oversight

Air Force Logistics: Increased Costs for Spare Parts Safety Levels Are Not Justified

Published by the Government Accountability Office on 1990-08-23.

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

.-                   lJllit.rvl   States   General   Accounting   Office            i

GAO                  Itcport to the Chairman, Subcc>mmitt&
                     on Defense, Committee on
                                                                                    :
                     Appropriations, House of
                     k~prwentatives

Arljplst.   l!t!~o
                     AIR FORCE
                     LOGISTICS
                     Increased Costs for
                     Spare Parts Safety
                     Levels Are Not
                     Justified


                                                                           142062




GAO/NSIAI)-W-148
  .
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division

                   B-240044

                   August 23,199O

                   The Honorable John P. Murtha
                   Chairman, Subcommittee on Defense
                   Committee on Appropriations
                   House of Representatives

                   Dear Mr. Chairman:

                   As requested, we examined the Air Force’s justification for and imple-
                   mentation of a new model for computing safety level requirements for
                   aircraft spare parts. The new model, the aircraft availability model, is
                   intended to better relate requirements for safety levels to readiness than
                   the prior model, the variable safety level model. Safety levels are quan-
                   tities of stocks in addition to normal operating requirements. They pro-
                   vide protection against shortages in the event that demands or resupply
                   time are greater than predicted. Safety level stocks comprise a sizeable
                   portion ($5 billion) of the Air Force’s total peacetime requirements for
                   aircraft spare parts.


                   The Air Force needs to (1) reassess the costs resulting from the use of
Results in Brief   the aircraft availability model and (2) establish safety level require-
                   ments based on operational needs. When the Air Force implemented the
                   aircraft availability model in June 1988, it set aircraft availability goals
                   at the highest predicted levels that could be achieved without exceeding
                   costs under the prior model. However, a largely unexplained increase of
                   about $482 million in safety level requirements occurred after the air-
                   craft availability model was implemented. Such an increase in require-
                   ments would generally result in future procurements of parts and
                   increased repair requirements. Although Department of Defense (DOD)
                   officials believe some of this increase in requirements was met by extra
                   stock, the Air Force was not able to document the extent that such stock
                   fulfilled the new requirements.

                   The Air Force’s higher availability goals were not justified by needed
                   increases in mission capable rates, the major measure of operational
                   capabilities. Because the Air Force has reached desired levels of mission
                   capability, we believe that substantial savings are available if require-
                   ments are based on operational needs. Air Force computations show
                   that safety level requirements in fiscal year 1991 can be reduced by
                   about $590 million if the model is reprogrammed with the average air-
                   craft availability goal achieved under the prior model rather than the


                   Page 1                                 GAO/NSIALb90-148   Spare Parts Safety   Levels
             B240044




             higher average aircraft availability goal chosen under the new model.
             Such a reduction in requirements would reduce budgeted procurement
             and repair costs by about $170 million.

             In addition, the Air Force needs to ensure that unneeded procurements
             to fill requirements under the prior model are canceled. When the new
             model was implemented, the Air Logistics Centers continued to purchase
             spare parts using March 1988 computations under the prior model.
             After the Air Force found that an estimated $747 million in parts were
             on order that were not required, the Logistics Centers were directed to
             take actions to avoid unneeded procurements. Reports from the Logis-
             tics Centers indicated that needed cancellation actions were not taken.
             In response to a draft of this report, DOD commented that the Logistics
             Centers, using revised procedures and stricter controls, subsequently
             terminated unneeded buys that resulted from safety level changes or for
             other reasons.


             After several years of study, the Air Force Logistics Command imple-
Background   mented the aircraft availability model in June 1988. The Air Force
             believed the model would better relate requirements to aircraft readi-
             ness than the prior model. The Logistics Command also asserted that
             implementing the model would improve the average aircraft availability
             rate from 66 percent under the prior model to 85 percent, with little or
             no increase in safety level costs. One study predicted no increase in pro-
             curement costs and did not address changes in total requirements,
             whereas a subsequent study used revised factors to predict a decrease
             in expenditures and about a $70 million increase in requirements in the
             budget year.

             The Air Force expected the new model to select a better mix of spare
             parts by identifying those parts that are most essential in keeping air-
             craft operational. The model was designed to weigh the impact of each
             part on operational needs. The prior model (1) concentrated on compo-
             nent parts and the number of times they failed and needed to be
             replaced and (2) generally resulted in more requirements for lower cost,
             high-demand items. The aircraft availability model (1) focuses on avail-
             ability of the entire aircraft and (2) could result in more requirements
             for larger, higher cost end items.




             Page 2                                 GAO/NSIAD-90-149   Spare Parts Safety   Levels
                        The Logistics Command’s prediction that the new model could achieve
Costs Under Model       higher aircraft availability rates at little or no increased costs does not
ExceededPredictions     appear to be valid. After the new model was implemented, safety level
                        requirements increased by about $482 million. This increase occurred
                        from March 1988 to March 1989 when the Air Force’s future projected
                        parts usage decreased by $4 billion, which should have decreased safety
                        level requirements and procurement and repair expenditures.

