_-_I”.._.. ___._^_ ..l.ll_,_ ..-__ “_-- ._.__._. “._. __.._ llr~it.~d States -_.I-_.-^l._“l. (ktrt~ral Accounting Ol’f’ice 13riel’ing Ikport to the Chairman, GAO Sukomrnittcc on Oversight of Govc:rnment Management, Committee on Governmental Affairs, 1_J.S. Senate Arl~llst~ 1!)!M DEFENSE INVENTORY Information on Disposal of Unrequired Inventory ___.. - .__._ - -_-_ “I_ . .._ l.ll”ll.“l--*--l_------ _---~-.---~ __.-__ ^__.II_._ _-. ._“I_.--. . --...-..- 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 n B2m3o1 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 B-23fMol 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 B-239501 Adamsons, Assistant Director, and Louis Modliszewski, Evaluator-in- Charge. Sincerely yours, Donna M. Heivilin Director, Logistics Issues Page 5 GAO/NSIAD-BO-228BR Defense Inventory (sosoao) .-_-.- _-.-----. Ordc~ring Information ‘I’hcb first, five c:opic~s of each GAO report. are free. Additional copies are $2 each. Orders should be sent to the following address, accompanid by a check or money order made out, to t.trcbSoI)c~rint.c!ndc~nt. of I)ocumchnt.s, when necessary. Orders for 100 or mor(b copies to be mailed to a single address arc discounted 25 percent.. I1.S. GcbncbraI Accounting Office I’. 0. hx 60 16 Gail.h(~rsburg, MI) 20877 Ortlc~rs may also be placed by calling (202) 2756341.
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)