United States General Accounting Office Report to Congressional Requesters GAO March 1990 DEFENSE INVENTORY Growth in Ship and Submarine Parts , . National Security and International Affairs Division B-229462 March 6, 1990 The Honorable John Glenn Chairman, Committee on Governmental Affairs United States Senate The Honorable Jim Sasser Chairman, Committee on the Budget United States Senate This report responds to your Committees’ requests that we study defense secondary inventories. We previously provided you with an overview of inventory growth and are completing our response with two reports on areas of largest growth. The other report deals with aircraft parts growth, while this report discusses the causes of unrequired ship and submarine parts and addresses ways in which such stocks can be minimized. As arranged with your offices, we plan no further distribution of this report until 30 days from its issue date, unless you release its contents earlier. At that time, we will send copies to other interested committees and Members of Congress; the Secretaries of Defense and the Kavy; and the Director of the Office of Management and Budget. We will also make copies available to other parties upon request. This report was prepared under the direction of Donna M. Heivilin, Director, Logistics Issues (202) 275-8412. Other major contributors are listed in appendix V. Frank C. Conahan Assistant Comptroller General Executive Summ~ The Department of Defense’s (DOD) inventory of secondary items ( minor Purpose end items and repair parts) grew from about $43 billion in 1980 to S 103 billion in 1988, an increase of 138 percent. The Navy’s inventory of ship and submarine parts increased by 249 percent. from about 32.7 billion in 1980 to about $9.3 billion in 1988. The Chairmen, Senate Committees on the Budget and on Governmental Affairs, asked GAO to analyze the growth in ship and submarine parts, especially growth not related to increases in military capability. GAO'S objectives were to ( 1) detail the major causes for unrequired inventory, (2) determine whether opportu- nities exist to minimize growth in unrequired stock, and (3) determine if, in addition to unrequired inventory, the inventory contained items with little potential for future use. This is the third in a series of reports addressing the growth in DOD's secondary inventories. The Kational Security Act of 1947 requires the Secretary of Defense to Background report annually to the President and the Congress on DOD'S inventory, including principal and secondary items. Principal items include air- craft, tanks, and ships. Secondary items include aircraft, tank. ship, and submarine parts; construction materials; clothing and textiles; and medi- cal and dental supplies. DOD categorizes its inventories into six classlfica- tions. Two represent required stocks held to meet war reserve and peacetime operating stocks. Four cltisifications represent unrequlred stocks. Three of the four represent stocks that DOD holds for potential future requirements and contingencies, but has no need to buy. The fourth classification represents stocks whose retention cannot be Justi- fied for either economic or defense reasons. Under the Defense Inactive Item Program, the Navy reviews its m\.en- tory once a year to identify inactive items for possible elimination from the inventory. Items are identified as inactive when they have ( 1 ) been on the master data file for seven years, (2) had no demand in the last two years, (3) no current requirement, and (4) no current applicxatlon. In 1988, 40 percent ($3.7 billion) of the Navy’s inventory of ship and Results in Brief submarine parts was unrequired. GAO sampled the 183,000 item5 I hat include such stocks and found that the major causes for the unrtqlllred inventory were requirements that did not materialize, deactl\,at I()II I bf older ships, and replacement and phasing out of equipment. IIOH tat ear. GAO could not determine why unrequired inventory exists for o\ t’r half the sample items, since (1) documents justifying past procurcmtknt cltbci- sions are not available, (2) the Navy has no record of events afft.1 1I~IR Page 2 GAO/NSIAIMO-111 Drfrtnw Inventory Executive Summary the demand for these items, and (3) sometimes the managers are not familiar with the procurement or demand history of their items. Unrequired inventory can be minimized by ensuring that items being replaced or phased out are not purchased or repaired unnecessarily. GAO estimates that 109,000 ship and submarine parts which have unre- quired inventory have little potential for future use because the items have no users, past demands, or forecast demands. These parts meet some, but not all four of the DOD’s criteria for being considered for elimi- nation from the inventory. GAO believes the requirement to meet all four criteria is too restrictive. GAO also estimates that another 31,000 ship and submarine items for which the Navy has unrequired stocks, meet current Defense Inactive Item Program criteria for possible elimination from the inventory, but few items are being considered. The Navy’s last inactive item review eliminated about 1,500 items and a special project eliminated another 3,200 items. GAO estimates that the Navy is spending $24 million annually to store and manage these 140,000 items which may be of no use. Principal Findings Reasons for Unrequired GAO identified the causes of unrequired inventory for 45 of 100 ran- domly chosen items. GAO could not determine why an additional -5-1sam- Stock ple items had unrequired inventory (one item was determined not to have unrequired inventory). Either records were not available or item managers were not sufficiently familiar with the 54 items to explain why the items had unrequired inventory. Based on its sample, GAO estimates that about $900 million of the unre- quired inventory resulted from requirements that changed. Reasons for the changes included planned program requirements and demands that changed or did not materialize. GAO also estimates that about $1.7 billion of unrequired inventory resulted from the Navy’s fleet modernization efforts, which included replacing and phasing out equipment and deacti- vating ships. Page 3 GAO/NSIAJ%9@111 Defense hentory Executive Summary GAOestimates that the Navy would not be able to explain why about $1.2 billion worth of the inventory was unrequired. The Navy does not require item managers to keep records justifying purchase decisions beyond when the material is received. In addition, many item managers have been responsible for their items for only a short period of time. AS a result, information is not available to identify the basis for past purchases or to identify events causing items to have unrequired inventory. GAO believes that the lack of information can hinder item managers in that they are not aware of why items were purchased, why the items have unrequired inventory, or even why the items are being retained. Having such information could help item managers to recognize causal factors and thus minimize the purchase of items that could become unneeded, and would help them to decide which items should be retained. Minimizing Unrequired GAO found that the Navy does not systematically notify inventory con- trol points that items are being replaced or phased out. Even when noti- Inventory fied, inventory records often contained no information to alert the responsible item managers that items are being replaced or phased out. GAO believes that procedures to disseminate and record data on items being phased out are necessary to keep unrequired inventory to a minimum. The purchase of one GAO sample item was finalized after the inventory control point was notified that the item was obsolete. GAO believes that terminating that contract effort before the contract was finalized would have avoided acquiring unneeded inventory. Inactive Items In 1988, the Navy only eliminated about 1,500 items under the Defense Inactive Item Program and another 3,200 under a special project. GAO’S sample included 57 items that did not meet all four WD criteria for being considered inactive for elimination, but had one or more charac- teristics that indicate little potential for future use. For example. 15 items had no users, 45 items had no demands in the past 2 years, and 33 items had no forecast demands. GAO estimates that of the 183.000-item population, about 109,000 items, valued at $2.3 billion could be evalu- ated for elimination if items did not have to meet all four criteria to be considered inactive. Page 4 GAO/NSL4D90-111Lkfenw Inventory Executive Summary 640 found that 11 sample items met all four DOD criteria for being classi- fied inactive and should be considered for elimination from the inv.en- tory. GAOestimates that an additional 3 1,000 items should be considered under existing criteria. Based on DOD cost estimates, GAO estimates that it costs the Savy $21 million to store and manage items that meet criteria to be considered for elimination and that could be considered if fewer criteria were required. GAO recommends that the Secretary of Defense direct the Secretary of Recommendations the Xavy to: l Require item managers to retain summary data for major items showing the basis for an item’s most recent procurement and events affecting the item. l Establish procedures to inform inventory control points about systems being phased out or replaced, require inventory records be coded to identify the items, and ensure that purchases of such items are made only for immediate needs. l Begin systematically identifying and evaluating all inactive items. and eliminate those with no potential for future use. GAO also recommends that the Secretary of Defense expand the defense inactive item program criteria to allow classifying items as inactive so that more items with little potential for future use can be evaluated. Agency Comments dations (see app. IV). In its response, the Department provided informa- tion on actions it will take to correct the problems noted in this report Page 5 GAO/NSIAtMO-111Lkfen.w In\w~lc~~ Contents Executive Summary Chapter 1 Introduction The Stratification Process The Supply System Inventory Report Objectives, Scope, and Methodology Chapter 2 Reasonsfor Growth in Ship and Submarine Secondary Inventory Reasons for Unrequired Inventory Ii 14 Unrequired Inventory Reasons Why About Half the Items Had Unrequired Stock 18 Could Not Be Determined Conclusions 19 Recommendation 19 Agency Comments and Our Evaluation 20 Chapter 3 21 Minimizing the Navy Efforts to Minimize Unrequired Stocks 21 Some Unrequired Inventory Is Unavoidable 22 Acquisition nc Efforts to Reduce Unrequired Inventory Resulting From 22 Unrequired Ykentory Planned Program Requirements Some Unrequired Stock Can Be Minimized 23 Conclusions 24 Recommendation 25 Agency Comments and Our Evaluation 25 Chapter 4 26 Inactive Items The Defense Inactive Item Program 26 Many Items Have Little Potential for Future Use 27 Contribute to Inactive Items Are Slowly Removed From the Inventory 28 Unnecessary Storage Cost of Holding Inventory 29 costs Conclusions 29 Recommendations 30 Agency Comments 30 Appendixes Appendix I: Types of Requirements Used in the 32 Stratification Process Appendix II: Reasons Why Sample Items Had Unrequired n4 Stock Appendix III: Items That Could Be Considered Inactive :38 Page 6 GAO/NSlAD9@111Defense In\rntory Contents Appendix IV: Comments From the Department of Defense Appendix V: Major Contributors to This Report Figure Figure 2.1: Required, Lnrequired, and Unstratified Ship and Submarine Parts Inventory ( 1980 and 1988) Abbreviations DOD Department of Defense GAO General Accounting Office SPCC Ships Parts Control Center Page 7 GAO/NSlAMO-111 Defrnv In\*ntory Chapter 1 Introduction The Department of Defense (DOD) classifies its material inventories as principal items, such as aircraft, tanks, and ships; or secondary items such as aircraft parts, ship and submarine parts, construction materials, clothing and textiles, and medical and dental supplies. The value of DOD’S secondary inventory grew from about $43 billion in 1980 to about $103 billion in 1988, an increase of about $60 billion, or 138 percent. About $9.3 billion of DOD’S 1988 inventory was in ship and submarine parts. The value of ship and submarine parts increased $6.6 billion, or 249 percent, between 1980 and 1988. About $3.7 billion of ship and submarine parts in 1988 was in unrequired stocks, an increase of about 226 percent. The Navy Supply Systems Command administers the Navy’s supply sys- tem and provides supply management policies and procedures to its inventory control points. The Ships Parts Control Center (WCC) is the Navy’s inventory control point primarily responsible for the ship and submarine inventory. At the inventory control points, item managers are primarily responsible for ensuring that needed items are available to the Navy fleet when and where needed. An item manager’s tasks include determining when and how many items to repair or purchase, positioning items at supply cen- ters to meet