                        The Air Force had not analyzed the causes for this increase in require-
                        ments or the increase in procurement and repair cost that would result.
                        Air Force officials cited factors other than the model that could have
                        contributed to increased safety level requirements. DOD agreed that
                        safety level requirements increased by $482 million 1 year after the air-
                        craft availability model was implemented and stated that Air Force data
                        showed that $391 million of this increase was due to using the new
                        model. DOD said they believed that some of the increased requirements
                        would be met with extra stock. However, the Air Force has not deter-
                        mined the amount of the increased requirements that would be met
                        through the use of extra parts rather than procurements. Furthermore,
                        even if extra parts were available, many would be unserviceable (i.e.,
                        requiring repair). If all the increased requirements were met through
                        repair of extra stock, the additional one-time repair costs would be
                        about $72 million, based on a standard repair cost at 15 percent of
                        purchase cost.


                        The Air Force’s stated purpose in developing the aircraft availability
Costs ReducedIf         model was to better relate logistics support to operational needs. How-
Availability Is Based   ever, in implementing the model, the Logistics Command appeared to
on Operational Needs    have moved away from the model’s purpose. The command chose a
                        higher level of aircraft availability baaed on prior costs rather than
                        operational needs as reflected by mission capable rates, the primary
                        measure to determine readiness. The mission capable rate is that portion
                        of total time that the aircraft can perform its mission.

                        The new model provides the Air Force with the flexibility to adjust air-
                        craft availability goals, which drive the quantities of spare parts
                        required by l-percent increments, from 0 to 100 percent. However,
                        rather than setting the goals at the level needed to support operational
                        needs at the least cost, the Air Force Logistics Command set the goals
                        based on prior spending. The goals were set at the maximum level that
                        could be achieved when spending the same amount that was spent using
                        the prior model. The Air Force determined that aircraft availability


                        Page 3                                 GAO/N&ID-90-148   Spare Parts Safety   Levels
                                  B-240044




                                  model costs equaled prior model costs when the targets were set to
                                  achieve an average aircraft availability of 85 percent, or about a
                                  30-percent increase over the average aircraft availability of 66 percent
                                  calculated under the prior model.

                                  The aircraft availability rates used in the model are theoretical numbers
                                  that the Air Force cannot and does not plan to measure. The rate for any
                                  specific type of aircraft is essentially the percent of aircraft not missing
                                  designated parts. The calculated rate cannot be directly translated into a
                                  mission capable rate and does not account for activities such as lateral
                                  support and maintenance actions that the Air Force normally uses to
                                  meet operational needs. However, increases in aircraft availability rates
                                  should produce increases in mission capable rates.

                                  The Air Force has reported satisfaction with its ability to perform
                                  needed missions and has neither requested nor justified an increase in
                                  mission capable rates. A senior Air Force official testified in May 1989
                                  before the Subcommittee on Defense, House Committee on Appropria-
                                  tions, that aircraft operational readiness had improved significantly
                                  since 1980 (see fig. 1) and that aircraft mission capable rates looked
                                  exceptionally good.


Figure 1: Mlaslon Capable Rates
                                  90 Poraonl




                                  50

                                  40

                                  30

                                  20

                                  10

                                   0

                                   1950          1991   1992   1993   1994     1995      1999     1967      1998        1999
                                   Fiscal Year




                                  Page 4                                     GAO/NSIAD-90-148   Spare Parta Safety   Levels
                               5240044




                               Because the mission capable rates of the late 1980s were achieved when
                               safety level requirements were equivalent to an aircraft availability rate
                               of 66 percent, this lower rate apparently met the Air Force’s operational
                               needs. We recognize that either increases or decreases to the availability
                               rates for specific aircraft could be needed to satisfy mission capability
                               requirements at the least possible cost. However, if the aircraft availa-
                               bility model is reprogrammed using the rate of 66 percent rather than
                               the rate of 85 percent, we estimate that fiscal year 1991 safety level
                               requirements can be reduced by about $590 million. Such a reduction
                               could reduce fiscal year 1991 budgeted procurement and repair costs by
                               an estimated $95 million and $75 million, respectively. These estimates
                               are based on the Air Force’s latest procurement and repair cost ratios
                               for meeting safety level requirements.


                      Several months after the new model was implemented, the Logistics
Unneeded Parts        Command directed the Air Logistics Centers to evaluate the impact of
Purchased Using Prior the model on its parts purchases. The Logistics Command instructed the
Model                 Logistics Centers to implement the model in June 1988, even though
                      they had made buy decisions for fiscal year 1989 based on requirement
                               computations in March 1988 under the prior model.

