (Washington, D.C.: Mar. 31,
                          1999).




                          Page 18                                                 GAO-03-708 Defense Inventory
                           history and warranty information. As parts circulate through the repair
                           pipeline, maintenance personnel will be able to scan the memory buttons
                           in order to identify what maintenance work has been previously executed,
                           and then determine what additional maintenance actions should be taken.

                           According to the Navy’s analysis, serial number tracking will streamline
                           maintenance work by facilitating identification of maintenance problems
                           and part defects, measurement of part reliability, and investigations of
                           spare part engineering. Moreover, the initiative could reduce time required
                           to complete certain maintenance actions.28

                           The Navy has budgeted approximately $58 million over 5 years to
                           implement Serial Number Tracking. This amount includes engineering
                           research to determine which components are compatible with contact
                           memory button technology, installation of contact memory buttons and
                           barcodes, and outfitting maintenance facilities with scanning equipment.
                           Despite these start-up costs, the Navy anticipates that this initiative will
                           yield net savings of more than $193 million over 7 years, resulting
                           primarily from reduced spare parts loss.


Initiative to Improve      The Naval Supply Systems Command and its Inventory Control Point staff
Procedures for Returning   are implementing a project to redesign and shorten the time required for
Unserviceable Items to     unserviceable items to be returned to repair facilities. Navy officials told
                           us they anticipate that the reengineered process will reduce the number of
Repair Sources Lacks       unfilled customer requisitions and create efficiencies in the scheduling and
Performance Measures       repairing of broken parts. At the time of our review, responsibility for
                           overall project management was transitioning from the Naval Supply
                           Systems Command to the Naval Inventory Control Point. Because there is
                           no documented performance plan, the extent to which data will be
                           available to document the initiative’s impact on equipment readiness and
                           mitigation of critical spare parts shortages is unclear.

                           Currently, Navy officials said, the typical unserviceable item is handled
                           and processed 3 to 5 times during an average period of 35.8 days from
                           initial turn-in by the fleet customer to receipt of the broken part at the
                           designated repair activity. The Navy envisions a computer Web-based



                           28
                             A Navy official cited the example of a maintenance team that had reduced the time
                           necessary to conduct an airframe maintenance inventory from 3 days to 4 hours by using
                           contact memory button technology.




                           Page 19                                                  GAO-03-708 Defense Inventory
                          system whereby a sailor aboard ship can query a computer system and get
                          immediate shipping and packaging instructions. This will reduce the
                          number of shipping destinations and enable the Navy to reduce overall
                          costs. However, without a management plan that specifies performance
                          goals and implementation milestones, the Navy cannot be assured that the
                          initiative will be fully implemented and achieve intended results.


Readiness-Based Sparing   The Navy’s use of the Readiness-Based Sparing initiative as a criterion for
Initiative Could Help     stocking parts aboard ships appears to have potential for improving
Mitigate Critical Spare   critical spare parts availability and operational capability of selected
                          weapon systems. 29 However, according to DOD, because this model is not
Parts Shortages If        fully supported by current data collection processes, much of the analysis
Expanded                  must be developed off-line. Currently, Navy officials stated that they have
                          used readiness based sparing techniques in determining spare parts
                          allowances in support of some older weapon systems and all new systems
                          being provided to the fleet.

                          The Naval Supply Systems Command is continuing to develop computer
                          models that base allowances for weapon system component parts on
                          readiness considerations. Under the traditional approach, allowances are
                          largely based on historical failure rates of individual parts. The Navy’s new
                          readiness-based models are geared to the operational readiness
                          requirements of selected critical subsystems, and consider how random
                          part failures might adversely affect the ability of the installed component
                          to perform the overall mission. Officials explained that the traditional
                          demand-based sparing model works well for mechanical-type parts, which
                          tend to break down at regular intervals as a result of usage. However,
                          experience has shown that newer electronic components have much less
                          predictable failure patterns. To compensate for this, weapon system
                          designers sometimes build in redundancies that enable equipment to
                          continue working even after random part failures occur. For example, by
                          using the readiness based sparing process, Navy officials anticipate that
                          the operational availability of the Close-In Weapons System will improve
                          from 45 percent under the demand-based approach to 87 percent under




                          29
                            We are reporting separately on the Navy’s overall efforts to improve spare parts support
                          to the operational fleet commanders.




