oversight

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)

               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
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