oversight

Army Inventory: Growth in Inventories That Exceed Requirements

Published by the Government Accountability Office on 1990-03-22.

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

                   United   States   General   Accounting   Office
                   Report to the Chairman, Subcommittee              Y
                   on Readiness, Committee on Armed
                   Services, House of Representatives


March   1990
                   ARMY INVENTORY
                   Growth in Inventories
                   That Exceed
                   Requirements




GAO,‘NSLAD-90-68
    National Security and
                                            -.-
    International Affairs Division

    B-237804

    March 22,199O

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

    Dear Mr. Chairman:

    This report responds to the former Chairman’s concern about the extent of growth in the
    Army’s inventory and the extent to which this growth could be attributed to the Army’s
    buying and maintaining more than it needed to meet military requirements. In this regard,
    the former Chairman asked us to determine

- what had caused the growth and
l what actions needed to be taken to curb it without impairing military capability

    We are sending copies of this report to the Director, Office of Management and Budget; the
    Chairmen, House Committee on Government Operations, Senate Committee on Governmental
    Affairs, House and Senate Committees on Appropriations, and the Senate Committee on
    Armed Services; and the Secretaries of Defense and 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 275-4141 if you or your staff have any questions. Other major
    contributors are listed in appendix III.

    Sincerely yours




    Frank C. Conahan
    Assistant Comptroller General
                              Executive summary




                              GAO determined that more timely and aggressive actions by item man-
                              agement officials could have reduced the procurement of unneeded
                              items. In some cases, information was available before the procurement
                              contracts were awarded or shortly thereafter to show that the items
                              were not needed. However, the Army has not developed a systematic
                              approach to evaluating when unneeded procurements should be can-
                              celed, reduced, or allowed to proceed.

                              GAO also found that inaccurate information  in the requirements database
                              had contributed to the growth of inapplicable inventory and had been
                              previously reported by various audit groups at other Army buying com-
                              mands as well as at the Aviation Systems Command.



Principal Findings

Extent of Growth in           GAO found that, for the 5-year period under review, the Aviation
Inapplicable Assets           Systems Command’s inventory increased from $1.7 billion to $4 billion,
                              an increase of 134 percent. However, its inapplicable inventory
                              increased from $207 million to $804 million, an increase of 289 percent.
                              GAO judgmentally selected 45 items in the Command’s inapplicable
                              inventory. These items accounted for $531 million, or about 66 percent,
                              of the $804 million of inapplicable inventory.


Inventory Retained to         Twenty-one of the 45 items GAO reviewed related to end items of equip-
Support Equipment Being       ment being phased out of the Army system. These 21 items accounted
                              for $453 million of the inapplicable inventory reported by the Aviation
Phased Out                    Systems Command as of September 30, 1988. According to inventory
                              management officials, the reasons that items had not been phased out
                              were as follows:

                          l The 1984 moratorium on the disposal of inventory precluded them from
                            disposing of items related to end items still in the active Army’s inven-
                            tory. Although the moratorium has been lifted, the Army has been reluc-
                            tant to dispose of unneeded inventory for fear that it may dispose of
                            something that will be needed in the future.
                          . The Army’s inventory retention policy essentially allows for the reten-
                            tion of any or all items as either economic, contingency, or numeric
                            retention level stocks.



                              Page 3                               GAO/NSIAD-90-68Growth in Amy Inventmies
                              Executive summary




                              unserviceable engines, valued at $6,341,640, were reported as inapplica-
                              ble inventory.


Missed Opportunities to       GAO determined that timely and aggressive action on the part of item
Reduce the Procurement of     management officials to cancel or reduce planned procurements could
                              have prevented unnecessary procurement. Item management officials
Unnecessary Assets            told GAO that recommended cutbacks or cancellations of planned
                              procurements had lower priorities than recommendations to buy and
                              that they do not have sufficient time to act on all recommendations.

                              The Aviation Systems Command has been aware of inaccuracies in the
                              database and the failure of item managers in taking timely actions to
                              reduce unneeded procurement. Nevertheless, Command officials have
                              not established a system to provide feedback on corrective actions being
                              taken.


                              GAO recommends that the Secretary of the Army direct the Commander
Recommendations               of the Army Materiel Command to take the following actions:

                              Dispose of items that are not needed to support end items being phased
                              out of the Army’s inventory.
                              Reemphasize to item managers the need to be more responsive to
                              changes in forecasted demands and to update and correct the database
                              that computes requirements.
                            . Establish a systematic approach to aggressively canceling or reducing
                              planned procurements when items are not needed to meet current
                              requirements.
                            . Report, as part of the Federal Managers’ Financial Integrity Act process,
                              the actions being taken to address the database problems as well as the
                              actions to cancel or reduce unneeded procurements.


                              The Department of Defense agreed with all of GAO'S findings and recom-
Agency Comments               mendations and provided information on how and when the recommen-
                              dations would be implemented. The Department’s detailed comments
                              appear as appendix II




                              Page6                                GAO/NSL4DMBS Growth in &my   hVentorieS
         Contents




         Table 2.5: Types of Inaccurate Requirements Data and the                  19
             Resulting Inapplicable Inventory Reported by
             AVSCOM (as of September 30, 1988)

Figure   Figure 2.1: Growth Rates of the Total and Inapplicable                    11
              Inventories at AVSCOM for the 5 Years Ending
              September 30, 1988




         Abbreviations

         AFAO       Approved Force Acquisition Objective
         AVSCOM     Aviation Systems Command
         DOD        Department of Defense
         GAO        General Accounting Office
         NICP       National Inventory Control Point


         page'?                               GAO/NSIAD-99-68GrowthinArm~Inventories
                             Chapter 1
                             Intmduction




                             of these factors. However, one factor that was discernible was the con-
                             tinuous growth in the percentage of inventory that was not needed to
                             meet AFAO requirements. During the 5-year period, inapplicable inven-
                             tory, as a percentage of total inventory, increased from 16 to 22 percent
                             on an Army-wide basis and from 12 to 20 percent at AVSCOM.


                             Concerned about the growth in the Army’s inventory, the former
Objectives, Scope, and       Chairman of the Subcommittee on Readiness, House Committee on
Methodology                  Armed Services, asked GAO to determine how much, if any, of this
                             growth could be attributed to the Army’s buying and maintaining more
                             than it needed to meet military requirements. In this regard, the former
                             Chairman asked us t,o determine

                         . what had caused the growth and
                         l what actions needed to be taken to reduce the growth without impairing
                           military capability.

                             We selected AVSCOMas the location for our review because the dollar
                             value and the percentage of growth of its inventory during the 5-year
                             period ending September 30, 1988, were the largest of all the NICPS.
                             Additionally, AVSCOMhad the largest amount of inapplicable inventory as
                             of September 30, 1988. and with the exception of one other NICP, it had
                             experienced the largest, rate of growth in this category of inventory.

                             To address the objectives, we reviewed Department of Defense (DOD) and
                             Army policies and procedures regarding the requirements determination
                             for inventory acquisition and retention. We also interviewed personnel
                             responsible for implementing supply management actions and reviewed
                             and analyzed studies and reports from various analytical and audit
                             agencies, such as the Logistics Management Institute; Logistics Opera-
                             tions, Incorporated; t,he Army Audit Agency; and DOD'S Office of the
                             Inspector General.

                             We selected 45 items, on a judgmental basis, that AVSCOMhad identified
                             in its September 30, 1988, budget stratification report as being inappli-
                             cable to current AFAO requirements (see app. I). We selected the items
                             that had $5 million or more of inapplicable inventory and excess items
                             that had significant amounts of due-ins. The 45 items represented
                             66 percent of the $804 million of inapplicable inventory reported by
                             AVSCOMas of September 30, 1988.




                              Page 9                               GAO/NSIAD-99-68Growth in Army Inventories
Chapter 2

Reasonsfor Inapplicable Inventory


                                            The rate of growth in inapplicable inventory at AVSCOMfor the 5-year
                                            period ending September 30, 1988, was more than twice the rate of
                                            growth in AVSCOM'Stotal inventory. Inapplicable inventory increased
                                            from $207 million to about $804 million, a 289-percent increase, and
                                            total inventory increased from $1.7 billion to $4 billion, an increase of
                                            134 percent. Figure 2.1 shows the rates of growth in AVSCOM'Stotal and
                                            inapplicable inventories.


Figure 2.1: Growth Rates of the Total and
Inapplicable Inventories at AVSCOM for      300
the 5 Years Ending September 30,1988
                                            280
                                            260
                                            240
                                            220
                                            200
                                            lea
                                            160
                                            140
                                            120
                                            100
                                             so
                                             so
                                             40
                                             20
                                              0

                                              1983                  1934              1985             1966
                                              FiscalYear
                                                     -         AVSCOM Total Inventory
                                                     - - - -   AVSCOM lnappkable Inventory

                                            Note: These rates apply to inventory acquired with procurement    appropriations


                                            The reasons that inventory becomes inapplicable are varied, and each
                                            item has a somewhat unique story behind it. However, for the 45 items
                                            in our review, which accounted for $53 1 million of AWCOM'S inapplicable
                                            inventory as of September 30, 1988, there were certain recurring rea-
                                            sons that the inventory had been classified as inapplicable:

                                            Inventory was being retained to support end items that were being
                                            phased out of the Army system.
                                            Demand rates for certain items had not materialized.




                                            Page 11                                            GAO/NSL4D9OB6Growth in Army Inventories
                                           chapter 2
                                           Reasonsfor Inapplicable Inventor)




Table 2.2: Inapplicable Inventory On
Hand for Weapons Systems Being                                                 Number of line     On-hand inapplicable
Phased Out of the Army’s Inventory         System assembly                             items                 inventory
                                           CH-47 helicopter                                15              $377,487,408
                                           CH-54 hellcopter      engme                      1                15.288,351
                                           T% helicopter      es--       -                  3                49,162,446
                                           UH-1 hellcopter                                  1                  5,830,675
                                                                                                                __~
                                           OV-I B and C hellcopters                         1                  5,278,899
                                           Total                                           21             $453.047.779



                                           The following examples illustrate cases in which inapplicable inventory
                                           was being retained to support end items being phased out of the Army’s
                                           inventory:

                                       . As of September 30, 1988, AVSCOMhad 680 rotary-wing blades (with a
                                         unit price of $42,199) on hand, while the AFAO requirement for this item
                                         was 46. This item is used on the 11 remaining CH-47C helicopters, which
                                         are being phased out of the inventory.
                                       l As of September 30, 1988, AVSCOMreported 74 turboshaft engines (with
                                         a unit price of $392,009) on hand to support an AFAO requirement of
                                         35 engines for the CH-.54A helicopter. The 72 CH-54As in service are
                                         scheduled to be phased out of the Army’s inventory by 1993.