demands, disposing of excess items, and ensuring that bud- gets reflect material needs. DOD has established a stratification process to match its secondary The Stratification inventory, by item, to types of requirements. The process forecasts the Process requirements and determines if enough material will be available to sat- isfy them. Requirements and inventory summaries are used for such supply management activities as budgeting, procurement programming, and determining the supply system’s readiness and financial status. To satisfy the multiple uses of the stratification process, inventory data are computed, arranged, and displayed in several ways. Four compari- sons are used for budgeting purposes. An opening status compares on- hand and due-in inventory to current requirements. Forecasts of Page 8 GAO/NSIAIMO-111Defense lnrrntory Chapter I Introduction requirements and inventory are also made to show the inventory availa- ble to meet current, apportionment, and budget years needs.1 A fifth comparison measures readiness by showing items on hand to sat- isfy requirements as of the stratification date. A final comparison shows the reasons for retaining items. This comparison provides the basis for inventory information reported to the Congress. Nineteen categories specify why inventory is retained and the twentieth category is for potential excess. DOD budgets for 15 of the categories and considers them to be requirements. DOD does not budget for an additional four categories, but sets allowed retention levels so that items which are on hand will be retained (see app. I). The first 15 categories represent the approved force acquisition objec- tive. The approved force acquisition objective includes operating stocks for the current, apportionment, and budget years; and additional stocks to cover safety levels, lead time (time needed to purchase items), and war reserves2 The next requirement is for approved force retention stocks, which are not funded for purchase but may be retained if already on hand. These stocks equip and support the U.S.-approved forces from the day war begins until production equals demand. In this report, approved force acquisition objective and approved force retention stocks are called required stocks (see app. I). Three additional categories may also be retained if already on hand. These are called economic, contingency, and numeric retention stocks (see app. I). The Navy does not use the numeric retention category in stratifying its ship and submarine parts. Stocks which exceed all the above categories are identified as potential excess because their retention cannot be justified for defense or eco- nomic reasons. ‘The current year represents the remamder of the fiscal year in progress at the time of the stratlflca- tion report. The apportionment year consists of the lZ-month period after the current year. and the budget year consists of the 1Z-month period after the apportionment year. ‘War reserves are stocks that are stored in peacetime to satisfy increased wartune consumption they are intended to sustam operations until resupply takes place. Page 9 GAO/NSIAbSO111 Defense Inventory Chapter I Introduction In this report economic. contingency. and numeric retention stocks and potential excess are called unrequired stocks. Although DOD has justified holding retention stocks. it does not have a current requirement to buy the material. The National Security Act of 1947 requires the Secretary of Defense to The Supply System report annually to the President and the Congress on DOD’S stored sup- Inventory Report plies, including principal and secondary item inventories. DOD reports the inventories by service and by material categories, such as aircraft parts and ship and submarine parts. Each category is reported by approved force acquisition objective; approved force, economic. contin- gency, and numeric retention stock; and potential excess:’ Navy financial inventories do not account for approved force acquisition objective, retention, and potential excess stocks. The Navy uses its strat- ification summaries to develop ratios for the inventory in the various categories. It applies the ratios to the financial inventory to estimate amounts reported in the supply system inventory report. The Chairmen, Senate Committees on the Budget and on Governmental Objectives, Scope,and Affairs, requested us to study the growth in DOD’S secondary invento- Methodology ries. They asked that our work include a macro-analysis of growth and aspects of the growth not related to increases in military capability. In July 1988, we issued a briefing report analyzing the areas of inven- tory growth (e.g., aircraft parts and ship and submarine parts) and types of inventory growth (e.g., required and unrequired stocks).’ We reported that DOD’S secondary item inventory increased about $5 1 billion between 1980 and 1987. Required stocks grew about $27 billion, while stocks in excess of requirements grew about $19 billion. About $5 billion of the inventory was in-transit stocks. We reported that aircraft parts represented about $3 1 billion of the $5 1 billion in inventory growth ‘DOD also reports unstratified stock.s.According to a DOD official, unstratified stocks represent Items in transit between supply pants and between supply points and customers. 4Defense Inventory: Growth in Secondary Items (GAO/NSIAD-W-189BR.July 19, 19WJ) Page 10 GAO/NSL4D9@111Defense Inventory Chapter 1 Introduction between 1980 and 1987, and that ship and submarine parts represented about $9 billion.’ This report addresses the growth in Navy ship and submarine parts, especially increases not related to military capability. Our objectives were to (1) detail the major causes for unrequired inventory. ( 2 1 deter- mine whether opportunities exist to minimize growth in unrequired stock, and (3) determine if, in addition to unrequired inventory. the inventory contained items with little potential for future use. We are issuing a separate report” to address the growth in aircraft parts. We performed our work at the Office of the Assistant Secretary of Defense (Production and Logistics), the Navy Supply Systems Com- mand, and the Ships Parts Control Center, Mechanicsburg, Pennsylvania. We obtained an SPCCinventory report as of March 3 1, 1988, listing 183,435 ship and submarine consumable and depot level repairable items having unrequired stock (on hand or due in) in the economic reten- tion, contingency retention, and potential excess categories. The total dollar value of the unrequired stock was $3.5 billion. We determined the total dollar value of unrequired stock for each item, examined frequency distributions of the total dollar values, and divided the population into five different dollar strata. Since we had no basis to provide criteria for stratum sizes, we selected and analyzed a prelimi- nary random sample of 50 items. Based on the results of the preliminary sample, we selected a final sample size of 100 items. The final sample accounted for $31.6 million in unrequired stock, about 1 percent of the population. We reviewed the sample items to identify the causes for the items being in an unrequired status, and to determine if the items should be retained in the inventory. ‘The figures reported in our 1988 report were based on DOD’s supply system inventory reports During our recent analysis of Navy data, we detemCned that inventory presently being reported a-~ ship and submarine inventory was reported in such other categories as missile and electromcs parts in 1980. Using comparable figures, between 1980 and 1988 the ship and submarine Inventor?, increased from $2.7 billion to $9.3 billion. “Defense Inventory: Growth m Air Force and Navy Unrequired Aircraft Parts, (GAO‘SSI.AD-q()- I()(). Mar. 1990). Page 11 GAO/NSLAD-SO-111 Defense Inventory Chapter 1 Introduction To identify the causes for the items being in an unrequired status, we analyzed information from consolidated stock status reports. cyclic data sheets, stratification reports, and procurement and transaction histories for each sample item. We also discussed the item’s status with responsi- ble item managers and branch chiefs. To assess if items should be classified as inactive for deletion from the inventory, we compared them to SPCCcriteria for the Defense Inactive Item Program. To determine if the Navy should evaluate additional items for possible elimination from the inventory, we reviewed item applications, users, past demands, and forecasted demands, and consid- ered the reasons for the items being in the unrequired category. We conducted our review from July 1988 to May 1989 in accordance with generally accepted government auditing standards. The Depart- ment of Defense provided written comments on a draft of this report. These comments are presented and evaluated in chapters 2,3. and 4 and are included in appendix IV. Page 12 GAO/NSIAD-SO-111 Drfrnr Immtory Chapter 2 Reasonsfor Unrequired Inventory Between 1980 and 1988, the Navy’s unrequired ship and submarine parts inventory increased by about $2.6 billion (from about $1.1 billion to $3.7 billion). The $3.7 billion represented 40 percent of the Savy’s $9.3 billion ship and submarine parts inventory as of September 30. 1988. Out of our statistical sample of 100 items, we determined why 45 items had unrequired inventory. The most common reasons identified were requirements that did not materialize and efforts to modernize the fleet, e.g., deactivating older ships and phasing out or replacing equipment. We could not identify why 54 items had unrequired inventory because records were not available and item managers were not familiar with the items’ histories. Projected to the population of unrequired ship and submarine parts, the 54 items represent about 117,500 items with unre- quired inventory valued at about $1.2 billion. Documents justifying the items’ last procurement or repair contracts were not available and many item managers had not been responsible for the items when SPCCpro- cured the unrequired stock. Appendix II lists the 45 items for which we identified reasons for unre- quired inventory, the 54 items for which we could not identify reasons. and the 1 item for which inventory was overstated and the item was consequently erroneously reported as having unrequired inventory. Page 13 GAO/NSIAMO-111 Defense ln\rr~rory Chapter 2 Reasonsfor C‘nrequiredInventory The Kavy’s ship and submarine parts inventory increased 249 percent Growth in Ship and between 1980 and 1988, from $2.7 billion to about $9.3 billion. Figure Submarine Secondary 2.1 shows the inventory growth. Inventory Figure 2.1: Required, Unrequired, and Unstratified Ship and Submarine Parts 5 Ddlam Ill billlom Inventory ( 1980 and 1988) 4 3 2 l I Remimdrm&d Unrequifedsmdu Una~ smcka The unrequired ship and submarine parts inventory increased 226 per- cent, from $1.1 billion to about $3.7 billion. According to a Navy official, the large amount of unstratified stocks is due to items awaiting delivery to deployed ships. 7Reasonsfor requirements changed or did not materialize in 19 cases and (2) items Unrequired Inventory were replaced, phased out, or ships deactivated as part of fleet moderni- zation efforts in 23 cases. Page 14 GAO/NSlAIHO-111 Defense Inventory Chapter 2 Reasons for Cnrequired Inventory Requirements Changed LVefound that 19 items had unrequired inventory because the need for the items changed or item use was lower than expected. We estimate that this caused about $900 million worth (about 27,000 of the 183.435 items) of inventory to be unrequired.’ Requirements that changed include planned program requirements and demands that did not mate- rialize, overstated replacement factors, and items that were purchased before the systems they supported were activated. Planned program requirements are requirements to support one-time activities such as outfitting or altering ships. We identified 10 items for which delayed or canceled planned program requirements contributed to unrequired inventory. For example, SPCChad 17 rotor assemblies for a pump. Thirteen of the assemblies were unrequired and had a value of about $1.5 million. SPCCawarded a contract to repair 6 of the assemblies in 1985. According to the item manager, planned requirements for the assemblies had been dropped. In October 1987, the item manager attempted to terminate the contract to repair the 6 assemblies. but decided that the termination costs would be too high because the con- tract was almost completed. In four cases, the demands for the items decreased. For example, in March 1988 SPCChad 60 machine-threaded plugs used on a check valve. Ten of the plugs, valued at about $190, were unrequired. According to the item manager, the demand for the item had dropped since the item was last purchased in 1987. The item manager could not explain the drop. The replacement factor, which represents an item’s expected average annual use, was overestimated for three items. For example, SPCC reported having 102 amplifiers for a radar system in stock in Yarch 1988. Eighty-six of the amplifiers were unrequired and had a value of about $780,000. WCC had contracted for 62 of the assemblies in 1986 and 1987. According to the item manager, the anticipated replacement rate had been overestimated. As a result, too many items were purchased. In two cases, SPCC inventory included on-order items for systems that were not yet operational. In one case, SPCC terminated the order for two resistor assemblies when installation of the sonar they supported was ‘We computed the estimates at the 95-percent level of statistical confidence. That IS. we 3rv ‘6 i*hr cent certain that the true number of items with unrequired inventory becauseof changed rtqulrts- ments IS between 12.800 and 41,800 items and that their value is between $154 mllhon .mtl 5 I 7 billion. Page 15 GAO/NSIADSO-111 Defense Inbrntory Chapter 2 Reasonsfor Unrequired Inventory delayed. SPCC’S March 1988 inventory showed two resistor assemblies on order. SPCChad awarded a contract for two assemblies to support a sonar, initially scheduled to be activated in 1991 or 1992. According to the item manager, the sonar will not be installed until at least 1995. Fleet Modernization Causes related to fleet modernization contributed to 23 items with unre- quired inventory in our sample. We estimate that about $1.7 billion worth (about 32,000 of the 183,000 items) of inventory was unrequired as a result of fleet modernization efforts.’ The items were unrequired because equipment was being phased out or replaced, and ships were deactivated. The unneeded items were not removed from the inventory and their components were sometimes used on other equipment. Equipment Phaseouts and We identified 17 items with unrequired inventory because the equip- Replacements ment that used the items was being phased out or replaced. For exam- ple, in March 1988 SPCChad 65 circuit card assemblies for submarine sonar communications sets, and 62 valued at about $44,000 were unre- quired. According to the item manager, the communications set was being replaced. As the communications sets are replaced, they are returned to the inventory and their components are used as needed on other equipment. This circuit card assembly cannot be used on other equipment and will eventually be scrapped. SPCC records show 59 of the assemblies as potential excess. Two items that had been replaced could be upgraded to the new items. For example, SEC had 21 circuit card assemblies for a sonar receiver in its March 1988 inventory. One of the assemblies was ready for issuance and 20 needed repairing. Four of the assemblies, valued at about $7..700, were unrequired. The item manager explained that all the assemblies would eventually be unrequired because the item had been replaced. Since it is less expensive to upgrade the old item than to buy a new one, the old item will be retained. Deactivated Ships Three of the items were unrequired because the ships that used the items were deactivated. For example, WCC had 31 radar antenna mounts in its March 1988 inventory. Thirty of the mounts were unrequired inventory valued at about $1.2 million. Twenty-two of the mounts could ‘Based on stat;std sampling, we are 95 percent certain that the true number of items wrh II~W quired inventory becauseof fleet modernization is between 16,500 and 48,300 and thew L a11w13 between $726 million and $2.7 billion. Page 16 GAO/NSL4D9O-111Defenue Imrntory Chapter 2 Reasonsfor Unrequired Inventory not be issued because they needed repairing. SPCC officials fount. that the ships using the fire control system had been deactivated. Items Kot Removed From the Three items were unrequired because they had not been eliminated from Inventory the inventory after equipment they supported were removed or their stock number canceled. For example, in March 1988 SPCC had two scale dials valued at $15 each used on a fire control system. One of the dials was reported as required stock and the other as unrequired. The uses for this item had been eliminated in 1984. According to the item mana- ger, since the uses had been eliminated, the item had no further require- ment and could be eliminated. Other Causes Complying with minimum order value purchase requirements, buying above the authorized quantity, and buying the wrong item were addi- tional causes of unrequired inventory. Because of the infrequency of these causes of unrequired inventory, we did not project their occur- rence to the population. spcc has established a minimum order value purchase requirement so that the cost to process a purchase request is not more than the item’s value. In one instance, one dial was needed; however, SPCCpurchased 25 dials to meet the $250 minimum order purchase value. In another case, SFTC authorized 400 anchor shackles, but procured 7%. The item manager could not explain the overprocurement but believed that an initial provisioning order for 300 may have been lost and then a second order of 420 to cover the authorized quantity was awarded Hoth orders were subsequently delivered. In another instance, a Kavy shipyard ordered a centering magntat which it thought was an assembly that included the needed part. (A clamp which was needed was not listed as a separate item in the invent or> system.) When the order arrived, they found that it was not an a+tam- bly or the needed part. One sample item, a circuit card assembly, was not actually in an \~nrtl- quired status. The number of items due in from repair and prtx\lrtbrntbnt contracts were overstated. Removing the overstated due-in st(H.k\ caused the item to no longer be in an unrequired status. Page 17 GAO/NSIAD!Wll 1 Ddrnrrr I nt * nrory Chapter 2 Reasonsfor Cnrequired Inventory We could not determine why .54 of 100 items had unrequired stock ReasonsWhy About because records supporting past decisions were unavailable and/or the Half the Items Had item managers were not sufficiently familiar with the items. We esti- Unrequired Stock mate that reasons for unrequired inventory could not be identified for items valued at about $1.2 billion, or about 117,.500of the 183.000 items Could Not Be with unrequired inventory. For these items such key information as the Determined items’ users, past demands, or forecast demands used to justify the last purchase was not available. Additionally, in many cases, the current item manager had been responsible for the item for only a short period and did not know about the item’s history. For example, WCChad 53 reactor assemblies for a sonar system in its March 1988 inventory. Fifty-one of the assemblies were unrequired and were valued at about $160,000. The most recent delivery involved five of the items that were contracted for in 1985 and delivered in *July 1986. As of September 1988, neither the item manager nor the branch chief had records to show why the items were ordered or were currently in the unrequired category. Justification Document 23 WCCpolicy requires item managers to submit documentation supporting purchases over $25,000 for approval by higher authority. The docu- Not Retained After ments include the item’s consolidated stock status report, cyclic data Material Is Received sheet, requirements evaluation forms, and other supporting data. These documents provide such information as past and forecasted demands. lead time, and users. The policy requires the item managers to retain the documents until the material is received, but not after receipt. According to SPCC officials, documentation supporting purchases are not required to be retained after the material is received because of the large volume of paper involved. The officials stated that the Navy’s I7ni- form Inventory Control Program, a computer system which provides automated support to the Navy’s inventory control points, is being updated. The final stage of the update, which is scheduled to be com- pleted in late 1993, will provide an archive file for retaining information used to make procurement decisions. According to a Naval Supply Systems Command official, the Navy does not have any additional retention requirements besides SPCC’S. He said ‘Wecomputed the estimates at the %-percent level of statistical confidence. That IS. we arcsWI par- cent certam that the true number of items for which reasons for unrequired inventory c~~lld nor be identified IS between 97.600 and 137.100 items and that their value 1sbetween $733 mllllon .tnd S I 7 billion. Page 18 GAO/NSIAIHO-111 Lkfen.seIntrntory Chapter 2 Reasonsfor Unrequired Inventory that acquisition regulations require retention of procurement documents for 3 or 6 years, depending on the size of the contract. However, he said that procurement documents are sent to storage and are generally not available for item managers’ day-to-day use. Many Item Managers Not We interviewed item managers 5 to 8 months after the date of the inven- tory report from which we took our sample. We found that for 13 of the Familiar With Items 54 items, responsibility for the items had already changed. For an addi- tional 18 items, item managers had been responsible for the items for less than 2 years. Item managers were unfamiliar with over half the sample items because Conclusions they had recently assumed responsibility for the items and documents explaining past decisions or events resulting in unrequired inventory were unavailable. We believe that the lack of information can hinder item managers in that they are not aware of why items were purchased. why items had unrequired inventory, or why the items are retained. We believe that SPCC’Splans for a computerized archive file of procure- ment decision information will help item managers to better manage their inventories and to identify the causes of unrequired inventory. We also believe that records of events affecting the status of an item would also be beneficial. Such events could include replacement notifications, elimination of applications or users, ship deactivations, and program delays. Until a computerized archive file is implemented, we believe that sum- mary data showing the justification of procurement decisions and events affecting major items should be kept. Setting a minimum contract value or time limit for retaining information would help keep the item managers’ work loads to a reasonable level. We recommend that the Secretary of Defense direct the Secretary of the Recommendation Navy to require item managers to retain summary data on major items showing the basis for each item’s most recent procurement and events affecting the item. Page 19 GAO/NSL4D-90-111Defense Imrntory Chapter 2 Reasonsfor Unrequired Inventory concurred with our findings and recommendation. DOD said that the Agency Comments and DOD Navy’s automated data processing modernization planned for implemen- Our Evaluation tation in fiscal year 1994 would provide the necessary information. In the interim, the r\;avy will explore the feasibility of a manual system to retain the information. Because of the potential slippage of the 1994 implementation of the automated data processing modernization, we believe that priority should be given to the manual system to retain an understanding of the bases for procurement decisions and events affecting the item. Page 20 GAO/NSIAMO-Ill Defense Imentory . . ll4mming the Acquisition of Unrequired Inventory Some unrequired inventory may be the unavoidable result of tleet mod- ernization activities. The Navy has also made efforts to minimize acquir- ing unrequired inventory. A major cause of unrequired inventory that we identified is changes and cancellations of planned program require- ments, SPCC’efforts S to provide item managers with the status of the requirements may reduce the amount of unrequired inventory resulting from this cause. Although SPCChas made efforts to minimize the acquisition of unre- quired inventory, we identified instances where more could have been done. We identified instances in which items being phased out or replaced were being repaired or additional items were being purchased. In another case, SPCCpurchased an obsolete item. We believe that these examples unnecessarily added to the unrequired ship and submarine parts inventory. To control unnecessary inventory growth, the Kavy consolidated its Navy Efforts to inventory management efforts in an inventory management improve- Minimize Unrequired ment program in January 1989. The program’s objective is to develop an Stocks approach for controlling factors contributing to growth in the secondary item inventory. The Navy has undertaken initiatives in 73 areas to con- trol inventory growth. The initiatives include reviewing economic order quantity policies, minimizing reliance on purchases to last the life of equipment, ensuring that all such buys are fully justified, and develop- ing a comprehensive effort to review planned program requirements. In addition to its own efforts to reduce unrequired inventory, SPCCis participating in about half of the above inventory management improve- ment program initiatives. For example, SPCCofficials periodically review selected items that have unrequired inventory. Between March and Sep- tember 1988, SPCCreviewed 