oversight

Army Inventory: Army Annually Spends Millions to Keep Retention-Level Stocks

Published by the Government Accountability Office on 1990-09-11.

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

                   United   States   General   Accounting   Office   L




GAO                Report to the Chairman, Subcommittee
                   on Readiness, Committee on Armed
                   Services, House of Representatives


September   1990
                   ARMY INVENTORY
                   Army Annually
                   Spends Millions to
                   Keep Retention-Level
                   Stocks




GAO/NSLAD-90-236
~I!       ~ztt&F~~&&lfp
               , *-
          National !Security and
          International  Affairs Division

          B-2401 18

          September 11, 1990

          The Honorable Earl Hutto
          Chairman, Subcommittee on
            Readiness
          Committee on Armed Services
          House of Representatives

          Dear Mr. Chairman:

          This report responds to your concerns about the large amount of inventory the Army is
          retaining in excess of current operating and war reserve needs. In this regard, you asked us
          to determine

      l   the Army’s policy for keeping stocks in excess of operating and war reserve needs,
      l   the Army’s method of determining what items and what quantities to retain, and
      l   the effect of retaining this inventory on warehousing space.

          We are sending copies of this report to the Director, Office of Management and Budget; the
          Chairmen, House Committee on Government Operations, Senate Committee on Governmental
          Affairs, House and Senate Committees on Appropriations, and Senate Committee on Armed
          Services; and the Secretaries of Defense and the Army. Copies will also be made available to
          other parties on request.

          Please contact me at (202) 275-4141 if you or your staff have any questions. Other major
          contributors are listed in appendix II.

          Sincerely yours,




          Richard Davis
          Director, Army Issues
Executive Summary


Purpose                $4.3 billion of inventory that exceeds current operating and war reserve
                       needs. Concerned that the Army was retaining such inventory, the
                       Chairman of the Subcommittee on Readiness, House Committee on
                       Armed Services, requested GAO to evaluate (1) the Army’s policy for
                       keeping stocks in excess of operating and war reserve needs, (2) the
                       Army’s method of determining what items and what quantities to
                       retain, (3) the effect of retaining this inventory on warehousing space.


                       The Army Materiel Command and its six National Inventory Control
Background             Points manage the Army’s $18.5 billion wholesale-level inventory,
                       which includes secondary items such as spare and repair parts. GAO'S
                       review was performed at the Aviation Systems Command, one of the six
                       National Inventory Control Points.

                       Part of the inventory is needed to meet current operating and war
                       reserve requirements. The remainder is categorized as either “potential
                       excess” or “retention-level” inventories. Potential excess inventory is
                       comprised of stock that the Army has determined is not needed and can
                       be processed for disposal. Retention-level inventory is categorized as:

                   . Economic retention: items with a reasonably predictable demand rate
                     that are more economical to retain than to replace by future
                     procurement.
                   l Contingency retention: items with no predictable demand rate but are
                     being retained for possible contingencies.
                   l Numeric retention: items that are infeasible or uneconomical to dispose
                     of or a management decision has been made to retain them in the supply
                     system. An example of the latter category would be all inventory related
                     to active weapon systems.


                       The Army’s retention inventory policy and practices result in keeping
Results in Brief       virtually all inventory applicable to active weapon systems regardless of
                       its quantity, its material condition, or the number of end items to be
                       supported. At the Aviation Systems Command, about $1 billion of its
                       $5.5 billion inventory was retention-level inventory. For many line
                       items, the Command’s retention inventory exceeded that needed to sup-
                       port weapon systems until they are phased out of the Army.

                       Maintaining this inventory is expensive. The Army incurs annual costs
                       of about $130 million to hold the Aviation Systems Command’s


                       Page 2                             GAO/NSIAlLM@236by’s   Retention-Level Stocka
                        JZxecutiveSummary




                        retention-level inventory. On an Army-wide basis, the annual cost to
                        hold retention-level inventory is about $481 million. Continuing to retain
                        this inventory also contributes to the overcrowding of storage facilities
                        and adversely affects inventory management of needed items.

                        There are systemic problems with the computer programs that the
                        Army uses to make decisions regarding retention-level inventory. These
                        problems included (1) the lack of program documentation describing
                        how the systems work and the computer logic being used, (2) the compu-
                        tation of retention levels for items whose phase-out dates had passed,
                        and (3) the use of inaccurate and incomplete data to determine retention
                        levels, storage space needs, and the number of end items being
                        supported.



Principal Findings

                        To determine inventory retention levels, the Army uses a computer pro-
Retained Inventory      gram that stratifies all inventory that exceeds current operating and
Exceeds Needs           war reserve requirements into one or more of the three retention levels.

                        As of March 31, 1989, the Aviation Systems Command had retention-
                        level inventory valued at about $1 billion. Of this total, about $853 mil-
                        lion involved line items with operating and war reserve requirements,
                        and over 50 percent of these items had retention inventories at least
                        twice as large as what was needed to support the current operating and
                        war reserve requirements. In addition, the Command had retention
                        inventories valued at about $147 million for line items that did not have
                        current operating or war reserve requirements.


                        Item managers are not required to review computer-generated sugges-
Need for Contingency    tions concerning the inventory to retain in the economic retention cate-
and Numeric             gory. For the computer-generated suggestions concerning inventory in
Retention Inventories   the contingency and numeric categories, item managers are required to
                        review and document the continued need for these items. Item managers
Was Not Documented      routinely accepted the computer-generated suggestions and did not doc-
                        ument their decisions to retain contingency and numeric inventory.

                         Item managers told GAO that they were generally unaware of the
                         requirement to document their reasons for retaining the inventory and


                         Page 3                            GAO/NSUDBO-236Army’s Retention-Level Stocks
                         Executive Summary




                         that even if they had been aware of the requirement, they did not have
                         the time to manage retention stocks.


                         GAO estimated that the Army incurs annual costs of about $130 million
Maintaining Retention-   to hold the Aviation Systems Command’s retention-level inventory.
Level Inventory Is       Additionally, this inventory contributes to warehouse overcrowding and
Costly                   reduces the effectiveness of supply management.

                         The majority of this inventory is at storage depots that are filled to 97
                         percent of capacity. According to the Army, when a storage facility is
                         filled to more than 85 percent of its capacity, efficiency suffers because
                         inventory must frequently be relocated to make room for other incoming
                         inventory. Frequent relocation, in turn, increases the potential for losing
                         or misplacing inventory and being unable to fill customer requisitions
                         because the needed inventory cannot be found.


                         Systemic problems such as computer programming, logic, and data
Other Systemic           errors also affect the determination of what and how much inventory
Problems Affecting       should be retained. GAO found that the computer programs were poorly
Decisions to Retain      documented regarding the system’s working procedures or the computer
                         logic used to make decisions on retention inventory. For example, the
Retention-Level          computer program is not supposed to compute retention levels for end
Inventory                items or major components whose phase-out dates have passed. How-
                         ever, the Command was retaining $29.6 million of retention-level inven-
                         tory for line items whose phase-out dates had passed as long as 9 years
                         before.

                         Information needed to determine retention levels, storage space needs,
                         the number of end items being supported, and weapon system phase-out
                         dates was often inaccurate, incomplete, or out-of-date. For example, the
                         computer is programmed to set the phase-out dates for an item at 15
                         years in the future whenever the actual phase-out date has not been
                         entered into the database. GAO found that computer-generated phase-out
                         dates for 5,392 line items had been set at 15 years in the future, and the
                         Command was retaining $474.3 million of retention inventory for these
                         items.