                          Page 20                                                    GAO-03-708 Defense Inventory
                         the readiness-based allowance model, and the AEGIS system from 24
                         percent to 91 percent, respectively.30

                         The Navy has analyzed how additional wholesale supply funding would
Impact of Additional     affect the availability of spare parts as well as equipment readiness rates,
Spare Parts Funding      and has determined that an additional investment of $1.2 billion would be
                         necessary to support readiness objectives established by the Chief of
on Supply Availability   Naval Operations. However, the Navy did not ask for this funding as part
and Readiness            of its fiscal year 2004 budget request, nor did its budget estimates link
                         planned spending to individual weapon system readiness, as
Estimated but Not        recommended by the Office of the Secretary of Defense in an August 2002
Reported                 study.

                         DOD has an 85 percent supply availability goal, which means that 85
                         percent of the requisitions sent to wholesale supply system managers can
                         be immediately filled from on-hand inventories. Navy supply system
                         models are focused on achieving this goal in the aggregate. However, the
                         Navy’s overall wholesale supply system performance has fallen short of
                         expectations in each of the last 3 fiscal years for both aviation- and ship-
                         related repairable spare parts. Supply availability ranged between
                         approximately 69 percent and 71 percent for aviation-related items, and
                         between 79 percent and 84 percent for ship-related parts. Navy officials
                         commented that they have had difficulty achieving the desired 85-percent
                         goal for aviation parts due to a number of reasons, including increased
                         demand stemming from aging weapon systems and accelerated
                         operational requirements.

                         The Navy has estimated that an extra investment in the working capital
                         fund of approximately $1.2 billion would increase aviation- and ship-
                         related spare parts inventories to levels that support current readiness
                         standards.31 According to a recent study conducted by the Naval Supply
                         Systems Command, constraints in repair pipeline requirement models
                         accounted for a 6 to 8 percent decrease in supply availability for aviation
                         parts, which equated to an estimated 5 to 6 percent decline in fully mission



                         30
                           The Close-In Weapons System is a radar controlled rapid-fire gun system that is installed
                         on Navy ships to defend against anti-ship cruise missiles. The AEGIS system is a shipboard
                         defensive system that is capable of automatically detecting, tracking, and destroying
                         airborne, seaborne, and land-launched weapons.
                         31
                           We did not validate the accuracy of the Navy’s additional investment, spare parts
                         availability, or readiness estimates.




                         Page 21                                                    GAO-03-708 Defense Inventory
              capable rates for naval aircraft.32 This study concluded that a working
              capital fund investment of $225 million would remedy wholesale inventory
              deficiencies resulting from inaccurate requirements models, and that
              another $688.5 million would prevent further decline in supply availability
              of aviation spare parts resulting from constraints that prevent the working
              capital fund from procuring new inventory requirements driven by
              increased demand. Furthermore, the study calculated that an additional
              $300 million investment would be required to increase supply availability
              across all inventory segments to 85 percent.

              In its budget estimate submitted to Congress in February 2003, however,
              the Navy did not ask for additional investment in the working capital fund
              to meet the supply availability and aviation readiness rates described
              above. At present, it is unclear whether the Navy will choose to request
              funding for these requirements in later years. In its fiscal year 2004 budget
              exhibits, the Navy linked its planned working capital fund expenditures to
              aggregate spare parts availability, but not to mission capable supply rates
              or other readiness rates for individual weapon systems. The benefit of
              such a link was cited in an August 2002 study by the Office of the
              Secretary of Defense, which recommended that service requests for funds
              for spare parts inventories be linked to specific weapon system readiness.
              The service did provide aggregate ship and aviation readiness information
              to the Office of the Secretary of Defense. However, Navy officials said that
              the service cannot directly link spare parts funding and readiness data by
              budget category until better information technology becomes available.
              Without information that links funding to readiness, the Navy’s budget
              package does not provide Congress the return on readiness investment
              information it may need to make resource decisions.


              Since 1990, we have repeatedly reported that DOD’s inventory
Conclusions   management practices are high risk. In our 2003 High Risk Series Report
              we recommended that DOD take action to address key spare parts
              shortages as part of a long-range strategic vision and a departmentwide,
              coordinated approach to logistics management. However, our work shows
              that the Navy currently lacks a servicewide strategic logistics plan and
              supporting plan that include a specific focus on mitigating critical spare
              parts shortages. In addition, the Navy’s current key logistics initiatives to



              32
               Fully mission capable rates measure the ability of aircraft to perform all of their assigned
              missions.