166 items that had purchase requests or contracts, valued at about $301 million, and also had unrequired inven- tory. As a result of their reviews, SFCCinitiated the termination of 62 contracts or purchase requests and corrected the records (e.g., entered requirements and changed demands or lead times) of other items. Also, in 1988 SPCCitem managers were given termination authority for items that have unneeded stock on order above requirements. According to SPCC,it terminated the largest number of contracts ever in fiscal year 1988. Between September 1988 and February 1989, SPCCterminated 7,279 purchase requests valued at $191 million and about 700 contracts valued at about $50 million. According to SPCC,it reduced the number of Page 21 GAO/NSIAMO-111 Defense hentory Chapter 3 Minimizing the Acquisition of Lnrequired Inventory contracts for unrequired inventory from about 17 percent of all con- tracts in 1986 to about 5 percent in 1988. Additionally, SPCChas designated a project officer to form and chair a working group aimed at reducing purchase requests and contracts for unrequired inventory. The group’s tasks include surveying and consoli- dating existing initiatives and information on items with unrequired inventory on order, and making recommendations on additional corrections. Phasing out and replacing old equipment resulted in unrequired stock Some Unrequired for 15 of the 45 items for which we identified causes. The 15 items had Inventory Is $6.4 million and $16.2 million in required and unrequired stock, respec- Unavoidable tively. These processes naturally occur as a result of fleet moderniza- tion, and in many cases they unavoidably result in inventory items that are no longer needed. For example, one of our sample items was a submarine power supply. The Navy had nine of the power supply units valued at about S343.000 each. None of the units could be issued because they needed repairing. According to the item manager, the power supply unit had been replaced, and the old units could not be modified or substituted for the new one. As the old units were removed from submarines, they accumu- lated as unrequired inventory (see ch. 4). Planned program requirements that are delayed or terminated contrib- Efforts to Reduce uted to unrequired inventory for 10 of the 45 items for which we tdenti- Unrequired Inventory fied causes of unrequired inventory. Because WCCitem managers are Resulting From now receiving more timely information on delayed and cancelled planned requirements, SPCCmay be able to reduce the amount of unre- Planned Program quired inventory resulting from this cause. Requirements Planned program requirements represent anticipated one-time demands, such as outfitting or altering of ships. Hardware systems commands. such as the Naval Sea Systems Command, generate program req11I re- ments. The requirements are provided to the inventory control Iwjlnts. such as WCC, through program support data. SPCCofficials estrmatk* that about $840 million of its $1.2 billion 1988 budget to procure tternz to support the fleet was based on planned program requirements Page 22 GAO/NSL4D!W-111 Ikfrw Insrntory C‘haptcr 3 ,Minimizing the Acquisition of Lnrrquired Invrnto~ -4ccording to SPR officials. the Center previously ad,justed its rcquirfl- ments program as many as four times a year based on program support data changes obtained from hardware systems commands. IIon-t>\.cr, SPCCnow has on-line access to the hardware systems commands’pro- gram support data which will permit the timely adjustment or canc~c~lla- tion of purchases. We identified instances in which items were unnecessarily repaired or SomeUnrequired purchased after SPCCwas notified that the items were being replaced or Stock Can Be phased out. In those instances, SPCC’Sinventory records did not identify M inim ized the items being replaced or phased out. Furthermore. the Navy informs SPCCof systems being replaced informally, rather than through a sys- tematic procedure. Contracting for Items We found three instances in which repair or procurement contracts for items being phased out or replaced resulted in unrequired inventory. For Eking Phased Out or example, SPCC officials told us that they were informed in the earl) Replaced 1980s that a radar unit that used a preregulator assembly was being replaced. (The officials could not provide a more accurate time for the notification because records were not available and the current item manager assumed responsibility for the assembly in *June 198.5.) In August 1985, SPCCcontracted for 21 of the assemblies. Based on the item’s lead time. we estimate that the contract was initiated in .January 1985. As of March 1988, WCC had 29 of the assemblies, valued at S 1.ZiO each, in its inventory. Twenty-two of the assemblies were unrequired. SPCCassigns computer codes to items to identify restrictions that may apply when purchasing an item. The codes assigned to the three items did not restrict procurements. WCC officials explained that items lvhich are being phased out or replaced on selected ships cannot be coded to prevent procurement because SPCC must continue to support ships that still use the item. We agree that codes should not prohibit the purchase of items being phased out or replaced, but believe that such procure- ments should be carefully reviewed. Inventory records could be coded to alert item managers to items being replaced or phased out and to expect decreasing demands. Obsolete Item Purchased We also found an instance in which an obsolete item was purchased The Navy had nine power transformers used on a sonar system. Eight of the transformers are unrequired. In April 1985, SPCCwas notified that the Page 23 GAO/NSlAD-SO-111 Defense III\ rntory Chapter 3 Ug. . . . the Acquisition of Unrequired Inventory transformers were obsolete and were being replaced. In November 1985. SKC contracted for three of the transformers at a cost of $936. Based on the item’s leadtime, we estimate that SKC began contract procedures in April 1985. According to the item manager, the contract was not subse- quently terminated because it was too far along. Because SPCC had been notified that the item was obsolete before the contract would have been issued, we believe that the contracting effort should have been stopped and the contract not issued. SPCC Not Formally The Navy has no formal procedures to notify spcc of items being replaced or phased out. While attempting to determine when spcc Notified of Item learned that items were being replaced, we found that program support Replacements data’ did not provide information on systems being replaced. A branch manager said that the hardware systems command program managers for new and old systems are not always the same people. He explained that because SEC item managers do not know that a replaced item’s demand will decrease, they treat demand decreases as aberrations. He said that continued support under such conditions results in ordering unrequired items. A Naval Supply Systems Command (the command responsible for pro- gram support data instructions) official agreed that program support data does not notify item managers of systems being replaced. The offi- cial stated that item managers at the inventory control points and pro- gram managers at the hardware systems commands communicate frequently. This informal communication helps to ensure that item man- agers are notified of a system’s replacements. We recognize that there may be frequent communication between item and program managers. However, because of turnover in item managers, we believe that a for- mal system to inform SEC of systems being phased out or replaced would help minimize unrequired inventory. Although some of the Navy’s unrequired inventory may be an unavoida- Conclusions ble result of its fleet modernization efforts, we believe that steps can be taken to minimize unrequired inventory. We believe that systematic and timely information on the replacement and phase out of items is essen- tial for item managers to efficiently manage inventory items and to keep unrequired stock to a minimum. Using codes to identify items to be ‘Program support data are documents provided by hardware systems commands to Inventor! cIIntro points. The documents provide tnformation on the installation of new weapons systems Page 24 GAO/NSIALMO-111Defense In%entory Chapter 3 lb&hi&g the Acquisition of Lhmqulred Inventory phased out or replaced would help to ensure that item managers are aware that items are being replaced or phased out and that demands may decrease. Additionally, acquisition efforts for replaced items can be abandoned to avoid the purchase of unneeded items, especially when the contracts are not yet issued. We recommend that the Secretary of Defense direct the Secretary of the Recommendation Navy to establish procedures to inform inventory control points about systems being phased out or replaced, require inventory records be coded to identify the items, and ensure that purchases of such items are made only for immediate needs. DOD concurred with our findings and recommendation. DOD said that pro- Agency Comments and cedures will be put in place to ensure continuity of program information Our Evaluation on declining and inactive equipment and systems between hardware sys- tems commands and inventory control points. The Department noted that the Navy’s automated data processing modernization will provide information on events affecting items. We agree with the Department’s overall approach to solving problems associated with systems and equipment being phased out or replaced. However, because the timeframe for the automated data processing modernization is uncertain, we believe that the Navy should use its cur- rent system to identify such items. One possible approach would be to use a specific acquisition advice code to identify items being phased out or replaced. Page 25 GAO/NSIAD8@111Defense lnvrntory Chapter 1 Inactive Items Contribute to Unnecessary Storage Costs In identifying the causes of unrequired inventory, we noted that most items in our sample were generally inactive. We estimate that about $2.1 billion worth of unrequired inventory is inactive and of questionable value to the Navy. The Navy stores and manages unrequired items in the hope that some will eventually be used. However, we believe that the Savy is needlessly using valuable resources to manage and store items of questionable value that may never be used. We identified 57 items that did not meet all criteria for being considered inactive, but which we believe may be of little use to the Navy. We ques- tion the items’ usefulness because they had no users, no demands in the past 2 years; no forecast demands, or were being replaced or phased out or were used on equipment being replaced or phased out. Analysis of each item is a prerequisite to a decision to eliminate an item. However, we believe that requiring items to meet all four program criteria before they are evaluated for elimination from the inventory is too restrictive because many inactive items are not being considered. Also, we estimate that about 30,600 of the 183,000 items with unre- quired inventory meet criteria for being classified inactive and should be evaluated for elimination from the inventory. The Navy’s annual reviews to eliminate items are not keeping up with the workload--srTcc’s last review eliminated less than 5 percent of the estimate, and a special project eliminated another 10 percent. DOD established the defense inactive item program to eliminate nones- The Defense Inactive sential expenditures by purging inactive items from its supply system. Item Program According to DOD Directive 4140.32, inactive items are items for which no current or future requirements are recognized by users or item mana- gers. Using DOD’S specific criteria, SPCCidentifies items as inactive when they have been on the master data file for 7 years, had no demand in the last 2 years, no current requirements, and no current applications. SF&S inactive item program objective is to dispose and decatalog the maximum number of inactive items possible while retaining only Ittbms with known current or future applications or requirements. SF(‘(’ stresses that item managers should not rely on file data alone to .JII~~~fc retaining or decatologing an item. For example, file data may indlcxt t’ Page 26 GAO/NSUD4JO-111Deft-n.* In\rntor~ Chapter 4 Inactive Items Contribute to Umecessary Storage Costs that an item has a valid application when the item has, in fact, been obsolete for years. We identified 57 items that did not meet all criteria for being considered Many Items Have inactive for elimination, but had characteristics that indicate little Little Potential for potential for future use by the Navy. For example, Future Use . 15 items did not have users, . 45 items had no demands in the past 2- or 5-year period, . 33 items had no forecasted demands, and . 