. United States General Accounting Office -GAO Report to the Chairman, Subcommittee on Readiness, Committee on Armed Services, House of Representatives January 1990 ARMYINVENTORY A Single Supply System Would Enhance Inventory Management and Readiness GAO/NSIAD-90-53 National Security and International Affairs Division B-237804 January 25,19!30 The Honorable Earl Hutto Chairman, Subcommittee on Readiness Committee on Armed Services House of Representatives Dear Mr. Chairman: This report is in responseto a request by the former Chairman that we determine how effectively the Army’s retail-level activities were mam@ng their inventories and, more specifically, how effectively the retail-level activities were identifying and reporting excessesto the wholesale level so that they could be returned to the supply system. We are sending copies of this report to the Director, Office of Managementand Budget; the Chairmen, HouseCommittee on Government Operations, SenateCommittee on Governmental Affairs, House and SenateCommittees on Appropriations, and the SenateCommittee on Armed Services;and the Secretariesof Defenseand the Army. Copies will also be made available to other parties on request. This report was prepared under the direction of Richard Davis, Director, Army Issues,who may be reached on (202) 276-4141 if you or your staff have any questions. Other major contributors are listed in appendix II. Sincerely yours, Fhnk C. Conahan Assistant Comptroller General Executive Summary purpose Concernshave been expressedabout whether the overall growth of the Army’s inventory meansthat it is buying and maintaining more inven- tory than it needsto meet its military requirements. Having too much inventory means that valuable resourcesare not used efficiently or effectively. Having too little may mean that units’ equipment is inoper- able, and readinessmay suffer. The former Chairman of the Subcommittee on Readiness,HouseCom- mittee on Armed Services,asked GAOto determine how effectively the Army’s retail-level activities were managing its inventory and, more specifically, how effectively the retail-level activities were identifying and reporting excessesto the wholesale level so that the excessescould be returned to the supply system. The wholesale and retail supply systems are independent systems. As a Background result, once an item is issued from the wholesale system, managers of the wholesale system lose visibility of it. Consequently, managers of the wholesale system are forced to make procurement and stockage deci- sions without knowing whether there are items in the retail system that could be returned to the wholesale system in order to reduce planned procurements or redistributed to other retail-level activities to meet their needs. GAOand others have previously reported on the need for the Army to improve its inventory managementprocesses.While these studies have covered a myriad of issues,one common theme has been that there is no interface between the wholesale and retail supply systems. This weak- nesshas resulted in the accumulation and retention of excessinvento- ries at certain retail-level activities, corresponding shortages at other retail-level activities, and unnecessaryprocurements at the wholesale level. The 13 retail-level activities (division-sized units) that GAOreviewed had Results in Brief over $134 million worth of spare and repair parts that were excessto their needsand had not been reported to the wholesale level. These units had $33 million of shortages, of which $8.4 million was for items that were excessat other locations. At the sametime, managers at the ~three buying commandsGAOreviewed were in the processof procuring $66.9 million for 1,669 of the same items that were excessat the retail level. The inability of the Army to redistribute the excessesimpairs the readinessof the units that need the items and results in unnecessary costs. The alternatives the Army is pursuing to solve many of the problems do not provide for complete vertical integration between the wholesale and retail levels. Thus, these improvements will not fully addressthe excess inventory and redistribution problems identified in this report. Despite the long-standing nature of the excessinventory issue and the lack of linkage between the wholesale and retail levels, the Army has not reported these problems as material wealmessesin its annual assess- ment on internal controls. Principal FSndings CommandsResist Retail-level activities are generally not complying with Army regula- Reporting Excess tions that require them to report excessinventory. Their reluctance to identify and report excessinventory to the wholesale level stems from Inventory an ingrained philosophy that if the items are turned in, the units may need them in the future and will have to buy them again. As a result, a mind-set has developed that it is better to have too much than too little. Inability to Redistribute The $134 million of excessinventory that GAOidentified at the 13 divi- Excesses sions it reviewed consisted of about 24,666 line items. The divisions also had shortages totaling $33 million for about 6,366 of these items. How- ever, neither the divisions that had a need for the items nor the whole- sale level item managers were aware that the items were excessat other locations. The reason for this situation is that the wholesale system does not have visibility and control of retail-level inventory. As a result, the excessitems could not be redistributed from where they existed to where the items were needed. Officials at wholesaMeve1 activities told GAO that even if they had visi- bility of the excessesat the retail-level activities, they could do little to redistribute them. The officials said that, becausethe items are consid- ered retail-level assets,they cannot direct a unit to send its excessesto another unit. If they becomeaware of excessesat a particular retail- level activity, they can request that the unit transfer its excessesto other units, but it is up to the unit commander to honor the request. P-3 GAO/lWNMOM lyIIuhv the An&r lnventmy GAOfound that the Army’s inability to redistribute excesseshad adversely affected Army units’ ability to maintain equipment in an operable condition. GAOidentified 6,116 high priority requisitions out- standing at the wholesale level for items that were excessat the retail level. High priority requisitions, by definition, are for items that are causing equipment to be inoperable due to the lack of a part. Because managers at the wholesale level did not have visibility of excessitems at the retail level, they were not able to redistribute the excessesto satisfy the outstanding requisitions. Managers of the Wholesale At the three buying commandsresponsible for buying 23 percent of the System Are Procuring line items identified as excessat the retail level, GAOfound that these commandshad ongoing procurement actions, valued at $66.9 million, for Items That Are Excessat 1,669 of the items in an excessposition at the retail level. If managersof the R&ail Level the wholesale system had visibility of the retail-level excessesand the authority to direct that excessesbe returned to the wholesale supply system or redistributed to other retail-level activities, many of these procurements could have been avoided. Army Efforts to Address The Army is aware of the excessinventory problem at the retail level the ExcessInventory and has ongoing and planned initiatives to addressit. The Army’s initia- tives