                          Page4                              GAO/‘NSMDW236   Army’8 Retention-Level   Stocke
                           Ehcutive Summary




                           The Army is aware of many of the problems associated with its
Actions to Alleviate       retention-level inventories. The Department of Defense is amending its
Problems With the          retention-level inventory policy to include consideration of such factors
Retention Inventory        as shelf life, item essentiality, storage space requirements, and number
                           of weapon systems being supported.


                           Revising the Department of Defense’s policy regarding retention-level
Recommendations            inventory is a step in the right direction. However, for the revision to
                           bring about the desired improvements, the policy must be strictly imple-
                           mented, and systemic problems must be corrected. In this regard, GAO
                           recommends that the Secretary of the Army direct the Commander of
                           the Army Materiel Command to:

                       l Develop specific implementation guidance for item managers to use in
                         determining what and how much inventory to retain in accordance with
                         the revised retention-level inventory policy.
                       l Ensure that when computer programs used in making retention deci-
                         sions are changed, the changes are adequately documented so that when
                         systemic problems arise, fixes can be incorporated, and a historical trail
                         is created for future reference.
                       . Modify the computer programs to classify inventory in excess of the
                         economic retention level as potential excess stock unless the item man-
                         ager can justify and document that the item is needed for some other
                         purpose. As part of this process, item managers should (1) ensure that
                         the database is accurate and complete and (2) determine whether the
                         item should be retained or processed for disposal in accordance with the
                         implementation guidance issued as part of the revised retention policy.


                           The Department of Defense agreed with all of GAO’S findings and recom-
Agency Comments            mendations and provided information on how and when the recommen-
                           dations would be implemented. The Department acknowledged that
                           reviews of contingency and numeric retention stocks had not been
                           actively pursued in recent years because of the strict limitation on
                           disposals. In the future, item managers will have to manually move
                           stock into numeric or contingency categories, with appropriate justifica-
                           tion The Department’s detailed comments appear as appendix I.




                                                   .

                           Page 5                             GAO/NSIAD9@236Army’s Retention-Level Stocks
intents


Executive Summary                                                                                     2

Chapter 1                                                                                             8
Introduction            Objectives, Scope, and Methodology                                            9

Chapter 2                                                                                            12
Army’s Policy Results   Determination of Inventory to Be Retained
                        Retention-Level Inventory Exceeds Expected Needs
                                                                                                     12
                                                                                                     13
in Large Retention-     Justifications for Contingency and Numeric Retention                         14
Level Inventories            Stocks Not Documented
                        Maintaining Retention-Level Inventories Is Costly and                        15
                             Reduces Supply Efficiency
                        Army’s Actions to Reduce Its Retention-Level Inventory                       15

Chapter 3                                                                                            17
The Quality and         Lack of System Documentation
                        Retention Levels Are Computed for Items With Past
                                                                                                     18
                                                                                                     18
Accuracy of                 Phase-Out Dates
Information Must Be     Database Contains Incomplete and Inaccurate                                  19
                            Information
Improved to Ensure an   Management of Retention-Level Inventory Has a Low                            21
Effective Retention         Priority
Program
Chapter 4                                                                                            22
Conclusions,            Conclusions
                        Recommendations
                                                                                                     22
                                                                                                     22
Recommendations,        Agency Comments                                                              23
and Agency Comments
Appendixes              Appendix I: Comments From the Department of Defense                          26
                        Appendix II: Major Contributors to This Report                               34

Tables                  Table 1.1: Status of the Army’s and AVSCOM’s Wholesale                         9
                            Secondary Items Inventory by Category
                        Table 2.1: Inventory Line Items in One or More Retention                     13
                            Levels
                        Table 2.2: Retention-Level Inventories as Percentages of                      13
                            AFAO Requirements


                        Page 6                               GAO/NSIADBO-236Army’s Retention-Level Stocks
Contenta




Table 3.1: Retention Inventory for Items Whose Phase-                   18
    Out Dates Had Passed




 Abbreviations

 AFAO      Approved Force Acquisition Objective
 AVSCOM    Aviation Systems Command
           Commodity Command Standard System
 DOD       Department of Defense
 GAO       General Accounting Office
 IRO       Inventory Research Office
 NICP      National Inventory Control Point
 SIMA      Systems Integration Management Activity


 Page7                            GAO/MIAD+W236 Army’s Retention-Level Stocks
                                                                                                                          .


Chapter 1

Introduction


                   The Army’s wholesale secondary items inventory,’ valued at about
                   $18.5 billion, is managed by the Army Materiel Command and its six
                   National Inventory Control Points (NICP). The Army Materiel Command
                   establishes inventory management policy, and the NICPS have responsi-
                   bility for determining inventory requirements and procuring, storing,
                   and distributing the inventory to the Army’s field activities. Within the
                   Army’s inventory management system, there are three depots that are
                   designated as “Area Oriented Depots” and that serve as the Army’s
                   major distribution depots. About 92 percent of all secondary inventory
                   is distributed through these depots.

                   The wholesale inventory of secondary items consists of “applicable” and
                   “inapplicable” inventories. “Applicable inventory” is that portion of the
                   inventory needed to meet current operating and war reserve require-
                   ments-the “Approved Force Acquisition Objective” (AFAO). The differ-
                   ence between the AFAO and the total inventory is referred to as
                   “inapplicable inventory.” Inapplicable inventory is categorized as
                   “potential excess stock” and “retention-level stock.” Potential excess
                   inventory is that portion of the inventory that the Army has determined
                   is not needed and can be processed for disposal. Retention-level inven-
                   tory is subdivided into the following categories:

               l   Economic retention: that portion of the inventory determined to be more
                   economical to retain for future peacetime issue than to replace by future
                   procurement. To warrant economic retention, the item must have a rea-
                   sonably predictable demand rate.
               l   Contingency retention: that portion of the inventory for which there is
                   no predictable demand or requirement and that would normally be cate-
                   gorized as potential excess, except that a determination has been made
                   to retain the item for possible contingencies.
               l   Numeric retention: that portion of the inventory for which disposal is
                   currently infeasible or uneconomical or for which a management deci-
                   sion has been made to retain it in the supply system. An example of the
                   latter category would be where management has decided to retain all
                   inventory applicable to an active weapon system.

                   A significant portion of the Army’s wholesale inventory is comprised of
                   retention-level inventory. As of March 31, 1989, the Army had about
                   $3.7 billion of economic, contingency, and numeric inventory. These

                   ‘Secondary items include spare and repair parts, subsystems, and assemblies, as opposed to end items
                   such as aircraft, tanks, and trucks. Examples of secondary items are engines, transmissions, and
                   rotary-wing   blades.
                                                .



                   Page 8                                        GAO/NSIAEHO-236Army’s Retention-Level Stocks
                                             Chapter1
                                             Intmduction




                                             stocks represented about 20 percent of the Army’s $18.5 billion whole-
                                             sale inventory of secondary items. At the Aviation Systems Command
                                             (AVSCOM), where we performed our review, retention-level inventory
                                             amounted to $1 billion, or about 18 percent, of the Command’s $5.5 bil-
                                             lion inventory. Table 1.1 illustrates the status of this inventory.