38 of the items with unrequired inventory had no information available to identify why the inventory was unrequired. Because information was lacking on the items, we believe they warrant further review to deter- mine if they represent valid assets. Thirty-two of the items fell into at least 3 of the above categories. ( A detailed listing of the 57 items is provided in appendix III.) Nine of the 57 items had applications, but no users. The applications (uses for the items) appear to be invalid without users (ships or shore activities that use the item). The items also had no demands in the past 2 years and had been in the inventory for more than 7 years. For exam- ple, inventory records for an electric engine drive showed that the item had been in the inventory since 1952, had no demands during the past 5 years, and had no demands forecast. The item manager stated he could not explain why the item had unrequired stock. In addition, 12 of the 57 items were being replaced or phased out or were used on systems being replaced or phased out. For example. the Navy had 65 circuit card assemblies used on a sonar that was being replaced. Although inventory records showed that the circuit card had applications and users, the item manager stated that the card had no other use and was being scrapped. We estimate that about $2.3 billion (about 109,600 of the 183,0(H) Items) of unrequired items should be considered for deletion from the mvrn- tory rather than being retained for future t~se.~ ‘We computedthe estimatesat the g&percentlevel of statistical confidence.That IS.wr .UT A IN- cent certain that the true numberof items which could be consideredto be inactive 1s&I UITT + N)oO and 130.300items and that their value is between$1.3 billion and $3.3 billion. Page 27 GAO/NSIAD!BO-111 Drfrnv In\-ntory chapter 4 Inactive Items Contribute to U~leeessvy Storage Costa Using the Navy’s criteria for classifying items as inactive, we evaluated Inactive Items Are the 100 sample items and found that 11 of the items met the criteria for Slowly Removed From bemg . classified inactive for elimination from the inventory. We estimate the Inventory that about 30,600’ of the 183,000 items with unrequired inventory would meet the Navy’s criteria. As a result of our initial discussions with item managers, the managers eliminated two of the items from the inventory. We subsequently fol- lowed up on the other nine items that met the criteria and found that three of them were not being considered for elimination. Item managers agreed that the items should be deleted, but could not explain why the items had not been. For the other six items, we found that three were being eliminated, and that three had been referred to other commands for review as the initial step in the process. SPCCreviews items for elimination under the defense inactive item pro- gram once a year after the September stratification. According to an SPCCofficial, 1,428 items valued at about $29 million were eliminated as a result of their last review. Efforts to Delete Items In 1985, the Combat Systems Department at SPCXinitiated a program in its Major Caliber Gun Branch to reduce the number of items without designated uses. The branch identified approximately 13,000 items with no applications. These ordinance items had been transferred to SPCC’S control when SPCCassumed responsibility for items previously managed by the Ordnance Supply Office. SFVCasked the Naval Ordnance Station, Louisville, Kentucky, to determine if the items had specific uses. In December 1986, the Ordnance Station said that it would take 13 to 14 staff years of intensive labor and would cost approximately $500,000 to review the 13,000 items. The Ordnance Station proposed verifying des- ignated uses for items with on-hand inventory. It also proposed that SPCCeliminate those items that had no stock on hand. To ensure that items supporting active equipment were not eliminated, SPCCproposed a program to reduce the number of items without desig- nated users in three phases. The first phase involved automatically deleting inactive items without applications. The second involved reviewing and eliminating, as appropriate, other inactive items. The 2Wecomputed the estimates at the 9bpercent level of statistical confidence. That is, we are 95 per- cent certain that the true number of items that would meet criteria for being considered martlve IS between 14,OCQand 47,200 items. Page 2.9 GAO/NSIAB~lll Defense Inventory Chapter I kuwtive Items Contribute to tinnecesary Storage Costs third phase involved reviewing and eliminating active items that meet criteria for consideration. The Naval Sea Systems Command approved the plan in March 1986. As of the end of fiscal year 1988, SPCChad deleted about 3,200 items and the Ordnance Station added applications for 900 additional items. Our loo-item sample included 7 items managed by the Major Caliber Gun Branch. - DOD defines storage costs as the costs incurred for material storage and Cost of Holding the amortized costs of warehouses, and sets the annual storage cost at 1 Inventory percent of the inventory value. We estimate that the storage costs for the 30,600 items that currently meet the Navy’s criteria for being con- sidered for elimination from the inventory and the 109,600 items with little potential for future use is about $24 million a year. SEC officials pointed out that such costs as warehouse depreciation do not represent actual cash outlays and that because of the need to store active inventory, in some cases few additional costs are incurred in hold- ing inactive items. The Navy could minimize its expenses and allow managers to better Conclusions manage active items by deleting inactive items. Although DOD defines inactive items as those with no recognized current or future require- ments, specific DOD and SEC criteria appear to be more restrictive. SKC guidance and our analysis indicate that requiring items to meet all four criteria before being considered for elimination does not recognize the possibility of inaccurate or incomplete data. Thus, the criteria prevent unneeded items from being considered for elimination from the inventory. In addition, the Navy’s current approach is not adequately deleting inac- tive items. The Navy’s 1988 reviews eliminated items totaling less than 5 percent of the items meeting current criteria for consideration. and only 1 percent of those that we believe should be considered. We sup- port continuing and strengthening the annual reviews. However, we also believe that a systematic approach for priority areas, such as is being used in the Major Caliber Gun Branch, is also needed. Page 29 GAO/NSL4D9O-111Defense inventory Chapter 4 Inactive Items Contribute to Unnecessary Storage Costs We recommend that the Secretary of Defense expand the defense inac- Recommendations tive item program criteria to allow classifying items as inactive so that more items with little potential for future use can be evaluated. We also recommend that the Secretary of Defense direct the Secretary of the Kavy to begin systematically identifying and evaluating all inactive ship and submarine items, and to eliminate those with no potential for future use. DOD concurred with our recommendations and said that expansion of the Agency Comments defense inactive item program would be discussed at the next quarterly meeting between DOD and the services. DOD also has authorized a pilot program which will allow more flexibility for the Navy to dispose of unneeded items. Page30 GAO/NSIMMO-111 Defense In\rntory . Page 31 GAO/NSIAMO-111 Defense Inventory Appendix I Types of Requirements Used in the Stratification Process I. Required stock Approved force acquisition objective __--.~ Preposrtroned war reserve. War reserves are stocks that are stored In oeacetime to protectable satisfy increased wartrme consumptron They are Intended to sustarn operatrons until resupply takes place These Items are funded Other acqursrtron war reserve. War reserves In addrtron to the preposrtroneb war reserves protectable which are also funded. bue-out Material reqursitroned by actlvltlesthat IS not avaIlable for issue. but IS recorded as a commrtment for issue or for purchase for direct delivery Memo future Issue ReCurrlnq and nonrecurrtnq demands forecasted for the requirements - current year remainder of the current year Memo future issue ReCUrrIng and nonrecurring demands forecasted for the requirements -apportionment apportronment year year Memo future issue Recurring and nonrecurnng demands forecasted for the requirements - budget year budget year. Safety level Stock on hand to permit contrnued operatron tn tne event of minor interruption of normal replenishment or unpredrc!able fluctuation rn demand Numeric stockage obtectrve Items that have intermrttent demands, but because of essentrality of the items, unavailability of the Items IS unacceptable Repair cycle Inventory required to satisfy demands from the trme an Item IS received for repair until the trme It IS returned reao/ for issue. Admrnrstratrve lead time Inventory needed to satisfy demands between the !sme a procurement action IS rnrtrated and a contract IS atiaraed Production lead time Inventory used to satisfy demands between the time a contract IS placed and the time the ftrst Items are rece,,ded under the contract. Procurement cycle Stock that may be on hand or on order to cover !he ce:*od between purchases. Balance approved force Requirements needed to provrded for a total Issue oer od of acqursrtron obfectrve 24 months. Balance. prepositioned war The unfunded balance of the preposrtroned war reser.e reserve Balance, other preposrtroned The unfunded balance of the other prepositroned nar war reserve reserve. Approved force retention The quantity of an Item, In addition to the approveg ‘;‘:e stock acqursrtion obfectrve, required to equip and su~pcr* approved forces from the time war begins until pr: : , * on equals the Item’s demand. ’ . -ded) Page 32 Appendix I Type8 of RequirementaUeedin the Stratification Process II. Unrequired stock Economic retention stock Stock that has no requirement and normally would be potential excess. However, DOD has determlned that tt IS more economlcal to retain the stock for future peacetlme use instead of SatlSfylng possible future needs through orocurement. -___ Contingency retention Stock that has no oredlctable demand or auantlflable stock - - requirement and normally would be In the Potential Excess category. However, DOD has decided to retain the stock for possible future needs. Numeric retention stock Stock for which disposal IS currently InfeasIble or uneconomical, and management has decided to retain It In the supply system. P8ge 33 GAO/NSLAMO-111Defense Inventory Appendix II ReasonsWhy Sample Items Had Unrequired Stock National stock number ~ __. Item name Reason for unrequired stock I.%equirement changes 4730012337914 Pope elbow Planned program requrrements drd not materlaltze 5905012583670 Resrstor assembly The system usrng the item IS no! yet rn use 4470005225505 Seal ring, nuclear Demands changed canopy i356011579433 Housing seal Planned program requrrements drd not matenalrze. 4330010420950 Falter, flurd Planned program requrrements did not matenalrze 5840011725836 Amplrfrer The Item replacement factor was overstated -___- 1440006248219 Amplrfrer The Item replacement factor was overstated 5840004692557 Electronrc component Planned program requirements dtd not materialrze --__ 4620009159333 Valve gate The Item replacement factor was overstated. .~-___- 5840012282252 Amplifier switch Planned program requirements did riot materialize 4320009104544 Rotor assembly, Planned program requirements did not compressor materialize. 5845LLQ762127 Machine screw The system usrng the Item IS not yet In use 5365011881252 Plus, machrne thread Demands chanaed 5999012431717 Crrcurt card assembly Demands changed __~ 5640010441978 Insulation pope cover Demands changed 1440010227260 Crrcurt card assembly Demands and/or planned program requirements did not matenalrze 4820005424825 Stem, valve Demands and/or planned program requrrements drd not matenallze 5845004611945 Crrcurt card assembly Demands and/or planned program requirements drd not matenalrze 4320011696912 Impeller, pump, Demands and/or planned program centrifugal requrrements did not matenallze II. Fleet modernization 1260000268225 Disk Shops usinq the item were deactivated 6110003518707 Starter, motor The item or equipment that used the Item was replaced or IS being phased out 6130010226830 Power supply The item or equipment that used the item was replaced or IS being phased out 5845010188505 Crrcurt card assembly The Item or equrpment that used the Item was replaced or IS berna- phased out 6605001108594 Circuit card assembly The Item or equrpment that used the Item was replaced or IS being phased out Icontinued Page 34 GAO/NSIALMO-111Defense Inventory Appendix II seasons Why Sample Items Had Unrequired Stock t44~br$ stock Item name Reason for unrequired stock 5840005674556 Preregulator The Item or equipment that used the tterr assembly was replaced or IS being phasea out 1285010392576 Switch, waveguide The item or equipment that used the Item was replaced or s bejng phased out 5935010884043 Connector, plug, The Item or equipment thal usea the Item electric was replaced or IS being phased out 5845002840604 Sonar set The Item or equipment that used the Item subassembly was replaced or IS being phased out 6125008969607 Motor-generator The ttem or equipment that used the Item was replaced or IS being phasea out 1285006511612 Mount, radar antenna Ships using the Item were deactivated 5865001404415 Power supply The Item or equipment that used the Item was replaced or IS being ___- phased.