                               In December 1988 the Logistics Centers notified the Logistics Command
                               that an estimated $116 million of planned buys and $632 million of
                               recent buys (a total of $747 million) were not needed. The unneeded
                               buys were due to changes in requirements caused by the new model and
                               other changes such as decreased demand. The Logistics Centers’ esti-
                               mates were based on data generated by the automated requirement com-
                               putation system and were not manually validated. Although the
                               Logistics Command instructed the Logistics Centers to avoid and cancel
                               unnecessary purchases, the Air Force was unable to determine whether
                               the unneeded buys were avoided and/or canceled. In response to a
                               Logistics Command request in December 1988, none of the Logistics Cen-
                               ters indicated that they had canceled unneeded buys, and two indicated
                               that they planned to continue using the March 1988 computation for
                               purchasing parts. The Logistics Centers stated that the purchases were
                               too far advanced for changes of such magnitude and that such changes
                               would imperil the Air Force’s goal of obligating 100 percent of the avail-
                               able funds in fiscal year 1989.

                               DOD advised us that although no termination actions were taken in
                               response to changes that were identified by the June 1988 quarterly



                               Page 5                                GAO/NSIADSO-148   Spare Parts Safety   Levels
                                                                                                   c




                          B-240044




                          computation, the Logistics Centers did terminate excess buys during
                          subsequent quarters.


                          We concur with the Air Force’s intent in implementing the aircraft avail-
Conclusions and           ability model to control spare parts costs by better relating requirements
Recommendation            to readiness. However, we believe subsequent actions-setting      goals
                          based on prior cost rather than operational needs; accepting large, unex-
                          plained requirement increases without investigation; and continuing
                          unjustified procurements to achieve obligation goals-are inconsistent
                          with an objective of controlling costs. We believe the Air Force can avoid
                          millions of dollars in potentially unjustified procurements and repairs
                          through timely actions to lower target availability rates and adjust
                          requirements.

                          We recommend that the Secretary of the Air Force direct the Com-
                          mander, Air Force Logistics Command, to reevaluate the cost and bene-
                          fits of using the aircraft availability model to compute safety level
                          requirements. The reevaluation should be completed promptly to pre-
                          clude procurement and repair of potentially unjustified safety levels and
                          should include (1) an investigation and resolution of the increase in
                          safety level requirements associated with implementing the aircraft
                          availability model and (2) a determination of the availability rate for
                          each aircraft that will provide minimum safety levels to achieve accept-
                          able mission capability in the most cost-effective manner.


                          In its comments on our report, DOD said it did not concur with most of
Agency Comments and       the findings and recommendations. DOD said that it disagreed with our
Our Evaluation            report primarily because we equate safety level costs to gross safety
                          level requirements, whereas DOD (1) equates safety level costs to what
                          must be spent to buy or repair stock to fill those requirements and (2)
                          indicates that increases in safety level requirements may not affect
                          expenditures. Our report discusses increased safety level requirements
                          and recognizes such an increase, except in unusual cases, will result in
                          costs to buy or repair parts.

                          Our analysis of DOD'S detailed comments shows a high degree of accept-
                          ance of our major findings and/or the initiation of DOD actions that are
                          responsive to our recommendation. For example, DOD

                      .   agreed that safety level requirements increased by $482 million 1 year
                          after the new model was implemented;


                          Page 6                                GAO/NSIAD-W)-148   Spare Parts Safety   Levels
    B-240044




l acknowledged that the Air Force chose to improve availability, rather
  than meet operational needs at minimum cost, when it initially imple-
  mented the aircraft availability model;
l recognized that future safety level procurement and repair costs could
  be substantially reduced if availability goals were reset at the prior
  average level; and
. advised us that the Air Force is expected to complete an analysis by
  August 1990 that will better relate aircraft availability goals to opera-
  tional needs and will include a standard method to update the goals for
  future computations.

    In our draft report, we recommended that the Air Force Logistics Com-
    mand direct termination reviews of procurements of safety level stock
    that were determined to be excess to requirements after implementation
    of the aircraft availability model. In its comments, DOD assured us that
    this had been done. We had also recommended that when the model is
    rerun using lower availability goals, the Logistics Command should
    ensure that timely termination reviews are made of affected procure-
    ments. DOD commented that the Air Force had recently implemented
    stricter controls, including quarterly reviews, to ensure timely termina-
    tions of on-order excesses. According to DOD, changes in requirements
    due to changes in aircraft availability goals will be reviewed as part of
    the Air Force’s mandatory quarterly reviews. On the basis of DOD'S com-
    ments, we have deleted the two recommendations concerning termina-
    tion reviews.

    Our objectives, scope, and methodology are discussed in appendix I.
    DoD'S comments appear in appendix II.




    We are sending copies of this report to the Chairman, Subcommittee on
    Defense, Senate Committee on Appropriations; the Chairmen, House and
    Senate Committees on Armed Services; the Secretaries of Defense and
    the Air Force; the Director, Office of Management and Budget; and other
    interested parties.




