oversight

Defense Inventory: Defense Logistics Agency's Materiel Returns Program

Published by the Government Accountability Office on 1990-03-14.

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

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           M ;r.rc h              I!t!)O
                                                                                                                    DEF ENSE
                                                                                                                    IN V E N T O R Y
                                                                                                                    D e fe n s e L o g i s ti c s
                                                                                                                    A g e n c y ’s M a te ri e l
                                                                                                                    R e tu rn s P ro g ra m

                                                                                                                                                                 3b




                                                                                                                                                        141123
Uni t ed      States
General        Accounti n g        Offi c e
Washi n gton,           D.C. 20648

Nati o nal          Securi t y               and
Internati o nal                  Affai r s         Di v i s i o n

B-222859

March             14,199O

The Honorabl e         John Gl e nn
Chai r man,       Commi t tee        on
     Governmental          Affai r s
Uni t ed States Senate

The Honorabl e      Earl Hutto
Chai r man,    Subcommi t tee   on
   Readi n ess
Commi t tee    on Armed Servi c es
House of Representati v es

In response            to our March 15, 1988, testi m ony                     before the Subcommi t tee
on Readi n ess,           House Commi t tee           on Armed Servi c es,               on the Defense
Logi s ti c s   Agency’s         (DLA) i n ventory         growth, the former Subcommi t tee
Chai r man        asked us to exami n e            i n more detai l DLA' S materi e l                  returns pro-
gram and i t s i m pact on i n ventory                   growth. In addi t i o n,             on Apri l 1, 1988,
the Chai r man,            Senate Commi t tee           on Governmental                 Affai r s, asked us to
eval u ate      DIA' S     management          over customer            returns of excess materi e l s .
We revi e wed            how returns can contri b ute                to i n ventory         growth and
descri b e      what the servi c es          are doi n g to reduce excess and returns. Our
obj e cti v es,      scope, and methodol o gy               are di s cussed         i n appendi x         I.


Customer               returns to DIA, excl u di n g            fuel and subsi s tence                 i t ems, total e d
$3.1 bi l i o n            for fi s cal years 1981 through                    1988 and averaged                    about 8.5
percent             of i t s sal e s. For the same peri o d,                 DLA' S    total i n ventory               i n creased
$5.7 bi l i o n,            from $3.1 bi l i o n       to $8.8 bi l i o n,          or about 184 percent.                       Stocks
excess to i t s current operati o ns                       and war reserve needs more than tri p l e d
from $1 bi l i o n               to $3.5 bi l i o n.    However,            there i s no way to determi n e
how much materi e l                     returns contri b uted              to DLA' S i n ventory             growth and
excess materi e l                 because        of the hi g h number               of transacti o ns         i n vol v ed         and
the i n abi l i t y          of the accounti n g         systems to provi d e               such data.

DLA               and the servi c es     have i m pl e mented            and have underway             numerous
i n i t i a ti v es      to avoi d excess and reduce returns. The i n i t i a ti v es                       are
desi g ned             to reduce not onl y the returns but al s o excess materi e l .                                In addi -
ti o n, the servi c es               have programs          to i m prove          thei r i n ternal redi s tri b uti o n
procedures                 for excess materi e l .        DLA' S     accounti n g        system produces                 data
that coul d ai d DIA managers                        i n assessi n g       the effecti v eness      of the acti o ns.




Page      1                                                                 GAO/NSLAD-90-58            Inventory      Management
                       B-222859




                       We are not maki n g            any recommendati o ns                                          i n thi s report, because                 (1) the
                        servi c es’ correcti v e       acti o ns    are too new to                                       eval u ate       thei r i m pact      on
                       returns to DLA and (2) the September                            1989                               DOD Inspector           Generals’
                       report contai n s         recommendati o ns,              whi c h,                              if i m pl e mented,          woul d requi r e
                       a Department           of Defense returns program                                                 managed           by the whol e sal e
                      i n ventory     managers,          whi c h    i n cl u des     DLA.




                                i s responsi b l e             for provi d i n g        l o gi s ti c s       support,    i n cl u di n g           procuri n g,
Background            DLA
                       stocki n g,             and i s sui n g         consumabl e             i t ems, to the mi l i t ary               servi c es         and
                      other government                         agenci e s.         Each year DLA’S si x suppl y                           centers buy and
                       manage          bi l i o ns         of dol l a rs        of materi e l           unti l they i s sue it to customers
                       worl d wi d e.              As of September                  30, 1988, DLA managed                          about 2.8 mi l i o n
                      i t ems. About 2 mi l i o n                        i t ems were stocked,                   and 52 percent                  had a uni t
                       pri c e of $10 or l e ss.

                        The servi c es           establ i s h      requi r ements             by determi n i n g                the quanti t y         of an
                      i t em they need for a speci f i c                       peri o d,      usual l y      2 years, to fulfil                   a desi g -
                        nated purpose                  (e.g., to operate            thei r equi p ment             duri n g         peaceti m e).            When
                      they have excess materi e l ,                         they can return it to DLA for ei t her fi n anci a l
                        credi t or no fi n anci a l              credi t , dependi n g                on whether              DLA    needs it to meet
                       requi r ements.                Under the materi e l                returns        program,              customers-pri m ar-
                       ily the servi c es-                   must report excess DLA-managed                                i t ems to DLA for di s -
                      posi t i o n     i n structi o ns.         If DLA needs the materi e l ,                    it wi l di r ect the
                      customer              to return it.

                      DI6    gi v es customers            fi n anci a l credi t for materi e l                                       it needs to meet peace-
                      ti m e requi r ements            and war reserve          requi r ements.’                                        It does not gi v e credi t
                      for returned          materi e l        above these requi r ements                                            even though     DLA   retai n s
                      it for future use.


                      Credi t returns                al l o w customers           to buy needed         i t ems wi t h the credi t s,
Returns Can           thereby           conservi n g          thei r operati o ns        and mai n tenance                 and i n dustri a l
Contri b ute  to      funds. About 43 percent                        of returns made between                      fi s cal years 1981 and
In$entory    Growth   1988 were credi t returns,
                      no-credi t          i t ems, however,
                                                                       and 57 percent
                                                                       were wi t hi n
                                                                                                 were “n o-credi t ”
                                                                                            retenti o n      limits
                                                                                                                                       returns.
                                                                                                                            establ i s hed
                                                                                                                                                      The
                                                                                                                                                   by the
                      Department                 of Defense and DLA. Credi t and no-credi t                               returns          for fi s cal
                      years 1981 through                       1988 total e d       about $1.3 bi l i o n            and $1.8 bi l i o n,
                      respecti v el y .
              1)
                      ’ War reserves      are stocks       that are   stored      i n peaceti m e         to sati s fy     i n creased    warti m e         consumpti o n;          they
                      are i n tended    to sustai n    operati o ns    unti l   resuppl y         takes     pl a ce.