              Page 22                                                     GAO-03-708 Defense Inventory
                     improve the efficiency of supply and inventory management practices do
                     not include a specific focus on mitigating these shortages. Instead, these
                     initiatives address many underlying issues, such as reducing customer wait
                     time, increasing asset visibility, improving the management of items
                     turned in for repair, and increasing the reliability of repair parts. Without a
                     focus on mitigating spare parts shortages, the Navy lacks a coordinated
                     approach, with attributes of an effective plan, such as goals, objectives and
                     performance measures, to systematically address the shortages and assess
                     progress in mitigating them. The ongoing development of the Sea
                     Enterprise plan and imminent update of the Naval Supply Systems
                     Command Strategic Plan provide an opportunity to include this focus and
                     provide the coordination needed to ensure that the Navy’s key logistics
                     initiatives we reviewed can achieve their maximum financial and readiness
                     benefits. Lastly, without information that links spare parts funding to
                     individual weapon system readiness and provides assurance that
                     investments in spare parts are based on the greatest readiness returns,
                     such as that recommended in the August 2002 Inventory Management
                     Study, Congress and other decision makers cannot determine how best to
                     prioritize and allocate future funding.


                     We recommend that the Secretary of Defense direct the Secretary of the
Recommendations      Navy

                     •   develop a framework for mitigating critical spare parts shortages that
                         includes long-term goals; measurable, outcome-related objectives;
                         implementation goals; and performance measures as a part of either
                         the Navy Sea Enterprise strategy or the Naval Supply Systems
                         Command Strategic Plan, which will provide a basis for management to
                         assess the extent to which ongoing and planned initiatives will
                         contribute to the mitigation of critical spare parts shortages, and

                     •   implement the Office of the Secretary of Defense’s recommendation to
                         report, as part of budget requests, the impact of funding on individual
                         weapon system readiness with a specific milestone for completion.


                     In written comments on a draft of this report, DOD generally concurred
Agency Comments      with the intent of both recommendations, but not the specific actions.
and Our Evaluation   DOD’s written comments are reprinted in their entirety in appendix I.

                     In concurring with the intent of our first recommendation, DOD expressed
                     concern that because spare parts shortages are a symptom of higher-level



                     Page 23                                            GAO-03-708 Defense Inventory
problems, including the need for more reliable spare parts and more
effective life cycle support processes, its management improvement plans
must focus on improving the processes, rather than on the symptoms.
According to DOD, the Naval Supply Systems Command’s current strategic
plan and planned revisions are/will be focused on improving the Navy’s
overall supply support processes to ensure that its naval forces have
sufficient support to achieve required readiness performance levels.
Therefore, DOD does not agree that the Navy needs to modify the Naval
Supply Systems Command Strategic Plan or include provisions in the
evolving Sea Enterprise strategy that are specifically focused on spare
parts shortages. DOD stated that the Navy’s process improvement
initiatives are intended to reduce the need for spare parts through the use
of more effective inventory management practices aboard ship,
standardizing the use of readiness based sparing concepts on board ship
and at shore facilities, and developing an effective total asset visibility
plan. DOD believes that these efforts will improve the efficiency and
effectiveness of the Navy’s supply system and inherently minimize any
future shortages of critical spare parts.

We disagree that these process improvements alone are sufficient to meet
our recommendation. Our report recognizes that the Navy’s logistics plans
focus on efforts to improve overall logistics support practices, and upon
successful implementation will likely contribute to improved supply
availability. Based on our report’s findings, however, we believe that the
goals, objectives and milestones of the Naval Supply Systems Command’s
strategic plans, or the higher-level Sea Enterprise plan, should include a
focus on the mitigation of critical spare parts shortages. Without such a
focus the Navy’s efforts to address the problem of critical spare parts
shortages are more likely to be duplicative or ineffective. Therefore, we
believe implementation of our recommended actions is necessary to
ensure improved equipment readiness for the Navy’s legacy and future
weapon systems.

In concurring with the intent of our second recommendation, DOD stated
that the Navy is investing in information systems to help it link inventory
investment decisions with weapon system readiness. DOD stated that the
Navy will provide information to link weapon system readiness and
inventory investments for its major weapon systems as information
becomes available. Because the Financial Management Regulation already
requires the Navy to submit this information as part of its annual budget
submission, DOD stated that more specific direction from DOD is not
necessary, and that current Navy actions satisfy the intent of our
recommendation.




Page 24                                         GAO-03-708 Defense Inventory
              We support the Navy’s actions, but remain concerned that the service has
              not specified milestones for developing information systems that link
              readiness and spare parts budget data. Providing this information in a
              timely manner will strengthen the Navy’s stewardship and accountability
              of requested funds, and will assist the Congress in making spare parts
              investment decisions that provide a good readiness return. We have
              therefore modified our second recommendation to include a provision that
              the Navy establish completion milestones for implementing the reporting
              requirement, as discussed above.