Table 1.l: Status of the Army’s and
AVSCOM’s Wholesale Secondary Items           Doliars in billions
Inventory by Category (as of March 31,                                                           Army                  AVSCOM
1989)
                                             Inventory category                             Amount Percent          Amount Percent
                                             AFAO                                             $142     76.8            $4.4    80.0
                                             Economic retention stock                           1.4     7.6             0.3     5.5
                                             Contingency retention stock                          1.7       9.2         0.5     9.1
                                             Numeric retention stock                             0.6        3.2         0.2     3.6
                                             Potential excess                                    0.6        3.2          0.1       1.8
                                             Total                                             $18.5~     100.0         $5.50    100.0
                                             Tncludes on-hand and on-order Inventory.

                                             As stated in our March 1990 report, Army Inventory: Growth in Inven-
                                             tories That Exceed Requirements (GAO/NSIAD-90-t%), there were many rea-
                                             sons that inventory migrates to the retention-level categories such as:

                                         l   Inventory was being retained to support end items that were being
                                             phased out of the Army’s system.
                                         l   Forecasted demands did not materialize.
                                         l   The database used in computing requirements contained erroneous
                                             information.


                                             Concerned that the Army was retaining retention-level inventory that
Objectives, Scope,and                        exceeded requirements, the Chairman of the Subcommittee on Readi-
Methodology                                  ness, House Committee on Armed Services, asked us to evaluate (1) the
                                             Army’s policy for keeping stocks in excess of operating and war reserve
                                             needs, (2) the Army’s method of determining what items and what
                                             quantities to retain, and (3) the effect of retaining this inventory on
                                             warehousing space. We reviewed Department of Defense (DOD) and
                                             Army policy, procedures, and related documents pertaining to the reten-
                                             tion, transfer, and disposal of assets. We also interviewed DOD and Army
                                             personnel responsible for the formulation and implementation of the
                                             policy. The information we obtained provided us with the rationale for
                                             the policy and a working knowledge of the establishment of retention
                                             levels.



                                              Page 9                                    GAO/NSIAD90-296    Army’s Retention-Level Stmke
Chapter 1
Introduction




We initiated our review based on information available from the Sep
tember 30, 1988,” budget stratification reports for the Army’s six NICPs.
These reports showed the dollar value of the wholesale inventory of sec-
ondary items and the portions of the inventory categorized as “appli-
cable” and “inapplicable” (the “inapplicable” inventory includes the
retention-level and potential excess inventories). On the basis of this
information, we selected AVSCDMfor a detailed review because it had the
largest wholesale inventory of secondary items inventory and the
largest retention-level inventory.

At AVSCOM,we determined the numbers and dollar values of retention-
level inventory items for which (1) no peacetime and war reserve
requirements existed and (2) phase-out dates had passed.

On a judgmental basis, we selected 33 line items for our detailed review.
Our criteria included total inventory value, the amount of storage space
required, and the ratio of retention-level inventory to the item’s AFAO.
The inventory value of the 33 items was $642 million, or 11.7 percent, of
AVSCOM'Stotal $5.5 billion secondary items inventory. The retention-level
inventory for these items was about $343.5 million, or about 34 percent,
of AvscoM’s total retention-level inventory.

For each of the selected items, we reviewed the item’s case file and held
discussions with appropriate AVSCOMitem managers and officials to
determine why the items were being retained and whether their reten-
tion was justified.

 As part of our review, we discussed the automated processes for estab-
 lishing retention-level stocks with representatives of the Systems Inte-
 gration Management Activity (SIMA),located in St. Louis, Missouri, and
 the Inventory Research Office (IRO), located in Philadelphia,
 Pennsylvania.

 Information was not available in the database on the cubic feet of
 storage space required for each item. Therefore, we estimated these
 amounts using the “unit cube” and “unit pack” data contained in the
 item’s master data record. The “unit cube” is the cubic feet required to
 store the unit pack. According to AVSCDM'Stransportation officials, the
 unit cube is generally 1 inch larger in all dimensions (length, width, and

 2The information in the September 30,1988, budget stratification reports was updated when the
 March 31,1989, reports were issued. This later information became the basis for the statistics cited in
 this report.



 Page 10                                         GAO/NsIAD90236 Army’s Retention-Level Stocks
    Chapter 1
    Introduction




    depth) than the actual size of the item. The “unit pack” is the number of
    items in a standard package. We estimated the cubic feet of space
    required by dividing the unit cube by the unit pack and multiplying the
    result by the number of units involved.

    To ascertain whether AVSCOMwas retaining more assets than were
    needed to support the weapon system or end item, we calculated the
    quantity of assets needed to support the item up to its phase-out date.
    Our process included the following steps:

l We first determined the length of time until the item was due to be
  phased out.
l We next determined how many months of supply were on hand by
  dividing the total quantity of assets on hand by the demand rate shown
  in the supply control study.
. To ascertain whether AVSCOMhad inventory on hand beyond the phase-
  out dates, we compared the total months of supply on hand to the
  months of supply required up to the phase-out dates.
l We translated the months of supply past the phase-out dates into years
  by dividing by 12. We based all calculations on 30-day months.

    We conducted our work primarily at AVSCOMand at the Army Materiel
    Command from May 1989 to May 1990 in accordance with generally
    accepted government auditing standards.




     Page 11                           GAO/NSIAD!W236 Army’s Retention-Level Stacks
Chapter 2

Army’s Policy Results in Large Retention-
Level Inventories

                   The Army’s inventory retention policy,’ and its implementation, results
                   in the retention of virtually all inventory that exceeds MAO require-
                   ments regardless of the need for the items. As a result, the amount of
                   retention inventory retained is many times the amount of retention-level
                   inventory that is reasonably required to support end items. Maintaining
                   this inventory is costly and contributes to supply system inefficiencies,

                   The Army recognizes many of the problems caused by the retention of
                   these inventories and is attempting to dispose of some of its retention-
                   level inventory. However, until the policy for determining what and how
                   much inventory to retain is revised and specific guidance is provided to
                   managers on how to implement the policy, significant reductions in the
                   retention-level inventory are not likely to occur.


                   The Army’s inventory retention policy provides that all inventory appli-
Determination of   cable to any active weapon system may be retained regardless of its
Inventory to Be    quantity, the condition of the material, or the number of end items being
Retained           supported.

                   The Army uses a computer program to categorize the retention-level
                   inventories into economic, contingency, or numeric retention levels. The
                   program first computes the economic retention-level quantity based on
                   the cost of holding the inventory versus the cost of procuring the inven-
                   tory item at a later date. It then determines the contingency-level
                   requirement by adding the number of serviceable assets on hand in
                   excess of the economic retention level to the existing contingency
                   requirement in the database. Then it stratifies the serviceable and
                   unserviceable assets against that requirement. Any remaining inventory
                   assets are then categorized as numeric retention inventory.

                   As of March 31, 1989, AVSCOMhad about $1 billion of retention-level
                   inventory for 26,704 line items. As shown in table 2.1, many of the line
                   items had retention-level inventories in more than one of the retention-
                   level categories.




                   ‘The Army’s policy closely resembles DOD’s policy for establishing inventory retention levels.



                   Page 12                                        GAO/NSIAIWO-236 Army’s Retention-Level Stocks
                                            w-2
                                            Army% Policy Read&I in Large Retention-
                                            Level Invl?ntoriea




Table 2.1: Inventory Line ItOmS in One or
y9or; Retention Levels (as of March 31,     Dollars in millions
                                            Number of items having one                                        Number of
                                            or more retention levels                                          line items     Amount
                                            -. .-
                                            One                                                                   19.995       $451.4
                                            Two                                                                    61588        437.4
                                            Three                                                                    121        110.9
                                            Total                                                                26,704       $999.7




                                            In many cases, the quantity of retention-level inventory exceeds what
Retention-Level                             would reasonably be expected to be needed. As of March 31, 1989,
Inventory Exceeds                           AVSCOMhad 18,359 line items with AFAO requirements and on-hand
Expected Needs                              retention-level inventories. Of this total, over 50 percent of the line
                                            items had retention-level inventories at least twice the amounts needed
                                            to support AFAO requirements. In other words, not only was there suffi-
                                            cient inventory to meet the current operating and war reserve require-
                                            ments, but additional inventories of twice those amounts were being
                                            retained for other reasons. Table 2.2 shows the amounts of retention-
                                            level inventory as percentages of fWA0 requirements.