                      Page    2                                                                                GAO/N&W-90-68                    Inventory              Management
                           B-222859




_.__-..
                          Customers       ei t her retai n materi e l         that cannot be                        returned     for credi t or
                          transfer   it to property          di s posal     acti v i t i e s.     If the            Department       of Defense
                          decl a res thi s materi e l       to be surpl u s,                the materi e l           can be gi v en to another
                          government          enti t y, donated         to a state, or sol d as                      i t ems or scrap.

                          Because the amount                          of materi e l      returned      to DLA by the servi c es         has
                          remai n ed           rel a ti v el y       hi g h, we bel i e ve      that l o ng-standi n g   underl y i n g     fac-
                          tors sustai n               the return rate. The Department                        of Defense and the servi c es
                          have i d enti f i e d                 many of these factors (e.g., i n accurate              requi r ements,
                          fai l u re  to match i t ems due i n agai n st                         excess stocks on hand, and fai l u re
                          to termi n ate                contracts           for excess materi e l       on order) and are taki n g          cor-
                          recti v e    acti o ns               (see apps. II and III).

                          Si n ce credi t i s onl y gi v en for needed                        materi e l ,    credi t returns general l y
                          shoul d      not contri b ute              to i n ventory        growth. However,                 credi t returns    can
                          del a y or precl u de          addi t i o nal          purchases.        No-credi t        returns       are excess to
                          IXA’S i n ventory           requi r ements,               thus contri b uti n g         to i n ventory       growth.
                          However,         DLA i s requi r ed               to retai n these i t ems to meet future
                          requi r ements.

                          The Navy accounted                 for about 45 percent               of the total sal e s, excl u di n g
                          fuel s , subsi s tence,      and medi c al           i t ems, and for 49 percent                of returns.      It
                          had a 1.3- and 2.1-percent                  hi g her       rate of returns to sal e s than the Army
                          and Ai r Force, respecti v el y .                 The Navy’s       rate of returns         i n creased       for
                          fi s cal years 1985 through                 1988, whi l e the Army and Ai r Force rates
                          remai n ed        about the same. Navy offi c i a l s               attri b ute  the i n creased           rate to
                          the Navy’s          shi p moderni z ati o n          program,       where al l on-board              m&man-
                          aged spares stock used for components                             or equi p ment     bei n g repl a ced           is
                          returned        to DIJL


                             Recent servi c e      studi e s  suggest that a vari e ty                  of factors contri b ute                      to
Acti o ns    to Reduce      excess materi e l       and subsequent               returns.         The studi e s       i d enti f y        correcti v e
Exdess      and Returns      acti o ns   that if properl y      i m pl e mented             coul d reduce excess materi e l                          and
                            returns.       These acti o ns    general l y         fal l i n to two broad categori e s:                          (1) those
                            to reduce excess materi e l              and (2) those to redi s tri b ute                     it wi t hi n          each of
                            the servi c es      to meet requi r ements                 rather than returni n g                    it to DLA (see
                            app. III). DLA has been worki n g                   wi t h the servi c es           to reduce the vol u me                        of
                           i t ems that are returned             and then reordered                  wi t hi n    a l - year           peri o d      by
                          the same acti v i t y.          The servi c es        have taken speci f i c             steps to address                     thi s
                          i s sue.




                          Page    3                                                                  GAO/NSIAD-90-68            Inventory      Management
                     B-222859




                     Another        maj o r factor contri b uti n g                   to the returns probl e m            i s when a ser-
                      vi c e returned             an i t em because           it was excess to one uni t but needed                              by
                      another.      To address                thi s i s sue, the Army and Ai r Force wi l conti n ue                                 to
                     report i t ems as excess but wi l hol d the i t ems for i n ternal                                   redi s tri b uti o n,
                     unl e ss DLA needs the i t ems to meet i t s requi r ements.                                 In contrast,               the
                     Navy hol d s excess i t ems for i n ternal                          redi s tri b uti o n   but does not report
                    them. However,                      the Navy i s worki n g           wi t h DLA to report these i t ems as
                    excess so that DLA wi l be aware of the excess materi e l .                                       We support                  the
                    i n ternal     redi s tri b uti o n            practi c e   as l o ng as the servi c es         report the excess
                    materi e l     to DLA so that it can di r ect redi s tri b uti o n                        of the materi e l               to meet
                    requi r ements               el s ewhere.

                      The Army mai n tenance                      depots’ current                 practi c e    i s to return i t ems not
                      needed         i n the current          year to DLA rather than to hol d them for future
                      work. Thi s practi c e               appears         to be a maj o r contri b utor                    to DLA’S return
                      and reorder            probl e m,       and the Army i s currentl y                       reconsi d eri n g          it. We
                     bel i e ve      the i t ems shoul d           be retai n ed            by the depots if an anti c i p ated
                     requi r ement            for them exi s ts. However,                        they al s o need to be reported                          to
                    DLA, for possi b l e              return or redi s tri b uti o n                el s ewhere        if a hi g her      pri o ri t y
                    need exi s ts. In another                    case, the Army’s                  computer          system cannot auto-
                    mati c al l y        match excess materi e l                     wi t h i t ems that are on order, thus creat-
                    i n g a si t uati o n          where the excess materi e l                       on order i s not consi d ered                      for
                    termi n ati o n.          Al t hough        a new computer                   program        wi t h thi s capabi l i t y               has
                    been i m pl e mented                 at some acti v i t i e s,           a more sophi s ti c ated               program            is
                    requi r ed          for the remai n i n g         l o cati o ns.


                    The Department           of Defense agreed wi t h thi s report and sai d that it wi l
Agency   Comments   conti n ue    to pursue     the i m provements       noted, as wel l as moni t or the ser-
                    vi c es’ progress      on the acti o ns     reported   (see app. IV).


                    Unl e ss you announce         i t s contents     earl i e r, we pl a n no further di s tri b uti o n
                    of thi s report unti l 30 days from i t s i s sue date. At that ti m e, we wi l
                    send copi e s to the Secretari e s           of Defense, the Army, Navy, and Ai r
                    Force; the Di r ector,     Offi c e of Management             and Budget; the Di r ector,
                    Defense Logi s ti c s    Agency;       and other i n terested         parti e s. We wi l make
                    copi e s avai l a bl e to others upon request.