    Page 7                                GAO/NSIAD-90-148   Spare Parts Safety   Levels
0240044                                                                        .




Please contact me at (202) 276-4268 if you or your staff have any ques-
tions concerning this report. Major contributors to this report are listed
in appendix III.

Sincerely yours,




+/G$T
Nancy R. Kingsbury
Director
Air Force Issues




Page 8                                 GAO/NSIAD-W-148   Spare Parta Safety   Levels
.




    Page 9   GAO/NSLADW)-MS   Spare Parta Safety Levela
                                                                                                   I
CIkmtents


Letter                                                                                                      1

Appendix I                                                                                             12
Objectives, Scope,and
Methodology
Appendix II                                                                                            14
Comments From the
Assistant Secretary of
Defense for
Production and
Logistics
Appendix III                                                                                           24
Major Contributors to
This Report
Figure                   Figure 1: Mission Capable Rates                                                4




                         Abbreviation
          Y




                         DOD       Department of Defense


                         Page 10                           GAO/NSIAD-90-148   Spare Parts Safety   Levels
Page 11   GAO/NSIAKMO-148   Spare Parta Safety Levels
Appendix I

Objectives,Scope,and Methodology


              The Chairman, Subcommittee on Defense, House Committee on Appro-
              priations, requested that we evaluate the Air Force’s justification for
              and implementation of the aircraft availability model. We focused our
              work on the effect that the aircraft availability model has had on safety
              level spare parts requirements and costs and the predicted benefits of
              the model.

              We reviewed the analysis made by the Air Force Logistics Command
              that was used to justify implementing the aircraft availability model,
              but we did not independently assess the model’s logic or test its compu-
              tational accuracy. We examined studies made by the Air Logistics Cen-
              ters to assess the impact of the model on aircraft spares budget and buy
              decisions for fiscal years 1989, 1990, and 1991. We compared aircraft
              safety level requirements and related procurement and repair costs com-
              puted as of March 31,1988, under the previous model with those com-
              puted as of March 31, 1989, under the aircraft availability model. We
              also analyzed statements provided to Air Force Logistics Command by
              the Logistics Centers on the impact of the model on safety level procure-
              ment and repair requirements. These statements identified the magni-
              tude of the changes in the types of spare parts required using the
              aircraft availability model.

              We obtained information from Air Force records on aircraft mission
              capable rates, which are used to measure aircraft readiness, and ana-
              lyzed the relationship of these rates to the aircraft availability rates of
              the model. We also compared the aircraft availability target of the new
              model to the aircraft availability target of the prior model. We reviewed
              data to determine whether the mission capable readiness rates achieved
              using the prior model were adequate or whether a need exists to
              increase mission capability through additional safety level spare parts.

              In addition, we assessed the opportunity for the Air Force to reduce
              spare parts costs by decreasing the aircraft availability target of the
              new model and the impact that such a reduction would have on mission
              capability. We obtained Air Force Logistics Command data that show
              changes in safety level requirements based on changes in aircraft availa-
              bility rates.

              We discussed the our work with officials at Air Force Headquarters,
              Washington, D.C.; the Air Force Logistics Command, Wright-Patterson
              Air Force Base, Ohio; and the Oklahoma City Air Logistics Center,




              Page 12                                GAO/NSIAD-90-149   Spare Parts Safety Levels
.   Appendix I
    Objectives, Scope, and Methodology




    Oklahoma, We performed our work between February 1989 and Feb-
    ruary 1990 in accordance with generally accepted government auditing
    standards.




    Page 13                              GAO/NSIAD-90-148   Spare Parts Safety Levels
Appendix II

Comments F’rom the Assistant Secretary of                                                                              *
Defensefor Production and Logistics

Note. GAO comments
supplementing those in the
report text appear at the
end of this appendix.                              ASSISTANT   SECRETARY   OF DEFENSE
                                                         WASHINOTON. DC. 20101~8000




                                                                                      June 19, 1990

                             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, "AIR FORCEUX;ISTICS:
                             Increased Costs For Spare Parts Safety Levels Not Justified," &ted
                             April 16, 1990 (GAOCode 393450, OSD Case 8282). The Department
                             nonconcurs with the principal  findings and both of the
                             recommendations contained in the draft report.
Discussed on p, 6.                   Fundamental to the DODdisagreement is the use of the term
                              "safety level costs."      The GAOequates safety level costs to gross
                             safety level requirements; the DODequates safety level costs to what
                             it must spend to buy or repair stock to fill       those requirements.    For
                             that reason, safety level costs did not substantially       exceed
                             predictions.      The Air Force use of the model to improve aircraft
                             availability,     rather than reduce costs, was reasonable during its
                             initial     implementation.   The Air Force is currently aggressively
                             terminating unneeded buys. Terminations of total potential         on-order
                             excess have increased from 8 percent in 1986 to 19 percent in 1989.
                             Even stricter     controls have recently been implemented, and potential
                             terminations     are now reviewed on a quarterly basis.
                                   The detailed DODcomments on the report findings and
                             recommendations are provided in the enclosure.  The Department
                             appreciates the opportunity to comment on the draft report.
                                                                          SiNerely,


                                                                          David   Jy Berteau
                                                                          Principal Deputy
                             Enclosure

                     Y




                                Page 14                                      GAO/NSIAD90-148      Spare Parts Safety   Levels
        .