                                           Our examination of available procurement history for the 21 items
                                           showed that the most recent procurement on any item occurred in 1980,
                                           over 8 years ago. A logistics management official said that he was not
                                           aware of any special management procedures used for the phase-out of
                                           the older weapon systems. It was his understanding that the phase-out
                                           was to be handled through the reduction of flying hours. In other words,
                                           as the flying hours are reduced, the automated requirements system will
                                           compute a reduced requirement, which in turn, reduces the number of
                                           inventory items required to support the systems.

                                           We asked AVSCOMitem management officials why there was such a large
                                           amount of inapplicable inventory for weapon systems oeing phased out
                                           of the Army’s inventory. They cited the following reasons:

                                       l   The 1984 moratorium on the disposal of inventory related to end items
                                           still in service precluded them from disposing of unneeded items.
                                           Although the moratorium has been lifted, the Army has been reluctant
                                           to dispose of unneeded inventory for fear that it may dispose of some-
                                           thing that is needed in the future.



                                           Page 13                             GAO/NSIAB9OB8 Growth in Army Inventories
                        Chapter 2
                        Reasonsfor Inapplicable Inventory




                        to 10 diffusers per 100 engines, but no action was taken to reduce the
                        planned procurement.

                        As of September 30, 1988, AVSCOMreported an inapplicable inventory of
                        diffusers valued at $668,990; of this amount, $619,696 was due in from
                        procurement.


Estimated Demands Did   An electrical indicator with a unit price of $2,506 is used on the AH-64
                        helicopter. In August 1987, a contract was awarded for 200 indicators,
Not Materialize         based on an engineering estimate of 10 demands per month. Because
                        deliveries could not be made to meet all the early needs, issues were
                        restricted to (1) supplying levels negotiated with retail customers and
                        (2) meeting emergency situations that would otherwise ground the air-
                        craft. The restriction was lifted in April 1988, and 1 year later, actual
                        demands were averaging three per month. As of September 30, 1988,
                        AVSCOMreported an inapplicable inventory for this item valued at
                        $165,396, all of which was due in from procurement.

                        In another case, AVXOM awarded a contract in August 1987 for 258 ship-
                        ping and storage containers (with a unit price of $367) for the UH-60
                        input gearbox. The determination of the quantity procured was based on
                        the assumption that one container would be required for each gearbox
                        spare.

                        Delivery of the 258 containers began in August 1988 and was completed
                        in December 1988. As of May 21, 1989, all 258 containers remained unis-
                        sued. The item manager for the gearbox said that the current require-
                        ment for containers had been reduced. The item manager said that,
                        because the overhaul contract for the gearboxes called for the repair of
                        the containers in which the gearbox had arrived, a one-for-one replace-
                        ment was not likely. As of September 30, 1988, AVSCOMreported
                        258 units, valued at $94,686, as inapplicable inventory for this item.


Supply Support          In July 1987, AVSCOMcontracted for 136 circuit card assemblies, with a
Agreements Canceled     unit price of $826. Of this total, 120 cards were for a supply support
                        agreement with the 1Jnited Kingdom. About 1 month before the contract
                        was awarded, the support agreement for this item was canceled. How-
                        ever, this information was not entered into the automated supply con-
                        trol study database until May 1988-about 1 year after contract award.
                        The item manager said that a loo-percent termination charge would
                        have been incurred anytime after contract award. As of September 30,


                        Page 15                               GAO/NSL4D90-88Growth in Army Inventories
                                       Chapter 2
                                       Reasonsfor Inapplicable Inventory




                                       The changing demand pattern for this item is reflected in the differing
                                       procurement recommendations made in supply control studies from
                                       1985 to 1988, as shown in table 2.4. Also illustrated is the manager’s
                                       decision to buy or not to buy.

Table 2.4: Procurement
Recommendations for a Solenoid Valve                           Automated study’s
                                       Study month             recommendation
                                                                    ~~~__          Manager’s decision   Reason for decision
                                       December         1985   Buy 1,424           Buy 300              Programmed
                                                                                                        requirements
                                                                                                        overstated.
                                       June 1986               Reduce   by 770     No cutback           Potentral cancellatron
                                                                                                        of overhaul as source
                                                                                                        of supply.
                                       November         1986   Buy 2.109           No buy               Programmed
                                                                                                        requirements
                                                                                                        overstated.
                                       March     1987          Reduce   by 1,334   Buy 1,564            Procurement     due-ins
                                                                                                        overstated   by 1,935
                                                                                                        umts, unserviceables
                                                                                                        needed for over-haul;
                                                                                                        production   lead trme
                                                                                                        understated.
                                       January    1988         Buy I,51 5          No buy               Programmed
                                                                                                        requirements
                                                                                                        overstated
                                       August     1986         Reduce   by 1,053   Reduce    by 1,584   Safety level, reorder
                                                                                                        cycle, and
                                                                                                        programmed
                                                                                                        requirements
                                                                                                        recillced



                                       As can be seen in table 2.4, the item management team in each case used
                                       its knowledge and judgment regarding what was in the database. This
                                       led to changes and even contradictions to the automated recommenda-
                                       tions These manual interventions, though a necessary part of the sup-
                                       ply control study process, can lead to decisions that generate
                                       inapplicable assets.

                                       In another case involving the vane assembly used in T53-L-13B turbine
                                       engines, AVSCOMcomputed a safety level requirement of 1,296 units
                                       (with a unit price of $4,945). The supply control study for March 1987
                                       recommended a buy of 2,261 units, and a buy for 2,000 units was
                                       approved in April 1987.

                                       The July 1987 supply control study recommended a cutback of
                                       775 units primarily because the administrative lead tune had decreased
                                       from 9 months to 3.5 months. The item manager did not concur with the


                                       Page 17                                     GAO/NSIAD9IM% Growth in Army Inventories
                                      Chapter 2
                                      Reasonsfor Inapplicable Inventory




Table 2.5: Types of Inaccurate
Requirements Data and the Resulting                                                                                    Value of inapplicable
Inapplicable Inventory Reported by                                                                       Number of       inventory reported
AVSCOM (as of September 30, 1988)     Type of inaccurate data                                             line items             by AVSCOM
                                      Inaccurate    war reserve   rates                                            1              $7,212,930
                                      Unmatched       pnme and substrtute        stock numbers                     2               7,618,528
                                      Incorrect    ownership   codes                                               2              11,030,735
                                      Programmed       requirements       not entered   Into
                                        database                                                                   1                 112,344
                                      Total                                                                        6            $25,974,537


                                      The following examp1r.s illustrate how the use of inaccurate require-
                                      ments data can result in items’ being reported as inapplicable.


Inaccurate War Reserve                In 1984 AVSCOMcomputed war reserve requirements for the tailboom
                                      assembly used on the E’model of the AH-1 helicopter. The automated
Rates                                 system failed to recognize that each aircraft model had a different war
                                      reserve rate. The automated system computed a single war reserve
                                      requirement for thta F model based on the total number of all aircraft
                                      models.

                                      The system computed a war reserve requirement of 55 tailboom assem-
                                      blies for the AH-IF helicopter when only 4 were needed to meet AFAO
                                      requirements. On the basis of this computation, item managers procured
                                      32 assemblies in September 1985. The error was discovered in
                                      January 1986; however, no action was taken to cancel or reduce the pro-
                                      curement. As of Septrmbcr 30, 1988, AVSCOMreported 102 assemblies,
                                      valued at $7,212,930, as inapplicable inventory.


Prime and Substitute Stock            The collective servo assembly (with a unit price $10,000) for the UH-60
Numbers Not Matched                   helicopter was incorrectly identified as an obsolete item in May 1988.
                                      This action resulted in the prime stock number’s being coded as obsolete
                                      in the requirements system and the substitute stock numbers’ being
                                      identified as prime items.

                                      The item manager said that, although he had identified all the stock
                                      numbers needed to relate the prime item and its substitutes and to con-
                                      solidate the assets for both the prime and substitute items, the database
                                      had not been fully corrected. As of September 30, 1988, inventory val-
                                      ued at $2,460,000 was reported as inapplicable, of which $2,430,000
                                      was due in from proc.urcbment.



                                      Page 19                                                    GAO/NSIAL%904%Growth in Army Inventories
                         Chapter 2
                         Reasonsfor Inapplicable Inventory




                         Our review disclosed other factors, such as those discussed below, that
Factors Affecting the    can also cause inventory to be reported as inapplicable.
Amount of
Inapplicable Inventory   After the swashplate assembly for the AH-64 helicopter failed in flight,
                         the program manager assumed responsibility for controlling issues of
Reported                 the item. As a result, demands were not recorded in the demand files of
                         the automated requirements system, and the system forecasted reduced
                         requirements. On September 30, 1988, the $3 million of inventory on
                         hand and due in was incorrectly reported as inapplicable. When auto-
                         mated control of the issues was reestablished in February 1989, the
                         automated system computed a buy requirement of $5,197,563.

                         In another case, an AH-64 transportability kit was coded as an obsolete
                         item. Therefore, the automated system did not compute a requirement
                         for it. At the time of our review, 11 kits on hand and 4 due in were
                         reported as inapplicable inventory valued at $549,507. However, AVSCOM
                         had decided to disassemble the kits and stock the individual kit compo-
                         nents. These components were assigned stock numbers unrelated to the
                         kit stock number. Thus, while the kits were technically inapplicable, the
                         kit components did not represent inapplicable inventory.

                         In a third case, AVSCOMhad transferred logistic support for the Army’s
                         U-21 aircraft and all serviceable engines to a contractor in March 1987.
                         However, unserviceable engines are being retained by AVSCOMin case the
                         5-year support contract is not renewed and in case the engines are
                         needed for foreign military sales. Because .~VSCOMno longer managed the
                         item, the automated system did not compute a requirement for the
                         engine, and 60 on-hand unserviceable engines, valued at $6,341,640,
                         were reported as inapplicable inventory.