                    Page    4                                                                    GAO/NSIAD-90-58             Inventory       Management
 B-222869




The maj o r contri b utors            to thi s report are l i s ted     i n appendi x           V. If you
have any questi o ns,         pl e ase cal l me on 275-8412.




Donna M. Hei v i l n
Di r ector, Logi s ti c s    Issues




Page    S                                                   GAO/NSIAD-90-58         Inventory      Management
 C&tents



           I
Ap        endi x I                                                                                                                                   8
Obj       cti v es, Scope, and
Me     / hodol o gy
Ap endi x II                                                                                                                                      9
Ho $ Returns Can                    Inventory           Growth                                                                                    9
                                                                                                                                                  9
                                    Customer           Returns
Contri b ute  to                    Materi e l        Retenti o n      Pol i c y                                                                14
Invpntory    Growth
Appendi x      III                                                                                                                              17
Acti i o ns to Reduce               Ongoi n g        Efforts        to Reduce      Excess/   Returns                                            17
Exkess and Returns
Appendi x       IV                                                                                                                              22
Co&rnents        From    the
Department         of
Defense
Appendi x      V                                                                                                                                23
Maj o r Contri b utors         to
Thi s Report
Tabl e s                            Tabl e       II. 1: DLA’s Sal e s to Servi c es      and Thei r Returns          for                        13
                                           Fi s cal     Years 1985 Through          1988
                                    Tabl e       11.2: DLA Hardware        Suppl y     Centers’ Sal e s and                                     14
                                           Returns for Fi s cal       Years 1985 Through            1988

Fi g ures                           Fi g ure       II. 1:   Customer         Sal e s and Returns                                                11
                                    Fi g ure       11.2:    Customer         Returns as a Percentage        of DLA                              12
                                             Sal e s
                                    Fi g ure       11.3:    Credi t and No-Credi t     Customer Returns                                         13
                                    Fi g ure       11.4:    Vol u me    of DLA Credi t and No-Credi t   Returns                                 15
                                             for Fi s cal         Years 1986-88


                                    Page       6                                                   GAO/NSIAD90-68      Inventory   Management
 Contents




 Fi g ure           11.5: Dol l a r   Val u e   of DLA Returns     for Fi s cal      Years                        16
                1986-88




Abbrevi a ti o ns

DLA                     Defense Logi s ti c s    Agency
DOD                     Department         of Defense
GAO                     General    Accounti n g       Offi c e


Page        7                                                    GAO/NSl A D-90-58       Inventory   Management
Appendi x   I

Obj e cti v es,   Scope, and Methodol o gy


                        Our obj e cti v es    were to determi n e     (1) how materi e l     returns contri b ute                          to
                        the Defense Logi s ti c s    Agency’s     (DLA)   i n ventory    growth, and (2) what                              the
                        Department         of Defense (DOD), DLA, and the mi l i t ary        servi c es are doi n g                        to
                        reduce returns of materi e l          and excess i n ventory.

                        We performed               our work pri m ari l y  at DLA and servi c e         headquarters.     We
                        al s o vi s i t ed     a U.S. si t e for each of the servi c es        and two Army si t es i n
                        Europe. We anal y zed                recent DLA and servi c e       studi e s to i d enti f y the
                        causes of excess and returns, parti c ul a rl y                 i n reference     to DLA and servi c e
                        acti o ns         taken si n ce our March 1988 testi m ony.

                        Concurrent     wi t h our audi t , the Inspector                        General    was performi n g       an
                        audi t of the DOD materi e l         returns program.                     The Inspector       General s’
                        effort covered          the enti r e program,           i n cl u di n g      DLA  and i t s compl i a nce    wi t h
                        DOD program       pol i c y.   To avoi d dupl i c ati o n               of audi t work, we coordi n ated
                        our work wi t h the Inspector              General .

                        We performed           our work from Jul y 1988                   through         June 1989 i n accord-
                        ance wi t h general l y          accepted       government           audi t i n g    standards.         However,
                        we di d not veri f y       DLA' S     sal e s, i n ventory,       and returns           stati s ti c s.




                        Page   8                                                         GAO/NSIAD-90-58         Inventory    Management
          .


k&%dums                    Can Contri b ute                                                    to
Inventory               Growth

                                    For fi s cal years 1981 through                     1988, DLA’S sal e s i n creased                                    from $3.4 bi l -
Ini e ntory   Growth               l i o n to $6.4 bi l i o n.       In addi t i o n,    the val u e of i t s i n ventory                                 al m ost tri p l e d,
                                  from $3.1 bi l i o n            to $8.8 bi l i o n.     About 52 percent           of the                         i t ems had a uni t
                                  pri c e of $10 or l e ss. Materi e l                excess to DLA’S budget year                                     requi r ements
                                  more than tri p l e d,            from $1 bi l i o n       to $3.5 bi l i o n,    Duri n g                        the same
                                  peri o d,     the number            of days i t took DLA to sel l i t s worki n g                                     i n ventory]
                                 i n creased       from 200 to 328 days. Thus, DLA had a 64-percent                                                             growth i n
                                i t s worki n g       i n ventory        compared          to i t s sal e s.

                               There i s no practi c abl e         way to determi n e       how much materi e l          returns
                               contri b uted    to DLA’S i n ventory          growth because         of the hi g h number         of
                               transacti o ns    i n vol v ed    and the i n abi l i t y of the accounti n g       systems to pro-
                               vi d e such data. For exampl e ,             an i t em returned    i n fi s cal year 1983 coul d
                               (1) sti l be i n the i n ventory,          (2) have been sol d , or (3) have been di s -
                               posed of. The accounti n g             systems cannot i d enti f y       whi c h factor appl i e s
                               to a speci f i c returned      i t em.


                               Customers,             mai n l y the servi c es,    order and recei v e        bi l i o ns      of dol l a rs    of
Cuqtomer      Returns          materi e l         each year. For fi s cal years 1981 through                  1988, customers
                               returned            materi e l s val u ed    at $3.1 bi l i o n that equal e d             8.3 percent        of
                               DIA’S      sal e s. Over hal f of the returns, or $1.8 bi l i o n,                     was excess to DLA’s
                               current operati o ns             needs or war reserve stocks.