focus primarily on increasing the Mistribution of excesseswithin Problem the retail level. For example, the Standard Army Retail Supply System and the Objective SuppJySystem both attempt to increase redistribution within a corpe or a theater. IIowever, the systems, as currently envi- sioned, will only redistribute assetswithin a corps or among units within a theater. The systems will not redistribute assetsbetween corps in different theaters or among units in different theaters. Consequently, the problems GAOfound with excessesin one corps and shortages in another corps or theater will not be resolved. Problems With Inventory GAOand other audit organizations have repeatedly reported on the Not Reported as a Material accumulation of excessinventory at retail-level activities. Despite the size and long-standing nature of the problem, the Army has not included Weakness the excessinventory issue as a material weaknessin its annual report on internal controls to the Secretary of Defense. GAOrecommendsthat the Secretary of the Army report the accumula- Recommendations tion and retention of retail-level excessesas material weaknessesin the p-4 GAO- IUuugbg the Army’8 lnvenw Army’s next annual assessmentof internal controls, as required by the Federal Managers’ Financial Integrity Act. Becausethe retail-level activities are not complying with Army regula- tions that require that excessitems be reported and returned to the wholesale-level supply system, GAO recommendsthat the Secretary of the Army establish a single supply system that provides the inventory supply system manager with systemwide asset visibility and the author- ity to redistribute excessesfrom locations where they are not neededto locations where they are. supply system will improve the efficiency and effectiveness of item management.The Department stated that (1) such a system will provide superior responsivenessto the supply system customers at reduced costs and (2) vertical inventory management-ensuring that the item manager has visibility of retail assetsand the authority to direct the redistribution of assetsamong retail activities-is a fundamental goal of the Department as it moves from item/commodity managementto weapon systems management. pyC6 GAo/IwUDWa Muughg the Army’s lnventmy Contents Executive Summary 2 Chapter 1 8 Introduction Problems That Result Prom a Lack of Linkage Among the Supply Levels 10 Prior Studies Addressed the Need for a Single Supply 10 System Objectives,Scope,and Methodology 11 Chapter 2 14 Retail-Level Excesses Magnitude of the ExcessProblem 15 Inefficiencies Resulting Prom Having Two Separate 16 Degrade Supply Supply systems Support and Result in Causesof Retail-Level Excesses 19 UMecessary Assessmentof Internal Controls 21 Procurements Chapter 3 22 Army Actions to Efforts to Address the ExcessInventory Problem Efforts to Gain Visibility and Control of ExcessItems in 22 27 ReduceRetail-Level the European Theater Excesses Chapter 4 30 Conclusions and Conclusions 30 Recommendations 31 Recommendations Agency Comments 31 Appendixes Appendix I: Divisions GAO Visited 34 Appendix II: Major Contributors to This Report 35 ~ Tables Table 2.1: Repair Parts ShortagesThat Could Have Been 17 Pilled by Redistributing ExcessInventory Table 2.2: Number and Value of Line Items That Are 18 Excessat Retail-Level Activities and Are Being Procured by Three NICPs Table 2.3: Exavnplesof Unfilled Requisitions Causing 19 Equipme lt to He Inoperable Page 6 GAO/NSlAD&M3 MaMglng the Army’s lmmtory Table 3.1: Diqmition of ExcessItems Receivedby the 29 ERFFromOctober1968ThroughA~ril1989 Figure 1.1: Illushgtion of the Amy’s Wholesaleand 9 lwail mPlY wf-= F@re 2.1: ExcessInventory categoriaed as Authorized 14 !%ockListExcessatxlNomSinckListExcessforthe 13 Divisiam as of January 13,1989 Figure 2.2: ExcessInventory Comm to Authorized 16 Leveisforthe 13ArmyJXvishsasof January 13, 1939 Abbxevbtlons Aviationsystemscommand amtinental United St&es Defe-mw-m Depdment of Defense Ilirectsupport - mPlY srstem Eum~emRedistribvtionFacility GeneralAccountingOffice rbiimikcomm8nd National Inventory Control Point Iaemgde~hint ~Anmy=~PPlysystem -I-W49tem !M!ChdItWIl 7-m-v Tank-Autxmmtwe U.S. Army, Europe Chapkr 1 htiuction The Army’s supply system consists of two major categories-wholesale and retail. The wholesale level is comprised of six National Inventory Control Points (MCP)and related depots that are responsible for deter- mining requirements; buying the items; storing them at depots; and issu- ing the items to Army posts, camps, and stations. As of September30, 1938, the wholesal~level inventory was valued at about $21 billion for several million secondary spare and repair parts.1 The Army’s retail-level supply system-often referred to as the “instal- lation supply level”- is responsible for computing requirements, requi- sitioning items from the wholesale system, storing the items, and issuing the items ID user units. The value of the retail-level inventory, while difficult to determine, is e&mated at several hundred million dollars. When an item is issued from the wholesale-level depot to an installation, it enters the retail-level system. At that tune, ownership, accountability, and control over the item pass from the wholesale-level inventory mana- ger to the retail-level inventory manager, and the wholesale-level mana- ger generally losesvisibility of it. Pigure 1.1 shows a general description of the wholesale and retail-level supply systems. Chapter 1 lntrodnetion Wholode Lqvel -. -. -. -. -. -. -. -. -. -. -. -. L The lack of linkage between the wholesale and retail supply levels is further complicated by the lack of visibility among the various supply levels that exist within the retail level. For example, items at the direct- support level, which are division-level units, are not visible to the corps- level units, and vice versa. The corps only obtains visibility of excessitems at the direct-support level after the direct-support unit identifies its excessesand physically moves the items to the corps. The wholesale system obtains visibility of corps-level excesseswhen the corps reports its excessesto the wholesale-level inventory manager. However, item managers at all levels are generally reluctant to report items as excess.This reluctance GAO/NSUMMB lUuu&g the Army’s hentory stems from the philosophy that if they declare an item excessand turn it in, they might have to requisition it at a later date and pay for it again. Also, retail-level managersgenerally believe that it is better to have too much than too little. Problems That Result tion of excessitems at someunits, shortagesof the sameitems at other From a Lack of units, and procurement of these items at the wholesale level. This lack Linkage Among the of linkage and visibility amongthe various supply levels affects opera- tional readiness.For example, combat equipment is often inoperable due Supply Levels to the lack of parts that are excessat other units. However, becausethe unit needing the part and the wholesale-level manager are unaware that the part is excessat someother location, the equipment remains inoper- able until the parts are requisitioned from the wholesale level and the wholesale level fills the requisition from stock or procures the part. long-standing problem. Over the years, we have reported on the need for Addressed the Need the Army to implement a supply system that would give managers at for a Single Supply the wholesale level increasedvisibility and control over items