   .
                             Appendix    II
                             Comment.8From the Assistant        Secretary            of
                             Defense    for Production   and Logistics




                                              GAODRAFTREPORT- DATEDAPRIL 16, 1990
                                                 GAOCODE392450 -0SD CASE 8282
                         "AIR FORCEIOGISTICS:            INCREASEDCOSTSFOR SPARE PARTSSAFETYUWELS
                                                            NOT JUSTIFIED"
                                                  DEPARlUENT        OF DEFICNSE C-S


                                                                l    *   *   l   l



                                                                    FINDINGS
                     .     kzyDING 9:   m:             1.                                  The
                           GAOreported that, in June 1988, after several years of study,
                           the Air Force Logistics Commandimplemented the aircraft
                           availability  model to better relate requirements to aircraft
                           readiness.   The GAOnoted the Commandalso maintained that the
                           model would improve, with little     orno increase in safety level
                           costs, the average aircraft    availability   rate from the 66 percent
                           under the priormodel,   to 85 percent.      The GAOalso reported that
                           one study predicted no increase in requirements, while a
                           subsequent study, using revised factors, predicted about a
                           $70 million Increase.
                            According to the GAO, the Air Force expected the new model to
                            provide a capability      to select a better mix of spare parts by
                            identifying    those parts that are most essential to keeping
                            aircraft    operational.     The GAOpointed out that the model was
                            designed to weight the impact of each part on operational needs.
                            The GAOexplained that the prior model concentrated on (1)
                            individual    parts and the number of times they failed and needed
                            to be replaced and (2) generally resulted in more requirements
                            for low cost, high demand items. The GAOobserved, however,
                            that the aircraft      availability   model focuses on availability of
                            the entire aircraft,      which could result in more requirements for
                            larger, higher cost end items where failure may be more likely
Now on p, 2.                to make aircraft     non-operational.    (pp. 2-3/GAO Draft Report)
Discussed on p. 6.         OD:               Partially   Concur. The DODdoes not agree with the
                           GAOinterpretation      of safety level costs.   The GAOequates safety
                           level costs to gross safety level requirements; the DODequates
                           safety level costs to what it must spend to buy or repair stock
                           to fill those requirements.       The Aircraft Availability   Model a
                                       e gross safetv level &rements;          rather, it




                                                                                                                ENCLOSURE




                             Page 15                                                      GAO/NSIAD-90-148   Spare Pads Safety   Levels
                            Appendix II
                            Comments From the Aseiataut Secretary    of
                            Defense for production and Logistics




                            v                        to achieve availability  goals.  To
Discussed on pp, 3,6.       accomplish that objective,   the model increases the safety level
                            requirements for some items with extra stock to avoid buying or
                            repairing others to fill   deficits.  The model increases the DOD
                            return on investment and reduces expenditures by taking advantage
                            of sunk costs in existing inventory.     The DODdisagrees that the
                            value of gross safety level requirements is relevant when it does
                            not affect expenditures.
See comment 1,              The DODalso disagrees with the GAOdescription       of what the Air
                            Force studies predicted.    The first Air Force study predicted
                            ~             would not increase; it did not address gross safety
                            level s.              The second study predicted a $70 million
                            increase in gross safety level requirements in the budget year,
                            but a decrease in expenditures.      It should be noted that the
                            second Air Force study examined only the ~IJ&& year impact of
                            changing models; it did not examine the current year impact,
                            and It was limited only to the Air Force top weapon system
                            programs. Had the study evaluated the current year impact of
                            changing models for all weapons, it would have predicted that
                            the model would increase gross safety level requirements by
                            $391 million.
                        l
                            FIMDINGi:      Costs   Under   The New blodek   S~8llv         Excu~W4
                            PTedintlonp.     The GAOfound that, after implementing thenew
                            model, safety level requirements increased by about5492 million.
                            The GAOobserved that the increase occurred during the March 1999
                             to March 1999 period, when future projected parts usagedecreased
                            by $4 billion--a    change that should have decreased safety level
                             requirements.    The GAOreported that the Air Force has not
                            analyzed the causes for the increase in requirements.       The GAO
                            reported that, according to Air Force officials,     factors other
                            than the model could have contributed to the increased safety
                            requirements.     The GAOobserved, however, that the Air Force did
                            not provide supporting data for that position.     The GAOalso
                            reported that, while Air Force officials    agreed the model could
                            increase safety level requirements, they also believed many of
                            the requirements will be met by repair of on-hand parts, rather
                            than purchase. The GAOconcluded that, even if all the increased
                            requirements could be met through repair, the additional      one time
                            repair costs would be about $72 million --based on a standard
                            repair cost at15 percent of purchase cost.