                               DOD’S         materi e l             returns program                  provi d es           procedures         for reporti n g                 and
                               redi s tri b uti n g                excess materi e l .            It requi r es            customers-pri m ari l y                        the ser-
                               vi c es-to              report thei r excess L&A-managed                                      i t ems for di s posi t i o n             i n struc-
                               ti o ns. The program                         al s o requi r es          DLA           to accept (1) for ful l or parti a l
                               fi n anci a l          credi t -dependi n g                   upon the i t ems’ condi t i o n-i t ems                                that are
                               needed               to meet i t s current                 operati n g               stocks and war reserve requi r ement
                               and (2) for no fi n anci a l                        credi t those i t ems that are wi t hi n                              i t s l o - and
                               DOD’S          20-year           i n ventory         retenti o n          l i m i t s.

                               Customers      recei v e  fi n anci a l       credi t for returned           materi e l   when DLA needs
                               i t to meet current      operati o ns          needs or war reserve stocks. Otherwi s e,
                               DLA    accepts the materi e l           onl y on a no-credi t        basi s . No-credi t      returns
                               become part of DLA’S i n ventory                     that i s excess to current operati o ns          or
                               war reserve needs. If demand                     shoul d     grow beyond         an i t em’s procure-
                               ment cycl e , the i t em coul d be used to fi l orders.



                               W‘ orki n g       i n ventory   i s dcfi n c-    DLA’s     current     operati n g     stocks   requi r ement.




                               Page          9                                                                      GAO/NSIAD-90-58             Inventory       Management
 Appendi x   II
 How Returua     Can            Contri b ute              to
 Inventory   Growth




DIA    accepts no-credi t        returns     accordi n g          to DOD' S i n ventory       retenti o n   pol -
i c y, i . e., 20-years   for weapon-rel a ted              i t ems and economi c           retenti o n”  for
other i t ems. DLA' S overal l         economi c         retenti o n       peri o d  i s 10 years. Begi n -
ni n g Jul y 1988, DLA woul d onl y accept i t ems val u ed                          at $13 and above.
The $13 mi n i m um         represents       the esti m ated           cost to process         a return.

The potenti a l            for credi t returns to have contri b uted        to i n ventory  growth
appears        mi n i m al     because      DLA   accepts them to meet i t s approved      current
operati o ns           or war reserve        needs. In effect, credi t returns general l y
shoul d      not contri b ute          to growth because      they meet known requi r ements.

 The return process                    does not al w ays                     encourage                      the servi c es        to return
 materi e l          si n ce, at a mi n i m um,                 they must pay the costs of shi p pi n g                                         the
i t em to DLA. They have al s o l o st the benefi t                                                of l a rge amounts                  of opera-
ti o ns and mai n tenance                         funds for i t ems they bought                                    and di d not need and
returned              for “n o credi t .”               Accordi n gl y ,         when DLA noti f i e d                        the servi c es
about the hi g h rate at whi c h the same acti v i t i e s                                                    were returni n g              and then
reorderi n g               the same i t em, the servi c es                       i n i t i a ted             correcti v e       acti o ns.       For
exampl e ,              DLA   and the servi c es                  have programs                          ai m ed at reduci n g               returns
by i d enti f yi n g           and el i m i n ati n g              the causes of credi t and no-credi t                                      returns.
These causes i n cl u de                     the l a ck of vi s i b i l t y                    wi t hi n        the servi c es          over
requi r ements                and excess stocks between                                      and among thei r uni t s. Conse-
quentl y ,           some mi l i t ary            uni t s returned              thei r excess materi e l                          to DIA even
though            the materi e l        was needed                       by another                uni t .

Correcti v e         acti o ns          al s o i n cl u de     i n creasi n g          the effecti v eness              of data
processi n g         systems               to match requi s i t i o ns                wi t h on-hand        excess materi e l
and i m provi n g              initial         and subsequent                 requi r ements           determi n ati o ns.          We
bel i e ve   that as these acti o ns                        are i m pl e mented              the returns           as a percent-
age of sal e s-by                    servi c e       and i n ventory             center-shoul d             decl i n e.      Thus,
tracki n g      thi s percentage                      coul d hel p DLA eval u ate                the effecti v eness             of
these acti o ns.

Fi g ure    II. 1 shows the sal e s and return amounts                  for fi s cal years 1981
through        1988. The return amounts                  are based upon summary                  r)I,A comp-
trol l e r  records      that i n cl u de   al l returns, i . e., customer        sal e s, l o aned      mate-
ri e l , and defecti v e        i t ems, We di d not i n cl u de    the Subsi s tence           Suppl y
Center because            i t s returns    were l e ss than 0.5 percent            of sal e s.



E‘ conomi c       retenti o n    is retai n i n g         i t ems       excess       to the current           operati o ns    or war        reserve           needs    because
it is more     economi c al        to retai n       the         i t ems     for   future    peaceti m e          use than    repurchase               them.




Page      10                                                                                              GAO/NSIAD-90-68                 Inventory              Management
           I’


---

                                                               Appendi x   II
                                                               How Returns     Can                     Contri b ute             to
                                                               Inventory   Growth




Fi g urb        11.1: Customer   Sal e s   and   Returns
                                                           5       Dol l a ni n          bi l i o ns



                                                           4



                                                           3



                                                           2



                                                           1



           /                                               0

                                                                   1981                   1992                 1983                  1994             1995   1996          1997       1966
                                                                   Fi s cal y ear

                                                                   1                 1 Sal e s
                                                                                        Customer             returns


                                                           Note:        Excl u des             fuel    and      subsi s tence               i t ems


                                                           Fi g ure   II.2 shows the percentage                        of customer        returns   to sal e s. After an
                                                           i n crease    of about 3 percent                 duri n g     fi s cal years 1981 and 1982, the per-
                                                           centage      has remai n ed      rel a ti v el y          stabl e ever si n ce. The percentage            of cus-
                                                           tomer returns         to sal e s averaged                 8.5 percent       for the peri o d.




                                                           Page         11                                                                                          GAO/NSIAD-90-68          Inventory   Management
                                 Appendi x                II
                                  How Returns     Can                  Contri b ute            to
                                  Inventory   Growth




11.2: Customer  Returns   as a
tage of DLA Sal e s
                                 10          Porcoti




                                  1961                         1962                     1963                  1964             1985              1966               1967                1966
                                  Fi s cal     year



                                 Note:       Excl u des         fuel   and     subsi s tence        i t ems


                                 Fi g ure II.3 shows that no-credi t                                                 returns   have    i n creased        at a greater              rate
                                 than credi t returns.