                         The Army has experienced significant growth in the amount of inven-
Conclusions              tory that is not currently needed to support operating requirements, and
                         the reasons for the growth are varied.

                         At AVSCOM,the principal reasons for this growth are that (1) inventory is
                         being retained for weapon systems that are being phased out of the sys-
                         tem, (2) inventory was acquired to support demand rates that did not
                         materialize, and (3) errors existed in the requirements database.




                         Page 21                              GAO/NSIAIMO4S Growth in by   Inventories
    Chapter 3
    Actions Neededto Prevent or Reducethe
    Amount of Inapplicable Inventory




    manager said that a subsequent inquiry to the contractor had deter-
    mined that termination charges were too high, and as a result no cancel-
    lation actions were initiated.

. In August 1988, item management officials recommended the cancella-
  tion of two procurement requests for T53 engine solenoid valves that
  had been issued in 1987 but had not yet been placed on contract. One
  request for 709 units was canceled. However, the second request for
  875 units, costing $653,625, was not canceled because procurement per-
  sonnel stated that the contract award was in process, and therefore pro-
  curement could not be canceled.

    The item manager was later advised that, because of legal problems
    with the solicitation, the planned procurement could have been can-
    celed. However, the item manager declined to pursue cancellation
    because the item was forecasted to be in a buy position in 4.5 months.
    Instead of pursuing cancellation, the item manager increased production
    lead time in the requirements computation system from 6.4 months to
    36 months so the March 1989 stratification report would not show the
    assets in an inapplicable position.

l   A contract for 2,000 vane assemblies, costing $9.5 million, was awarded
    in September 1987. From November 1987 through July 1988, the supply
    control studies recommended cutbacks of 578 to 2,095 units in the con-
    tract quantities. The .July 1988 supply control study recommended a
    cutback of 1,312 units, and item management officials approved the cut-
    back of 1,000 units in August 1988. However, the cutback was not
    effected because the contractor’s termination charges were equal to
    90 percent of the contract cost.

    The issue of delayed and inadequate efforts to cancel or reduce pur-
    chase requests and unneeded contract quantities was the subject of a
    March 1989 DOD Inspector General’s report entitled Contract
    Terminations at Army Inventory Control Points. The overall conclusion
    of the report was that the Army did not have an effective process for
    making economical contract termination decisions and that the quality
    of documentation supporting termination decisions and internal controls
    over the process needed improvement.

    The report stated that the Army would not be able to establish an effec-
    tive termination decision-making process until it could accurately quan-
    tify the value of excess assets on contract. The report also called into



    Page 23                                 GAO/NSIAD+O4S Growth ln Amy Inventories
                         Chapter 3
                         Actions Needed to Prevent or Reducethe
                         Amount of Inapplicable Inventory




                         The AVSCOMtask force’s findings on the requirements database were sim-
                         ilar to ours. The task force’s report pointed out that about 70 percent of
                         the monthly supply control studies were not being reviewed primarily
                         because of an insufficient number of personnel and the lack of proper
                         training.

                         Although the lack of manpower and an item manager’s work load can
                         affect the actions or lack of actions taken on a supply control study rec-
                         ommendation, our review disclosed several instances in which informa-
                         tion on supply control studies was available to the item manager, yet no
                         action was taken, or action was not taken in a timely manner. As a
                         result, opportunities to cancel or reduce unneeded procurements were
                         missed.


                         Over 55 percent of AVSCOM'Stotal inapplicable inventory relates to end
Need to Dispose of       items being phased out of the Army. The continued retention of this
Inapplicable Inventory   inventory is guided by the Army’s current retention policies, which
                         essentially allow for the retention of any item the item manager wants
                         to retain regardless of whether the item is needed to support an end
                         item during its remaining life.

                         Our review identified instances in which inapplicable inventory was
                         being retained for possible foreign military sales or in support of a possi-
                         ble contingency, even though the required documentation justifying the
                         item’s retention had not been prepared. We also identified instances in
                         which the amount of inapplicable inventory being retained greatly
                         exceeded what was needed to support current operating and war
                         reserve requirements.

                         The Army’s reluctance to dispose of inventory that is not needed to sup-
                         port current operating or war reserve requirements, according to Army
                         studies, has contributed to the severe overcrowding of depots; it has
                         also driven up storage and operating costs. Overcrowding and high cost,
                         in turn, have necessitated re-warehousing and moving stock, thereby
                         increasing the potential for misplacing needed stock.




                         Page 26                                  GAO/NSL4L%90-68
                                                                                Growth in Army Inventories
                                              -.
                   Chapter 3
                   Actions Needed to Prevent or Reducethe
                   Amount of Inapplicable Inventmy




                    Although the internal control reports did not specifically identify the
                    lack of management actions on the supply control study’s recommenda-
                    tions as a cause of inventory growth, the failure to cut back or cancel
                    unneeded procurement or to declare unneeded stock excess does contrib-
                    ute to this growth.


                    A large portion of the inapplicable inventory relates to older Army
Conclusions         weapon systems that are being phased out. Retention of inventory in
                    excess of what is needed during the remaining lives of these systems
                    adversely affects the management of inventory that is needed. Further-
                    more, the retention of inapplicable inventory adds to the warehousing
                    requirement, the manpower to store and maintain the unneeded items,
                    and the potential for not being able to find needed items.

                    Because investment in inventory that becomes inapplicable represents a
                    less-than-optimum use of resources, the emphasis should be on prevent-
                    ing inventory from becoming inapplicable rather than on dealing with
                    the problem after it occurs. In this regard, the need for accurate require-
                    ments data is paramount if managers are to accurately determine what
                    and how much inventory is needed.

                    Efforts to improve the accuracy of the requirements database and more
                    aggressive and timely actions to cancel the procurement of unneeded
                    items would aid in reducing the amount of inventory that becomes inap-
                    plicable. Although previous audit reports have made recommendations
                    to improve these areas, the problems continue. In this regard, a sound
                    internal control program to monitor the implementation and progress of
                    these recommendations is needed. In the absence of such actions, the
                    Army must deal with the problem of inapplicable inventory after it
                    occurs.

                                              ~-
                    We recommend that the Secretary of the Army direct the Commander of
Recommendations     the Army Materiel Command to take the following actions:

                  9 Establish a systematic, approach to aggressively canceling or reducing
                    planned procurements when items are not needed to meet current
                    requirements. This approach should also include a documentation trail
                    to enable managers to evaluate the economic trade-offs involved in can-
                    celing or reducing planned procurements and taking delivery of
                    unneeded items.



                    Page 27                                 GAO/NSIALXW68 Growth in Army   Inventories
  Chapter 3
  Actions Neededto Prevent or Reducethe
  Amount of Inapplicable Inventory




. Each inventory control point has established a Data Base Advisory
  Group. The charter of the Group is to identify database problems and
  monitor their resolution, Furthermore, if the identified problems are
  systemic, the Group can initiate changes to the requirements determina-
  tion system.
. A new Supply Management Data Base is being developed and should be
  implemented in September 1992. It is expected that the new database
  will provide item managers with a highly useful management tool for
  maintaining required information on the items they manage.

  Concerning our recommendation that the actions being taken to address
  database problems and to cancel or reduce unneeded procurements be
  reported as part of the Federal Managers’ Financial Integrity Act pro-
  cess, DOD said that such information would be reported in the Army
  Materiel Command’s September 30, 1990, report.




  Page 29                                 GAO/NSIAMKJBS Growth in Army Inventories
Appendix I
Value of Inapplicable Inventcry for the 46
Items in GAO’s Review (as of September
30,1988)




                                                                         Value of inapplicable
Stock number                    Nomenclature                                         inventory
1615-01-242-9201                Englnetransmlsslon                                  21,456,OOO
                                                           ----
1615-01-244-4970                Rotary   transmission                               55.800,000
1615-01-244-4971                Rotarytransmlsslon                                  80.652,OOO
2835-00-809-8316                APU gasturbbne          engme                       14,063,465
2840-00-000-0048                Engine                                              21.620,000
2840-00-937-0480                Engine                                              35,819,049
Total                                                                            $531,311,369




Page 31                                              GAO/NSIALMO-68Growth in Army Inventories
                        AppendixII
                        ComrnentsFromtheDepartmentofDefense




                                      WDRAFTPEPORT-DATEDJANUARY       5, 1990
                                         GAO CODE 393310 - OSD CASE 8219

                      "ARMY INVENTORY: GBLWl'NIN INVENTORIES THAT EXCEEDREQUIREM&NTS"

                                             DEPARl%lENTOF DEFENSECC+MENTS

                                                           * * * * *
                                                            FINDINGS


                  .    FINDING A:       Res nsibili
                                        &I-.                 for
                       The GAO observed        that managing the wholesale          level   Army inventory
                       is the responsibility          of the Army Materiel       Command and its six
                       National      Inventory    Control   Points.       The GAO pointed    out that
                       these activities        determine     requirements     and procure,     store,
                       maintain,       and issue inventory       items to Army users.        According    to
                       the GAO, as of September           30, 1989, the six activities          had
                       management responsibility           for about $12 billion         of Army wholesale
                       level     inventory.

                        The GAO noted that the portion            of the total    inventory      that is
                        needed to meet current          operating    and war reserve      requirements       is
                        referred      to as the Army's "Approved        Force Acquisition        Objective."
                        The GAO explained         that the difference      between the Approved Force
                        Acquisition      Objective     and the total    inventory    is referred       to as
                        "inapplicable      inventory."

                        The GAO asserted         that investment    in inventory    that is unneeded
                        represents      a less-than-optimum      use of resources.        The GAO
                        observed,     therefore,      that the objective     of any inventory
                        management system should be to buy and maintain                a sufficient, but
                        not excessive,       amount of inventory       to meet current     operating
Now on pp.1,8-9         requirements.         (pp. 2-3, pp. 12-15/GAO Draft       report)

                        WD RESPONSE:        Concur.

                  .     FINDING B:       Invento
                                        IRetained
                        The GAO analysis      showed that the inapplicable        inventory       for 21 of
                        the 45 items reported       by the Aviation    Systems Command were
                        related   to aircraft     systems and major assemblies         that were being
                        phased out.     According     to the GAO, all of the applicable
                        inventory    for the 21 items was on hand (rather           than due in).         The
                        GAO estimated     the total     value of the inapplicable        inventory    for
                        these items at 5453 million.