in the retail system. Most recently, in 1987, we reported that excessitems at System the retail-level activities above division level had increased from $86 million in 1984 to $166 million in 1986, an increase of about 83 percent.2Cur analysis of these excessesat selectedinstallations showed that over 70 percent of the excesseswere not being reported to managers of the wholesale supply system for redistribution to other installations where there were corresponding shortages.Furthermore, wholesale-level managers had either procured or were in the processof procuring many of these sameitems to fill shortages at the installation level. The issue of excessitems at the retail level was also the subject of a report issued by Logistics Operations, Incorporated, in March 1988 to the Army Deputy Chief of Staff for Logistics. The report, which dis- cussedthe causesof excessat the retail level, identified several reasons that excessitems accumulate. While the individual reasonsdiffered, there was a common theme to the findings. The report pointed out that 21nventmybmgement Army Needsto ReduceRetail Level Ekcesses(GAO/NSIAD-S7-197, Sept.2,1987). Pyre 10 GAO/NSUDWM Mmuglng the Army’s Inventory units were generally not following Army policies and regulations. In par- ticular, the report noted that many of the unit commanderswere manipulating the system in order to avoid having to report excessitems. This finding supports our current finding that the general attitude of many commandersis that it is better to have too much than not enough. The Department of Defense(DOD) has generally been supportive of our previous recommendation that the Army implement an inventory man- agement system that gives wholesale-level managers increasedvisibility and control of items at the retail level. Also, the higher levels of Army managementhave been receptive to the idea of extending wholesale- level visibility of and control over retail-level inventories. As discussed in chapter 3 of this report, the Army has taken several initiatives toward implementing the concept. The former Chairman of the Subcommitteeon Readiness,House Objectives, Scope,and Committee on Armed Services,asked us to determine how effectively Methodology Army retail-level units at the direct-support level were managing excess inventory, including how effectively retail-level units were identifying and reporting excesssecondary repair parts so that these parts could be returned to the wholesale supply system and redistributed to other units. To accomplish this objective, we selected 13 divisions located in the United States and Europe (units under the command of U.S. Army Forces Command and U.S. Army, Europe) (seeapp. I). Using the divisions’ asset balance files as of January 13,1989, we identi- fied the parts that were in excesspositions3 The assetbalance file shows the inventory status for each item maintained by the direct- support unit, including its authorized level and inventory on-hand, due- in, and due-out balances. We compared the excessesat each of the direct-support units to shortagesof the same items at each of the other direct-support units to determine the extent to which shortages at one location could have been filled by the redistribution of excessesfrom other locations. Cur meth- odology for performing this analysis was as follows: l Shortagesin the European-baseddivisions were matched with excesses at other European divisions. 3An i&m ia consideredto beexcenswhen its on-handand due-in balm= exceedita authorizedand duwut balancea. P8ge 11 GAO7 Muuglng the Army’s Inventory - -1 In- . The remaining shortages in the European-baseddivisions were matched with excessesat the continental United States (CONUS) based divisions. l Shortagesin the cowbased divisions were matched with the remaining excessesin the coNUs-baseddivisions. We did not match CoNus-based shortages with excessesin the European- baseddivisions, becauseit is unlikely that the Army would redistribute items from its forward-deployed units to meet shortages at units in the United States. A unit was consideredto have shortages when the quantity on-hand plus the quantity due-in minus the quantity due out was less than the authorized level. However, in determining the extent to which shortages could be filled by the redistribution of excesses,we considered only on- hand assetsas being available for redistribution. Consequently, our analysis takes a very conservative approach. In order to determine whether the items that were excessat the retail level were being procured at the wholesale level, we obtained the pro- curement data tapes from three of the NICPS (Aviation Systems Command[AVSCOM],Missile Command [MICOM], and Tank-Automotive Command [TAMIMD that had responsibility for procuring items identified as excess,We then matched the listing of excessitems to the list of items being procured as of January 1989. We also compared the list of excessitems to a list of high priority back orders4from the units deployed in Europe in order to determine whether the lack of redistribution was affecting readiness. We held discussionswith Department of the Army officials in the Office of the Deputy Chief of Staff for Logistics, the Office of the Secretary of Defense,and the Army Materiel Commandto obtain their views on implementing a vertical managementsystem and increasing wholesale- level managers’ visibility and control over spare and repair parts at the retail level. At retail-level activities, we held discussionswith officials on the sameissue as well as on the reasonsthat excesseswere being generated at their activities. We also analyzed studies prepared for the Department of the Army and DOD byinternal and external activities on the causesof excessesand the qThehiehpriorfty~orderscoMistedofpeiorityOland02requisitions,meaningthattheseltems wereneededtorepairequipmentth8twasinaninopmbleamdition. Pae 12 GAO- AWl@ng the Army’s Inventory actions necessaryto reduce the numbers of excessitems at the whole- sale and retail levels. Additionally, we discussedwith DOD and Army officials their planned and ongoing actions to remedy the excess situation. In order to assure ourselves that the data being generated by the various automated systems on the levels of excesseswas accurate, we validated it on a selective basis. For example, we traced the information shown on the retail-level activities’ assetbalance files to inventory records main- tained by the activities. We verified the procurement and back order data shown on the NICPSprocurement files through discussionswith item managers at the NICPS and reviewed supply control studies on the items in question. Although there were somediscrepancies,the level of accuracy was, in our opinion, sufficient to allow us to rely on the data used in the automated systems and to evaluate the status of the inven- tory at the wholesale and retail levels. Our review was performed from June 1988 to June 1989 in accordance with generally acceptedgovernment auditing standards. Page 13 GAO/NBuD8068 lbb@ng the Army’s Inventory F&ail-Level ExcessesDegradeSupply Supprt - and Result in UnnecessaryProcurements According to Army policy, divisions are expected to be able to perform their missions with spare parts inventories at prescribed authorized levels. When the amounts of on-hand and due-in inventory exceed authorized levels, the units are to report these excessesto managersof the wholesale system so that the items can be used to meet the needsof other Army units. As of January 