                                 Page        12                                                                                GAO/NSIAD-90-58          Inventory          Management
                                                       Appendi x   II
                                                       How Returns     Can                                       Contri b ute               to
                                                       Inventory   Growth




Fi g urd    11.3: Credi t   and   No-Credi t
Custoi n er      Returns
         /                                             600           Dol l a r9               In ml l o m




                                                                        Fi s cal           year

                                                                    I                                No credi t




                                                      Note:        Excl u des                        fuel        and       subsi s tence               Items


                                                      DLA’S returns               data by servi c e       were onl y avai l a bl e             for fi s cal years 1985
                                                      through        1988. The average                 rate of returns to sal e s for the 4-year peri o d
                                                      was 7.6 percent.                 However,       there are si g ni f i c ant        di f ferences            i n the per-
                                                      centage      of returns            by servi c e     and suppl y           center. For exampl e ,                 hardware
                                                      suppl y    centers had a return rate fi v e ti m es the Medi c al                                   Suppl y       Center’s
                                                      rate. Tabl e s            II. 1 and II.2 show the di f ferences                  by suppl y          center and ser-
                                                      vi c e, respecti v el y .
_-.-.__-+
Tab14 11.1: DLA’s Sal e s         to Servi c es and
Thei r Returns for Fi s cal         Years 1985        Dol l a rs           i n mi l i o ns                                  .-~        --.--          ---.                .--. __-                             ..--~-
Through    1988                                                                                                                                     Sal e s                                             Returns                                  Percent
                                                                                                                                           _- Amount
                                                                                                                                               ~~~ ..__..-.               Percent                    Amount          Percent                     of sal e s
                                                      Hardware”                                                                                     $11,290                        65                  $1,159        --___...     87                     10.3
                                                      Cl o thi n g                 and             texti l e s                                          3,464                      20                       116                        9                   3.3
                                                                                                                                                                                   15                                                  4                   2.0
                                                      Medi c al                                                                                         2,591                   ___..-               ~__.._ 51
                                                      Total                                                                                       $17,345                       100                   $1,326                    100                       7.6
                                                      “H ardware                    i n cl u des                 El e ctroni c s,          Industri a l ,       ConstructIon,        and   General      Suppl y   Centers




                                                      Page         13                                                                                                                 GAO/NSIAD-90-68              Inventory               Management
                                                 Appendi x II
                                                 How Retuw     Can                   Contri b ute    to
                                                 Inventory Growth




       1
Tabl e j 11.2: DLA Hardware      Suppl y
Cent+’        Sal e s and Returns for Fi s cal   Dol l a rs        i n mi l i o ns
Yearsi 1985 Through        1988                                                      -. _ .-.__---
                                                                                                               Sal e s                             Returns                                 Percent
                                                  _-.                                                     Amount         Percent                Amount             Percent                 of sal e s
                                                 Army                                                       $2,731                 24                  $269                  23               9.8
                                                 AiNavy
                                                    r Force                                                   5,127
                                                                                                              3,116                4528                  570
                                                                                                                                                         280                 4924 ----... _ 11.1
                                                                                                                                                                                            ~~9.0

                                                 Mari n e          Corps                                         316                  3            .____41                       4                 13.0
                                                 Total                                                    $11,290              100               $1,159                    100                    10.3


                                                 The Navy accounted                          for about 45 percent                 of the hardware               suppl y       cen-
                                                 ters’ total sal e s and for 49 percent                             of returns. Its rati o of returns to sal e s
                                                 was 1.3- and 2.1-percent                         hi g her      than the Army and Ai r Force, respec-
                                                 ti v el y .    Moreover,              the Navy’s          rate of returns i n creased                  the most duri n g
                                                 fi s cal years 1986 through                          1988, whi l e the Army and Ai r Force’s                              rates
                                                 remai n ed         rel a ti v el y        the same. Navy offi c i a l s             attri b ute        the hi g her        rate to
                                                 the Navy’s             shi p moderni z ati o n               program.        Al l on-board            DLA-managed
                                                 spares stock used for components                                  or equi p ment            bei n g repl a ced         is
                                                 returned          to DLA. Despi t e thi s probl e m,                   the Navy has i m pl e mented                         a new
                                                 capabi l i t y      to redi s tri b ute           excess among i t s acti v i t i e s               and has al s o initi-
                                                 ated a 73-poi n t                  program      to avoi d excess and reduce returns.

                                                 In September      1989, the Inspector            General   concl u ded     that DLA i n ventory
                                                 managers      had properl y    i m pl e mented        DOD pol i c y    and procedures      and that
                                                 the program’s      i n ternal control s        were adequate.

                                                 Accordi n g          to an October            11, 1985, memorandum                          from the Deputy Secre-
Materi e l           Retenti o n                 tary of Defense, servi c eabl e                        and economi c al l y           repai r abl e             materi e l s         that
Pol i c y                                        have appl i c ati o n         to a weapon                system shoul d             be retai n ed.              It al s o el i m i -
                                                 nated the mi n i m um            dol l a r        val u e of more than $20 for reporti n g                                     and
                                                 returni n g        excess materi e l           i n DOD Di r ecti v e           4100.37,            “R etenti o n             and
                                                 Transfer        of Materi e l     Assets.” As a resul t , customers                                  were al l o wed                to
                                                 return excess materi e l                   to DLA regardl e ss              of i t s val u e. As shown i n
                                                 fi g ures   II.4 and 11.5, the vol u me                      of DLA’S return transacti o ns                           al m ost
                                                 doubl e d,     but the val u e onl y i n creased                     by $25.5 mi l i o n,                 or about 3 per-
                                                 cent after the threshol d                    was el i m i n ated.




                                                 Page         14                                                                     GAO/NSLAD-90-68           Inventory             Management
                                         Appendi x                II
                                         How Retun\s     Can                          Contri b ute            to
                                         Inventory   Growth




11.4: Vol u me of DLA Credi t and No-
Returns for Fi s cal Years 1988-88
                                        Transactl o no                 In thousanda
                                        1400




                                        1000


                                          so0


                                         690


                                         400




                                                         1966                  1987                  l s ee
                                                         FIacal         yaar

                                                                           No credi t
                                                                           Credi t




                                        Page        16                                                             GAO/NSIAD-90-68   Inventory   Management
          I

                                                     Appendi x   II
                                                     Bow Returns     Can                    Contri b ute   to
                                                     Inventory   Growth




        /
Fl g ur ’ 11.5: Dol l a r Val u e   of DLA Returns
for Fi : cal Years 1988-88
                                                     400      Dol l a rs    In mi l l o m




                                                     300




                                                     200




                                                              Fi s cal     yorr


                                                              I                   b&lcredi t
                                                                                  Credi t



                                                     Accordi n g     to DLA offi c i a l s ,    thei r depots were abl e to process                                          the
                                                     i n creased    vol u me of returns             wi t hout        hi r i n g       addi t i o nal             personnel .          Fur-
                                                     ther, even though        Di r ecti v e        4100.37         was revi s ed                      i n May 1988 to i n corpo-
                                                      rate the new pol i c y      and el i m i n ate          speci f i c       dol l a r            threshol d s,           i t di d
                                                      provi d e  DIA wi t h  some di s creti o n.