                         page33                                           GAO/NSIAD9088      GrowthinArmyInventories
                                  Appendix II
                                  Comments From the Department of Defense




                               support   agreements      that were canceled,     (4) an overhaul  repair
                               program that was canceled,         and (5) incorrect    manual adjustments
Now on pp.2,   4, 14-18.       to requirements      levels.    (pp. 3-8, pp. 21-26, p. 31/GAO Draft
                               Report)

                               DOD RESPONSE:         concur.

                           .   FINDING D: Requirements                Levels Based on Inaccurate             Data.    The
                               GAO found that inaccurate               data in the automated           requirements
                               determination       system resulted          in the overstatement           of some
                               requirements       and the understatement              of others.       The GAO noted
                               that,    in cases where the requirements                  levels    were overstated,       the
                               inventory     applied      to these requirements             was subsequently
                               determined     to be inapplicable             (when the incorrect          data was found
                               and corrected).           The GAO reported          that in those cases in which
                               the requirement         levels      were understated         because of inaccurate
                               data,    the inventory         applied     to these requirements           was erroneously
                               also reported       as inapplicable          inventory.          The GAO cited      examples
                               of (1) inaccurate          war reserve       rates,      (2) instances      where prime
                               and substitute        stock numbers were not matched,                  (3) incorrect
                               ownership     and management codes, and (4) instances                      where
                               programmed requirements              were not in the data base.                (PP. 3-S.
Now on pp 2,4,   18-20.        pp. 26-30, p. 31/GAO Draft                Report)

                               DOD RESPONSE:         Concur

                           .   FINDING E: Factors             Affectinu        the Amount of Inauulicable
                               Inventory        Reported.       The GAO identified            other factors     that cause
                               inventory        to be reported        as inapplicable.            The GAO described        an
                               example of a swashplate               assembly        for the AR-64 helicopter         that
                               failed      in flight.        According       to the GAO, after         the swashplate
                               failed,       the program manager assumed the responsibility                       for
                               controlling         issues    of the item.           The GAO stated      that,   as a result
                               of this decision,           demands were not recorded                in the demand files
                               of the automated           requirements          system and the system then
                                forecasted        reduced requirements.                The GAO pointed      out that,    as of
                               September        30, 1988, the $3 million                of inventory     on hand and due
                               in was incorrectly            reported      as inapplicable.           According    to the
                               GAO, when the automated               control       of the issues was reestablished
                                in February         1989, the automated            systemcomputed       a buy requirement
                               of $5,197,563.

                               The GAO discussed    another   example where an AR-64 transportability
                               kit was coded as an obsolete       item.    The GAO found that because,
                               of this coding error,     the automated     system did not compute a
                               requirement   of it.   The GAO found that,         in this case, the item
                               manager decided    to disassemble     the kits and stock the individual
                               components.    The GAO concluded      that,   while the kits    were




                                  Page 36                                              GAO/NSIAD90-68 Growth in Army Inventories
                                  Appendix II
                                  Comments From the Department of Defense




                                                                                                                             -

                              progress  of these recommendations               is   needed.      (pp.   3-8,   PP.
Now on pp 3, 5, 22-25         33-37, pp. 39-4O/GAO Draft   Report)

                              DOD RESPONSE:          Concur.

                          .   FINDING G: Need to Dispose of Inapplicable                       Inventon,       and ImProve
                              the Accuracv       of the Reouirements           Data Base.        The GAO found that
                              over 55 percent         of the Aviation         Systems Command's total
                              inapplicable        inventory      relates    to end items being phased out of
                              the Army.        The GAO further         found that continued          retention     of this
                              inventory      is guided by the current             Army retention        policies     which
                              essentially       allow    for the retention         of any item the item manager
                              may want to retain           regardless      of whether the item is needed to
                               support     an end item during          its remaining     life.

                              The GAO observed         that the need to improve the accuracy             of the
                              requirements       data base to ensure that procurements             are based on
                              accurate      and up-to-date      requirements    data has been a
                              long-standing       issue.      The GAO referred     to Army Audit Agency audit
                              reports     citing    this deficiency,       but concluded    that lack of
                              accurate      data continues      to be a problem.       The GAO pointed       to the
                              number of cases it identified             in which inaccurate       requirements
                              data had resulted          in overstated     and understated
                              requirements--which,          in turn,    caused inventory      to be reported      as
Now on pp. 3, 5, 25-26.       inapplicable.          (pp. 3-8, pp. 37-4O/GAO Draft         Report)

                              DOD RESPONSE:           Concur


                          .   FINDING Ii:   AS-.                                        The GAO observed
                              that the Federal   Managers Financial        Integrity   Act requires    that
                              annual assessments    of internal    controls      be made by subordinate
                              organizations   to identify    weaknesses      in the programs   they manage.

                              The GAO        pointed     out that the Army's annual report        to the
                              Secretary         of Defense did not identify       inventory   growth as a
                              material        weakness.      The GAO also noted that the Aviation             Systems
                              Command        annual reports      for FY 1987 and FY 1988 did not
                              specifically           address the Command's ability       to control     inventory
                              growth.         The GAO did find,      however that the reports        identified
                              insufficient           manpower to conduct    supply control     studies      as a
                              material        weakness.

                              The GAO concluded       that,     even though the internal    control    reports
                              did not specifically          identify   the lack of management actions        on
                              supply  control     studies      as a cause of inventory   growth,    the
                              failure  to cut back or cancel unneeded procurement             or to declare




                                                                                                                             -



                                   Page 37                                             GAO/NSIAIMOBB Gmwth in Army Inventories
                                 Appendix II
                                 CommentsFrom the Department of Defense




                                 in appropriate        programs     of instructions          covering    both intern
                                 and journeyman        level   training      for item managers.
                                 Additionally,       the Army Logistics          Management College          has been
                                 requested     to incorporate         required     instruction        in the basic
                                 procurement      course,     Management of Defense Acquisition
                                 Contracts,      covering     contract      cutback     and termination
                                 procedures.

                                  The Army Materiel        Command issued supplemental     guidance    to
                                  Inventory   Control      Points    on July 13, 1989, governuxg    the use
                                  of excess on-order        and on-hand assets as
                                  Government-Furnished         Material.

                                  The Army Materiel      Command instituted        a quarterly      report   to
                                  require    Army Inventory    Control    Points    to ascertain       cost
                                  avoidances    that have been realized         through    contract     cutbacks        ti
                                  and terminations      of on-order    excess materiel         and by use of
                                  excess materiel     as Government-Furnished          Material.

                         .   RECOMMENDATION 2:        The GAO recommended that the Secretary  of the
                             Army direct    that the Commander of the Army Materlel     Command
                             dispose   of items not needed to support     end items being phased out
Now on pp. 5 and 28.         of the Army's     inventory.    (p. 9, p. 4O/GAO Draft Report)

                             DOD RESPONSE:      concur.

                             .    Since December 1988, the Army has intensified             efforts    to
                                  dispose   of unneeded stocks.    The value of disposals
                                  generated   by Army Inventory   Control      Points  during      FY 1989
                                  was $583.6 million,    a 63 percent     increase    over the FY 1988
                                  value of $357.2 million.

                             .    A Defense Management Review Decision            927 will   permit  greater
                                  disposal   activity    of inapplicable      Stocks.     A detailed  plan
                                  for implementing     the DW is currently           being developed    and
                                  is expected     to be completed      by September     30, 1990.

                             .    Effective     October      1990, the Army will      implement    procedures
                                  in the Standard         Army Information      Systems at the intermediate
                                  level     to eliminate      the return     of low dollar   value
                                  non-reparable        excess    stock  returns    to the wholesale     level.

                         .   RECOMMENDATION 3:     The GAO recommended the Secretary    of the Army
                             direct   that the Commander of the Army Materlel     Command
                             reemphasize   to rtem managers the need (1) to be more responsive
                             to changes in forecasted    demands and (2) to update and correct
Now   on pp. 5 and 28.       the data base that computes requrrements.        (p. 9, p. 4O/GAO Draft
                             Report)




                                  Page 39                                           GAO/NSL4MlOS8 Growth in Amy Inventories
Appendix III

Major Contributors to This Report


                        Robert J. Lane, Assistant Director
National Security and
International Affairs
Division, Washington,
D.C.
                                                                                                 --
                        Milton E. Roedder, Evaluator-in-Charge
Kansas City Regional    Robert C. Sommer, Technical Assistant for ADP Services
Office                  Howard H. McGee, Evaluator
                        Mark T. Amo, Evaluator




(393310)                Page 41                              GAO/NSIALMO88 Growth in Army Inventories
                                                                                                                         -
        1

    5
            -.,-.-.,--.-   -    -   -   ,-   -    -      .   -   .,   .                            ._ - - - -.-,-
.




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Official   Business
Penalty    for Private      Use $300
                                Appendix II
                                CommentsFrom the Department of Defense




                           -RESPONSE:          concur.
                           .    A similar      recommendation         in DOCIG Audit Report on Contract
                                Terminations        at Army Inventory          Control    Points   resulted    in
                                issuance     of an Army Materiel            Command headquarters         memorandum
                                on July 21, 1989, which directed                 establishment       of a Data
                                Base Advisory         Group at each of Army Materiel             Command's
                                Inventory      Control     Points.        The Advisory     Groups are chartered
                                to surface       data base errors          and other problems        and monitor
                                the resolution         of the problems.          Where problems       are
                                systemic,      the Groups may initiate             changes to prescribed
                                Commodity Command Standard                System procedures.         Other
                                missions     include      enforcement       of supply control        study reviews
                                and assuring        that item managers and their              supervisors
                                maintain     complete      records       of all attempts      to reduce or
                                terminate      contract      quantities.

                           .    A new Supply Management Data Base is currently                          under
                                development         which, when implemented,             will   provide     a highly
                                useful      on-line      management tool to item managers for
                                maintaining         required     information        on the items they manage.
                                The data base will            replace     current      hard copy outputs        which
                                must be manually            manipulated      off-line.        Subject    to funds
                                availability,          this   new data base is expected              to be
                                implemented         during    September      1992.