Table 2.2: Retention-Level Inventories as
Percentages of AFAO Requirements (as         Dollars in millions
of March 31, 1989)
                                                                                                                   Retention inventory
                                             Number of                                 Value of inventory          as a percentage of
                                             line items                                AFAO       Retention                      AFAO
                                                     6,439                             $843.7        $138.3                       16.4
                                                     2,691                                67.2         96.2                      143.2
                                                     2,606                                39.1        109.6                      280.3
                                                     1,398                                13.4         63.9                      476.9
                                                       907                                 5.0         35.7                      714.0
                                                        623                               30.8        266.3                      8646
                                                      1,675                                4.6         643                     1,397.a
                                                      1,210                                2.1         62.8                    2,990.5
                                                        437                                0.1           5.7                   5,700.o
                                                        373                                0.1           9.8                   9,800.O
                                             Total 16.369                             $1,006.1       $652.6


                                             In addition, AVSCOMhad retention inventories valued at about $147 mil-
                                             lion for 8,345 line items that did not have AFAO requirements. In other
                                             words, even though the items did not have current operating or war
                                             reserve requirements, AVSCOMwas retaining inventory for them.



                                              Page 13                                   GAO/NSIAIHO-236 Army’s Retention-Level Stocks
                             chapter2
                             ArmybPoucylteSultsinLageRetentio~
                             LevelInventdea




                             In the following three examples, the amounts of inventory retained
                             exceeded expected needs:

                     l       As of November 1989, AVSCOMreported that it had 6,298 rotor blade con-
                             tainers (with a unit price of $626) on hand to support an AFAO require-
                             ment of 3,234. On the basis of the November 1989 supply control study
                             demand rate for the containers, we estimate that AVSCOMhas 64 years of
                             supply for this item.
                     l       As of November 1989, AVSCDMhad 243 shipping and storage containers
                             (with a unit price of $736) for the transmission used on the UH-1M and
                             UH-1H aircraft. The item had an operating and war reserve requirement
                             of 46. The Army was keeping twice this amount (123) as retention
                             stocks. On the basis of the November 1989 supply control study demand
                             rate, we estimate that AVSCOMhas a 17-year supply of these containers.
                         l   As of November 1989, AVSCOMhad $209 million of retention-level inven-
                             tory on hand for three different types of transmissions used on the
                             CH-47C helicopter, which is to be phased out in September 1992. For
                             these three items, the on-hand inventory ranged from 11 to 18 times
                             more than what was needed to support AFAO requirements. Furthermore,
                             these retention inventories have been maintained for at least 2 years for
                             two of the items. Two months after we brought this matter to AVSCOM'S
                              attention, it approved disposal actions for $156.9 million of the
                              retention-level inventory.


                             Item managers are not required to review computer decisions to retain
Justifications for           economic retention stocks. However, they are required to review and
Contingency and              validate computer decisions to retain contingency and numeric retention
Numeric Retention            assets. We found that item managers were not documenting the reasons
                             for retaining contingency and numeric inventories. Instead, item man-
Stocks Not                   agers, for the most part, accepted the retention levels determined by the
Documented                   computer program. As a result, inventory accumulated in the retention-
                             level categories and stocks that could have been classified as potential
                             excess were not so classified.

                              As of March 31,1989, AVSCOMhad $666.6 million of contingency and
                              numeric retention inventory. Our sample of 33 line items contained 21
                              line items with $266.8 million of contingency and numeric retention
                              inventory. Our analysis of the case folders and our discussions with item
                              management officials disclosed that in only one case had the reason
                              been documented for retaining the inventory. Item managers told us
                              that they were generally unaware that they were required to document
                              the reasons for retaining the stocks.


                              Page14                             GAO/TVSlAD-9@236   Army’s Betention-Level   Stoclrs
                         Chapter 2
                         Army’s Policy Resulta in Large Retention-
                         Level Invent&w




                         The large retention-level inventories maintained by the Army contribute
Maintaining Retention-   to the overcrowded storage conditions already existing at the Army’s
Level Inventories Is     major depots. These overcrowded conditions impair warehousing and
Costly and Reduces       supply efficiency. Furthermore, it is costly to maintain these
                         inventories.
Supply Efficiency
                         According to the Army, when storage facilities are filled to more than 85
                         percent of their storage capacity, efficiency suffers because inventory
                         must frequently be relocated to make room for incoming inventory. Fre-
                         quent relocations, in turn, result in the loss or misplacement of inven-
                         tory and the failure to fill customer requisitions because the needed
                         items cannot be found.

                         According to the Army’s Inventory Control Effectiveness report for the
                         first quarter of fiscal year 1989, Army depot storage facilities were
                         filled to an average of 87 percent of their capacities. At the three Area
                         Oriented Depots, which process and distribute over 92 percent of the
                         Army’s wholesale inventory, the problem is even worse. These depots
                         are filled to 97 percent of their capacities.

                         AVSCOM'Sretention inventory contributes to this overcrowding. AVSCOM’S
                         total inventory occupies 7.7 million cubic feet of space, of which 1.4 mil-
                         lion cubic feet are taken up by retention-level inventories. To put this in
                         perspective, retention-level inventory would cover an area equal to the
                         size of a football field stacked 28 feet high.

                         The retention of this inventory not only impairs supply efficiency, but it
                         is also costly. According to the Army, the annual cost associated with
                         holding retention-level inventory is equal to 13 percent of the inven-
                         tory’s value. On this basis, we estimate that it costs the Army about
                         $130 million, annually, to hold AVSCOM’Sretention inventory. On an
                         Army-wide basis, the annual cost to hold retention-level inventory
                         would be about $481 million.


                         The Army is aware of many of the problems associated with over-
Army’s Actions to        crowded warehouses and is taking action to alleviate this condition. In
ReduceIts Retention-     January 1990, as part of a Defense Management Review initiative, the
Level Inventory          Army requested that DOD change its retention policy by eliminating the
                         numeric retention stock category. This change would have allowed the
                         Army to dispose of its numeric retention stock and retain economic and
                         contingency retention stocks.

                                                      .

                          Page 15                                    GAO/NSIADw)-236 Army’s Retention-Level St&w
Chapter 2
Army’s Policy Results in hrge Retention-
Level Inventories




Although DOD did not agree to the Army’s request because it was con-
cerned that items might be disposed of that were needed, DOD agreed
that if a case-by-case review showed the items were not needed, then the
items could be processed for disposal. F’urthermore, DOD is amending its
policy guidance to the services on the retention of assets supporting
active weapon systems by including a consideration of shelf life, item
essentiality, storage space requirements, number of weapon systems,
and projected life.

In our opinion, DOD’S policy revisions are a first step toward reducing the
retention-level inventories currently being maintained. Equally impor-
tant, however, is the need for specific Army guidance on how the policy
is to be implemented so that inventory managers will know not only
what, but how much, to retain.