                                                     Begi n ni n g  i n Jul y 1988, DLA establ i s hed                           a $13-m i n i m u m     val u e threshol d
                                                     for al l no-credi t     returns,  whi c h hel p ed                       reduce the vol u me            of returns
                                                     about 20 percent.          The $13 represents                           DLA’s    esti m ated    cost to process        a
                                                     return.




                                                     Page    16                                                                   GAO/NSIAD-90-68             Inventory      Management
        .
Appendi x   III

’Aktio ns         to Reduce                Excess and Returns


                              Recent Army, Navy, and DLA studi e s             addressed  the probl e m  of excess
On’ oi n g Efforts   to       materi e l , and i d enti f i e d numerous   causes of excess materi e l .  The Ai r
Re uce Excess/                Force di d not have a comparabl e          study, and DLA’S returns anal y si s      was
Re ” urns                     done before the March 1988 heari n g.


                               A March 1988 Army contract                                  study i d enti f i e d            numerous             causes of
                               excess, i n cl u di n g         stockage       pol i c i e s,           systems’ defects, operator                            errors,
                               and vi o l a ti o ns         of operati o nal             requi r ements.                  The study i d enti f i e d                 75 con-
                               tri b uti n g        factors, concl u ded            that the probl e ms                      requi r ed        aggressi v e
                               acti o n, and recommended                     acti o ns            on 31 of the factors that woul d
                               achi e ve         maxi m um       benefi t s.    The Army approved                                changes           to pol i c y         and
                               automated               system procedures                    coveri n g             17 of the recommendati o ns,
                              i n cl u di n g        12 of 15 recommendati o ns                          i d enti f i e d     as havi n g          the greatest
                              payoff. The 12 recommendati o ns                                    deal wi t h reduci n g                  the turbul e nce                in
                              uni t s of repai r parts and at stabi l i z i n g                                mai n tenance            repai r programs.
                              The 19 remai n i n g              recommendati o ns                       deal t wi t h, for exampl e ,                    more accu-
                              ratel y determi n i n g             what repai r parts are stocked                                   for provi d i n g            initial
                              provi s i o ns           and for programmed                      mai n tenance.


Navy                           In January                 1989, over 60 Navy top suppl y                        representati v es        of the Naval
                              Suppl y        Systems Command                       prepared     a 73-poi n t           pl a n of acti o n to reduce
                              i n ventory               growth. The 73 poi n ts fal l i n to 8 broad i n ventory                             i n i t i a ti v es        to
                              avoi d excess and redi s tri b ute                       excess more effi c i e ntl y .             For exampl e ,                    one
                              maj o r i n i t i a ti v e       was to i d enti f y        excess materi e l            on order to see i f con-
                              tracts coul d be termi n ated                       to prevent     addi t i o nal            excess materi e l                   i n the
                              suppl y       system.

                              Other Navy acti o ns            i n cl u de i n i t i a ti v es             to i n crease                the accuracy       of fore-
                              casti n g i n ventory   requi r ements                        and to exami n e                    the requi r ements            model s
                              used to determi n e      economi c              order quanti t i e s,                    i n cl u di n g       initial    orders and
                              reorders.       Another  i n i t i a ti v e    i s to revi e w readi n ess-based                                    spare stock
                              i t ems to determi n e      i f reasonabl e                     reducti o ns          can be made.


DLi i                         Over the past 2 years DLA has addressed                                            the hi g h rate (about 19 percent
                               of returns)       at whi c h servi c e         acti v i t i e s               returned        and reordered      the same
                              i t em wi t hi n      a year. DLA provi d ed                    the servi c es            wi t h a subj e cti v e   sampl e
                              of 10 to 20 i t ems each for sel e cted                           acti v i t i e s      and asked each to hel p i d en-
                              ti f y and mi n i m i z e    the condi t i o ns                that contri b uted                 to thei r return and




                              Page    17                                                                      GAO/NSIAD-90-68               Inventory       Management
-
                               Appendi x           III
                               Acti o ns        to Reduce       Excess    and        Returns




-
                               reorder.             The      servi c es         i d enti f i e d   several    causes        and      i n i t i a ted        correcti v e
                               acti o ns.


Ef fbrts to Redi s tri b ute   DOD and             the servi c es           have ongoi n g  acti o ns              to i m prove i n ter-                    and      i n tra-
Re ~t/.wns                     servi c e          redi s tri b uti o n        of excess to reduce                 returns to DLA.

                                 The Army i d enti f i e d                 three contri b uti n g               causes for the return and
                                 reorder    probl e m.       The causes were (1) the practi c e                                      of requi r i n g        i t s mai n -
                               tenance      depots to return to DLA al l materi e l                                       not needed          wi t hi n     the cur-
                                  rent year for credi t , (2) the fai l u re                            of Army suppl y                managers            to match
                                 i t ems on order and due i n to those on thei r computer-generated                                                              excess
                               l i s t, and (3) i n accurate                  requi r ements.               The mai n tenance                 depots l a ter reor-
                                dered some of the i t ems they had returned                                              to DLA because                they needed
                               them for thei r mai n tenance                            programs.             Fai l u re        to cancel orders for
                               excess materi e l           and i n accurate                     requi r ements              al s o contri b uted           to the
                               probl e m      because        acti v i t i e s          conti n ued         to order and return materi e l                            they
                               thought       they needed                   but di d not need.

                               The Army i s attempti n g                                     to el i m i n ate            these causes by (1) al l o wi n g         its
                               mai n tenance             acti v i t i e s                  to retai n current excess materi e l                   to meet known
                               future requi r ements,                                (2) modi f yi n g               i t s computer     program          to match
                               excess due-i n             i t ems automati c al l y                                and to cancel those that are excess,
                               and (3) i n sti t uti n g                      a tracki n g               and reporti n g          system to i d enti f y       repeated
                               requi s i t i o n  data on a quarterl y                                       basi s for the same i t em. The Army al s o
                               pl a ns to establ i s h                   l i m i t ati o n           goal s for the amount               of materi e l       returned
                               and reordered.