~~out ~~ _~ _~ 1020003800898 Houslng and valve Ships using the rtem were deactivated block 6605010501325 Compass, gyro The Item or equipment that used the Item was replaced or IS being phased out 6130010931407 Power supply The ttem or equipment that used the Item was replaced or IS being phased out 5840005647959 Shaft The Item or equipment that used the Item was replaced or IS being phased out 5355001571144 Dial, scale Application removed or stock number inlas canceled. 5999008362944 Electronic component Application removed or stock number aas canceled. 5950009853226 Power transformer The item or equipment that used the item was replaced or IS being phased out 5845010629031 Circuit card assembly Item was replaced. but can be upgraaed 1440010299764 Circuit card assembly Item was replaced, but can be upgraded 1355008325696 Torpedo depth The Item or equipment that used the Item adjustment wrench was replaced or IS being phased out 6605009733978 Periscope, optlcal Application removed or stock number aas canceled ‘Ill. Other causes 6625010928549 Dial MInImum order value was procurea 5845LLQ775495 Anchor shackle Purchases were for more than authorized amount. 5845010629509 Circuit card assembly Item IS not In unrequired category 5840004566233 Magnet, centering Wrong item was purchased IV. Reason unknown 3040003200996 Gear shaft, spur 1265003822727 Lever 5315002519350 Pin tapered, plain -. 5962011101612 Unknown 1045001302855 Clutch fork ,c;D’ rued‘i Page 35 GAO/NSL4D-SO-111 Defense In\*ntory Appendix II Rea.9011~Why Sample Items Had Unrequired Stock Micb;l stock Item name Reason for unrequired stock 2920003340317 Electnc engrne drive 5840005514463 Observatron wrndow 2010007837747 Couplrng, qull, shaft 4470008966395 Tool, cnmp 1285009317160 Crrcurt card assembly 4935010799561 Circurt card assembly 6105007997989 Motor, alternatmg current 5820001100523 Key adapter -. 5307009444412 Stud, contrnuous threaded 4320008883233 Impeller, pump, center ~-~ ~~~ ~~~--~ 1045005870119 Roller, torpedo hand 1360002103164 Depth setttng mechanrsm 6110004072937 Reactor. assembly 4320001035589 Rotor, pump 5815007893750 Communication patching panel 1285005031726 Radar set 6115006865115 Generator set, steam 1210003815407 Shaft 1020001769878 Plate 6605003898669 Actuator, switch. adaptor 5840&X3441214 Grip assembly 5305012063451 Screw, cap, socket, hex 2835010942653 Handle 5845LLQ722839 Indicator beanna 5845LLQ721923 Connector 4820003806623 Valve, check 6210004125883 Light, indicator 5845007846987 Roller assembly 2825002673716 Blading set, turbine 6930010985683 Circuit card assembly 3020000456082 Gear, spur 5985004456480 Attenuator, fixed 1220006554754 Mirror, glass 5961006998467 Semiconductor devrce 5930012432285 Switch assembly ,---’ _vs - ,ed) Page 36 Appendix II ReasonsWhy Sample items Had Um-equiredStock $~;tio~l stock Item name Reason for __~--~ unrequired stock 3120007721989 Bearing, sleeve 1005001761558 Pin 5810001609267 Printed wlnng assembly 2825008638056 Nozzle diaphragm turbine 4520006187393 Seal plates 1925LLQ755862 Valve, solenoid 7050003272979 Demodulator, phase sensitive 1440007560597 Marn chassis 1355010292538 Circuit card assembly 6150010292481 Cable assemblv. special ’ 5930010395286 Switch assembly. wire 3010003010241 Coupling shaft, ngld 58650 102484 13 Converter, frequency 5845LLQO 10608 Spnnq and handle Page 37 GAO/NSIAMO-111 Drfrnv Intrntow Appendix III Items That Could Be ConsideredInactive Cause of No quarterly unrequired Item being National stock No demands in demand inventory is replaced/ number Name No users Last 2 years Last 5 years forecast unknown Phased out 6625010928549 Dial X X X X 4730012337914 Pipe elbow X X 3040003200996 Gear shaft spur X X X X __- 1265003822727 Lever X X X X 5315002519350 Ptn tapered. plain X X X X X 1045001302855 Clutch fork X X X X 1260000268225 Disk X X X 2920003340317 Electric engine dnve X X X X X 5845LLOOlfl608 Spring and handle X X X X 1210003815407 Shaft X X X X 6605003898669 Actuator, switch adaptor X X 3 X 5840003441214 Grip assembly X X X X 5305012063451 Screw, cap, socket. hex X X d X 5845LLQ722839 Indicator bearing X X X X x ~- ___~~~~ 5845LLO721923 Connector X X X X X 6210004125883 Light. tndlcator X X X d X 5845007846987 Roller assembly X X X X X 6110003518707 Starter, motor X X X 4935010799561 Clrcurt card assembly X X X X 6105007997989 Motor, alternating current X X X a X 6130010226830 Power supply X X X X X 5307009444412 Stud. continuous threaded X X X X 5950009853226 Power transformer X X X X 2825002673716 Blading set. turbine X X d X 6930010985683 Clrcult card assembly X X X X 3020000456082 Gear, spur X X X X 5985004456480 Attenuator. fixed X X X X 5961006908467 Semiconductor device X X X X 5930012432285 Switch assembly X X 5640010441978 Insulation pipe cover X a 5845010188505 Circuit card assembly X a X 5845LLQ775495 Anchor shackle X X X 6605001108594 Circuit card assembly X X X X 1045005870119 Roller, torpedo hand X X X X 4330010420950 Filter, fluid X X X 3 1360002103164 Depth setting mechanism X X X X 3120007721989 Bearing, sleeve X X X 1005001761558 Pin X X czr’,- .ed\ Page 38 GAO/NSLAD-SO-111 Defenw ln\r~lrory Appendix Ill Items That Could Be ConsideredInactive Cause of No quarterly unrequired Item being National stock No demands in demand inventory is replaced/ number Name No users Last 2 years Last 5 years forecast unknown phased out 2825008638056 Nozzle diaphragm turbine X X 3 X 4520006187393 Seal plates X X X X 1925LL0755862 Valve. solenoid 1440007560597 Main chassis i355010292538 Clrcult card assembly 1355008325696 Torpedo depth adjustment wrench 6150010292481 Cable assembly. special 5935010884043 Connector. DIUQ, electric 5845002840604 Sonar set subassembly X X X d X 6125008969607 Motor-generator d X 6110004072937 Reactor, assembly ~._____ X X a X 4320001035589 Rotor, pump 5815007893750 ;~;e~unicatlon patching X X X 1285005031726 Radar set X X X 1285006511612 Mount, radar antenna X X 6115006865115 Generator set, steam X X X X 5865001404415 Power supply X 6605010501325 Compass, Gvro X X X a X 6130010931407 Power supply 3Th8sItem IS not managed based on demands and therefore has no demand forecast Page 39 GAO/NSIADSO-111Defense1ntrntw-y Appendix IJ CommentsFrom the Department of Defense Note GAO comments supplementing those In the report text appear at the end of this appendix ASSISTANT SECRETARY OF DEFENSE FE0 WAsHINGTON. 0 t *o,o,-8000 (L/SD) Mr. Frank C. Conahan Assistant Comptroller General National Security and International Affairs Division U.S. General Accounting Office Washington, DC 20548 Dear Mr. Conahan: This is the Department of Defense (DOD) response to the General Accounting Office (GAO) Draft Report, "DEFENSE INVENTORY: Growth in Navy Ship and Sukanarine Patis," Dated January 5, 1990 (GAO Code 391619), OSD Case 8216. The Department concurs with the GAO findings and recommendations. As discussed in the enclosure, the DOD is making progress in reducing inventory growth, but recognizes that further improvements are needed. The Department has an aggressive program underway for reducing unnecessary inventory growth. The Department has authorized a pilot program to execute a revised retention policy which has been initiated by the Naval Supply Systems Command. In addition, the Navy has initiated Automated Data Processing modernization to provide more accurate, complete and timely historical data for decisions. The Department and the Military Services will discuss, at their next quarterly meeting, improvements to the Defense Inactive Item Program. The detailed DoD conments on the report findings and recommndations are provided in the enclosure. Several additional technical comnents were prwided separately to the GAO. The Department appreciates the opportunity to ccmmnt on the draft report. Sincerely, AiL+L. David J. Berteau Principal Deputy Enclosure Page40 GAO/NSIADM-111 Ikfrcu Inwntory Appendix lV CommentsFrom the Department of Defense CK) DPAIT RtpORT -DATED Janusry 5, 1990 (GAD CODI 391619) 08D CASt 8216 PINDING . -A: Gtowth. The GAO found that, between 1980 and 1988, the overall value of the DOD secondary inventory grew from about 543 Billion to about $103 billion--an increase of about 138 percent. According to the GAO, the value of ship and submarine parts increased 56.6 billion, or 244 percent, during this period. The GAO also found that about $3.7 billion, or about 40 percent of the Navy inventory of ship and submarine parts in 1988, was in unrequired stocks--an increase of about 226 percent since 1980. The GAO observed that the Navy Supply Systems Comand administers the overall Navy supply system, while the Navy Ships Parts Control Center is the control point primarily responsible for the ship Now on pp 2-3. 8-10 and subauarine inventory. (pp. 2-3, pp. 11-14/GAO Draft Report) ppp RMPONSE: Concur. It should also be recognized, however, See comment 1 that a significant portion of the increase can also be accounted for by price indexing, which created artificial growth in the inventory. There are significant price differences when comparing the FY 1980 inventory value with FY 1988. . lIHoTNG: e ror SAID And on- *n-to=. To assess the causes for umeguired parts in the inventory, the GAO sampled 100 items having unrequired stock listed on the Ships Parts Control Center inventory report as of March 31, 1988. The GAO was able to identify reasons why 45 of the items had unrequired inventory. According to the GAO, the two most comnon reasons were that (1) requirements changed or did not materialize (in 19 cases), and (2) items were replaced, phased out, or ships deactivated as part of fleet modernization efforts (in 23 cases). Of the 19 items where requirements changed, the GAO found that delayed or canceled planned program requirements contributed to the uxarequired inventory in ten cases. The GAO also found that (1) the demands for the items decreased in four instances, (2) ENCLOSURE Page41 GAO/NSIAlMO-111 DefemseInventory Appendix Iv Comments FromtheLkpartmentof Defense - the replacement factor was overestimated for three of the Items, and (3) In two cases the inventory included on-order items for systems not yet operational. Based on its sample results, the GAO estimated that the change in requirements caused about $900 million of listed items to bs unrequired. The GAO also found that 17 of the 23 items associated with fleet modernization involved instances where the equipment that used the items was being phased out or replaced. In addition, the GAO found that three of the items were unrequired because the ships that used the items were deactivated, while three other items were unrequired because they had not been eliminated from the inventory after equipment they supported was removed or the stock number canceled. The GAO estimated that overall, about $1.7 billion of the listed items were unrequired as a result of fleet modernization efforts. In addition, the GAO found that (1) complying with minimum order value purchase requirements, (2) buying above the authorized quantity, and (3) buying the wrong item were the causes of unrequired inventory for the other 3 cases. (P. 3, p. 5, pp. Now on pp 2-3, 13-17 17-23/GAO Draft Report) pOD MSPCNSt: Concur. The Navy has been taking significant steps in its attempts to understand the underlying causes of the "unrequired" items in inventory, and to improve the requirements determination and acquisition processes to minimize the possibility of procuring such material in the future. To this end, a Navy study of the top 50 line items for ship and submarine repairables and consumables was conducted after the March 1989 Secondary Item Stratification. This study included repairable items with $297.5 million of value on hand in an "unrequired" See comment 2 (i.e. inapplicable to the Budget Year requirement) status, and $70.8 million of consumable items. Of the repairables, 39 line items had inapplicable assets, due to weapon system modifications and program decline. Total value was $230.3 million, or 77.4 parcent of the value in the sample. Nine repairable line items, with assets worth $60.4 million (20.3 percent of the sample), were identified as resulting from unforecasted demand decreases, including itams which had reduced demand due to reliability improvements. 