 Page 16                                   GAO/NSIAlMO-236 Army’s Retention-Level Stocks
The Quality and Accuracy of Information Must
Be Improved to Ensure an Effective
Retention Program
                  Along with DOD’S revision to its policy on retention-level inventory, the
                  Army needs to improve the accuracy of the information system it uses
                  to determine how much and what inventory to retain. Otherwise, the
                  overall quality of its retention decisions will not improve.

                  The Commodity Command Standard System (CBS)~ is the principal
                  information system used by inventory managers to make inventory deci-
                  sions on what and how much to buy and retain. However, many of the
                  cuss components do not produce the desired results because much of the
                  data in the automated system is inaccurate. Contributing to the problem
                  is the fact that the computer programs are poorly documented.

                  IRO,which designed the system, identified systemic problems that affect
                  the retention-level inventory decisions being made. After reviewing
                  selected aspects of the CBS, IRO identified problems with the economic
                  retention module. A review was initiated in response to questions from
                  some of the NICPS concerning the computer-generated outputs from the
                  economic retention programs. 1~0 found errors in the computer program-
                  ming methodology for determining economic retention levels.

                  IRO officials told us that they had not been able to quantify the effect of
                  the errors on the retention levels. They said that the effects depended
                  on the input and the relationships of the various factors considered in
                  the computer programs.

                  In addition, we identified other systemic problems, such as the fol-
                  lowing, that affected the accuracy and quality of decisions concerning
                  the amount of retention-level inventory being maintained by AVSCOM:

              . Program documentation describing how the systems work and what
                computer logic is being used is lacking.
              l Data used to determine retention limits, storage space needs, number of
                end items being supported, and phase-out dates are inaccurate or out-of-
                date.

                  Furthermore, decisions on retention-level inventory have a low priority,
                  and little time and effort are spent by inventory management officials
                  on these matters.



                  ‘The CC233programs are written and maintained by SIMA. The development of the methodology,
                  models, and logic used in the Army’s system is the xxqonsibility of IRO.



                  Page 17                                     GAO/NSlAJMO-236 Army’s Retention-Level Stocks
                                           Chapter 3
                                           The Quality and Accuracy ofhfornmtion
                                           Muet Be Improve-dto Enmre an Effective
                                           Retention Program




                                           The subsystem of the ccss that computes requirements and retention
Lack of System                             levels is about 20 years old. Over the years, this subsystem has under-
Documentation                              gone three major revisions, and five different programmers have main-
                                           tained it. Documentation for the programs for this subsystem were
                                           written long before the present DOD documentation standards were set.
                                           As a result, the documentation for many of the changes and revisions
                                           contains no flowcharts,   subsystem descriptions, or explanation of what
                                           the current programs do or what computer logic is used. The limited
                                           documentation that does exist consists of comments at the end of the
                                           lines of code in the programs and some remarks at the beginning of each
                                           program module.

                                           The lack of system documentation contributes to the difficulty in fixing
                                           systemic problems and determining what effect systemic problems have
                                           on the resulting computations of retention-level inventory.


                                           According to SIMAofficials, the computer program is not supposed to
Retention Levels Are                       compute retention levels for items whose phase-out dates have passed.
Computed for Items                         Our analysis showed that as of March 31,1989, AVSCOMhad 238 line
With Past Phase-Out                        items, with retention level inventory valued at $29.6 million, whose
                                           phase-out dates had passed. However, SIMAofficials could not explain
Dates                                      why retention levels had been calculated for these 238 items. Table 3.1
                                           shows the phase-out dates, quantities, and inventory value of items
                                           being retained to support these items.

Table 3.1: Retention Inventory for Items
Whose Phase-Out Dates Had Passed (as       Dollars in thousands
of March31,1989)
                                                                                        Line item
                                           Year of phase-out                        Number       Quantity              Amount
                                            1980                                          8            119                  $9.3
                                            1984                                         26            653                  92.2
                                            1985                                         47        18,586                1,001.8
                                            1986                                         13            190                  10.7
                                            1987                                        140        23,484               28,501.2
                                            1988                                          4          1.155                  21.6
                                            Total                                       238        44,107             $29.6364




                                            Page 18                                 GAO/NSIADSO-338Army’s Retention-Level Stocks
                            chapt.er 3
                            The Quality and Accun~~yof Inform&ion
                            Must Be Improved to Ensure an Effective
                            Retention Program




                            The database that item managers need to make retention decisions con-
Database Contains           tains inaccurate data, or the necessary data are missing from the
Incomplete and              system. As a result, decisions on what and how much inventory should
                            be retained are also inaccurate.
Inaccurate
Information

Retention Limit Data File   The ccs includes a program to analyze the cost of retention versus dis-
                            posal. It uses the cost to dispose of an item and revenue from the sale of
Not Up-to-Date              disposed items as data entered into other modules in the requirements
                            determination system. If data for disposal costs and income are not
                            entered into the retention limit file and kept current, the resulting com-
                            putations are erroneous. These data affect retention decisions and other
                            requirements computations.

                            According to SIMA and IRO officials, the NICPS are not updating their
                            retention limit files as required. AVSCOMhas not updated its retention
                            limit file for about 2 years.


Number of End Items         An important factor to consider in determining how much stock to
                            retain is the number of end items for which support is required. Without
Being Supported Is Not      this information, item managers have no way of knowing whether or not
Always Known                the retention-level inventory is sufficient. End items to be supported
                            include those operated not only by the Army but by the other military
                            services. We found that this information was not readily available. In
                            some cases, AVSCOMdid not know the number of aircraft it had the
                            responsibility to support.


Phase-Out Dates Are         Item managers need to know not only the quantity of end items
Generally Inaccurate        requiring support but also the length of time that they will have to sup-
                            port the end items (the time until the item is phased out). Project man-
                            agement offices are responsible for entering item phase-out dates into
                            AVSCOM’Sitem database. If a date is not entered, the system is
                            programmed to establish a projected phase-out date 15 years in the
                            future.

                             Of AVSCOM’Sinventory of 47,004 line items, we identified 5,392 line
                             items, with retention inventories of $474.3 million, whose phase-out
                             dates had been arbitrarily established at 15 years in the future. Our
                             analysis of the 33 sample items we selected on a judgmental basis


                             Page 19                                  GAO/NS~230   Army’s Retention-Level Stocks
                         Chapter 3
                         The Qudity and Accuracy of Infomution
                         Must Se Improved to Ensure an Effective
                         Betention Program




                         showed that the phase-out dates for 25 of the items had been estab-
                         lished by the computer at 15 years. The value of retention-level inven-
                         tory for these items was $295.3 million. Material management officials
                         had information showing that the planned phase-out dates were less
                         than 15 years in the future for 17 of the items and were more than 15
                         years in the future for 7 of the items. For only one of the items was the
                         phase-out date correct.

                         By using 15-year computer-generated phase-out dates for the 17 items,
                         the computer calculated and stratified more assets to be maintained in
                         economic retention than it should have. Although it was not possible to
                         determine how much less the economic retention levels should have
                         been for 12 of the items, there should not have been any economic reten-
                         tion levels for the other 5 items because their phase-out dates had
                         passed.


Storage SpaceNeeds Are   Army Regulation 710-l states that retention-level inventory decisions
Often Not Known          are subject to storage space limitations. We found, however, that infor-
                         mation needed to determine storage space requirements was not always
                         available in the system. As a result, the impact on storage space by
                         retaining inventory is not considered in making retention decisions.