                                 Accordi n g          to a DLA anal y si s ,       mai n tenance         depots account                   for the most
                                 i t ems returned,           and Army depots accounted                       for 6 of the top 10 acti v i t i e s
                                 returni n g         and reorderi n g        the same i t ems. To conserve                       i t s i n dustri a l
                                 funds, the Army has adopted                            the practi c e   of returni n g              al l i t ems for
                                 credi t that are not needed                  wi t hi n      the current year. Formerl y ,                        i t retai n ed
                                i t ems for up to 3 years i f there was a proj e cted                            need. Such i t ems were
                                not cl a ssi f i e d      as excess because                they were wi t hi n        establ i s hed                retenti o n
                               l i m i t s. Both Army Depot Command                             and Corpus Chri s ti                 Army Depot offi -
                                ci a l s sai d that the Army had apparentl y                           exacerbated             one probl e m                  by
                               tryi n g to sol v e another.

                               Because            of the di f fi c ul t y            i n forecasti n g     needs for mai n tenance        programs,
                               Corpus            Chri s ti  offi c i a l s    bel i e ved        i t woul d be better to di s conti n ue       the
                               revi s ed         practi c e   and hol d i t ems a year or two i f there was a proj e cted
                               need. A           headquarters              offi c i a l     agreed that the current practi c e           does not


                               Page        18                                                                 GAO/NSLADBO-68                    Inventory         Management
           .


.
                                 Appendi x                 III
                                 Acti o ns              to Reduce         Excess    and      Returns




                                appear                     reasonabl e       and requested     the Army Depot Command       to consi d er
                                havi n g                 i t s mai n tenance      depots retai n needed i t ems wi t h a demand      fore-
                                cast i n                 the next 6 to 12 months. However,             the Army Depot Command
                                had not                      made a deci s i o n   at the tim e of our revi e w.


    Excess on Order and
    Inaccurate Requi r ements
                                The Army has modi f i e d         i t s computer               program      to i d enti f y and cancel
                                excess due-i n materi e l .      Al t hough     thi s modi f i c ati o n            has been i m pl e -
                                mented at some acti v i t i e s,        other acti v i t i e s        sti l need a more sophi s ti c ated
                                program.

                                  The Army has al s o opened faci l i t i e s                 i n Europe to i m prove             the redi s tri b u-
                                  ti o n of excess materi e l s .       The fi r st two faci l i t i e s      are ful l y operati o nal               and
                                  a thi r d i s schedul e d       to open i n November                1989. The faci l i t i e s      enter i t ems
                                  returned            by Army uni t s i n to a computer              that determi n es           where an i t em
                                 i s needed and i s sues di s posi t i o n         i n structi o ns.       The i t ems are al s o entered
                                i n to the Army Materi e l             Command’s             Standard      Depot System, whi c h con-
                                nects the faci l i t i e s,      and the Army’s General                  Materi e l    and Petrol e um
                                Acti v i t y’s          system, whi c h manages          al l of the Army-owned                   DLA  materi e l         in
                                the faci l i t i e s.

                                 The Army’s         U.S. faci l i t i e s         report al l no credi t DLA returns to the General
                                  Materi e l    and Petrol e um                Acti v i t y,  where the returns are matched            wi t h
                                 other Army requi r ements                        for redi s tri b uti o n. Accordi n g       to Army offi -
                                 ci a l s , the procedure             di f fers from the other servi c es               because the faci l i t i e s
                                 shi p thei r excess materi e l                  to the nearest Army depot, rather than hol d -
                                i n g it at the uni t l e vel .

    Navy                         The Navy i d enti f i e d       several   contri b uti n g        causes to excess returns,
                                 i n cl u di n g (1) computati o ns      that consi d ered            quanti t i e s        l e ss than DLA' S
                                uni t of i s sue-the           number of i t ems i n a package-when                               cal c ul a ti n g
                                i n ventory       l e vel s and (2) decreased             i t em demands,            whi c h caused returns.

                                To reduce the amount of materi e l              returned    to DLA, the Navy hol d s i n for-
                                mati o n on parti a l    excess’ i n a central computer          fi l e for 75 days to match
                                al l outstandi n g    or new requi s i t i o ns   agai n st the fi l e . Thi s system tri e s to



                                T‘ hese           are     i t ems   are   excess   of i m medi a te    requi r ements   but   wi t h   an anti c i p ated       future   demand.




                                Page         19                                                                          GAO/NSL4D-90-58                    Inventory      Management
             Appendi x           III
             Acti o ns        to Reduce   Excess    and     Returns




             match            sel e cted excess           i t ems     to other       acti v i t i e s’    requi s i t i o ns               to avoi d
             returns            and reorders,

             In Jul y 1988, the Navy revi s ed                                i t s procedures           for materi e l     returns      for
             ol . A-managed           i n ventory           i t ems. Accordi n g                   to Navy offi c i a l s ,  parti a l
             excess i t ems wi t h anti c i p ated                          future demand               are not reported            to DLA but
             are hel d for i n ternal               redi s tri b uti o n.              Further,        the i t ems are reported            to
             the Navy’s          defense          program                 for redi s tri b uti o n        of assets where they are
             matched        agai n st         Navy requi s i t i o ns.

             &A-managed              i t ems that are i n total excess (i . e., there i s no known                                    need)
             are returned           to DLA for both credi t and no credi t . Accordi n g                                  to Navy
             offi c i a l s ,  the Navy had shared data i n i t s redi s tri b uti o n                           computer            fi l e
             wi t h DLA' S Defense Suppl y               El e ctroni c s           Suppl y          Center on a test basi s , and
             was begi n ni n g           to do the same wi t h DLA' S Defense Constructi o n                                   Suppl y
             Center. They i n tend              to share fi l e data wi t h al l DLA suppl y                           centers.
             Accordi n g         to a DLA suppl y       offi c i a l ,       ful l coordi n ati o n        i s pendi n g        compl e -
             ti o n of the defense            automated               addressi n g     system moderni z ati o n                   effort.

Ai r Force    The Ai r Force i d enti f i e d        three factors contri b uti n g         to the return of i t ems
             to DIA. The factors were (1) unanti c i p ated                  reducti o n      i n demand,   (2) base
             i n ventory      adj u stment    gai n s, whi c h    resul t ed      i n excess materi e l , and (3)
              anti c i p ated     returns of DLA-managed           i t ems to the Ai r Force suppl y           sys-
             tem from i t s customers.

             The Ai r Force di d not i d enti f y                        any substanti a l        acti o ns   that coul d mi n i -
             mi z e or reduce returns but it di d i n sti t ute                            procedures        to mi n i m i z e     post-
             return shi p ments             (i . e., Ai r Force bases wi l hol d i t ems for a l o nger                             peri o d
             of t,i m e, al l o wi n g     redi s tri b uti o n            to other bases) i n Apri l 1989. It al s o has
             recommended               changes            i n how it accounts              for, reports, and redi s tri b utes
             excess materi e l s ,         whi c h            al o ng wi t h i t s other pl a nned          acti o ns,         may
             reduce the amount                   of excess returns. The Ai r Force di d not have any
             speci f i c acti o ns       to address                  the second and thi r d factors.