1989, the value of authorized inventory levels for the 13 divisions included in our review totaled about $349 million. However, these units had about $184 million of excessitems. As shown in fiire 2.1, most of the excessinventory consistedof items for which on- hand and due-in quantities exceededthe authorized inventory levels. To a lesser extent, the excessesconsisted of items the units were not autho- rized to stock. Pyre 14 GAOY lUmughg the Army’s Inventory Retail-level activities had not reported the excesses,and the wholesale- level managers did not have visibility or control over these excesses.As a result, wholesale-level managerscould not redistribute the excessesto locations where the items were needed.Additionally, managersof the retail system lacked the ability to identify situations in which shortages in one division could be filled by excessesat other units-an inventory managementtechnique called “cross-leveling.” As a result, the 13 divi- sions we visited were requisitioning items from the wholesale system when excessesexisted in other divisions. To compound the matter, becausethe wholesale-level managers do not have the authority to direct the redistribution of retail-level excesses, combat equipment can becomeinoperable due to the lack of parts that are excessat other locations. The 13 divisions we reviewed were authorized to have total inventories Magnitude of the valued at about $349 million. In fact, they had over $184 million of Excess Problem items on hand or on order that were excessto their needs.Of the total excess,$76 million related to items on hand, and $109 million related to items due in. Figure 2.2 illustrates, for each of the divisions, the amount of excessinventory compared to the division’s authorized inventory level. Page 15 GAO- Ibhagbg the ARnY’Shentory Figum 2.2: Excosa hmntory Compuod to Au(horirad Lwola for the 13 Amy DMaiona (18of January l&l999 55 NIolamdDon8N 50 40 40 sn Having two separate supply systems can result in inefficient supply Inefficiencies operations. Our review disclosednumerous instances in which items Resulting From that were excessto the needsof a division were neededby another divi- Having Two Separate sion to repair or replace inoperable equipment. At the sametime that these imbalances existed, the wholesale level was in the processof pro- Supply systems curing the sameitems. Items Excessat Some Managersof the Army’s retail logistics system currently do not have the capability to identify and move items that are excessin one division to Divisions Are Neededby fill shortages that exist in others. Instead, divisions that have shortages Other Divisions have but one alternative: to requisition the neededitems from the wholesale sy3em. P8ge 16 GAO/IWADWM Muuglng the Army’s Inventory -. The 13 divisions, with $75 million of on-hand excessitems, also had item shortages totaling $33 million. For example, one unit neededan M-l tank engine valued at about $317,000. At the sametime, other units had excessengineson hand. However, neither the unit that neededthe engine nor the wholesale-level item manager was aware that the item was excessat other locations. About 26 percent, or $8.4 million, of the shortages could have been alle- viated by redistributing the excessesfrom other divisions. As shown in table 2.1, over $1.6 million of shortages in European divisions could have been filled from excessitems held by the samedivisions, and another $1.8 million of shortages could have been filled from excesses held by CONUS-baseddivisions. Additionally, $6 million in shortagesin CONUS-baseddivisions could have been filled by excessitems retained by other cows-based divisions. T8bk 2.1: ROp8ir PaIt -8 Thrt Dollars in millions Short881 ~~XIJ~ have Value of Divlaion locatlon Niizc 8hOf-O. Eum CONUS Total Europe 4 $19.0 $1.6 $1.8 $2.4 CONUS 9 14.0 5.0 5.0 Total 13 $93.0 911P 28.8 28.4 T)ur methodoiogy did not include determining which excess items could have been redistributed from Europe to satisfy shortages at CONU!Mased divisions. Items Excessat the Retail Becausethe retail-level excesseshad not been reported to the wholesale inventory managers and the managerswere not aware of these excesses, Level Are Being Procured many of the items were being procured at the wholesale level. at the Wholesale Level The $184 million of excessitems identified during our review include at least 23,993 separate line items. As shown in table 2.2, AVSCC)M,MICOM, and TACO&Ihad managementand procurement responsibility for 6,668 of these items and had ongoing or planned procurement actions for 1,669 of them. The value of excessitems related to the 1,669 line items being procured was $66.9 million. With a few minor exceptions, the quantities being procured exceededthe quantities in excesspositions. Therefore, if the item managers had been aware of excessesand had had redistribu- tion authority, the excessescould have been used to offset the ongoing and planned procurements. Pye 17 GAO/BSUMM3 Muuglng the Army’s Inventory Tabh 2.2: Numbw and VW0 of Urn ltoma That An Exwu a Retall-Lovol Numbor of tine itema valw of ret8il-M ActMth8ndAnCkhrgProcurmdby NICP king procured ~XO0W.I ThmoNlcPs AVSCOM 650 9w86,ocm MlCOM 289 12,009,ooo TACOM 730 !50,922,0oo TOM 1.999 266.2n7.fm Item managers and managementofficials at the wholesale level expressedsupport for a single supply system that would enable wholesale-level managersto have visibility and control over assetsin the retail system. The officials stated that, with the exception of certain items managed in the SelectedItem ManagementSystem-Expanded (SIMSX),wholesale managershave no knowledge of the inventory levels of retail-level activities. They pointed out that wx data has histori- cally been so inaccurate and outofdate that they have discontinued receiving or reviewing it. Furthermore, even if the accuracy and credibility problems did not exist, the wholesale-level item managersdo not have the authority to redistribute retail-level assets. Inability to Redistribute The wholesalelevel managers’ lack of authority to redistribute retail- level excessescan result in equipment’s being inoperable due to a lack of ExcessDegradesReadiness spare parts that are excessat other units. Our analysis of unfilled requisitions at the wholesale level showed that there were 6,116 high priority requisitions1that were on order at the three NICPSfor items that were excessat the retail-level activities. The types of equipment that were inoperable due to the lack of parts included someof the newer major end-items of combat equipment, such as M-l tanks and Apache helicopters. Table 2.3 shows selecteditems that were neededfor the M-l tank and the Apache helicopter and the extent to which these neededitems were excessat retail-level activities. ‘The requkitk s were of priority @OUIM01,02, and 03. By definition, theserequisitions are for items without whlcf equipmentis inoperable. Page18 GAO/MUDW53 Mumglng the Army’8 Inventory Tabb 2.9: Example* of Unfilled ~oquwtbns Causing Equipment to Be Nathal stook numkr/ EndltWl I- any) Unit prlw SuppoMl ra&z!z :zE 1660-01-253-0362 $2,162 Apache 4 3 (Support structure) 2835-01-216-8639 316,912 M-l 1 18 (Turbine engine) 5999-01-083-5741 538 M-l 7 225 (Circuit card) Differences in logistics policies and philosophies among the retail-level Causesof Retail-Level activities coupled with basic system weaknessesinhibit efforts to reduce ExCeSSeS the excessesgenerated and maintained at the retail level. More specifi- cally, we found that