2 Page 42 GAO/NSLAMtO-111Defense Inventory Appendix Iv CommentsFrom the Department of Defense On hand assets included items that were originally procured and installed on ship, but which were subsequently placed in the supply system after removal from the weapon platform. Examples of these include 538 million in assets from the AN/ULQ-6 electronic warfare system, which was replaced by the AN/SW32; $29.9 million for the AN/SAC-20 UHF radio, which was the standard shipboard UHF radio from 1960 through 1980 before being replaced; and $28.3 million for the Mark 46 Torpedo, which has undergone a number of modifications/upgrades. The same two reasons dominated the shipboard consumables, but in the reverse order. Twenty-nine line items, worth $43.1 million (60.9 percent of the consumable sample value), were due to unforecasted demand decreases and reliability improvements, and 17 line items, worth $26.6 million (37.6 percent) were due to weapon system modifications and program decline. To provide additional perspective on the meaning and magnitude of these numbers, three other points need to be kept in mind. . It is Navy policy that equipment removed from ships, including supporting spares, be turned over to the supply system. This ensures the visibility and potential utilization of these items. . There has been a conservative disposal policy in effect since 1984, so the large number items removed from ships during the Fleet Modernization Program remained in the supply system, slowly building the inventory value. Returned material frequently stratifies as "unreguired" because the demand for it drops as part of the action that returned it to the supply system. It was required before its return. . The price increases from 1980 to 1988, discussed in FINDING A, inflated the %ook value" of items, even if they really had little further use to the service. . -ING C: w Why e Stock Could Not 8, au. The GAO reported that it could not determine why 54 of the 100 items it sampled, valued at S8.5 million, had unrequired stock. Overall, the GAO estimated that reasons for unrequired inventory could not be identified for about $1.2 billion of the items listed with unrequired inventory. The GAO 3 Page 43 GAO/NSIAlHO-111 Lkftwse In\rntory Appendix lT CommentsFrom the Department of Defense observed that one reason it was unable to make the determination is that justification documents are not retained after the material is received. The GAO explained that supporting documentation provides needed information, such as past and forecasted demands, lead time, and users. The GAO found that under current Navy policies, documentation supporting purchases are not required to be retained after the material is received--because of the large volume of paper involved. The GAO noted, however, that the Navy Uniform Inventory Control Program, presently being updated, will provide an archive file for retaining information used to make procurement decisions. The GAO also found that many item managers were not familiar with the item for which they had responsibility. The GAO reported that it interviewed item managers 5 to 0 months after the date of the 1988 inventory report used for its sample and found that for 13 of the 54 items, responsibility for the items had already changed. In addition, the GAO found that for 18 other items, item managers had been responsible for the items for less than 2 years. The GAO concluded that as a result, information is not available to identify the basis for past purchases or to identify events causing items to have unrequired inventory. The GAO observed that such lack of information can hinder item managers in that they are not aware of (1) why items were purchased, (2) why the items have unrequired inventory, or even (3) why the items are being retained. The GAO concluded that having such information could help item managers to recognize causal factors and thus minimize the purchase of items that could become unneeded--and would also help them to decide which items should how on pp 2-4 18-19 be retained. (p. 3, pp. 5-6, pp. 23-25/CAO Draft Report) po0 RCSPCME: Concur. The Navy will correct the problem of insufficient summary data on major items showing the basis for each item's most recent procurement and events affecting the item through Automated Data Processing modernization efforts currently underway. Resystemiration of the Inventory Control Points will provide the capability to record in an historical data base, a snapshot of all the pertinent information on an item at certain key events, including those times when a recommendation for a buy has been initiated. The data base will include all information which led the inventory model to reconmrend a buy, as Well as any manual intervention made by the item manager. The current plan calls for implementation of the modernized system in FY 1994. See comment 3 The actual implementation date of this system is uncertain at Page 44 GAOiNSIAIHO-111 Defrnw In\rr~toq Appendix TV CommentsFrom the Department of Defense - this time, however, due to recently proposed DOD funding reductions. The Navy will also explore the feasibility of implementing an interim manual system for retaining this information by FY 1991. (See also the DOD response to Reconunendation 1.) . FINDING 0: Naw EffOti8 TO Minimize Onnuuired Stocks. The ~0 explained that some unreguired inventory may be the unavoidable result of fleet modernization activities. To control unnecessary growth, the GAO found that the Navy initiated an inventory management improvement program in January 1989, with an objective to develop an approach for controlling factors contributing to growth in the secondary item inventory. The GAO reported that the Navy has undertaken initiatives in 73 areas to control inventory growth, including-- (1) the review of economic order quantity policies,. (2) minimizing reliance on purchases to last the life of equipment, (3) ensuring that all such buys are fully justified, and (4) developing a comprehensive effort to review planned program requirements. The GAO further reported that the Ships Parts Control Center, in addition to its own efforts, is participating in about half of the Navy inventory management improvement initiatives, such as the periodic review of selected items that have unneeded stock on order above requirements--and has also designated a project officer to form and chair a working group to reduce purchase requests and contracts for unrequired Nowon pp 4 21.22 inventory. (p. 6, pp. 26-2S/GAO Draft Report) DOD RESPONSt: Concur. The Navy’s Inventory Management Improvement Program is a formally structured program monitored by semi-annual flag level summits. The Inventory Management Improvement Program continues to make significant progress in identifying problems in inventory management and process improvements to overcome those problems. A second sununit meeting was held August 28, 1989, and the next is scheduled to be held In April 1990. At each meeting, senior officers review problems and progress in different functional areas. These areas include new item entry through the provisioning process, determining requirements for inventory levels and replenishment, reduction of procurement lead times, timely termination of contracts, and disposal of items no longer needed. Ships Parts Control Center personnel have actively worked in the Inventory Management Improvement Program, and they have been leading the way by developing their own initiatives for 5 Page46 GAO/NSIAD-SO-111 Defrnhr In\rntoq Appendix IV CommentsFromtheDepartmentof Defense identifying items that support declining programs and eliminate material procurements in support of those programs. They have established a Ships Decommissioning Project to identify items applicable to ships being removed from active service within the procurement horizon. Items unique to those ships have their requirements eliminated, and common items have demand forecasts reduced. Affected items are then reviewed to identify opportunities to delay or cancel procurement requests, or to terminate contracts for material already on order. With regard to contract terminations, the Ships Parts Control Center has started a number of management initiatives to ensure more accurate identification of termination candidates and more timely processing after they are identified. These include development of standardized item manager procedures and training and establishment of a "Tiger Team" to expedite review and develop a tracking system to monitor termination with the goal of being better able to project good termination candidates and costs up front, thereby maximizing the potential success of termination efforts. This system was instrumental in enabling Ships Parts Control Center to process more than $106 million in potential terminations in FY 1989. . m: g. The GAO identified instances where items were unnecessarily repaired or purchased after the Ships Parts Control Center was notified the items were being replaced or phased out, resulting in unreguired inventory. The GAO found that, although the Center assigns computer codes to items to identify restrictions that may apply when purchasing an item, the codes did not restrict procurements for the instances it found. The GAO reported that Center officials explained that items being phased out or replaced on selected ships cannot be coded to prevent procurement, because the Center must continue to support ships that still use them. The GAO agreed that codes should not prohibit the purchase of items being phased out or replaced, but observed that such procurements should be carefully reviewed. The GAO also cited one instance where the purchase was finalized after the inventory control point was notified the item was obsolete. The GAO concluded that terminating that effort before the contract was finalized could have avoided the acquisition of unneeded inventory. 6 Page 46 GAO/NSIAIMO-111DefenseIn\rntory ,4ppendix IV Comments From the Department of Defense According to the GAO, the Navy has no formal procedures to notify the Ships Parts Control Center of items being replaced or phased out. Instead, the GAO found that the Navy relies on informal connnunication between item managers at the inventory control points and program mangers at the hardware systems commands. The GAO acknowledged that there may be frequent communication between item and program managers. The GAO concluded, however, that because of turnover in item managers, a formal system to inform the Ships Parts Control Center of systems being phased out or replaced would help minimize unreguired inventory. The GAO also concluded that using codes to identify items to be phased out or replaced would help increase item manager awareness that demands may decrease. The GAO further concluded that acquisition efforts for replaced items should be abandoned to avoid the purchase of unneeded items, especially when the contracts are not yet issued. Now on pp 2-5, 23-24 (pp. 3-4, pp. 6-7, pp. 29-31/GAO Draft Repoti) poD WSPONSE: Concur. The Navy does not knowingly procure material above requirements for items being replaced or phased out. There undoubtedly are cases where material was procured, when, in retrospect, it should not have been. Item managers have been sensitized to the need for close scrutiny of planned procurements in this regard. Current Navy resystemization plans include a significant enhancement to configuration and program changes which are initiated by Design Change Notices. These enhancements are currently scheduled to be available in 1994. These automated tools do not obviate the need for close comnunication between See comment 3 inventory and program managers. Ships Parts Control Center has proven procedures in place to adjust demand forecasts as well as procurements that are affected by ship and suknarine decosnnisionings. Naval Supply Systems Cossnand Instruction 4420.36, "Program Support Data for Interim, Initial and Follow-Up Secondary Item Requirements, '1 effectively applies to new and growing programs. The instruction requires program data submission for configuration alterations as well as new equipment and systems. Replacement items can be identified for alterations when program support data is coordinated with Design Change Notices. Additional guidance will be developed for decreasing equipment and systems not directly associated with alterations. The Naval 7 Page47 GAO,'NSIADSO-111lkfrnw III\W:~II-J AppendixN CommentsFromthe Departmentof Defense Supply Systems Command will coordinate actions with the Hardware Systems Conunands to establish formal requirements to identify decreasing programs in Naval Supply Systems Cosnnand Instruction 4420.36, as well as continuing efforts to improve cosununications on program and configuration data in general. Initial guidance will be developed by October 1990. (See also the DOD response to Recosnnendation 2.) . -I: w m-m --m Lit+&9 -. The GAO explained that the DOD established the Defense Inactive Program to eliminate nonessential expenditures by purging inactive items from its supply system. According to the GAO, the Ships Parts Control Center identifies items as inactive when they have: been on the master data file for 7 years; had no demand in the last 2 years: no current requirements; and no current applications. The GAC further explained that the Center's inactive item program objective is to dispose and decatalog the maximum number