oversight

Army Logistics: Better Management of the Army's Unserviceable Inventories Could Save Millions

Published by the Government Accountability Office on 1990-11-30.

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

GAO


                   ARMY LOGISTICS
                   Better Management of
                   the Army’s
                   Unserviceable
                   Inventories Could Save
                   Millions


                                    142752




GAO/NSlAI)-91-23
Y

:
       Uuited States
GA!0   General Accounting Office
       Washington, D.C. 20648

       National Security and
       International Affairs Division

       R-2402 13

       November 30,lQQO

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

       Dear Mr. Chairman:

       As you requested, we examined the Department of the Army’s plans for using its
       unserviceable asset inventories. Our work revealed that the Army could reduce its
       procurement costs by repairing these assets instead of purchasing new ones. This report
       makes several recommendations to the Secretary of the Army for improving the Army’s
       management of its unserviceable asset inventories.

       As arranged with your office, unless you publicly announce its contents earlier, we plan no
       further distribution of this report until 7 days from its date. At that time, we will send copies
       of this report to appropriate congressional committees, the Secretaries of Defense and the
       Army, and the Director of the Office of Management and Budget. Copies will also be made
       available to others upon request.

       Please contact me at (202) 275-4141 if you or your staff have any questions concerning the
       report. Major contributors to this report are listed in appendix III.

       Sincerely yours,




       Richard Davis
       Director, Army Issues
Executive Summq


                   As of September 1989, the Army’s unserviceable inventory of spare and
Purpose            repair parts totaled about $5.1 billion (“unserviceable” assets are
                   defined as assets that need to be repaired). This inventory has increased
                   by about 5Q percent from fiscal years 1985 to 1989. Repairing assets is
                   often less costly and less time-consuming than purchasing replacements
                   to support operational and combat-readiness requirements. Thus, the
                   Army can minimize its inventory investment costs and enhance readi-
                   ness by reusing its unserviceable stock more often,

                   The Chairman of the Subcommittee on Readiness, House Committee on
                   Armed Services, requested GAO to examine the Army’s plans for reusing
                   its unserviceable inventory and to determine whether the Army should
                   be repairing these assets instead of buying new ones to meet user needs.
                   GAO also examined the Army’s efforts to dispose of unserviceable inven-
                   tory that it had determined tiould not be repaired.


                   The Army Materiel Command, through its six inventory control points,
Background         is required to maintain sufficient numbers of assets through repair or
                   procurement to satisfy user demands and to dispose of assets the Army
                   cannot reuse. Unserviceable assets at Army depots include those that
                   the Army intends to repair (“reparable items”) and those it intends to
                   throw away once they fail (“consumable items”).

                   Roth the Department of Defense and the Army prefer the economical
                   repair of unserviceable assets to new procurement because repair pro-
                   vides maximum readiness at the least investment cost. Further, Depart-
                   ment of Defense and Army policy provides for the disposal of assets
                   that cannot be economically repaired or reused in order to free up
                   storage space and prevent unnecessary holding costs.


                        visited three Army inventory control points and found that they
Results in Brief   GAO
                   had unserviceable assets in storage that they could have repaired to
                   reduce the purchases of new assets. On the basis of its sample, which
                   included 140 of 815 items the control points were purchasing between
                   June and November 1989 (purchases for all 815 items were valued at
                   about $216.8 million), GAO believes that repairing unserviceable assets
                   would have enabled the Army to reduce costs.

                   During its review of the 140 items, GAO found that the Army had unser-
                   viceable assets in storage that it had determined were too costly to
                   repair but had not been designated for disposal. The inventory control


                   Page 2                          GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                           Executive   Summary




                           points retained unneeded materiel because they believed that they were
                           following the Army’s current retention policies, which essentially allow
                           the item manager to keep any item.

                           These issues have been reported before but have not been corrected, in
                           part, because the Army’s internal controls have not been effective.



Principal Findings

Procurement Costs Can Be   GAO  found that at three Army inventory control points-the Aviation
Reducedby Repairing        Systems Command, the Communications-Electronics Command, and the
                           Missile Command-item managers had initiated purchases for new
Unserviceable Assets       assets without considering the potential for repairing unserviceable ones
                           in storage.