excessescontinue to accumulate at the units because the logistics philosophy of many units contradicts Army policy for man- aging retail inventories, somedivisions are not preparing excessitem reports that identify excess inventory, requisitions for certain types of items that are due in to units and are excessto the units’ needs are not reported to management for cancella- tion, and . someArmy divisions are not using standard systems to managemajor items. Unit Philosophy Many of the divisional units we visited had two principal reasonsfor not complying with Army policy, which requires units to report and turn in Contradicts Army Polities excessitems. First, the units must use their own funds to purchase for - Managing Retail repair parts from the Army stock fund system. When these items are Inventories turned in as excess,the units may receive full, partial, or no credits, depending on the stock status of the item at the next higher level of supply. Therefore, if they turn in excessitems and receive less than full credit, they have wasted unit funds. Furthermore, if the sameitem is reordered in the future, the unit will have to pay full cost. As a result, many division logistics officials have adopted the philosophy that excessitems will be retained indefinitely if there is a possibility that they may be neededin the future. For example, one division we visited had adopted the policy of retaining all excessitems for which there might be a future need. The division had Pye 18 GAO- Aboglng the Army?3 Inventory also adopted a policy to retain a quantity of non-stock listed* items equal to 1 year’s demands,even though Army policy clearly provides that non-stock listed items are not to be retained. Division officials said that they did not believe it was cost-effective to turn in excessitems for little or no funding credit if they might have to reorder the sameitem in the future. As of January 13,1989, the division had $24 million worth of excessinventory. The secondprincipal reason cited by Army units for retaining excess items was a lack of trust that the Army’s supply system would meet their supply needsin a timely fashion. One division had four excess M-l turbine engines with a total value of $1.3 million. Division officials said that if they neededan engine and it was not readily available, the tank had to be reported as “not mission capable.” Therefore, they had decided to retain the extra enginesrather than turn them in to the sup ply system because of their concern that engineswould not be available from the supply system when needed.As of January 13,1989, the divi- sion had about $12 million of excessinventory. SomeDivisions Did Not The Standard Army Retail Supply System (SARSS) has the capability to assist divisions in monitoring their supply levels and identifying excess Prepare ExcessItem on a daily basis. upon We found that somedivisions were not preparing excessitem reports so that they would not have to identify excessitems. For example, one division had not prepared an excessitem report for almost a year, even though excessitem reports are required monthly. As a result, manage- ment at the division level and higher had no way of knowing whether the units had excessitems and, therefore, could take no action to have the items turned in for redistribution. Due-Ins for Certain Types In January 1988, the U.S. Army’s Logistics Center reprogrammed its of Items Are Excluded D&-e&Support Standard Supply System (us-4)to accommodatea number of changesto excessitem reporting. In changing the system, however, From Computed Excesses the Center overlooked the logic table that dealt with on-order items to be repaired at the direct-support level. Before the system modification, direct-support reparable items with on-order excesseswould have been reported to division managers with recommendationsto cancel the M2 ltetau-hl Exm DegradeSUPPLY supportuldIteRdtln UnnmMuv Procurement8 unneeded items. However,after system modification, on-order excesses were not considered as part of the excessitem computation. Our review showed that not all direct-support reparable items with on- order excesseswere being reported to division management.For exam- ple, the 1st Cavalry and the 2nd Armored Divisions had $1.5 million worth of direct-support reparable on-order excessesas of September 16, 1988. By February 13,1989, on-order excessesof these types of items had increasedto $1.6 million. SomeArmy Divisions Are The DW system is one of the Army’s standard systems for divisions to managetheir inventories. However, somedivisions have decided to man- Not Using Standard age their major subassembliesmanually rather than through the auto Systems *. to Manage Major mated us-4system. During our review we identified two divisions that items were managing their major subassembliesinventories manually. These two divisions had inventories of about $9 million, including about $4 million of excessesthat had not been included in the automated sys- tem and had not been reported to management. Assessment of Internal emphasis on the need for effective internal controls. The act requires Controls agenciesto evaluate internal control systems and periodically report the results. Agencies are to make the evaluations according to Office of Management and Budget guidance and are to assesswhether the sys- tems meet the objectives of internal controls and comply with GAO standards. According to our Standards for Internal Controls in the Federal Government, internal controls help to ensure that the use of resources complies with existing laws and regulations to safeguard against waste, loss, and misuse. Internal controls also provide a reliable database with which to evaluate the use of resources.Good internal controls help to facilitate managementobjectives by serving as checks and balances. The Army did not report excessinventory or the lack of visibility over this inventory by the wholesale or retail-level managers as material weaknessesin its annual assessmentto the Secretary of Defense.Fur- thermore, at many of the locations included in our review, the installa- tions had either not assessedinternal controls over excessmaterial or considered excessmaterial as low risk. P8ge21 GAO/NSUDWM Muugtng the AmlY’SInventory -.. Chapter 3 Army Actions to ReduceRetail-LevelExcesses Excessinventory has been a longstanding problem. Over the years, the Department of the Army and commandersat all levels have made vari- ous attempts to gain visibility of excessitems and establish processes for redistributing excessitems from where they are located to where they are needed.While someprogress has been made, excessinventories and the Army’s inability to redistribute them continue. At present, the Army is focusing on developing systems that will result in the more effective identification and redistribution of excessitems among the retail-level activities. The systems being developed and tested will improve the identification and redistribution of excesseswithin a division and among divisions within a corps. However, the systems will not addressthe issue of redistribution between corps or theaters. While the Army’s actions are a step in the right direction, the systems being developed will not provide centralized visibility and redistribution authority. Consequently, the problem of excessesat one location and shortages at another will continue. The Department of Defenseand the Army have long recognizedthat the Efforts to Address the Army’s inventory managementsystem did