             The Ai r Force al s o revi e wed                    i t s materi e l         returns         pol i c y          for DLA i t ems and
              changed    i t s cri t eri a    for returni n g              materi e l .        Parti a l         excess materi e l                 wi l
              conti n ue   to be reported                 to DLA but wi l onl y be returned                                    for credi t (i . e.,
              when DIA needs the materi e l ) .                       Otherwi s e,          it wi l retai n the parti a l                        excess
             i t ems for i n ternal        redi s tri b uti o n.          The Ai r Force wi l report the excess
              materi e l quarterl y         to DLA to provi d e                      the agency          wi t h vi s i b i l t y          over i t s
             managed        i t ems. Ai r Force offi c i a l s                 bel i e ve     the revi s ed            procedure              wi l
              decrease     the amount              of materi e l         bei n g returned.                DLA-managed                    stocks



             Page        20                                                                    GAO/NSIAD-90-58                 Inventory        Management
 Appendi x           III
 Acti o ns        to Reduce    Excess      and   Returns




 that are i n total excess to Ai r Force requi r ements                                                  wi l     conti n ue          to be
 returned    to DLA on a credi t and no-credi t    basi s ,

  In i t s September            1989 report, the DOD Inspector                                  General           concl u ded               that a
  uni f orm     DOD program             managed          by the whol e sal e                     i n ventory              managers
  shoul d     be establ i s hed         for the l a teral              redi s tri b uti o n            of retai l acti v i t i e s’
  (e.g, Army and Ai r Force bases and Navy shi p s) excess materi e l .
 Accordi n g           to the report, i n recent years the servi c es                                    have establ i s hed
 thei r own programs                  to i n ternal l y        redi s tri b ute             excess materi e l                 for DLA-
managed           i t ems. The programs                 have been successful                             and hel p ed            sati s fy
other retai l acti v i t i e s’         requi r ements.                However,               current           servi c e      redi s tri -
buti o n     procedures            can restri c t       usi n g retai l excess assets to ful f i l                                  requi r e-
 ments of the same servi c e                     and excl u de               the whol e sal e              i n ventory           manager
i n the deci s i o n         process.

Establ i s hi n g               a cross-servi c e          redi s tri b uti o n            program           managed            by the
whol e sal e             i n ventory            managers           woul d not requi r e                a change            i n i d enti f yi n g
and reporti n g                   excess materi e l              at retai l acti v i t i e s.         Retai l acti v i t i e s             woul d
stil screen materi e l                         at l e ast quarterl y                and report it under exi s ti n g                           excess
materi e l            reporti n g         procedures.             However,              whol e sal e        i n ventory           managers
woul d not routi n el y                        provi d e    return authori z ati o ns                   for shi p pi n g             materi e l
to whol e sal e                 storage depots. Instead, the i n ventory                                   managers               woul d
redi s tri b ute               the excess materi e l                to acti v i t i e s        wi t h exi s ti n g       requi r ements
(backorders)                     from any servi c e,               and woul d use the remai n i n g                            excess
materi e l            to fil subsequent                  requi r ements.                We agree wi t h the report’s                              con-
cl u si o ns        i n thi s matter and that whol e sal e                               i n ventory            managers            shoul d           be
responsi b l e                for redi s tri b uti n g          servi c e       excess materi e l                 throughout               the DOD
suppl y           system.

 The Inspector            Generals’        offi c e found that DOD needs to redi s tri b ute
 excess materi e l          on an i n terservi c e        basi s as wel l as on an i n traservi c e
 basi s . The Assi s tant           Secretary       of Defense (Producti o n                          and Logi s ti c s)
 general l y     concurred          that such redi s tri b uti o n              i s needed.             In addi t i o n,    the
Ai r Force and Navy are general l y                      supporti v e,             al t hough           the Army has
some reservati o ns.              A maj o r obstacl e          to i n terservi c e             redi s tri b uti o n-
i n terservi c e     rei m bursement-has                 been i n formal l y                 resol v ed              among the
servi c es.




Page         21                                                                     GAO/NSIAD-90-58                Inventory       Management
                                                                                                                                                                                                c
Appebdi x   IV

C$nments         From the Department                                                                                        of Defense



                                                                            ASSISTANT           SECRETARY            OF     DEFENSE
                                                                                   WASti l N OTON.      O.C.   20301-8000




                                                                                                                               FEB"5                  1990
                     (L/SD)



                    Mr. Frank            C. Conahan
                    Assi s tant          Comptrol l e r                         General
                    Nati o nal          Securi t y            and               Internati o nal          Affai r s
                         Di v i s i o n
                    U.S. General                  Accounti n g                       Offi c e
                    Washi n gton,            DC 20548

                    Dear            Mr.          Conahan:

                               Thi s                  is
                                                       the           Department      of Defense           (DOD) response    to the General
                    Accounti n g                    Offi c e            (GAO) draft       report,       "INVENTORY MANAGEMENT:       DLA' s
                    Materi e l                   Returns              Program,"     dated       December     21, 1989    (GAO Code
                    391617/OSD                      Case            8212).

                                    The          DOD           has revi e wed            the report      and concurs         wi t h               the report' s
                    fi n di n gs.                          We wil          conti n ue         to pursue     the i m provements                       noted     in            the
                    report                 and             wil     moni t or          progress       on those   acti o ns.

                                 The             Department               appreci a tes           the   opportuni t y                 to   revi e w          the         report
                    in        draft              form.
                                                                                                           Si n cerel y ,


                                                                                                                /        I
                                                                                                           J &sJ * , LL -B&4-
                                                                                                           Davi d f . Berteau
                                                                                                           Pri n ci p al   Deputy




                                    Page         22                                                                          GAO/NSIAD-90-58                 Inventory             Management
 Appd+di x   V

M‘ aj o r        Contri b utors                  to Thi s                     Report


                                     Ri c hard A. Hel m er, Assi s tant               Di r ector
 Nati o nal      Securi t y and      Robert T. Bontempo,             Eval u ator-i n -Charge
 Intdrnati o nal         Affai r s   Roger A. Carrol l ,     Eval u ator
                                     Carol y n S. Bl o cker,    Wri t er-Edi t or
 Di vs’i o n,
 Wa I hi n gton,       DC.




                     Y




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