                           Between June and November 1989, these inventory control points iden-
                           tified 815 reparable items with buys in process valued at $216.8 million
                           and with unserviceable assets on hand. GAO randomly selected and ana-
                           lyzed 140 of these items and found that for 36 items, the item managers
                           could have reduced procurements by repairing the unserviceable assets
                           instead of buying new ones. On the basis of its sample results, GAO esti-
                           mated, with a g&percent confidence level, that the Army could have
                           saved between $21.1 million and $36.9 million for the 815 items by
                           repairing assets rather than buying them.

                           GAO  found that, at times, local instructions conflicted with established
                           inventory management regulations to minimize inventory costs. Because
                           of the Army’s emphasis on high stock availability and funding plans, the
                           inventory control points had presumed that meeting these goals was
                           more important than economizing in inventory investment decisions.


Army Retains Disposable    According to the Army’s data, of its total $5.1 billion inventory of unser-
                           viceable assets, it had about $1.4 billion in unserviceable assets, or
Assets                     about 27 percent, that had not been included in any past or present
                           repair program as of September 30,1989. Because the Army does not
                           intend to repair some of these assets, they are candidates for disposal.
                           In 30 of the sample 140 cases, however, GAO found that item managers
                           had not taken actions to dispose of reparable assets that were
                           uneconomical to repair.


                           Page 3                           GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                         Executive   Summary




                         The item managers told GAO that, although they had determined that
                         repairing the unserviceable assets was too costly, disposal actions were
                         low priority and too time-consuming because of the necessary manual
                         administrative processing.

                         The Army’s unserviceable inventory included about $17.3 million of
                         consumable assets. The Army intended to throw them away once they
                         failed, but instead, it has been keeping them. GAO'S review of these
                         assets at the three control points showed that for 13 of the 21 items
                         analyzed, the Army had not justified holding them in storage.

                         At the time of GAO'S review, item managers had not disposed of many of
                         these unserviceable assets because they believed that, under current
                         Army policies, as long as the assets were applicable to an active weapon
                         system, they could be kept in inventory. Although Army policies require
                         keeping stock that applies to these weapon systems, the requirement
                         relates only to serviceable, economically reparable items that do not
                         exceed shelf and storage limitations. Therefore, if the assets are
                         uneconomical to repair or if storage space becomes crowded, they
                         should be disposed of.

                         Retaining unserviceable reparable and consumable assets unnecessarily
                         contributes to the overcrowding of storage facilities and increased costs
                         to operate them, GAO found that the Missile Command, to help its item
                         managers identify items for disposal, had developed an automated
                         system to identify unserviceable assets that were (1) not reparable after
                         use, (2) designated as below-depot-level reparable items with no planned
                         repair program, or (3) above authorized retention levels. The Army
                         Materiel Command is deciding whether to require all its control points to
                         adopt this program.


Attempts to Strengthen   The issues hindering the economical use of the Army’s unserviceable
Internal Controls        assets have been reported on several occasions but have not been cor-
                         rected, in part, because the Army’s internal controls do not require
                         effective follow-up to ensure that corrective actions have been imple-
                         mented. Although the Army has promised many corrective actions in
                         response to recommendations from GAO and others, it has not followed
                         through to ensure that the corrective actions were implemented.


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


                         Page 4                          GAO/NSlAD-91-23   Army’s   Unserviceable   Inventories
                      Executive   Summary




                  l Establish a means to monitor the control points’ compliance with Army
                    policy and regulations that require unserviceable assets to be repaired
                    when it is more economical than purchasing new ones.
                  l Clarify to item managers that existing regulations allow them to dispose
                    of items the Army (1) has determined to be uneconomical to repair or (2)
                    does not plan to include in a repair program.
                  . Regularly follow up on planned corrective actions that have responded
                    to audit findings and recommendations to ensure that the actions have
                    been successfully implemented.

                      Other recommendations are included in chapters 2 and 3.


Agency Comments and   recommendations (see app. II). The Department indicated that, within
GAO Evaluation        90 days, the Secretary of the Army will direct the Commander of the
                      Army Materiel Command to take the recommended actions.

                      The Department partially concurred with GAO'S estimate of procurement
                      cost savings resulting from repairing assets rather than buying new
                      ones. However, the Department suggested that field-level assets cannot
                      be economically repaired at depots and that initiating repair programs
                      would have been either impractical or uneconomical for small quantities
                      of these types of unserviceable assets.