of inactive items possible-- while retaining only items with known current or future applications or requirements. In addition, the GAO noted the Center also stresses that item managers should not rely on file data alone to justify retaining or decataloging an item. The GAO pointed out, however, that Center guidance indicates item are to meet all four inactive criteria before being considered for elimination. The G&O identified 57 items in its sample that did not meet all the criteria for being considered inactive for elimination, but had characteristics that indicated little potential for future use. As examples, the GAO pointed out that: (1) 18 items in the sample did not have users, (2) 44 had no demands in the past 2 or 5 year period, (3) 32 had n o f orecasted demands, and (4) 40 had no information available to identify why the inventory was unrequired. The GAO also noted that 33 of the items fell into at least three of these categories. Based on its sample results, the GAO estimated that about 109,600 items of unrequired inventory, valued at about $2.3 billion, is inactive and of 8 Page48 Appendix N Comments From the Department of Defense questionable value to the Navy. The GAO concluded that requiring items to meet all four inactive program criteria before they are evaluated for elimination from the inventory is too restrictive--resulting in many inactive items not being considered for elimination. (p. 3, p. 7, pp. 33-36, p. 3EJ/GAo Now on pp. 2.4.26-27 Draft Report) s: Concur. The DOD concurs with continuing and strengthening Annual Defense Inactive Item Program. The DOD concurs with a review of current inactive item parameters to relax criteria for inactive item review. The DOD and the Military Semites meet on a quarterly basis. At the next quarter1 meeting, scheduled for February 28, 1990, Defense Inactive 7 tam Program improvements will be discussed. . -: zaskim It- Wd slo*lv r= a* I-toe. The GAO evaluated the 100 items it sampled, using the Navy criteria for classifying items as inactive, and found that 11 met the inactive criteria for elimination from the inventory. The GAO reported that (1) item managers subsequently eliminated two of the items from the Inventory, (2) three were in the process of being eliminated, and (3) three had been referred to other c0caaand.s for review. The GAO further reported item managers agreed that the other three items should be deleted and could not explain why they had not been. Based on its sample results, the GAO estimated that about 30,600 of the universe of 163,000 items with unroquired inventory would meet the Navy criteria for elimination. The GAO found that the Ships Parts Control Center reviews items for elimination under the inactive program once a year--after the September stratification process. The GAC reported that as, a result of the 1988 review, the Center eliminated 1,428 items, valued at about $29 million. The GAO also found that, in 1985, the Combat Systems Department at the Center initiated a program to reduce the number of items without designated uses. The GAO reported that, as of the end of BY 1988, about 3,200 of the 13,000 items originally identified for review had been deleted and applications for 900 other items had been added. The GAO concluded that, since the 1988 reviews eliminated less than 5 percent of the items meeting current criteria for consideration and only 1 percent of those the GAC believes should be considered for elimination, the current Navy approach is not adequately deleting inactive items. The GAOfurther concluded that the Page49 GAO/NSIAD9@111Defense Inbrntory Appendix TV Comments Fromthe DepartmentofDefense annual reviews should be continued and strengthened. The GAO also concluded, however, that a systematic approach for prrorlty areas is also needed--such as that being used in the &jor Now on pp 2. 4, 26. 29 Caliber Gun Branch. (p. 4, p. 7, p. 33, pp. 37-38/CAO Draft Report) JJOD WSPONSE: Concur. Annual reviews for inactive items will be continued and strengthened by improved communication of program data on inactive and declining equipmen- and systems. The Navy's approach is to give priority attention to equipment and system rendered inactive by ships and obsolescence. To this end, the DOD and the Military Services met on a quarterly basis. At the next quarterly meeting, scheduled for February 28, 1990, Defense Inactive Item Program improvements will be discussed. . 4IiWDGAH: Isam Storaaa Q2B.U. The GAO reported that the DOD defines storage costs as the costs incurred for material storage and the amortized costs incurred for material storage and the amortized costs of warehouses--and sets the annual storage cost at one percent of the inventory value. Based on its sample results, the GAO estimated that the storage costs for the 30,600 items that currently meet the Navy criteria for being considered for elimination form the inventory (see Finding G), and the 109,600 items with little potential for future use (see Finding F) is about $24 million a year. The GAO noted that Ships Parts Control Center officials pointed out that such costs as warehouse depreciation do not represent actual cash outlays and that, because of the need to store active inventory, in some cases few additional costs are incurred in holding inactive items. The GAO nonetheless concluded, however, that the Navy is needlessly using valuable resources to manageand store items of questionable value that may never be used. (p. 4, p. 7, p. 33, pp. 37-30/GAo Now on pp 2,4.26.29 Draft Report) PpD RIcSPma: Concur. Although cost accounts do not facilitate an exact accounting of the costs incurred by holding inactive Items, there is clearly an impact on total warehousing requirements. The Naval Supply Systems Ccnrman d has initiated a pilot program to execute a revised retention policy. This pllot program has been authorized by Office of the Secretary of Defense. The previous Navy policy required m of all assets with weapon system application, regardless of the quantity of material on hand or the population of the weapons system 10 Page50 GAO/NSL4DSO-111 lkfmv Inrrnton: Appendix N Comments From the Department of Defense supported. This pilot program will allow some flexibility on this particular requirement. The result is that Navy will move a significant amount of the potential excess material to the Defense Reutilization and Marketing Service in the near term. Those assets with potential interest to foreign governments ~~11 be offered to them through the Foreign Military Sales Program. . PtcoEbQMDATIoN a: The GAO recosanended that the Secretary of Defense direct the.Secretary of the Navy to require item managers to retain sunu~ry data on major items showing the basis for each item's most recent procurement and events affecting the item. Nowon pp 5.19 (p. 8, p. 25/GAO Draft Report) DC0 PESPCNa: Concur. The long term solution lies in the Automated Data Processing Modernization efforts currently underway, which will provide the capability and capacity to efficiently achive records for later review. This modernized system is planned for Mlementation in FY 1994. In the interim, the Navy will also explore the feasibility of implementing a manual system for retaining this infonoation by FY 1991. The concern is that an expanded paper archives will create a paperwork.storage and retrieval burden that overwhelms the already crowded work place the item managers must deal with. If possible, an effective %iddle ground” will be established that provides a sufficiently &tailed picture of an item's requirements at the time of purchase to be able to understand why the decision was made, yet will limit the amounts of paper retained and the overhead associated with managing such a system. . -ION 2: The GAO recarsaended that the Secretary of Defense direct the Secretary of the Navy to: (1) establish procedures to infona inventory control points about systems being phased out or replaced, (21 require inventory records be coded to identify the items, and (3) ensure that purchases of such items Nowon pp.525 are made only for bmnztdiate needs. (p. 8, pp. 32-33/-O Draft Report) 11 / L Page5 1 GAO/NSL4D9O-111Defenseinventory Appendix N Comments From the Department of Defense poD RESPONSE: Concur. The Naval Supply Systems Commandwill coordinate action with the Naval Sea Systems Corrunand, as well as other Navy Commands, to improve procedures for comnunlcating program data on declining and inactive equipments and systems. Procedures will be put in place to ensure continuity of information between the Program Support Inventory Control Point and the Program Manager in hardware Systems Conrnand. The Navy will correct the problem of insufficient summary data on major items showing the basis for each item's most recent procurement and events affecting the item through Automated Data Processing modernization efforts currently underway. The current plan calls for implementation of the modernized system in FY 1994. The actual implementation date of this system is uncertain at this time, however, due to recently proposed DOD funding reductions. The Navy will also explore the feasibility of implementing an interim manual system for retaining this information by FY 1991. It is Navy policy to replenish items for imediate needs, with obvious exceptions made for life of type buys and special circumstances where minimum buy quantities apply. To monitor this process, the Ships Parts Control Center has long had a hierarchal review chain that ensures higher dollar value procurements receive the attention they deserve. As part of this review, the most up-to-date program information is obtained to validate an item's requirements before any money is invested in it. . -3: The GM) recoasnended that the Secretary of Defense expand the Defense Inactive Item Program criteria to allow classifying items as inactive so that more items with little potential for future use can be evaluated. (P. 8, pp. Nowon pp 5.30 38-39/G?&) Draft Report) s: Concur. The DOD and the Military Services meet on a quarterly basis. At the next quarterly meeting, scheduled for February 28, 1990, Defense Inactive Item Program improvements will be discussed, including expansion of the Inactive Item Program criteria. . -I: The GAO recamnended that the Secretary of Defense direct the Secretary of the Navy (1) to begin systematically identifying and evaluating all inactive ship and 12 Page52 GAO/NSIADWlll Defense lntentory Appendix N Comments From the Department of Defense submarine items and (2) to eliminate those with no potential for Vow on pp 5 30 future use. (p. 8, p. 39/GAO Draft Report) DOD RX3PONs: Concur. The DOD has authorized a pilot program to execute a revised retention policy, which has been initiated by Naval Supply Systems Comand. The previous Navy policy required retention of all assets with weapon system application. This pilot program will allow some flexibility on this requirwnt. The result is that Navy will move a significant amount of the potential excess material to the Defense Reutilization and Marketing Senrice in the near tern. The action has started and should be completed by FY 1995, with approximately $9 Billion disposed of. 13 Page 53 GAO/NSIAD-90-111Defense Intrntory Appendix N Comments From the Department of Defense The following are GAO’Scomments on DOD’s letter dated February ;>ti. 1990. 1. In our previous report entitle Defense Inventory: Growth m Second- GAO Comments ary Items, (GAO/hSIAD-8&189BR, July 19, 1988), we discuss the \,arious fac- tors that have contributed to the overall inventory growth including price indexing. However, this report focuses on the causes of unrequired inventory. 2. The Navy study corroborates the findings set forth in this report. 3. The timing for the implementation of Resystemization has slipped in the past and in light of the proposed funding reduction may slip beyond the current target date of fiscal year 1994. Therefore, adopting interim measures should be given priority to avoid unnecessary expenditures for unrequired items. Page 54 GAO/NSIADSO-111 Defrnw Inrrntoq Appendix V Major Contributors to This Report -Lr\l.---& ~ssiscanr; mreccor National Security and GUS, ~~~~~~~~ * --‘-L-:wski. Evaluator-in-Charge Internation Affairs Gene H. Dechert, Evaluator Division, Washington, DC. - Daniel R. Garcia, Regional Manager Assistant Philadelphia Regional Donald R. White, Site Senior Office John M. Sabia, Evaluator (391819) Page 55 GAO/NSIALMO-111 Defense Inbrntory Requests for copies of GAO reports should be sent to: U.S. General Accounting Office Post Office Box 6015 Gaithersburg, Maryland 20877 Telephone 202-275-6241 The fh-st five copies of each report are free. Additional copies are $2.00 each. There is a 25”0 discount on orders for 100 or more copies mailed to a single address. Orders must be prepaid by cash or by check or money order made out to the Superintendent of Documents.
Defense Inventory: Growth in Ship and Submarine Parts
Published by the Government Accountability Office on 1990-03-06.
Below is a raw (and likely hideous) rendition of the original report. (PDF)