                                                                 2




                            Page 16                                          GAO/NSIAD-W-148   Spare Parts Safety   Levels
    .
                        Appendix II
                        Comments From the Assistant Secretary   of
                        Defense for Production and Logistics




                      The GAOacknowledged that the new model provides theAir Force
                     with the flexibility       to adjust aircraft  availability     goals--which
                      drive the quantities      of spare parts required--by      one percent
                      increments.     The GAOfound, however, that rather than setting the
                     goals at the level needed to support operational needs at the
                      least cost, the Commandset the goals based on prior spending.
                     The GAOnoted that based on the model's predictions,             the goals
                     were set at the maximum level that could be achieved when
                     spending the same amount as spent using the prior model.
                     According to the GAO, the Air Force determined that aircraft
                     availability     model costs equalled prior model costs when targets
                     were set to achieve an average availability         of85 percent--an
                     increase of about 30 percent over the 66 percent average
                     availability     calculated under the prior model. The GAOconcluded
                     that setting goals based on prior cost, rather than operational
                     needs, is inconsistent       with an objective of controlling       costs.
                     The GAOfurther concluded that the Command's prediction              that the
                     new model could achieve higher aircraft        availability     rates at
                     little     orno increased costs does not appear to be valid.          (p. 1,
Now on pp, 1,3-4,6   pp. 3-4, p. a/GAO Draft Report)
Discussed on p 6.    DODRESPONSE: Nonconcur. As discussed in the DODresponse to
                     Finding A, the DODdisagrees with both the GAOdefinition            of
                     safety  level costs and the GAOdescription        of what the Air Force
                     studies predicted.      -costs      of wsino       safetv level
                                     did not g&~g9 aoorev                            would m
                                   the Previous mom. as the Air Force expected.          From a
                     business perspective,      it is inappropriate  to focus on the size of
                     safety level requirements m          thev bear no relat;ion
                     expenditures.
See comment 2.       As discussed in the DODresponse to Finding A, Air Force data
                     indicates that about $391 million of the $482 million increase
                     in gross safety level requirements is attributable   to use of the
                     new model. The other $91 million is attributable    to changes in
                     other factors, such as increases in order and ship times.
Seecomment2.         The GAOestimate of how much of the change in gross safety level
                     requirements is attributable     to the change of models is
                     speculative.     The GAOestimate of the gross safety level
                     requirements increase was based upon a comparison of the models
                     using dissimilar    inputs, i.e., March 1989 data input into the
                     prior model and March 1989 data into the new model. In




                                                        3




                        Page 17                                       GAO/NSIAD-90-148   Spare Parts Safety   Levels
                                                                                                               .


                       Appendix II
                       Chnments From the Assistant Secretary      of
                       Defense for Productlon and Logistics




                     contrast, the Air Force estimate           of a $391 million increase
                     is based upon a comparison using           data from the same period.
                     Constraining the new model based           on prior costs was reasonable
                     for the initial  use of the model,          for reasons discussed in the
                     DODresponse to the Finding C.

                     -:CorrtraLI
                     m.         According to the GAO, the stated purpose in developing
                     the aircraft     availability        model was to better relate logistics
                     support to operational need. The GAOobserved, however, that the
                     Commandappeared to move away from that objective in implementing
                     the model, since higher availability                 was based on priorcosts
                     rather than operational needs, as reflected by mission capability
                     rates. The GAOexplained that aircraft                     availability  rates used
                     in the model are theoretical               numbers that are not measured. In
                     addition,    the GAOnoted that the rate for a specific                   aircraft  is
                     essentially    the percent of aircraft             missing designated parts and
                     is not directly     translated into a mission capability                 rate--nor do
                     the rates take intoaccount               other activities       the Air Force
                     normally uses tomeet operational needs. The GAOobserved that
                     increases in aircraft         availability      rates      should produce increases
                     in mission capability          rates.
                     The GAOpointed out that the Air Force has reported         satisfaction
                     with its ability     to perform needed missions, and has neither
                     requested,     nor justified,   an increase in mission  capability
                     rates.     The GAOobserved that, since the mission capability
                     rates    of the late 1980s were achieved when safety level
                     requirements were equivalent to an availability        rate of 66
                     percent, this lower rate apparently met Air Force operational
                     needs. The GAOacknowledged that eitherincreases           or decreases
                     in the prior rates for specific aircraft        could be needed to
                     satisfy mission capability       requirements at the least possible
                     cost. The GAOestimated, however, that if the model is
                     reprogrammed using the 66 percent rate, the FY 1991 safety level
                     requirements can be reduced by about $560 million--and         the
                     budgeted    procurement and repair costs reduced by about $90
                     million and $10 million,      respectively.   The GAOconcluded that
                     costs could be reduced if availability        was based on operational
Now on pp. 1, 3-5.   needs, rather than prior costs. (p. 2, pp. 4-6, p. WGAODraft
                     Report)
DIscussed on p. 7    DOD:           Partially  concur. If availability               goals in the
                     model were held constant, costs would predictably               decrease.