              To determine if the Navy’s strategic plans address spare parts shortages,
Scope and     we obtained and analyzed pertinent spare parts and logistics planning
Methodology   documents. We focused our analysis on whether these strategic plans
              addressed spare parts shortages and included the performance plan
              guidelines identified in the Government Performance and Results Act. We
              interviewed officials in the Office of the Deputy Chief of Naval Operations
              for Fleet Readiness and Logistics and in the Naval Supply Systems
              Command to clarify the content, status, and linkage of the various
              strategic plans.

              To determine the likelihood that key supply system initiatives will mitigate
              critical spare parts shortages and improve weapon system readiness, we
              obtained and analyzed service documentation on six of the initiatives that
              Navy officials believe are key to the future economy and efficiency of the
              service’s supply operations. We interviewed officials in the office of the
              Deputy Chief of Naval Operations, the Naval Supply Systems Command,
              the Naval Inventory Control Point, the Naval Air Systems Command, and
              the Naval Sea Systems Command. We obtained and analyzed Navy data
              pertaining to plans, objectives, performance goals, and implementation
              status and challenges for each of the six selected management initiatives.

              To determine the extent to which the Navy can identify the impact of
              additional investments in spare parts inventories, we interviewed officials
              and analyzed documents at the Naval Inventory Control Point. We also
              reviewed the Navy’s fiscal years 2004 and 2005 budget estimates provided
              to the Congress in February 2003, and considered DOD’s
              recommendations in its August 2002 Inventory Management Study.
              However, we did not independently validate or verify the accuracy of the
              Navy’s supply availability performance data or the analysis that estimated
              the increased funding needed to achieve the targeted supply system
              performance.



              Page 25                                          GAO-03-708 Defense Inventory
We performed our review from August 2002 through March 2003 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to the Secretary of Defense; the
Secretary of the Navy; the Director, Office of Management and Budget;
and other interested congressional committees and parties. 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.

Please contact me on (202) 512-8365 or Richard Payne on (757) 552-8119 if
you or your staff have any questions concerning this report. Key
contributors to this report were Glenn Knoepfle, Paul Rades, Barry
Shillito, George Surosky, and Susan Woodward.

Sincerely,




William M. Solis, Director
Defense Capabilities and Management




Page 26                                          GAO-03-708 Defense Inventory
                   Appendix I: Comments from the Department
Appendix I: Comments from the Department
                   of Defense



of Defense




         Page 27                                              GAO-03-708 Defense Inventory
          Appendix I: Comments from the Department
          of Defense




Page 28                                              GAO-03-708 Defense Inventory
                     Appendix I: Comments from the Department
                     of Defense




(350250)
           Page 29                                              GAO-03-708 Defense Inventory
                         The General Accounting Office, the audit, evaluation and investigative arm of
GAO’s Mission            Congress, exists to support Congress in meeting its constitutional responsibilities
                         and to help improve the performance and accountability of the federal
                         government for the American people. GAO examines the use of public funds;
                         evaluates federal programs and policies; and provides analyses,
                         recommendations, and other assistance to help Congress make informed
                         oversight, policy, and funding decisions. GAO’s commitment to good government
                         is reflected in its core values of accountability, integrity, and reliability.


                         The fastest and easiest way to obtain copies of GAO documents at no cost is
Obtaining Copies of      through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-
GAO Reports and          text files of current reports and testimony and an expanding archive of older
                         products. The Web site features a search engine to help you locate documents
Testimony                using key words and phrases. You can print these documents in their entirety,
                         including charts and other graphics.
                         Each day, GAO issues a list of newly released reports, testimony, and
                         correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site
                         daily. The list contains links to the full-text document files. To have GAO e-mail
                         this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily
                         E-mail alert for newly released products” under the GAO Reports heading.


Order by Mail or Phone   The first copy of each printed report is free. Additional copies are $2 each. A
                         check or money order should be made out to the Superintendent of Documents.
                         GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a
                         single address are discounted 25 percent. Orders should be sent to:
                         U.S. General Accounting Office
                         441 G Street NW, Room LM
                         Washington, D.C. 20548
                         To order by Phone:     Voice:    (202) 512-6000
                                                TDD:      (202) 512-2537
                                                Fax:      (202) 512-6061


                         Contact:
To Report Fraud,
                         Web site: www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in      E-mail: fraudnet@gao.gov
Federal Programs         Automated answering system: (800) 424-5454 or (202) 512-7470


                         Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800
Public Affairs           U.S. General Accounting Office, 441 G Street NW, Room 7149
                         Washington, D.C. 20548