                         Our analysis showed that the AVFCOMdatabase contained no information
                         on the cubic feet of storage needed for about 27 percent of the 47,004
                         items in AVSCDM'SMarch 3 1, 1989, budget stratification report. Our anal-
                         ysis also showed that the bulk of the storage space was required for
                         relatively few items. For example, 1,021 of the 47,004 items managed by
                         AVSCOMaccounted for 90 percent of the Command’s total storage space
                         requirements. About 99 of the items accounted for about 68 percent of
                         the total space.

                          In view of the overcrowded conditions that currently exist at Army
                          storage facilities, item managers need to consider space requirements in
                          their retention-level decision process. At present, managers are not con-
                          sidering these conditions. Rather, they are accepting the computer’s
                          decisions about what to retain in the inventory.




                          Page 20                                  GAO/NSIAD-BO-236
                                                                                  Arn~y’sRetention-Level Stocks
                    Chapter 3
                    The Qnality and Accmacy of Information
                    Muat Be Improved to Jhsure an Effective
                    Retention Program




                    Item managers told us that they generally accepted the computer’s
Management of       determinations without changing or questioning the recommended
Retention-Level     amounts. AVSCOMofficials stated that the Command did not have suffi-
Inventory HasaLow   cient resources to carry out its primary mission, let alone manage reten-
                    tion inventory. According to AVSCOM'SDirector of Logistics, the
Priority            Command’s mission is to ensure the operational readiness of and parts
                    availability for the aircraft fleet it supports. Consequently, supply con-
                    trol studies recommending procurement actions receive top priority, and
                    those recommending cutbacks or cancellations are reviewed and acted
                    on if time permits.




                    Page 21                                   GAO/NSLAMtO-236Army’s Retention-Level Stocks
Chapter 4

Conclusions,Recommendations,and
Agency Comments

                  The Army’s policy and practices for determining what and how much
Conclusions       retention-level inventory to retain results in the retention of inventory
                  in excess of what is needed to support current operating and war
                  reserve requirements regardless of the quantity of inventory, its condi-
                  tion, or the number of weapon systems to be supported.

                  Retaining these inventories can adversely affect the efficiency of the
                  supply system and result in overcrowded storage facilities. This over-
                  crowding necessitates moving inventory to make room for incoming
                  inventory, thereby increasing the possibility that inventory will be lost
                  or misplaced and that requisitions will go unfilled.

                  Maintaining inventory in excess of current needs is also costly. Using
                  Army estimates that the annual cost to hold such inventory is about 13
                  percent of the inventory value, it costs about $130 million annually to
                  hold AvscoM-managed items that exceed requirements. On an Army-wide
                  basis, the annual cost is about $481 million.

                  Decisions concerning what and how much retention-level inventory to
                  retain depend not only on sound policies, but also on having complete
                  and accurate information. At AVSCQM,the data needed to make these
                  decisions are often incomplete and inaccurate. In the absence of either
                  one of these important elements, the resulting decisions will be less than
                  optimal.

                  Additionally, explanation of how the automated system works and what
                  computer logic is being employed is poorly documented. Compounding
                  these problems is the fact that inventory management officials spend
                  little time and effort on managing retention-level inventory.


                  After we initiated our review, DOD began to revise its inventory reten-
Recommendations   tion policy guidance to the services to take into consideration such fac-
                  tors as the number of end items being supported, the remaining time
                  before the item is phased out of the Army’s system, and the essentiality
                  of the item. Therefore, we are not making any recommendations for
                  policy revision.

                  However, revising the policy will not, in and of itself, resolve the issues
                  identified in our review. The key to successful guidance lies in how the
                  policy is implemented and whether it is implemented using accurate and
                  complete information.



                  Page 22                            GAO/NSIAD90-236Army’s Retention-Level Stocka
                      chapter 4
                      Conchions, Recommendatlona,and
                      Agency Comments




                      To address these issues, we recommend that the Secretary of the Army
                      direct the Commander of the Army Materiel Command to take the fol-
                      lowing actions:

                  . Develop specific implementation guidance for item managers to use in
                    determining what and how much inventory to retain, in accordance with
                    the revised retention-level inventory policy.
                  l Ensure that when computer programs used in making retention deci-
                    sions are changed, the changes are better documented so that when sys-
                    temic problems arise, fixes can be incorporated, and a historical trail is
                    created for future reference.
                  l Modify the computer programs to classify inventory in excess of the
                    economic retention level as potential excess stock unless the item man-
                    ager can justify and document that the item is needed for some other
                    purpose. As part of this process, item managers should (1) ensure that
                    the database is accurate and complete and (2) determine whether the
                    item should be retained or processed for disposal, in accordance with
                    the implementation guidance issued as part of the revised retention
                    policy.


                      DOD agreed with all of our findings and recommendations and provided
Agency Comments       information on how the recommendations would be implemented.

                      According to DOD, the Department’s policy until recently required the
                      Army to retain all items related to the support of an active weapon
                      system even through the phase-out period. DOD acknowledged that this
                      has contributed to the growth in retention level inventories.

                      DOD acknowledged that reviews of contingency and numeric retention
                      stocks had not been actively pursued in recent years. A causative factor
                      was the strict limitation on disposals. DOD indicated that the Army is
                      reviewing economic retention and contingency levels to reduce them in
                      proportion to the number of end items still being supported. NICPS have
                      been instructed to initiate a methodical disposal of material for which
                      no need exists, particularly unserviceable material.

                      DOD commented that the construction and application of the relevant
                      data input file for the computerized system were not well documented
                      and the information the system was intended to portray was inaccurate.
                      DOD said the problems of documentation and appropriate historical data
                      are being addressed by a coordinating group.



                       Page 23                          GAO/NSIAB~236 Army’e Retention-Level Stocks
    Chapter 4
    Conclusions, Recommendations,and
    Agency Commenta




    With regard to our specific recommendations DOD stated that:

l The Army will initiate action to change appropriate regulations and pol-
  icies by September 1990 to comply with DOD's revised retention policy.
. Action is being taken to ensure that computer programs for the reten-
  tion model are documented and that audit trails are created for future
  reference. These actions are expected to be completed by the end of
  December 1990.
l Effective August 1990, inventory will no longer be automatically strati-
  fied to “contingency retention” or “numeric retention.” All material that
  does not stratify as economic retention must be justified for retention.
  Otherwise, it will be stratified as “potential excess.”




     Page 24                           GAO/NSIAD90.236 Army’s Retention-Level Stocks
Page 26   GAO/NSIAD-90-226Army’6 Retention-Level Stocks
Appendix I

Comments From the Department of Defense


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.                             ASSISTANT      SECRETARY        OF DEFENSE
                                                         W*SHINGTON.     n c   20301-8000




                                                                                      August   3,   1990




                             (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, "ARMY INVENTORY: Army Annually
                             Spends Millions   to Keep Retention-Level Stocks," dated June 25, 1990
                              (GAOCode 393349) OSD Case 8393. The Department concurs with the
                             findings and recommendations.
                                  The detailed DODcomments are provided in the enclosure.                  The DOD
                             appreciates the opportunity to cement on the draft report.
                                                                                  S*erely,



                                                                                  David .I! Berteau
                                                                                  Principal Deputy




                             Enclosure




                                 Page26                                          GAO/NSL4D9O-220Army'sRetention-LevelStiks
    Appendix I
    CommentsProm the Department of Defense




                 GADDRAFTREPORT- DATED JONE 25, 1990
                    G&o CODE393349 - OSDCASN8393
           "ARMY 1NvENTQRY: ARMXANNuALLYSPENDSMLLIONSTO
                     KEEP RETENTION-IEVELSTCCXS"