                                                           4




                        Page 18                                            GAO/NSIAD4@148       Spare   Parta Safety Levele
                         Appendix II
                         Commenta From the AsslstamtSecretary of
                         Defense for Production and LogMica




Discussed on p. 7.       However, while the model had been studied for several years, in
                         June 1998 it was still   operationally untested.    In view of that,
                         the Air Force properly decided to initially    implement the model
                         to improve availability,   rather than the riskier alternative   of
                         immediately using it to reduce costs.
DiSCUSSed on p. 7.       The Air Force Operations/Logistics     Working Group, in conjunction
                         with the Logistics Management Institute,      is currently analyzing
                         ways to relate aircraft   availability   goals to primary operating
                         stock spares requirements.     That analysis will include a standard
                         method to update the goals for future computations and is
                         expected to be completed by August 1990.

See comment 3.           While it is true that the Air Force did attempt to increase
                         aircraft     availability      rates using the new model, the high mission
                         capable rates achieved during the late 1980s were not achieved
                         solely by an average aircraft             availability rate of 66 percent.
                         Forty-five     percent of the Air Force mission outages were
                         satisfied     by extraordinary        actions, such as cannibalization   of
                         other    equipments and use of War Reserve Material.            Those special
                         actions increase mission capable rates above the model’s
                         expectations,      but they postpone problems, such as parts
                         shortages--which,         ultimately,     can be more expensive to correct.
                         Although such extraordinary            support actions are used when
                         necessary, to improve mission capable rates above aircraft
                         availability      goals, the DODdisagrees that the setting of
                         aircraft     availability      goals should necessitate exceptional
                         support actions to achieve them routinely
                     .   m:           g.                                           The GAO
                         reported that several months after the model was implemented, the
                         Logistics Commanddirected the Air Logistics Centers to evaluate
                         the impact of the new model on parts purchases. The GAOnoted
                         the Commandinstructed that the new model be implemented in
                         June 1988, but the Centers had made buy decisions for the next
                         fiscal year based on requirement computations under the old model
                         in March 1968. The GAOfound that, in December 1989, the Centers
                         notified  the Commandthat an estimated $115 million of planned
                         buys and $632 million of recent buys were not needed under the
                         new model. The GAOnoted that the estimates were based on data
                         generated by the automated requirement computation system and
                         were not manually validated.   The GAOfurther found that,
                         although the Commandinstructed the Centers to avoid and cancel
                         unnecessary purchases, the Air Force was unable to determine



                                                            5




                         Page 19                                        GAO/NSIAD-90-149   Spare Parta Safety Levels
                          Appendix JI
                          Comments From the Assistant Secretary   of
                          Defeuse for Production and Logistics




                        whether the unneeded buys were, in fact, actually avoided and/or
                        cancelled.    The GAOreported that in December 1988, none of the
                        Centers indicated cancellation     actions had been taken--while  two
                        of the five centers indicated they planned to continue using the
                        March 1988 computation for purchasing parts.      According to the
                        GAO, the reasons cited were (1) that the purchases were too far
                        advanced for changes of such magnitude and (2) that such changes
                        would imperil Air Force goals of obligating100      percent of the
                        available funds in FY 1989. The CA0 concluded that continuing
                        unjustified   procurements to achieve obligation   goals is
                        inconsistent   with an objective   of controlling costs.   The GAO
                        further concluded that the Air Force needs to ensure that
                        unneeded procurements to fill     requirements under the prior model
Now on pp. 2, 5-6.      are cancelled.    (p. 2, pp. 7-S/(%0 Draft Report)

Discussed on pp, 5-6.   PpD RESPON@: Nonconcur. The June 1988 cycle was not used to
                        initiate   or cancel buys because the computations were not
                        validated,   as the GAOacknowledges. However, the Air Logistics
                        Centers did terminate buys based on safety level changes, as well
                        as other reasons, in subsequent cycles.     The June 1988 cycle was
                        used to estimate the potential buy and termination impact of
                        changing models. The estimates of potential     terminations cited
                        by the GAOwere not solely attributable     to changes in safety
                        level, but included all sources.    The Air Force does not
                        separately track terminations of unneeded orders due to safety
                        Level changes.