not have the capability to EkcessInventory redistribute inventory items among units at the retail level. As a result, Problem units with item shortages had but one option: to requisition the needed items from the wholesale system. Units that neededan item had no sys- tematic way of knowing that it was excessand available at other units. The lack of visibility at the retail level is compoundedwhen the requisi- tions are sent to the wholesale level, becausemanagersof the wholesale system do not have visibility of retail inventories. Thus, the wholesale system manager has but two options to respond to demands from the retail level: to fill the shortage from wholesale inventory stock or to ini- tiate procurement. In recognition of these shortcomings, the Department of Defensetasked the Army, in April 1986, to develop and implement an integrated inven- tory managementsystem to provide wholesale managerswith visibility of and redistribution capability for inventory below the wholesale level.1 The April 1986 plan describedthe benefits of enhancedassetvisibility ‘Theteskineswereincludedina~stotementsienedbytheSecretaryofDefenseinApril 1986. The two taadnegwat put of an overall plan for Becondptyitem yt by weaponsystem ratherthanbycommodityinordertoenhanceweaponsystemreaduw8. P8ge22 GAO/NSUWM2 Muuglng the Army’s Inventory and redistribution as enabling wholesalelevel managers to better fore- cast materiel shortfalls on a systemwide basis and to recognizeand deal with materiel maldistribution or bottlenecks in the system. The Army, in responseto the taskings, set out to develop an improved system to increasemanagers’ assetvisibility and the redistribution of inventory assetsbelow the wholesale level. However, the Army’s efforts do not specifically addressthe intent of the Secretary’s tasking in that the initiatives do not provide the wholesale-level manager with asset visibility and redistribution capabilities. Instead, the Army’s efforts are directed at increasing the visibility and redistribution capabilities of the retail-level activities. Standard Army Retail In March 1981, the Army began to replace its retail inventory manage- ment systems. The replacement system-the Standard Army Retail Supply System Supply System-was designedto provide near-real-time inventory data that would enable a corps to gain visibility and control of inventory in its units. SARSS’ initial implementation plan called for the system to be fielded from the bottom up. First, the direct-support units would receive the initial system (~AIWI) to be fielded by September 1988. Divisions were scheduled to begin receiving SAWS2~ and corps to begin receiving SARSB 2~by June 1999. The current fielding plan shows that the SARSS system will not be totally fielded until the latter part of fiscal year 1993. SARISoffers opportunities for improving the managementof the Army’s retail inventory. For example, when fully implemented, ~ARSS will allow a corps to have complete visibility and control of inventory items in its divisional units. When excessesoccur in one unit, &UCBwill alert the corps managementteam to the excessesso that they can redistribute them to other corps units that are experiencing shortages. Notwithstanding this improvement, the system has somelimitations that could result in many of the sameproblems that we identified during our review. While improving the capability of the individual corps, SARS does not provide the capability to redistribute these excessesbetween corps, As discussedin chapter 2, $1.6 miIlion worth of excessitems being held by CONUS divisional activities could have been used to fill shortages in the four European divisions. WRSSwill not remedy this type of situation. Also, becauseSARSSwill not be linked to the wholesale system, the pro- curement of excessitems at the retail level will continue. SelectedItem Management The Army’s efforts to provide wholesale managers with visibility of items in the retail system began with the creation of the SelectedItem Systems ManagementSystem (SLMS) in 1971. The SIMSwas designedto provide wholesale managerswith the capability to validate requisitions for selecteditems by providing information regarding an item’s authorized and on-hand quantities as well as the quantities due in and due out. With this data, the item manager would be able to determine whether a requisition for the item was within authorized limits. The SIMS information was prepared manually by retail activities and submitted to wholesale managers.However, the data was often outdated when it was received, and in somecases,it was incomplete. As a result, SIMSwas viewed as ineffective in aiding wholesale system managers to validate requisitions. SIMS was subsequently modified and renamed the SelectedItem ManagementSystem-Expanded(NM&X).The modification included the requirement that retail-level activities report all transac- tions on the selecteditems directly to wholesale managers on a daily basis. However, many of the sametypes of problems continued to plague SIMSX. In 1986, the Army proposed expanding SIMSXto include not only requisi- tion validation but also the identification and redistribution of excess items. However, our discussionswith wholesale-level item managers revealed that SIMSX data is still outdated and inaccurate. Also, the item managers said that they do not have the authority to direct a retail-level activity to redistribute excessitems from one location to another. At best, they can request a retail unit to return its excessitems to the wholesale system. As a general rule, item managers at the three NICPS we visited have discontinued using s~lldsxas a managementtool. The Objective Supply In May 1988, the Commanding General of the U.S. Army Material System Command established the Objective Supply System Task Force to develop a concept for one supply system that would streamline adminis- trative and financial processesand reduce the amount of time required to fill requisitions. Page 24 GAO/N8IADgobB MumgIng the Army’s Inventmy -- The Task Force’s initial position was that the Army’s supply system was less than responsive to its units. It noted that the Army requires a sol- dier to submit a request for supplies, wait several days to find out whether the request can be filled from his or her own support activity, wait several more days to find out whether the request was sent to the wholesale system, wait several more days to find out what actions the wholesale system was taking on the request, and then wait from 12 to 26 days to receive the item. The Task Force also observed that the Army supply system’s customers are forced to deal in two separate worlds-retail and wholesale. These involve separate stockpiles controlled by separate automated systems. The customer must exhaust all possibilities of receiving support from the retail level before placing the request at the wholesale level. The Task Force believed that this level of complexity should not exist. Instead, the Army should have one system that provides support to all of its units. The supply concept developed by the Task Force envisioned the instan- taneous routing of requisitions directly from the installation to the wholesale system if assetswere not available at the requester’s installa- tion. The concept also envisioned providing the requisitioner with instant knowledge of the actions taken on the supply request, updating both supply and financial records automatically and simultaneously without impeding the flow of the requisition, and