                                  l    ****



                                      FINDINGS
.    FINDING A: BackarouN:      &walr of Arms WlaV.               The
     GAOobserved that the Army Materiel Commandand its six National
     Inventory Control Points manage the Army's wholesale-level
     inventory,  which includes secondary items such as spare and
     repair parts.
      The CA0 explained that the part of an item's inventory needed to
      meet current operating and war reserve requirements is referred
      to as the Army's *'Approved Force Acquisition     Objective."      The GAO
      further explained that the difference between an item's Approved
      Force Acquisition    Objective and its total inventory is
      categorized as "inapplicable     inventory."   (The GACnoted that
      this category includes "potential      excess" and "retention-level"
      inventories.)     The GAOobserved that potential    excess inventory
      is inventory the Army has determined is not needed and can be
      processed for disposal.      The GAOpointed out that retention-level
      inventory is categorized, as follows:
      --         mic RetentiQn--Inventory that has been determined to be
           more economical to retain than to replace by future
           procurement and has a reasonably predictable  demand rate.
      --            ncv RetentiQn--Inventory that has no predictable
           demand rate but is being retained for possible
           contingencies.
      --               entim--Inventory that is infeasible  or
           uneconomical to dispose of or inventory for which a
           management decision has been made to retain it in the supply
           system. (The GAOnoted that an example of the latter would
           be a decision to retain all inventory related to active
           weapon systems.)




     Page 27                                     GAO/NSIADBM36 Army’s Retention-Level Stocks
                           Appendix I
                           CommentsFromtheDepartmentofDefen.9e




                           The GAOfound that, as of March 31, 1989, economic retention
                           accounted for $1.4 billion   of the Army’s $3.7 billion    of
                           retention-level   inventory, while contingency and numeric
                           retention inventory accounted for $2.3 billion.      (pp. 2-3,
Now on pp, 2,8-g.          pp. 12-15/GAO Draft Report)
                           DODResoons9:    Concur.
                       .   FINDING 8: petainad Invmntorv s.                     The GAOobserved
                           that, to determine inventory retention levels, the Army uses a
                           computer program, which stratifies    all inventory exceeding
                           current operating and war reseme requirements into one or more
                           of the three retention levels--economic,      contingency, or numeric.
                           The GAOfound that, as of March 31, 1989, the Aviation Systems
                           Commandhad 26,704 line items with retention-level         inventory
                           valued at about $1 billion.      The GAOestimated that, of that
                           total, about $653 million    involved 18,359 line items with
                           operating and war reserve requirements--and over 50 percent of
                           the items had retention inventories     at least twice as large as
                           what was needed to support the current operating and war reserve
                           requirements.     The GAOfurther found the Commandhad retention
                           inventories   valued at about $147 million    for 8,345 line items
                           that did not have current operating or war reserve requirements.
                           The GAOcited an example involving the CH-47C aircraft      (which
                           is to be phased out in 1992) where the amount of retention
                           inventory exceeds expected needs . According to the GAO, as of
                           November 1989, the Commandhad $194.5 million of retention-level
                           inventory on hand for three different  types of transmissions used
                           on the CH-4X helicopter.    The GAOcalculated that, for these
                           three items, the on-hand retention inventories   ranged from 11 to
                           18 times what was needed to support the current operating and war
                           reserve requirements --and that the vast majority of the retention
                           stocks were in the contingency and numeric categories.      The GAO
                           found that those retention inventories   have been maintained for
Now on pp. 3, 12-14.       at least 2 years. (pp. 3-5, pp. 1&21/GAO Draft Report)
                           poD Resoonsp: Concur. Aviation weapon systems involve a complex
                           and lengthy cycle of programming, budgeting, and operational
                           support.   For example, the CH-47C helicopter  is expected to serve
                           until 1992, while the CH-47D will serve until the year 2010.
                           Until recently, the Department's policy required the Army to
                           retain all items related to the support of an active weapon
                           system, even through the phase-out period.    This has contributed
                           to the growth in retention level inventories.
                       .   FINDING C: Reasons That Contiacv     and Numeric Retention
                           Inventories Were Not Validated and Documented. The GAOfound




                                                     .


                           Page28                                 GAO/NSIADW)-298Army'eBetention-LevelStocks
                              Appendlx I
                              CommentsProm the Department of Defense




                          that item managers are not required to review computer decisions
                          to retain inventory in the economic retention category.           The GAO
                          further found, however, that they are required to review computer
                          decisions and to validate and document the need to retain
                          inventory in the contingency andnumeric categories.            The GAO
                          explained that, for those itemsnot to be retained, they are to
                          be processed for disposal.     In actuality,     however, the GAOfound
                          that the item managers routinely      accepted the computer's
                          decisions and did not justify      or document their decisions to
                          retain contingency and numeric inventory.         The GAOconcluded
                          that, as a result of the item managers not justifying          and
                          documenting contingency and numeric retentions,         inventory
                          accumulated in the retention categories and stocks that could
                          have been classified    as potential   excess were not. The GAO
                           reported item managers indicated that they were generally unaware
                          of the requirement to validate and document their reasons for
                           retaining the inventory and, further,       even if they had been aware
                          of the requirement, they did not have the time to manage
                           retention stocks.
                          The GAOexplained that its sample of 33 line items contained 21
                          items with $266.8 million of contingency and numeric retention
                          inventory.   The GAOfound that in only one case had the reason
                          for retaining the inventory been validated and documented.
Now on pp. 3-4, 14.        (pp. 5-6, pp. 21-22/CAO Draft Report)
                          DODResnonsg: Concur. Item managers are required to review all
                          computer recommendations to retain or dispose of material;
                          documentation of these reviews is a part of the review process.
                          The Department acknowledges that reviews of contingency and
                          numeric retention stocks have not been actively pursued in recent
                          years; a causative factor was the strict     limitation  on disposals.
                          However, the Department issued new guidance in June 1990 that
                          will reduce the size of the retention level inventory.       The
                          Army is complying with the policy and is initiating      appropriate
                          action.      A system change request, to be implemented in
                          August 1990, will eliminate the automatic stratification       of
                          assets into numeric and contingency retention levels.       In the
                          future, item managers will have to manually move stock into
                          numeric or contingency categories, with appropriate
                          justification.
                      .   FINDING D: Maintainina Retention-Level       Inventors Is Costly. The
                          GAOestimated that the Army incurs annual costs of about $130
                          million to store and maintain the Aviation System Command's
                          retention-level    inventory.   The GAOexplained that this inventory
                          also contributes     to warehouse overcrowding and reduces the
                          effectiveness    of supply management. According to the GAO, the




                               Page 29                                 GAO/NSIAD-99-236Army’s Retention-Level Stocks
                              Appendix I
                              Canments From the Department of Defense