Discussed on pp. 2,7.   The Air Force has an aggressive program to identify    and reduce
                        unneeded orders, whether generated by safety level changes or
                        other sources, such as changes in demand or flying hour programs.
                        As evidence of this, terminations of total potential    on-order
                        excess have increased from 8 percent in 1986 to 19 percent in
                        1989. Recently, even stricter     controls were implemented to
                        ensure timely terminations.    Economic termination analysis models
                        have been developed and implemented for both consumable and
                        recoverable requirements systems, with contract termination
                        coordinators assigned at each inventory control point.
                        Procedures are in place to revalidate requirements prior to award
                        of contract.   Potential terminations caused by any source,
                        including safety level changes, are now reviewed on a quarterly
                        basis.




                                                           6




                           Page20                                      GAO/NSIAD-90-148   Spare Parts Safety Level.8
         .

    .                           Appendix II
                                Comments From the Assistant Secretary   of
                                Defense for Production aud Logistics




                                                                * * * * *

                                                             PECCR4@UMTIONS
                            .                      : The GAOrecommended that the Secretary of the
                                 Air Force direct the Commander, Air Force Logistics Command,to
                                 reevaluate the cost and benefits of using the aircraft
                                 availability  model to compute safety level requirements.     The GAO
                                 further recommended that the reevaluation   should be completed
                                 promptly to preclude procurement and repair of potentially
                                 unjustified  safety levels--and should include the following:
                                          - an investigation  and resolution of the increase in
                                          safety level requirements associated with the
                                          implementation of the aircraft    availability model; and
                                          - a determination for each aircraft   of the availability
                                          rate that will provide minimum safety levels to most cost
                                          effectively  achieve acceptable mission capability.
Now on p. 6.                               (p. B/GAODraft Report)
Discussed on pp. 6-7.            -RESPONSE:       Nonconcur. The DODdisagrees that a reevaluation
                                 of the costs and benefits of using the Aircraft    Availability
                                 Model is warranted.    The Air Force studied the costs and
                                 benefits of using the model for two years prior to
                                 implementation.    The model produced what was expected--an
                                 increase in gross safety level requirements with little        or no
                                 increase in expenditures--as    discussed in the DODresponse to
                                 Finding A. The Air Force is refining and standardizing        the
                                 method of setting aircraft    availability targets based on
                                 operational need, as discussed in the DODresponse to Finding C.
Discussed on p. 7.      l            WNDATION 2: The GAOrecommendedthat the Commander, Air
                                 Force Logistics Command,direct termination reviewsof
                                 procurements of safety level stock, which were determined to be
                                 excess to requirements following implementation of the aircraft
                                 availability      model. The GAOfurther recommended that, when
                                 aircraft     availability goals are lowered following such an
                                 evaluation,     the Commandershould direct termination reviews of
                                 the affected procurements.      (p. B/GAODraft Report)
Discussed on pp. 6-7.            DODRESPONSE: Nonconcur. The Air Force has an aggressive
                                 program to identify and reduce unneeded items on order. That




                                Page 21                                      GAO/NSIAD-W-148   Spare Parta Safety   Levels
AppendLv II
Comment43 From the Amlstmt    Secretaq   of
Defeuae for Production and Logistics




termination policy was recently reemphasized to the Air Force
inventory control points.   Tracking potential    terminations    caused
by individual  elements in the June 1988 computation is not
feasible and would not be productive.   Any changes in
requirements due to changes in aircraft   availability     goals will
be reviewed as part of mandatory quarterly termination       reviews.




                                    8




Page 22                                       GAO/NSIAD-90-149   Spare Parts   Safety Levels
Appendix II
Commenta From the Am&ant      Secretary   of
Defense for Production and Logistics




The following are GAO'S comments on DOD'S letter dated June 19, 1990.

1. We revised page 2 to include language suggested by DOD.

2. We did not speculate on how much of the $482 million increase in
safety level requirements was attributable to the change in models. As
stated on page 3 and confirmed by DOD, safety level requirements
increased by $482 million after the new model was implemented. We
have included DOD'S statement that $391 million of the increase was
attributable to the model.

3. We agree that the high mission capable rates achieved during the late
1980s were achieved in part by actions such as use of war reserve mate-
rial and cannibalization of parts from aircraft. However, these are
acceptable support actions, when within established goals, and have his-
torically been used by the Air Force to improve mission capable rates.
Accordingly, we believe that these actions should be considered in set-
ting aircraft availability rates.




Page 23                                        GAO/NSIAD-90-149   Spare Parts Safety Levels
                                                                                             .
Appendix III

Major Contrtributorsto This Report


      *
National Security and   David Childress, Assistant Director
International Affairs   Thomas H. Wells, Audit Manager
                        Melvin Wagman, Senior Evaluator
Division, Washington,
D.C.
                        Virgil N. Schroeder, Regional Assignment Manager
Kansas City Regional    John A. Rohrbacker, Evaluator-in-Charge
Office                  Jerry B. Reeder, Senior Evaluator




(392460)                Page 24                               GAO/NSLAD-90-149   Spare Parts Safety Levela
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