                       .   PECU%%ENDATION 4: The GAO reconnnended the Secretary         of the Army
                           direct   that the Commander of the Army Materiel      Command report,    as
                           part of the Federal    Managers'  Financial Integrity    Act process,
                           the actions   beings taken to address the data base problems,         as
                           well as the actions    to cancel or reduce unneeded procurements.
Now on pp. 5 and 28.        (p. 9, p. 4O/GAO Draft   Report)

                           DOD RESPONSE: Concur.           The Army Materiel      Command Federal
                           Managers'   Financial    Integrity      Report of September      30, 1989,
                           addressed   a general    material      weakness,   which included     excess
                           inventory   and inventory       growth.      The Army Materiel    Command
                           Federal   Managers'   Financial      Integrity    Report of September      30,
                           1990, will   address the data base actions           and actions    to cancel                or
                           reduce unneeded procurements.




                                                                                     GAO/NSIAD-90-68Growth in Amy Inventories
                               Appendix II
                               CommentsF’mmthe Department of Defense




                           unneeded stock excess does contribute                  to this   growth.     (PP. 3-8,
Now   on pp. 26-27         pp. 3&4O/GAO Draft   Report)

                           DOD RESPONSE:       Concur.


                                                              *   *   l   l   *



                                                          PECOMt.lENDATIONS

                       .   R!XOBSSNDATION 1:        The GAO recommended the Secretary           of the Army
                           direct   that the Commander of the Army Materiel              Command establish
                           a systematic,     aggressive       approach    to cancel or reduce planned
                           procurements     when items are not needed to meet current
                           requirements.       (According       to the GAO, this approach      should
                           include    a documentation       trail     to enable managers to evaluate       the
                           economic trade-offs        involved      in canceling   or reducing   planned
                           procurements     and taking      delivery     of items not needed.)       (P. 9,
NOW on pp. 5 and 27.       p. 4O/GAO Draft      Report)

                           DOD RESPONSE: Concur.          Corrective    measures were instituted        to
                           improve   the contract     cutback    and termination    process    at Army
                           Inventory    Control   Points subsequent      to the period     (August 1988 -
                           September    1989) in which the GAO audit was conducted.               These
                           measures include     the following:

                           .     A computer model called         "TACOS Economic Cutback Model" has
                                 been implemented       at all Army Inventory          Control      Points      to
                                 assist    item managers in making economic cutback                  or
                                 termination      recommendations.        The computer program provides
                                 information      on how much, if any, to reduce the quantity                      of
                                 an item on contract       by comparing       the extra      holding      costs of
                                 assets    above the requirements         objective     - if not cutback            -
                                 against     the cost of amending or canceling             a contract        if
                                 assets    are cutback.     Training     to item managers in the use of
                                 the model has been completed           at five     Inventory       Control
                                 Points    and will    be completed     at the remaining          Inventory
                                 Control     Point by February       15, 1990.

                           .     Procuring     contracting      officers    and other personnel         were
                                 provided    interim     guidance      on December 19, 1989, by issuance
                                 of a draft     Army Materiel        Command Federal    Acquisition
                                 Regulation     Supplement      which outlines     economic     factors     that
                                 must be considered          in making contract     cutback    and
                                 termination      decisions.

                           .      The Army Logistics    Management College   has incorporated
                                  instructions   on contract   cutbacks  and termination    procedures




                                Page 38                                            GAO/NSIAD-9048 Growth in Army Inventories
                                  AppendixtI
                                  CommentsFromtheDepartmentofDefense




                     r
                              technically   inapplicable,       the kit components     did not represent
                              inapplicable    inventory.      The GAO also cited     a third    example where
                              the Aviation    Systems Command incorrectly        reported    U-21
                              unserviceable     engines   valued   at $6,341,640    as inapplicable.
Now on pp. 4-5, 21             (pp. 3-8, pp. 30-31/GAO Draft Report)

                              DOD RESPONSE:        Concur.

                          .   FINDING F:       Need to Awxessivelv     Pursue Procurement     Cutbeck end
                              Cancellation      Reccdwnendations.    The GAO reported    that the greatest
                              single     opportunity   to prevent  inventory    from becoming
                              inapplicable       is for item management officials     to take timely    and
                              aggressive      actions  to reduce or cancel    planned procurements    when
                              the items are not needed.

                              The GAO identified         numerous instances           in which prompt
                              cancellation       or cutback     actions       by the Aviation         Systems Command
                              could have prevented          inventory       from becoming inapplicable.
                              According      to the GAO, in some cases the supply control                      study had
                              recommended a cancellation             or cutback       prior     to the award of a
                              contract--however,         timely    action       was not taken by item management
                              officials.        The GAO also cited          other instances         where officials
                              had attempted        to cut back or cancel planned                procurements,       but
                              they abandoned these attempts               because the contracts            were in the
                              process      of being awarded.         Finally,      the GAO cited        cases where
                              officials      abandoned attempts         to cancel       procurements        already     on
                              contract      because of contract         termination         charges that the
                              contractor       would assess against           the Government.

                              The GAO explained         that the issue of aggressive                action     to cancel
                              or reduce purchase          requests      for unneeded items has also been
                              pointed    out in Inspector           General,    DOD, and Army Audit Agency
                              reports.      The GAO reported          that,   according       to item management
                              officials,      the emphasis was on awarding               contracts--not          on
                              canceling     or cutting       back contract       quantities.         The GAO concluded
                              that this     is the reason why supply control                  studies      recommending
                              procurement       actions     receive     top priority,        while those
                              recommending       cutbacks      or cancellations        are reviewed          and acted on
                              only if time permits.

                              In summary, the GAO concluded           that efforts        to improve the
                              accuracy      of the requirements      data base and more aggressive              and
                              timely     actions    to cancel the procurement          of unneeded items would
                              aid in reducing         the amount of inventory        that becomes
                              inapplicable.         The GAO emphasized       that,   although    previous     audit
                              reports     have made recommendations          to improve these areas,          the
                              problems      continue.       The GAO generally      concluded   that a sound
                              internal      control     program to monitor      the implementation        and




                     t-



                                   Page36                                              GAO/NSIAD-90-68GrowthinArmyInventories
                                   Appendix II
                                   CommentsFrom the Department of Defense




                        r
                                 The GAO examined the available               procurement        history      for these 21
                                 items and found that the most recent                  procurement         on any item was
                                 in 1980--over        8 years ago.        The GAO referred          to a logistics
                                 management official,          who said that he was not aware of any
                                 special      management procedures          used for the phase-out              of the older
                                 weapon system.         According     to the GAO, it was his understanding
                                 that the phase-out         was to be handled through               the reduction        of
                                 flying     hours.     The GAO explained         that this meant that as the
                                 flying     hours are reduced,        the automated         requirements          system will
                                 compute a reduced requirement,               which in turn,          reduces the number
                                 of inventory       items required        to support      the systems.           The GAO
                                 stated     that Aviation      Systems Command management officials
                                 indicated      that the reason for such a large amount of inapplicable
                                 inventory      for weapons systems being phased out was (1) a 1984
                                 moratorium       on the disposal       of inventory        related      to end items
                                 still    in service     precluded      them from disposing             of unneeded items
                                  (the GAO noted that themoratorrum                 had been lifted          but the Army
                                 has been reluctant         to dispose       of unneeded inventory              for fear that
                                 it may dispose        of something       that may be needed in the future);
                                 and (2) the inventory          retention      policy     of the Army essentially
                                 allows     them to retain      any or all items as either                 economic,
                                 contingency,       or numeric     retention       level    stocks.

                                 The GAO also stated           that prior      and ongoing    reviews    have shown
                                 that,     after   the moratorium        was imposed,     the Army was reluctant            to
                                 dispose      of any item--and        that the Army retention         policy    allows      a
                                 great     deal of flexibility          for determining      what and how much
                                 inventory       can be retained        over and above the approved          force
Now on pp. 2-3, 12-14            acquisition       objective      requirement.       (pp. 3-8, pp. 18-20,
                                 p. 31/GAO Draft         Report)

                                 DOD RESPONSE: Concur.               The problem      of inapplicable     inventory
                                 growth has been recognized               in many audits     and reports     and much
                                 management attention          and    many initiatives       within   the Department
                                 are focused on reversing             this trend.       However, premature
                                 disposal    of inapplicable          stocks could compound the problem
                                 rather   than correct       it.

                             .   FINDING C: Forecasted         Demands Overestimated.         The GAO review of
                                 45 items at the Aviation        Systems Command with inapplicable
                                 inventories   identified      13 instances    in which the reported
                                 inapplicable    inventory     of $33.8 million       had resulted    because
                                 forecasted   demands did not materialize.             The GAO stated     that,
                                 since the actual       demands were less than the estimates           used in the
                                 requirements    computation     process,   assets procured        to support     the
                                 forecasted   demand were not needed and became inapplicable.                   The
                                 GAO provided    examples    of (1) an overstated        depot overhaul      factor,
                                  (2) cases where estimated        demands did not materialize,          (3) supply




                        !-



                                    Page 34                                             GAO/NSlAD-90-68Growth in Army Inventories
Appendix II

Comments From the Department of Defense



                                               ASSISTANT    SECRETARY      OF DEFENSE
                                                      WASHINGTON.  Dt    Z0301-BOO0




                  Mr. Frank C. Conahan
                  Assistant    Comptroller     General
                  National    Security     and International
                    Affairs    Division
                  U.S. General Accounting         Office
                  Washington,     DC 20548

                  Dear Mr.     Conahan:

                         This is the Department        of Defense     (DOD) response       to the General
                  Accounting     Office    (GAO) Draft    Report,   "AMY INVENTORY:           Growth in
                  Inventories      That Exceed Requirements,"         Dated January       5, 1990, (GAO
                  Code 393310, OSD Case 8219).            The Department      concurs with'the         GAO
                  findings     and recomniendatlons.       Some of the issues        raised    in this
                  report    were previously      addressed     in a similar    Inspector      General Audit
                  Report,     "Contract   Terminations     at Army Inventory       Control     Point,"
                  dated March 29, 1989.          Consequently,     corrective     actions     are already
                  underway to rectify        many of the deficiencies         addressed      by the GAO.

                       The detailed          DOD comments on the draft     report           findings   and
                  recommendations          are provided  in the enclosure.

                          The Department      appreciates      the   opportunity         to comment on the
                  draft     report.