using guaranteed freight and overnight delivery direct to the customer’s supply support activity. In May 1988, the concept was presented to and approved by the Commanding General of the U.S. Army Materiel Command.Subse- quently, the Commanding General of III Corps approved the concept and the development of a GO-dayproof-of-principle demonstration at Fort Hood, Texas, using the 2nd Armored Division as the test division. In June 1988, the Director of the DefenseLogistics Agency (DLA) agreed to participate in the test. The test used a mainframe computer located at the Aviation System Command to capture installation assetinventory data from all divisional and corps-level supply activities located at Fort Hood, Texas. The inven- tory data was updated daily through transmWons of each activity’s asset balance files. Wholesale inventory balancesfrom the Red River Army Depot, which is the depot responsible for supporting the divisions P4e es GAO- IUmugbg tbc Army’s Inventory at Fort Hood, were provided to the mainframe computer, as were the asset balance files from the DLA’S Memphis DefenseDepot. The proof-of-principle demonstration began at Fort Hood on September30,1988, and ended on November 30,1988.2 The demonstra- tion began when the requisitions were received at the mainframe com- puter. If the requisition passededits for stock number validity and local purchase eligibility, the neededstock number was checked against avail- able stocks at all Fort Hood units. If stock was available, the requester was notified of the location of the stock. If the stock was not available at Fort Hood, the system searchedthe inventory files at the Red River Army Depot. If the items were available, the system automatically issued a materiel releaseorder, and the requester was notified that the item was beiig sent from Red River and would arrive in 1 to 3 days. If the item was not available at Red River, the requisition was passedto the appropriate NICP with notification to the requester that the action had been taken and that requisition status would be reported through the normal system. For Du-managed items, the system searchedthe inventory balances, and if the item was at the Memphis DefenseDepot or at the Red River Army Depot, the requester was notified that the item was available and would arrive in 1 to 3 days. If the item was not available at either loca- tion, the requisition was passedto the source of supply with notification to the requester that the action had been taken and that requisition sta- tus would be reported through the normal supply system. The average elapsed time for transmitting the requisition from the requester to the mainframe and receiving item status was 17 seconds. According to the Task Force’s report, the proof-of-principle demonstra- tion clearly showed the following: l The use of automation and communications can significantly reduce the time required to fill a request for supplies. As a general rule, the test showed that order-ship-time was reduced by 60 percent-from 26 days to 12 days. The Task Force estimated that the reduced order-shiptime would result in a one-time savings of $43 million in the Army stock fund. 2S~ceNovemberMS, the IV&S of the demm~&M have beenevaluated.It is expectedthat the bestpartsofthedemohptration wiubeillcorprat&!din~thesARss. Page 26 GAORyBuD8ods Muuging the Army’s Inventory . Providing instant status information to the customer created a seamless supply system that allowed the customer to enter requirements on a computer terminal and, within seconds,lmow whether and from where the neededmateriel would be shipped. l Although empirical data was not available to prove that the reduced order-ship-time improved readiness,it was the Task Force’sopinion that if supply parts are received more quickly, more equipment will be mis- sion ready. Various Commanders-in-Chiefof U.S. Army, Europe (UWZEUR), have Efforts to Gain explored alternatives to gain visibility and control over excessinvento- Visibility and Control ries within the theater. These efforts have focused on identifying the of Excess Items in the causesof excess,emphasizing the need for units to identify and turn in excessinventory, and establishing a redistribution processthat links the European Theater Army’s wholesale and retail logistics systems.While these efforts have resulted in improvements, excessinventories remain a problem within the theater. Some of the more significant efforts are discussedbelow. General Officer Steering In November 1983, USAREURestablished a committee composedof gen- committee eral grade officers to determine the extent of the excessinventory prob- lems and to provide recommendationson how to reduce and redistribute these inventories In March 1984, the committee reported that the theater did not have the ability to identify or redistribute excessitems within the theater and that excesseswere causedby (1) units’ not following Army policies for managing inventories and excess,(2) systemic weaknessesin the Army’s wholesale and retail logistics systems, and (3) a complicated process that inhibited the turning in of excessitems. One of the initial efforts taken to addressthe committee’s findings was to simplify procedures for turning in excessitems to the theater’s cen- tral receiving activity-the Retrograde Processing Point (RPP). The revised procedures provided for units to turn in items (1) without appointments, (2) with a reduction of accompanying paperwork, and (3) with no explanation of where the items had comefrom or why they were excess. As a result of the revised procedures, which easedthe turn-in process, the RPP'S work load soon exceededits ability to processthe materiel. Also, since the RPP did not have the capability to determine whether the Page27 GAO~ IUmaghg the Army’sInventory Chapter3 Army Aaions to Reduceltetd- LevelExu!mea excessitems were neededin theater, a significant number of the items were automatically returned to CONUSwholesale system storage depots. As a result of the theater’s inability to redistribute the excessitems to other USAREURunits, the items that were being returned to CONUS were often being requisitioned by other USAREUR units. For example, between July 1984 and January 1986, USAREURreturned 674 vans of excessmate- riel to a CONUS storage depot. As of January 1986, items valued at $88 million had been processedback into the wholesale supply system. Of this amount, $13.8 million of the items were immediately shipped back to Europe to fill shortages in USARELJRunits. The excessivework load at the RPP,coupled with the theater’s inability to redistribute excesseswithin the theater, provided the catalyst for U~AREUR to explore other alternatives for receiving and redistributing excessitems. European Redistribution In 1986, USAREUR and the U.S. Army Material Commandjointly estab- Facility lished the European Redistribution Facility @RF) as the central turn-in point for excessrepair parts in Europe. When excessitems are turned in to the ERF,the items are screenedto determine whether they are on the theater’s list of 2,899 intensively manageditems. If they are, unserviceable items are sent to the theater repair facility, and serviceable items are returned to the USAREUR inventory. , After the screening process,the remaining excessitems are again screenedto determine whether they should be (1) returned to a CONUS depot repair activity, (2) sent to the DefenseReutilization and Marketing Office, or (3) retained at the ERFto fill requisitions from USAREUR units. Ass&s retained at the ERFare reported to the wholesale logistics system’s inventory record and becomepart of the overall wholesale inventory. As a general rule, the wholesale system item mana- ger usesthe items in the ERFinventory to fill requisitions from USAREUR units. However, the items can also be used to fill shortageselsewhere. From October 1988 through April 1989, the ERFreceived and processed 196,299 line items of excessparts, valued at $277 million. Table 3.1 shows the disposition of these items. Page22 GAO/N- Managhg the Army’s Inventory n4lobl:Dbpowonotexcu8llwnr nawhfadbylhoLRpholnoctobulm minfn#c#jfj Rv#cghAprll-@ NanbuofibDmm Dobrvdw CONUS storage 61,562 $37.5 Theater repair 17,452 119.9 USARElJFl inventory 13,979 96.9 Retained by ERF esa3 16.4 Sent to disposal 15,693 4.2 Tocll I=?