Defense Inventory: Information on Disposal of Unrequired Inventory

Published by the Government Accountability Office on 1990-08-17.

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

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                                                  Information on
                                                  Disposal of Unrequired
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                                           United States
GAO                                        General Accounting Office
                                           Washington, D.C. 20548

                                           National Security and
                                           International Affairs Division

                                           B-23960 1

                                           August. 17,199O

                                           The Honorable Carl M. Levin
                                           Chairman, Subcommittee on Oversight
                                             of Government Management
                                           Committee on Governmental Affairs
                                           United States Senate

                                           Dear Mr. Chairman:

                                           As requested, we are providing information regarding the disposal of
                                           the Department of Defense’s (DOD) unrequired inventory. This report
                                           summarizes and updates our April 3, 1990, briefing to your staff. Unre-
                                           quired inventory is stock that is not needed to meet current require-
                                           ments but is held to satisfy possible future requirements and possible
                                           contingencies, Specifically, this report provides information on
                                           (1) unrequired inventory available for disposal and sale, (2) the condi-
                                           tion of potential excess inventory and the related storage costs, and
                                           (3) inventories disposed of and sales proceeds.

                                           DOD reported in its September 1989 Supply System Inventory Report
Unrequired Inventory                       that it had about $34 billion in four categories of unrequired inventory,
Available for Disposal                     including $10.1 billion in the potential excess category. Potential excess
and Sale                                   is the category of unrequired inventory that DOD considers available for
                                           disposal and sale. DOD classifies spare parts and other secondary inven-
                                           tory items as potential excess when the items’ retention cannot be justi-
                                           fied for defense or economic reasons. According to a DOD official, the
                                           amounts are reported at a standard price (the last purchase price, manu-
                                           facturer’s listing, or market quotation, plus a surcharge for such things
                                           as transportation, losses, and inflation). The amounts of potential excess
                                           that DOD reported are shown in table 1.

Table 1: Reported Potential Excess as of
September 30,1999, by DOD Component        Dollars in billions
                                           DOD component                                                            Amount
                                           Army                                                                          S.5
                                           Navy                                                                          6.8
                                           Marine Corps                                                                    .I
                                           Air Force                                                                     1.2
                                           Defense Logistics Agency                                                      1.5
                                           Total                                                                       $10.1

                                           Page 1                                    GAO/NSIAD-90-228BR   Defense Inventory

                      The amount of inventory that should be disposed of may exceed the
                      reported excess. For example, in March 1990, we reported’ that $2.3 bil-
                      lion of the $3.5 billion unrequired Navy ship and submarine parts inven-
                      tory that we sampled should be considered for deletion and subsequent
                      disposal. This $2.3 billion consists of unrequired inventory in addition to
                      potential excess and exceeds the $2 billion the Navy reported as poten-
                      tial excess for ship and submarine parts. Consequently, we believe that
                      deletions and subsequent disposals should be considered for more items
                      than DOD now categorizes as potential excess.

                      DOD  estimates that about two-thirds of the $10.1 billion potential excess
Potential Excess      inventory is used material that needs repairing (i.e., not ready for issu-
Inventory Condition   ance). According to DOD, its records do not indicate how many of the
and Storage Cost      items in need of repair cannot be economically repaired or how many of
                      the issuable items are new.

                      According to DOD officials, annual inventory storage costs are approxi-
                      mately 1 percent of the cost of the items. Thus, the average annual
                      storage costs are about $101 million. We are currently reviewing the
                      cost considerations of holding inventory and the implications on inven-
                      tory management decisions under another review.

Sales Proceeds From   According to DOD officials, items classified as excess are turned over to
                      the Defense Logistics Agency’s Defense Reutilization and Marketing Ser-
Inventory Disposals   vice for disposal. The items are available for sale only after they are
                      offered through a screening process to other defense agencies, the Gen-
                      eral Services Administration, state and local governments, and approved
                      private organizations. Nonfederal organizations do not reimburse the
                      federal government for items transferred during the screening process
                      but do reimburse the federal government for shipping costs. Items not
                      claimed during the screening process are generally sold. Table 2 shows
                      the value (at the standard price) of the property disposed of during
                      fiscal years 1988 and 1989.

                      “Defense Inventory: Growth in Navy Ship and Submarine Parts (GAO/NSIAD-90-111,   Mar. 6,199O).