                                                                            Sincerely,


                                                                            f
                                                                           b$dpt2%
                                                                            Davi      J. Berteau
                                                                            Principal     Deputy

                  Enclosure




              L




                      Page32
Value of Inapplicable Inventory for the 45 Items
in GAO’s Review (as of September 30,198S)

                                                                                         Value of inapplicable
                Stock number              Nomenclature                                               inventory
                1260-01-256-6924          Master     controller                                       $4,025,135
                1560.00-251-8754          Crrcurt card assembly                                          191,632
                1615-01-224-6950          Swashplateassembly                ~-____~~~-                 3,056,124
                1650-01-140-0967          Servoassembly                                                2,460,OOO
                1680.00-443.1137-~        Actuator       electrrc                                        258.426
                                                                                                  -
                i740-01-279-1554          Transportabrlrty          krt                                  549,507
                2840-01-137-5482          Drffuser                                                       668.9%
                2840-01-170-2912          Mrdframe       assembly                                        787,617
                2840-01-187-1558          Coolrng      plate                                             148,044
                4920-01-112-5906          Testset,verdrc                                               1,792,722
                4920-01-212-5572          Outputfrxture                                                  112,344
                6620-01-161-1193          Electronrc      rndrcator
                                                                                                  _       165.396
                8145-01-129-7975     -~   APU contamer                                                    187,302
                8145-01-128-1855          Shrpcontamer                                                    175,565
                8145-01-136-0844          APU contamer                                                   607,200
                8145-01-230-0189          Gearbox       contarner                                          94,686
                2840-60-855-6100          Turbine      engrne                                          6,341,640
                1610-00-617-9735          Arrcraft     propeller                                       5,278,899
                1615-01-014-6005          Drrveshaft       assembly                                    5,830,675
                2840-00-102-3966          Enqme                                                       15,000,000
                2840-00-102-3968          Engme                                                        5,243,566
                2840-00-924-3626          Vaneassembly                                                 5,736,950
                2915-00-135-0105          Fuel control                                                28,918,886
                4810-00-081-5670          Solenord       valve                                        13,748,535
                1560-01-076-1540          Tarlboom       assembly                                      7,212,930
                2915~01-224-9248          Marn fuel control                                            8,314x735
                2840-01-114~2211          Engine                                                       9,463,98i
                2840-00-904-2461          Engrne                                                      15,288,351
                1615-01-128-4399          Tarlrotorsub/assembly                                        5,158,528
                2840-01~140-6768          Engrne                                                        7,005,600
                1615-00-001-6443          Aft rotarywrng            blade                             26,754,166
                1615-00-172-2102          Forward       rotary wrng blade                             32,662,026
                1615-00-758-0176          Rotary     wrng head                                          5,561,262
                1615-00-781-6613          Transmrssron           assembly                             12,155,320
                1615-00-839-0690          Transmrssron           assembly                             17,331,600
                1615-00~919-1354          Rotary     wrng head                                          5,089,188
                1615-01-112-2998          Transmrssron           assemblv                             13.665.300
                1615-01-113-0460          Rotary     wing head                                        15.424,032
                1615-01-231-1830          Rotarywrng           head                                    19,434.ooo
                                                                                                      (continued)




                Page 30                                             GAO/NSIAD3O+S Growth in Army Inventories
                          Chapter 3
                          Actions Neededto Prevent or Reducethe
                          Amount of Inapplicable Inventory




                  l Dispose of items that are not needed to support end items being phased
                    out of the Army’s inventory.
                  . Reemphasize to item managers the need to be more responsive to
                    changes in forecasted demands and to update and correct the database
                    that computes requirements.
                  . Report, as part of the Federal Managers’ Financial Integrity Act process,
                    the actions being taken to address the database problems and to cancel
                    or reduce unneeded procurements.


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

                          Regarding our recommendation for a systematic, aggressive approach to
                          canceling or reducing the planned procurements of items not needed to
                          meet current requirements, DOD made the following comments:

                      . A computer model has been developed to assist item managers in mak-
                        ing economic cutback or termination decisions. The model will compare
                        the extra costs of holding inventory above the requirements objective to
                        the costs of amending or canceling a contract. Training of the item man-
                        agers on the use of the model was expected to be completed by
                        February 15,199O.
                      . Guidance was provided to contracting officers, in December 1989, that
                        outlined the economic factors to be considered in making contract cut-
                        back and termination decisions,
                      l The Army Logistics Management College has incorporated instructions
                        on contract cutbacks and termination procedures in its training courses
                        for item managers.

                          In response to our recommendation to dispose of items in support of end
                          items being phased out of the Army system, DOD said that the disposal of
                          unneeded items has been intensified. Furthermore, a plan is being devel-
                          oped and should be completed by September 30, 1990, to permit a
                          greater disposal of inapplicable inventory. Also, effective October 1990,
                          procedures will be implemented to eliminate the return of low-dollar-
                          value nonreparable excess materiel from the retail to the wholesale
                          level.

                          DOD responded as follows to our recommendation that item managers be
                          more responsive to changes in forecasted demands and update and cor-
                          rect the requirements database:



                          Page 28                                 GAO/NSLAD9088 Growth in Army Inventories
                         Chapter 3
                         Actions Neededto Prevent or Reducethe
                         Amount of Inapplicable Inventory




                         The need to improve the accuracy of the requirements database to
Need to Improve the      ensure that procurements are based on accurate and up-to-date require-
Accuracy of the          ments data has been a long-standing issue.
Requirements             The Army Audit Agency, in an August 1988 Report of Audit on Supply
Database                 Control at AVSCOM,stated that the AVSCOMDirector of Logistics had recog-
                         nized, in May 1987, that drastic action was needed to correct data prob-
                         lems in the requirements system. The report also pointed out that the
                         Commander had appointed an internal task force to review the database
                         problems and make recommendations. The task force’s report, in
                         September 1987, identified the lack of training, inadequate and inaccu-
                         rate system documentation, and high personnel turnover as major
                         causes of the requirements system’s database problems. In response to
                         the task force’s report, ,V SCOM’SCommander appointed personnel to
                         work on the issues.

                         However, the lack of adequate and accurate data continues to be a prob-
                         lem, as evidenced by the number of cases we identified during our
                         review in which inaccurate requirements data had resulted in over-
                         stated and understated requirements, which, in turn, caused inventory
                         to be reported as inapplicable.


                         The Federal Managers’ Financial Integrity Act requires that annual
Assessment of Internal   assessments of internal controls be made by subordinate organizations
Controls                 to identify weaknesses in the programs they manage.

                         The Army’s annual report to the Secretary of Defense did not identify
                         inventory growth as a material weakness. Neither did AVSCOM’Sfiscal
                         years 1987 and 1988 reports on internal controls specifically address
                         the Command’s ability to control inventory growth. However, the
                         reports did identify insufficient manpower to conduct supply control
                         studies as a material weakness. They also discussed the impact of man-
                         power shortages on the ability to perform inventory management func-
                         tions. The reports pointed out that many supply control study
                         recommendations to cut back procurement or declare items excess were
                         not being implemented. Furthermore, the reports noted that budget
                         stratifications, material requirements lists, and line item balance
                         reviews were not being performed with the thoroughness required and
                         that, as a result, supply availability and mission-capable rates had
                         decreased.




                          Page 26                                GAO/NSIADSO48 Growth in Army Inventories
Chapter 3
Actions Neededto Prevent cmReducethe
Amount of Inapplicable Inventory




question the absence of internal control over the completeness and time-
liness of item managers’ validations and contracting officers’ termina-
tion decisions. The report estimated that if termination procedures and
controls were implemented, over $1 billion could be saved, primarily
through reduced inventories.

The failure to take aggressive action on cancellation actions recom-
mended by the Army’s wholesale automated supply control study sys-
tem has been the subject of reports by the Army Audit Agency. In a
December 1988 report on the Armament, Munitions and Chemical
Command, the Army Audit Agency reported that item managers’ actions
were influenced by their general perception that it was better to have
too much stock on hand than to risk not being able to satisfy customer
demands. As a result of this perception, item managers frequently did
not respond to automated study recommendations to reduce or cancel
planned purchases. In its March 1989 report on supply management at
the Army Missile Command, the Army Audit Agency stated that the
Command’s emphasis on meeting requirements should be balanced by a
greater concern for the efficient use of resources. The report noted that
item managers had not followed the automated system’s recommenda-
tions to reduce purchases but, instead, had added requirements to the
system. These unsupported requirements had been added mainly to
avoid having the automated system show that excessive quantities were
on hand and due in and that purchases should be reduced.

In our discussions with item management officials, we were told that the
emphasis was on awarding contracts-not     on canceling or cutting back
contract quantities. Consequently, supply control studies recommending
procurement actions receive top priority, and those recommending cut-
backs or cancellations are reviewed and acted on if time permits.

One item manager stated that inventory becomes inapplicable because
item managers cannot perform all of their duties due to their large work
loads. He went on to say that getting contracts out to meet demands is
an important criteria in an item manager’s performance rating and that
he is only able to completely review 37 to 87 studies a month for the
410 items for which he is responsible. He said that he has never
reviewed all the studies on time and that, through inaction, an item can
go into an inapplicable status. Another item manager, when asked about
actions taken on a cutback recommendation, said that no action had
been taken and that the study had not been reviewed because there was
not enough time to review all of the studies.



Page 24                                GAO/NSL4Lk9O#3Growth in Army Inventories
Actions Needed to Prevent or Reducethe
Amount of Inapplicable Inventory

                           The DOD Inspector General, the Army Audit Agency, and others have
                           previously reported on the need for AVSCOMand the other Army buying
                           commands to improve the accuracy of the requirements database and to
                           take aggressive and timely action to cancel or cut back unneeded
                           procurements. However, as previously discussed, many of the same
                           problems continue.


                           The greatest single opportunity to prevent inventory from becoming
Need to Aggressively       inapplicable is for item management officials to take timely and aggres-
Pursue Procurement         sive actions to reduce or cancel planned procurements when the items
Cutback and                are not needed.
Cancellation               During our review, we identified numerous instances in which prompt
Recommendations            cancellation or cutback actions by AVSCOMofficials could have prevented
                           inventory from becoming inapplicable. In some cases, the supply control
                           study had recommended a cancellation or cutback prior to the award of
                           a contract, but timely action was not taken by item management offi-
                           cials. In other cases, in which officials had attempted to cut back or can-
                           cel planned procurements, they abandoned these attempts because the
                           contracts were in the process of being awarded. In still other cases, offi-
                           cials abandoned attempts to cancel procurements already on contact
                           because of contract termination charges that the contractor would have
                           assessed against the government.