@@@ 927ae While the ERFdemonstrates the potential for redistributing excessitems, the newly integrated wholeaale and retail logistics systems will be tdallydependentontheunitstoidentifyandturninexcessitems.As . dlscNs&inchapter2,Annydivisionsare~rdainingsignificant amounts of excessinventories. As a casein point, the four European- baseddivision!3inourxwlew had over $70 million of inventory over and above their authorized levels. -- Corkhsions and l!tcmmnUons Many&aWevelactivitiesareaclxwnulatingandretaininginven~ries conclusions ofcqtareaudrepairpartsthatarr?ex~totheirneeds,whileother retail-lewhmitsareexperiencingshoxtagesofthesesame!parts.Atthe sametime,wholeealesgstemmanagem~tryingtocarryouttheir respo&bilityofensmingthatsuffi&ntstockisavailabletomeetthe needsofallsupp8yactivitiesbyprocuringmanyof4Wx3ameitemsthat areexcesstotheIWedsofretail-levelactivities. ConWWhsatthereeaillevelarenot~f~Armyregula- tians,whic!hrequirethatexce8sinventorybe~and~to tkWlKDb&?~systePn.Their toidentifyandtumintheex~ itemsstemsfiumamind+etthathasde5relopedovertheyears.The thinkhgseemstobethatitisbettert0havefoomuchthautoolitt&, evenifitmeausthatother5haveinope!rabkequ@mentbecausetheydo not~vetheneededpruts.Asaresult,excesees~~~to~~. Atthsametime,whohale lluwgemarebuyingtbetheite3nstosat- isfyshcdagesatotherunics. BothArmy-wideand- commandeffortstoaddresstheexcess inwntory problem have only been margldly successrulbecausetheini- tiativeshavebeendes@nedonthepremise th&theWhOk?S&!andretail systemsmustoperafeMq+entlyofeachother. Thesystenrs8ndthe~~~beingdevelopediUClUdiUgsrrasS andtheobjectiveSupplySy&tt?qwillxKMullyannt#lrrtheproblems ldentifiedinourlwiew.’ Evenwhensrrpssisfullyimp~,the~ teluwillstiulackthe~to -teexce8sspareportsfrom oneclKpetofill~that~inotheraDxp6ortheatersofopera- tion.hther,srraBswiilu&pxwidewhohakmanagers WithtkVlSi- biliQaramtx79ofitenus~ topiwentthepruammeMofitems thatareexces3attheretail-levelactivities. TheO@ctiveSupplySystemTaskForceaqNuredtheesaeuceofthe re.medyfortheAlmykinventory~ m-by--!d& iugthttheArmymustcreateasin@,inte@&dsupplysystem.How- ever,initsdemaWWhtests,theTaskForce t?XthddtheWhO~ systembyallowhgthe~levelto~therelerraeofmaterialfrom thewhok4aleleveldepot.Thisis~ti~normlllpractice,iu whicht.hedepotperfoHusthesupplyfuxWWnofissuingmaterial release0rde~tofillrequisitions. chepter 4 ckmclusioIMawl ltecm-tlone We believe that the Department of Defense’sinventory managementphi- losophy of creating one integrated supply system deservesfull consider- ation if the problems identified in our review are to be fully addressed. To be effective, the single, integrated system must centralize.visibility and redistribution authority at the integrated inventory management level. Otherwise, each individual installation, command, and activity will continue to determine how much stock should be retained, and man- agers of no one organization will have a complete overview of what the supply system contains. We also believe that the magnitude of the excessproblems and the resul- tant inefficiencies warrant the reporting of these matters as a material weaknessin the Secretary of the Army’s annual assessmentof internal controls under the Federal Managers’ Financial Integrity Act. We recommend that the Secretary of the Army report the accumulation Recommendations and retention of retail-level excessesas material weaknessesin the Army’s next annual assessmentof internal controls, as required by the Federal Managers’ Financial Integrity Act. Becausethe retail-level activities are not complying with Army regula- tions that require that excessitems be reported and returned to the wholesale-level supply system, we recommendthat the Secretary of the Army establish a single supply system that provides the inventory sup- ply system manager with systemwide asset visibility and the authority to redistribute excessesfrom locations where they are not neededto locations where they are. DODagreed with our recommendation that the Army report the accumu- Agency Comments lation and retention of retail-level excessesas a material weaknessin its next annual assessmentof internal controls under the Federal Managers’ Financial Integrity Act. The Army has reported the matter in its most recent statement. DOD also agreed with our recommendation to establish a single supply system and ensure that the system manager has systemwide assetvisi- bility and redistribution authority. DOD commented that the Army has three initiatives underway to achieve these objectives. The first initiative focuseson providing war-fighting Pyre 81 GAoy lbhugbg the Army% inventory . commanderswith the ability to redistribute assetsto enhancetheir com- bat power. The secondinitiative involves prototype tests to link asset databaseson a real-time basis from the retail to the wholesale level. The third initiative, to be completed by fii year 1096, envisions a “seam- less” supply system that will provide verticai integration of the whole- sale and retail systems with the end result being one Army supply system, from top to bottom. This one system will provide total assetvis- ibility and redistribution capability. DOD also commented that a single supply system will improve the effi- ciency and effectiveness of item managementand will provide superior responsivenessto the supply system’s customers at reduced costs. Verti- cal inventory managementquring that the item manager has visibil- ity of retail assetsand the authority to direct the redistribution of assets among retail activities-is a fundamental goal of DODas it moves from item/commodity managementto weapon systems management. Appendix I Divisions GAO Visited 1st Cavalry Division, Fort Hood, Texas 2nd Armored Division, Fort Hood, Texas 1st Infantry Division, Fort Riley, Kansas 4th Infantry Division, Fort Carson, Colorado 6th Infantry Lhision, Fort Polk, Lmisiana 6th Infhn~ Division, Fort Richardson, Alaska 7th Infantry Division, Fort Ord, California 10th Mountain Division, Fort Drum, New York 24th Infantry Division, Fort Stewart, Georgia 1st Armored Division, berth, Germany 3rd Arlnod Division, Frankht, -y 3rd Infantry Division, Kitzlngen, Germany 8th Infantry Division, Bad Kreuznach, Germany Pye 84 QAO/lWMDWM Muugln# tb8 Army% Inventory Appendix II Major Contributor to This Report Robert J. Lane, Assistant Director National Security and International Affairs Division, Washington, DC. Vernon Westbrook, Jr., Evaluator-in-Charge Dallas RegionalOffiCe Christina NicoloffsiteSenior Merrie C. Nichols,‘Evaluator
Army Inventory: A Single Supply System Would Enhance Inventory Management and Readiness
Published by the Government Accountability Office on 1990-01-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)