                           Cosnnand's retention-level inventory takes up about 1.4 million
                           cubic feet of storage space-- an area equal to the size of a
                           football  field stacked 393 feet high.
                           The GACobserved     that the majority of that inventory is at
                           storage depots already filled     to 97 percent of capacity.     The GAO
                           referred to Army statements that, when a storage facility        is
                           filled    to more than 95 percent of its capacity, efficiency
                           suffers because inventory must frequently be relocated to make
                           room for other incoming inventory.       The GAOindicated that
                           frequent relocation,     in turn, increases the potential    for losing
                           or misplacing inventory and being unable to fill       customer
                           requisitions    because the needed inventory cannot be found. (p. 6,
Now on pp. 4 and 15.       pp. 22-23/GAO Draft Report)
                           poD ResmonsQ: Concur. The Army is expediting disporal of all
                           stocks stratified  as potential excess and numeric retention;    it
                           is reviewing economic retention and contingency levels to reduce
                           them in proportion to the number of end items still   supported.
                       .   EINDTNG:        iX.WSvstomScto~
                                    ion-bevel In-.             The GAOidentified     systemic prob-
                           lems--such as computer programning, logic, and data errors--which
                           affect the determination of what and how much inventory should be
                           retained.      The GAOfound that the computer programs were complex,
                           interrelated,      and poorly documented regarding the system's
                           working procedures or the computer logic used to make decisions
                           on retention inventory.          The GAOconcluded that, as a result of
                           the cited deficiencies,         when errors were identified,     it was often
                           not possible to determine the effects of the errors on retention
                           decisions.      The GAOnoted an example where the computer program
                           is not supposed to compute retention levels for end items or
                           major components whose phase-out dates have passed. The GAO
                           found, however, that the Commandwas retaining $29.6 million of
                           retention-level      inventory for 238 line items whose phase-out
                           dates had passed as long as 9 years before.           According to the
                           GAO, Army officials       could   not explain why the computer was
                           computing retention levels for these items.
                           The GAOalso found that information needed to determine retention
                           levels, storage space needs, the number of end items being
                           supported, and weapon system phase-out dates was often
                           inaccurate,  incomplete, or out-of-date.  The GAOcited another
                           example where the computer is programned to set the phase-out
                           dates for an item at 15 years in the future whenever the actual
                           phase-out date has not already been entered into the database.
                           The GAO found that computer-generated phase-out dates for 5,392
                           line items had been set at 15 years in the future and the Command


                                                                4




                               Page 30                                   GAO/NSIADW23S Army’s Retention-Level Stocks
                                Appendix I
                               Comments      Prom the Department of Defense




                              was retaining     $474.3 million of retention inventory for those
                              items. The GAOreviewed 33 of the items and learned that,
                              in     17 of the 33 cases, information in the case folders showed
                              the phase-out dates to be nearer than 15 years in the future.
                              The GAOconcluded the effect of using the erroneous
                              computer-generated dates is that the Connnandcan retain
                              additional    inventory in retention-level   categories.
                              The GAO further concluded that adding to the systemic problems
                              is the fact that the Commandplaces a low priority     on
                              retention-level  inventory decision-making and little    time and
                              effort are spent by inventory management officials    on these
Now on pp. 4, 17-21           matters. (pp. 6-7, pp. 25-31/GAO Draft Report)
                              Pesnonmq:   Concur. The construction  and application  of the
                              relevant data input file for the Retention Model used in the
                              Commodity CommandStandard System was not well documented. As a
                              result, the management information the model was intended to
                              portray was inaccurate.   The problems of documentation and
                              appropriate historical  data are being addressed by the Supply
                              Management Functional Coordinating Group.
                          .   lpINDIN0:   &- ion6 To Alleviate    Pv             the Blfention
                              Inventon.   The GAOobserved that the Army is aware of many of
                              the problems associated with its retention-level      inventories.
                              The GAO found that, in January 1990, as part of a Defense
                              Management Review initiative,    the Army requested that the
                              Department of Defense change its retention policy by eliminating
                              the numeric retention stock category.
                              The GAOreported the Department did not agree to the Army's
                              request because it was concerned items might be disposed of that
                              were needed. The GAOnoted, however, the Department agreed that
                              disposal actions could be taken if a case-by-case       review showed
                              the items were not needed. The GAOfurther noted that the
                              Department is amending its retention-level     inventory policy to
                              include consideration    of such factors as (1) shelf life,    (2) item
                              essentiality,   (3) storage space requirements, and (4) number of
Now on pp. 5, 15-16           weapon system being supported. (p. 8, pp. 23-24/GAO Draft Report)
                              DODResoonse: Concur. In January 1990, Headquarters, Army
                              Materiel Commandinstructed       the National Inventory Control Points
                              to screen materiel stratifying      to the Numeric Retention Level and
                              to initiate   a methodical disposal of materiel for which no need
                              exists, particularly    that materiel in an unserviceable condition.
                              Shelf life,   item essentiality,    storage capacity and weapon system
                              density have been factors considered by the Army for retention of
                              materiel.


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                                 Page 31                                      GAO/NSLAD-90236Army’s Retention-Level Stocks
                             Appendix I
                             Commenta     Prom the Department of Defewe




                       .   REC~TION        I: The GAOrecoasasnded that the Secretary ofthe
                           Army direct the Corsnander of the Army Materiel Commandto develop
                           specific implementation guidance for item managers to use in
                           determining what and how much inventory to retain, in accordance
                           with the revised retention-level  inventory policy. (pp. 0-9,
Now on pp. 5 and 23.       pp. 33-34/GAO Draft Report)
                           DODR~SOQLUQ: Concur. The Secretary of the Army will initiate
                           action to change appropriate regulations and policies by
                           September 30, 1990, to comply with the Department's revised
                           retention policy.
                       .   smTION          2: The GAOrecosanendsd that the Secretary ofthe
                           Army direct the Cossaander of the Army Materiel Commandto ensure
                           that, when computer programs used in making retention decisions
                           are changed, the changes are better documented so when systemic
                           problems arise, fixes can be incorporated,   and a historical trail
Now on pp. 5 and 23.       is created for future reference. (pp. 0-9. pp. 33-34/GAO Draft
                           Report)
                           DoD Reso~ap): Concur. Action is underway through the Supply
                           Management Functional Coordinating Group to ensure computer
                           program changes are documented and audit trails  are created for
                           future reference.   The Functional Coordinating Group will address
                           data and documentation issues for the retention model, with a
                           target date for correcting the problems set for the end of the
                           first quarter, FY 1991.
                       .   RECCWENDATION    3: The G&Orecommended that the Secretary ofthe
                           Army direct the Conmmnderof the Army Materiel Commandto modify
                           the computer programs to classify   inventory in excess of the
                           economic retention level as potential    excess stock.    (In
                           connection with this recommendation the GAOasserted that, item
                           managers then should (1) ensure the database is accurate and
                           complete and (2) determine whether the item should be retained or
                           processed for disposal, in accordance with the implementation
                           guidance issued as part of the revised retention policy.       The GAO
                           further asserted that, when a decision is made to retain an item,
                           the reasons for doing so should be documented.)      (pp. 8-9,
Now on pp 5 and 23         pp. 33-34/GAO Draft Report)




                              Page 32                                     GAO/NSLUHO-236Army’s Retention-Level Stocks
  Appendix I
  CommentsProm the Department of Defense




POD Roam:       Concur. Effective     in August 1990, no materiel
will be automatically    stratified to Contingency Retention or
Numeric Retention.    All materiel that does not qualify as
Economic Retention Stock or manually loaded as Contingency
Retention or Numeric Retention Stock will be stratified     to
Potential DOD Excess.




   Page 33                                 GAO/NSIAD9O-336Army’s IMention-Level Stocks
Appendix II

Major Contributors to This Report


                        Henry L. Hinton, Associate Director
National Security and   Robert J. Lane, Assistant Director
International Affairs   Richard Dasher, Evaluator-in-Charge
Division,
Washington, D.C.

                        Gary L. Billen, Assistant Regional Manager
Kansas City Regional    Leonard C. Hill, Site Senior
Office                  Robert C. Sommer, Technical Assistant for ADP Services
                        Howard H. McGee, Evaluator
                        Norman W. Trowbridge, Evaluator




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