                           The following examples illustrate opportunities that item management
                           officials could have taken to cut back or cancel procurements for
                           unneeded items:

                       l   A contract for 149 electronic actuators, costing $259,376, was awarded
                           in February 1988. In November 1987,3 months before contract award
                           but 1 year after cancellation of the overhaul program in which these
                           items were to be used, the item manager inquired about canceling the
                           planned procurement. The item manager was advised by procurement
                           personnel that the contract was already “out for bids.” When the
                           March 1988 automated supply control study recommended canceling
                           procurement of the 149 units, the item manager deferred taking action
                           because of her unsuccessful attempt in November.

                           The branch chief stated that the item had been in a cutback position for
                           2 years and that “we should not have waited quite so long.” The item




                           Page 22                               GAO/NSIAD90-68 Growth in Army Inventories
                           In a similar case, AVSCOMreported 382 OH-6 tail rotor subassemblies, val-
                           ued at $5158,528, as inapplicable inventory as of September 30, 1988.
                           The item manager said that this item had been in an inapplicable status
                           since 1985. He stated that he believed the reason for this was that tech-
                           nical data needed to consolidate the substitute items and the prime stock
                           number items in the database had not been gathered. As a result, sepa-
                           rate requirements were computed for the prime and substitute numbers,
                           and procurements were made for each item.


Incorrect Ownership and    T-700-GE-401 engines are owned and managed by the Navy, and the
                           Army procures the engines. Thus, AVSCOMdoes not compute a require-
Management Codes           ments level for the engine. On September 30,1988, however, the AVSCOM
                           database showed 2 engines on hand and 14 due in from procurement.
                           The database also showed the item as having an Army ownership code
                           (that is, being owned by the Army). As a result, the 16 engines, with an
                           inventory value of $7,005,600, were incorrectly reported as inapplicable
                           inventory. Of this total, 56,129,900 was due in from procurement.

                           In another case, management responsibility for the Master Controller,
                           which is used on the OH-58D helicopter, had been transferred from the
                           Army Missile Command to AVSCOMin October 1987. However, the man-
                           agement code was not changed to show AVSCOMas having item manage-
                           ment responsibility, and as a result, AVSCOMdid not compute a
                           requirement for the item. Consequently, the $4,025,135 of inventory for
                           this item was incorrectly reported as inapplicable as of September 30,
                            1988. Of this total, $3,986,056 was due in from procurement.


Programmed Requi.rements   An output shaft fixture, used for working on AH-64 and UH-60 engines,
Not in Database            was reported as of September 30, 1988, as having 39 units due in from
                           procurement. Of this total, 31 (valued at $3,624 each) were inapplicable.
                           The item manager explained that this type of item is normally associ-
                           ated with initial issue and is not demand based. Instead, the item is a
                           programmed demand item. He believed that programmed demands had
                           been entered into the database but that there were problems in getting
                           this type of demand data reflected in the studies. As a result, the
                           September 1988 requirement for eight was based on an insurance quan-
                           tity of two units plus six due out on requisitions.




                           Page20
                      Chapter 2
                      Reasonsfor Inapplicable Inventury




                      recommendation and stated that the assets would be used in future
                      rebuild programs. The division chief concurred with the item manager’s
                      decision and stated that a buy during the next year would be required if
                      the cutback were made. The item manager then manually adjusted the
                      study to reflect the g-month administrative lead time.

                      The contract for 2,000 units was awarded on September 18,1987.
                      Between November 1987 and June 1988, the supply control studies con-
                      sistently recommended cutbacks ranging from 578 to 2,095 items. The
                      July 1988 study recommended a cutback of 1,3 12 units due primarily to
                      a reduction of the safety level requirement. In August 1988, item man-
                      agement officials unsuccessfully attempted to cancel 1,000 of the due-
                      ins. However, because the termination costs would have been 90 percent
                      of the contract costs, no cutback was made. As of September 30,1988,
                      i\VSCOM reported $5,736,950 of inapplicable inventory for this item, all of
                      which was due in from procurement.

                      The item manager said that the safety level decrease from 1,296 units in
                      March 1987 to 0 in September 1988 was the primary reason that the
                      inapplicable inventory was reported in September 1988 and that fluctu-
                      ations in administrative lead time, production lead time, and reorder
                      cycle had contributed t,o a lesser extent. The item manager also said
                      that, while he has the authority to adjust some lead time factors, he
                      cannot override safety level computations.


                      Inaccurate data in the automated requirements determination system
Requirements Levels   resulted in the overstatement  of some requirements and the understate-
Based on Inaccurate   ment of others. In cases in which the requirements levels were over-
Data                  stated, the inventory applied to these requirements was subsequently
                      determined to be inapplicable when the incorrect data was found. In
                      cases in which the requirement levels were understated because of inac-
                      curate data, the inventory applied to these requirements was errone-
                      ously reported as inapplicable inventory.

                      Table 2.5 shows the types of inaccurate requirements data and the value
                      of inapplicable inventory reported by AVSCOMas of September 30, 1988,
                      for the items included in our review.




                      Page 18                               GAO/NSIAL%90-6!3
                                                                          Growth in Army Inventories
                          Chapter 2
                          Reasonsfor Lnapplicable Inventory




                          1988, AVSCOMreported inapplicable circuit card assemblies valued at
                          $191,632. Assemblies valued at $104,076 were due in from
                          procurement.


Overhaul Repair Program   A~SCOMawarded a contract on February 8, 1988, for 149 electrical actua-
                          tors (with a unit price of $1,758) used on the CH-47C helicopter. The
Canceled                  overhaul program in which the actuators are used was canceled in
                          October 1986. Even though the supply control studies for this item had
                          consistently recommended procurement reductions since January 1986,
                          no actions had been taken on the recommendations for the 2 years prior
                          to the 1988 contract award. As of September 30, 1988, AVSCOMreported
                          $258,426 worth of inapplicable actuators, all of which were due in from
                          procurement.

                          In another case, AVSCOMawarded a contract in September 1986 for
                          115 turbine engine cooling plates with a unit price of $2,008. The plate
                          is used almost exclusively in overhauling T700 engines. Prior to the pro-
                          curement, programmed overhaul requirements for fiscal years 1988
                          through 1991 were estimated at 431 plates. Programmed overhaul
                          requirements for these same 4 years were reduced as of February 1987
                          to 72 plates. At that time, the automated supply control study recom-
                          mended a cutback of 136 units on order. However, no efforts were made
                          to cancel the procurements. As of April 25, 1989, there were 237 ser-
                          viceable cooling plates in inventory to satisfy a 40-month requirement
                          objective of 107. As of September 30, 1988, AVSCOMreported 73 units due
                          in from procurement, valued at $148,044, as inapplicable inventory.


Requirements Levels       There are various factors involved in the calculation of a requirements
Manually Adjusted         level. In addition to factors that can be expressed in mathematical
                          terms, the human element plays a major role in the total equation. The
                          following examples illustrate how item management officials’ decisions
                          are influenced by information that exists outside the automated system.

                          A solenoid valve, used in T53 engines, was reported as being in an inap-
                          plicable inventory position as of September 30, 1988. Solenoid valves
                          valued at $13.7 million were reported as due in from procurement. Can-
                          cellation action was initiated for 1,584 units in August 1988, but the
                          cancellation attempt was not reflected in the database used to prepare
                          the September 30, 1988. report.




                          Page 16                              GAO/NSIAD-YIMBGrowth in Army Inventories
                                            Chapter 2
                                            Reasonsfor Inapplicable Inventmy




                                        l   The Army’s inventory retention policy essentially allows them to retain
                                            any or all items as either economic, contingency, or numeric retention
                                            level stocks.

                                            Our previously completed and ongoing work has shown that after the
                                            moratorium was imposed, the Army was reluctant to dispose of any
                                            item and that the Army’s retention policy allows a great deal of flexibil-
                                            ity in determining what and how much inventory can be retained over
                                            and above the AFAO requirement.


                                            In our review of the 45 items, we identified 13 instances in which the
Forecasted Demands                          reported inapplicable inventory of $33.8 million had resulted because
Overestimated                               forecasted demands did not materialize. Because actual demands were
                                            less than the estimates used in the requirements computation process,
                                            assets procured to support the forecasted demand were not needed and
                                            became inapplicable.

                                            Table 2.3 shows the reasons for the overestimated demands and the
                                            amounts of inapplicable inventory attributed to each.

Table 2.3: Overestimated Demands That
Resulted in Inapplicable Inventory                                                        Number of line             Value of inapplicable
(as of September   30, 1988)                Reason                                                items                          inventory
                                            Depot    overhaul   factor   overstated                     2                       $1,456,607
                                            Estimated demand         rates did not
                                              materialize
                                            ~~~.__---                                                   6                       12,299,551
                                            Supply    support   agreement      canceled                 1                          191,362
                                            Overhaul    program reduced or canceled                      2                         406,470
                                            ~~-.__-__~-~~                    -~ ~------   -----     ~-------~_____
                                            Reaulrements      levels manuallv adlusted                   2                      19.405.485
                                            Total                                                     13                      $x3,839,745


                                            The following examples illustrate how the overestimated forecasted
                                            demands resulted in inapplicable inventory.


Depot Overhaul Factor                       A centrifugal diffuser, with a unit price of $7,042, is used to overhaul
Overstated                                  the T700-GE-701 engine for the AH-64 helicopter. A May 1986 supply
                                            control study computed a requirement for 141 diffusers based on an
                                            estimated need for 35 diffusers per 100 engines overhauled. A contract
                                            was awarded in September 1987 for 88 diffusers. In March 1987,
                                            6 months before contract award, the depot overhaul factor was reduced



                                            Page 14                                       GAO/NSIAI%9M8 Growth in Army Inventories
                                          Chapter 2
                                          Reasonsfor Inapplicable Inventory




                                      l   Inaccurate requirements data had been used to establish the require-
                                          ments levels.

                                          While inapplicable inventory may not always be preventable, early and
                                          timely recognition of these causes can help to reduce it.

                                          Table 2.1 shows the value of and causes for inapplicable inventory, as
                                          reported by AVSCOM,for the 45 items in our review.