                      Page 2                                              GAO/NSIAD-90.228BR     Defense Inventory

Table 2: Property Diaporals by Method
for Fiscal Years 1988 and 1989          Dollars in millions
                                                                                                                 Value of property
                                        Diaoosal method                                                             1988           1989
                                        Ma- and inter-service transfers                                            $1,248           $1,712
                                        Foreign military sales                                                         12               19
                                        Transferred to other federal agencies                                         117              251
                                        Donations                                                                     293              290
                                        Sale of usable property                                                     1,839            2,113
                                        Scrapped                                                                    3,024            3,635
                                        Abandoned. destroved. or used as taraets                                      393              221
                                        Total                                                                      $8,928          -$8,241

                                        DOD regulations specify that property may be abandoned or destroyed
                                        only when a property disposal official has determined in writing that
                                        the property has no commercial value or that the estimated cost of care,
                                        handling, and preparation for sale would exceed estimated sales pro-
                                        ceeds. DOD also requires that selected items be demilitarized (made
                                        unusable for their original military purpose) before disposal. According
                                        to DOD officials, the value of property used as targets is included with
                                        abandoned and destroyed property.

                                        DOD  reported that the value of usable property sold was $1.8 billion2 in
                                        fiscal year 1988 and $2.1 billion in fiscal year 1989 and that the pro-
                                        ceeds from the sales were $107.6 million and $139.7 million, respec-
                                        tively. According to a DOD official, $72.4 million and $80.1 million of the
                                        proceeds from sales in fiscal years 1988 and 1989, respectively, were
                                        deposited in the U.S. Treasury. The remaining amount ($94.8 million for
                                        the 2 fiscal years) was used to reimburse the services for authorized
                                        expenses. Table 3 shows the proceeds of foreign military sales and the
                                        sale of usable property and scrap for the 2 years. W D attributes the rela-
                                        tively low return on the sale of the excess property to such factors as
                                        the used condition of much of the property sold, limited civilian uses,
                                        and surcharges included in the property’s reported value.

                                        ‘The amounts of property disposals and the proceeds from sales include property other than sec-
                                        ondary inventory items. DOD does not maintain separate records on the disposal and sale of sec-
                                        ondary inventory items.

                                        Page 3                                                 GAO/NSIAIMW228BR         Defense Inventory
Table 3: Proceeds From Sale8 for Flacal
Years 1988 and 1989                       Dollars in millions
                                                                                                      Proceeds from sales
                                          Type of sale                                                     1988         1989
                                          Foreign military sales                                              $0.7           $1.1
                                          Sale of usable orooertv                                             49.6           61.3
                                          Sale of scrap ’                                                   57.2             77.2
                                          Subtotal                                                        107.6’           139.7’
                                          Less authorized expenses                                        -35.2            -59.6
                                          Total proceeds deposited in the U.S. Treasury                   $72.4            $80.1
                                          aDoes not add due to rounding

                                          To obtain information on unrequired inventory available for sale and
Scopeand                                  related issues, we interviewed officials from the Office of the Assistant
Methodology                               Secretary of Defense (Production and Logistics) and reviewed DOD
                                          reports on inventory and on utilization and disposal.

                                          As agreed with your staff, we did not estimate the extent to which items
                                          in the budget are excess to requirements, as you had initially requested.
                                          DOD'S budget is based on projections of what its requirements and its on-
                                          hand inventory will be at the beginning of the budget year. The process
                                          is designed to budget only ,for items where the inventory is projected to
                                          be less than requirements. Further, our prior work indicates that most
                                          items become unrequired after they are ordered and/or received.

                                          We conducted our review between March and April 1990. As requested,
                                          we did not obtain written agency comments. However, we discussed a
                                          draft of this report with DOD officials and incorporated their comments
                                          as appropriate.

                                          As agreed with your office, unless you publicly announce its contents
                                          earlier, we plan no further distribution of this report until 30 days from
                                          its issue date. At that time, we will provide copies to interested congres-
                                          sional committees; the Secretary of Defense; and the Director, Office of
                                          Management and Budget. We will also provide copies to other interested
                                          parties upon request.

                                          Please call me at (202) 275-8412 if you or your staff have any questions
                                          concerning the report. Major contributors to this report were Uldis

                                          Page 4                                          GAO/NSIADBO-228BR    Defense Inventory

           Adamsons, Assistant Director, and Louis Modliszewski, Evaluator-in-

           Sincerely yours,

           Donna M. Heivilin
           Director, Logistics Issues

            Page 5                                  GAO/NSIAD-BO-228BR   Defense Inventory
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