Table 2.1: Causes for and Value of
Inapplicable Inventory for 45 Items       Dollars   in Thousands
(as of September   30, 1988)
                                          Causes of inapplicable           Number of                Inventory value
                                            inventory                         items     On hand      On contract On commitment
                                          Support for items being
                                            phased out                            21     $453,048                  0               0
                                          Overstated    demand     rates          13        6,907     -~ $13,176         $13,757
                                          lF&curate~rement~
                                             data                                  6       13,289         12,685                   0
                                          Other                                    5       8,660          9,252             537
                                          Total                                   45    8401,904        $35,113         $14,294


                                          About $482 million, or 91 percent, of the inapplicable inventory for the
                                          45 items is made up of on-hand inventory. These figures are consistent
                                          with figures on AVSCOM'Stotal inapplicable inventory: 87 percent, or
                                          about $697 million of the $804 million, was made up of on-hand inven-
                                          tory. Additionally, most of the on-hand inapplicable inventory related to
                                          weapon systems that were being phased out of the inventory.

                                           ~-~
                                          Our analysis showed that inapplicable inventory for 21 of the 45 items
Inventory Retained for                    reported by AVSCOMwas related to aircraft systems and major assemblies
End Items Being                           that were being phased out. All of the inapplicable inventory for the
Phased Out                                2 1 items was on hand (rather than due in).

                                          Table 2.2 shows the amount and value of on-hand inapplicable inven-
                                          tory by weapon system and major assembly.




                                          Page 12                                      GAO/NSIAIh9O+i8Growth in Army Inventories
Chapter 1
Introduction




For each of the selected items, we reviewed the item case files and held
discussions with appropriate AVSCOMofficials to determine why items
had become inapplicable and whether actions could have been taken to
prevent items from becoming inapplicable.

Our work was conducted primarily at AVSCOMand at the Army Materiel
Command from August 1988 to September 1989 in accordance with gen-
erally accepted government auditing standards.




Page 10                              GAO/‘NSL4B904iSGrowth in Amy Inventories
Introduction


               Managing the Army’s wholesale level inventory is the responsibility of
               the Army Materiel Command and its six Army National Inventory
               Control Points (NICP). These organizations are responsible for determin-
               ing inventory requirements, procuring, storing, maintaining, and issuing
               the items to user activities such as posts, camps, and stations.

               That part of an item’s total inventory that is required for current oper-
               ating and war reserve needs is classified as “Approved Force
               Acquisition Objective” (AFAO) requirements. The difference between the
               item’s inventory applicable to AFAOrequirements and the item’s total
               inventory is referred to as “inapplicable inventory.” Inapplicable inven-
               tory assets are categorized by the Army as either “retention-level”
               inventory or “excess” inventory.

               During the period September 30,1983, to September 30, 1988, total
               inventory increased $5.9 billion, from $6.1 billion to $12 billion, an
               increase of 96 percent.’

               The $5.9 billion increase in the Army’s total inventory during the 5-year
               period consisted of $4.3 billion growth in inventory applicable to AFAO
               requirements and $1.6 billion in inapplicable inventory.

               Inventory applicable to AFAOrequirements increased from $5.1 billion to
               $9.4 billion, a 83-percent, increase, and inapplicable inventory increased
               from $976 million to $2.6 billion, a 168-percent increase.

               The Aviation Systems Command (AVSCOM),where our review was per-
               formed, showed similar, but larger rates of increases in both applicable
               and inapplicable inventories. To illustrate, of the total inventory growth
               of $2.3 billion from 1983 to 1988, inventory applicable to AFAOrequire-
               ments accounted for $1.7 billion of the increase, and inapplicable inven-
               tory accounted for the other $600 million. Applicable inventory
               increased 112 percent, and inapplicable inventory increased
               289 percent.

               There are valid reasons for growth in the inventory levels during the
               5-year period. Inflation, price increases, and the major modernization
               efforts undertaken by the Army all contributed to the growth. It was not
               possible to quantify the extent of inventory growth attributable to each

               ‘As definedin this report,“invenlirry” includesassetsonhand,ZLSSSS   duem fromprocurement, and
               assetsonpurchaserequests(theprocurement      phasejust prior to the approvedorders’beingplaced
               oncontract).Also,theinventoryfiguresrelateto theassetsprocuredor t(, beprocuredwith procure-
               mentappropriationfunds.


               Page 8                                         GAO/NSL4D90.6&?
                                                                            Growth in Army Inventories
Contents


Executive Summary                                                                                 2
Chapter 1                                                                                         8
Introduction             Objectives, Scope, and Methodology                                       9

Chapter 2                                                                                       11
Reasons for              Inventory Retained for End Items Being Phased Out                      12
                                                                                                14
                         Forecasted Demands Overestimated
Inapplicable Inventory   Requirements Levels Based on Inaccurate Data                           18
                         Factors Affecting the Amount of Inapplicable Inventory                 21
                             Reported
                         Conclusions                                                            21

Chapter 3                                                                                       22
Actions Needed to        Need to Aggressively Pursue Procurement Cutback and                    22
                             Cancellation Recommendations
Prevent or Reduce the    Need to Dispose of Inapplicable Inventory                               25
Amount of                Need to Improve the Accuracy of the Requirements                        26
Inapplicable Inventory       Database
                         Assessment of Internal Controls                                         26
                         Conclusions                                                             27
                         Recommendations                                                         27
                         Agency Comments                                                         28

Appendixes               Appendix I: Value of Inapplicable Inventory for the                    30
                             45 Items in GAO’s Review (as of September 30, 1988)
                         Appendix II: Comments From the Department of Defense                   32
                         Appendix III: Major Contributors to This Report                        41

Tables                   Table 2.1: Causes for and Value of Inapplicable Inventory               12
                              for 45 Items (as of September 30, 1988)
                         Table 2.2: Inapplicable Inventory On Hand for Weapons                   13
                             Systems Being Phased Out of the Army’s Inventory
                         Table 2.3: Overestimated Demands That Resulted in                       14
                              Inapplicable Inventory (as of September 30, 1988)
                         Table 2.4: Procurement Recommendations for a Solenoid                   17
                             Valve




                         Page6                                GAO/NSIAD.90&3
                                                                           Growthin Army Inventories
                             ExecutiveSummary




Forecasted Demands           Thirteen of the 45 line items GAO reviewed involved cases in which
                             requirements computed on the basis of estimated demand rates had not
Overestimated                materialized. In some cases, item managers had received updated infor-
                             mation in time to cancel procurements but had not done so. As of
                             September 30, 1988, the Aviation Systems Command reported $33.8 mil-
                             lion of inapplicable inventory for these 13 items.

                             One of the 13 items was a centrifugal diffuser, which is used in the over-
                             haul of the T700-GE-701 engine for the AH-64 helicopter. A May 1986
                             supply control study computed a requirement for 141 diffusers-with      a
                             unit price of $7,042-based on an estimated depot demand rate of
                             35 diffusers per 100 engines overhauled. In March 1987,6 months
                             before a contract was awarded for 88 diffusers, the depot overhaul fac-
                             tor was reduced to 10 diffusers per 100 engines, but no action was taken
                             to reduce the planned procurement.


Errors in the Requirements   For 6 of the 45 items GAOreviewed, the Aviation Systems Command’s
Database                     database contained erroneous information, which caused the require-
                             ments system to compute incorrect requirements levels for these items.
                             As of September 30, 1988, the Aviation Systems Command reported
                             about $26 million of inapplicable inventory for these six items.

                             One of the 6 items was the T-700.GE-401 engine, which is owned and
                             managed by the Navy and procured by the Army. Because the Army
                             does not own the item, the Aviation Systems Command does not com-
                             pute a requirement for it. Inaccurate data in the Command’s database,
                             however, showed that the item was owned by the Army and that
                             2 engines were on hand and 14 were due in from procurement. As a
                             result, the 16 engines, with an inventory value of $7,005,600, were
                             incorrectly reported as inapplicable inventory.


Other Factors Contributing   For five other items, with a reported inapplicable inventory value of
to Inapplicable Inventory    $18.4 million, the reasons for the inapplicable inventory varied. For
                             example, in one case, the Aviation Systems Command transferred logis-
                             tic support for the Army’s 1J-21 aircraft and all serviceable engines to a
                             contractor in March 1987. However, unserviceable engines were
                             retained by the Command in case the 5-year support contract was not
                             renewed and in case the engines were needed for foreign military sales.
                             Because the Command no longer managed the item, the automated sys-
                             tem did not compute a requirement for the engine, and 60 on-hand



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Executive Summaxy


Purpose                level inventory increased from $6.1 billion to $12 billion. The former
                       Chairman of the Subcommittee on Readiness, House Committee on
                       Armed Services, asked GAOto determine how much of this inventory
                       growth could be attributed to the Army’s buying and maintaining more
                       inventory than it needed to meet its military requirements. The former
                       Chairman also asked GAOto determine what had caused the growth and
                       what actions needed to be taken to curb it without impairing military
                       capability.


                       Managing the Army’s wholesale level inventory is the responsibility of
Background             the Army Materiel Command and its six National Inventory Control
                       Points.

                       That part of an item’s inventory that is needed to meet current operat-
                       ing and war reserve requirements is referred to as the Army’s
                       “Approved Force Acquisition Objective.” The difference between an
                       item’s Approved Force Acquisition Objective and its total inventory is
                       referred to as “inapplicable inventory.”


                       Inflation, price increases, and the major modernization efforts under-
Results in Brief       taken by the Army all contributed to the inventory growth. It was not
                       possible to quantify the extent of inventory growth attributable to each
                       of the various factors. One fact was clear, however: the percentage of
                       inventory that was not needed to meet approved requirements grew
                       faster than overall inventories.

                       As of September 30, 1988, inapplicable inventory represented $2.6 bil-
                       lion, or 22 percent, of the Army’s total inventory. This figure represents
                       a 168-percent growth compared to a 96-percent growth for the overall
                       inventories since 1983. The largest growth, in terms of dollars, of inap-
                       plicable inventory occurred at the Aviation Systems Command, one of
                       the six Army buying commands. At this Command, GAOfound that the
                       inapplicable inventory had increased primarily for the following
                       reasons:

                   l Inventory was being retained to support end items that were being
                     phased out of the Army’s system.
                   l Demands forecasted for items often did not materialize.
                   . The database that computed requirements contained erroneous
                     information.


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