                      GAO  believes that its estimate of cost savings is valid. Although repairing
                      unserviceable assets at the lowest maintenance level possible generally
                      is the most cost-effective approach, the Army sometimes performs field-
                      level repairs at the depots if repair requirements cannot be satisfied at
                      lower-level facilities, Notwithstanding the actual scheduling of repair
                      programs, Army Regulation 710-l requires item managers to reduce
                      purchases of new assets by the number of unserviceable assets which
                      are available to be repaired. Therefore, based on this requirement, GAO
                      included field-level assets in an unserviceable condition in its procure-
                      ment savings estimate.




                      Page 5                            GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
Contents


Executive Summary                                                                                               2
                        I
Chapter 1                                                                                                       8
Introduction                Growth of the Unserviceable Inventory and Plans to
                                Repair Assets
                                                                                                                8

                            Repair of Assets Offers an Economic Alternative to                                  9
                                Procurement
                            Objectives, Scope, and Methodology                                              11

Chapter 2                                                                                                   13
The-Army Can Reduce         Army Policy Aimed at Minimizing Investment
                            Opportunities for Minimizing Inventory Management
                                                                                                            13
                                                                                                            14
Procurement Costs by            costs
Repairing                   Impact of Stockage Goals and Funding Plans on Stock                             18
Unserviceable Assets            Management Decisions
                            Conclusions
                            Recommendations
                            Agency Comments and Our Evaluation

Chapter 3                                                                                                   24
The Army Can                Unserviceable Assets in Army Depots
                            Opportunities to Dispose of Some Reparable Assets
                                                                                                            24
                                                                                                            26
Increase the Disposal       Consumable Assets Should Be Disposed of                                         26
of Assets in Storage        Factors Contributing to Keeping More Stock in Storage                           26
                                 Than Necessary
                            Actions to Encourage Increased Asset Disposal                                   27
                            Conclusions                                                                     28
                            Recommendations                                                                 29
                            Agency Comments and Our Evaluation                                              29

Chapter 4                                                                                                   31
Internal Controls           Recurring Problems Have Not Been Corrected
                            Compliance Needed With Existing Policy and Guidance
                                                                                                            31
                                                                                                            34
Should Be                   Conclusions                                                                     34
Strengthened to             Recommendation                                                                  35
Preclude Recurring          Agency Comments and Our Evaluation                                              35
Inventory
Managemerit
Deficiencies

                            Page 6                         GAO/NSIADBl-23   Army’s Unserviceable   Inventmiee
             Contents




Appendixes   Appendix I: Methodology for Identifying the Procurement                             36
                 of On-Hand Assets and for Computing Potential
                 Savings
             Appendix II: Comments From the Department of Defense                                39
             Appendix III: Major Contributors to This Report                                     56

Tables       Table 1.1: Army’s Unserviceable Asset Inventory and                                     9
                 Repair Plans
             Table 2.1: Comparison of Procurement Costs and Repair                               15
                 Costs for 36 Sample Items
             Table 2.2: Percentage of Demands Filled by On-Hand                                  19
                 Stock
             Table 3.1: Value of Army Unserviceable Assets With No                               24
                 Past or Present Repair Program
             Table 3.2: Dollar Value of Disposed Assets                                          28
             Table I. 1: Estimated Procurement Savings Resulting From                            37
                 Repairing Unserviceable Assets




             Abbreviations

             AMC        Army Materiel Command
             AMCCOM     Armament, Munitions and Chemical Command
             AVSCOM     Aviation Systems Command
             CECOM      Communications-Electronics Command
             DOD        Department of Defense
             GAO        General Accounting Office
             ICI'       Inventory Control Point
             MICOM      Missile Command
             NSN        National Stock Number
             TACOM      Tank-Automotive Command
             '1DW       Tube-Launched, Optically-Tracked, Wire-Guided
             TROSCOM    Troop Support Command
             RDIS       Requirements Determination and Execution System


             Page 7                         GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
Chapter 1

htroduction
                                                                                                                       I
                                                                                                                                 r


--
                               Army forces worldwide must have a continuous resupply of assets to
                               support their operational and combat readiness requirements. To meet
                               this demand, the Army maintains a large inventory of assets to
                               replenish stock depleted through day-to-day operations, and to replace
                               equipment parts that break down through normal use. The Army Mate-
                               riel Command (AMC) administers the Army’s supply system and estab-
                               lishes management polices and procedures for its six inventory control
                               points (ICP).’ To satisfy user demands, these ICPS forecast stock require-
                               ments and initiate supply actions to ensure that sufficient assets are
                               available when needed.

                               Military capability can be hindered if assets are not available when
                               users need them. Thus, the ICPS are challenged to maintain adequate
                               asset inventories in a mission-ready condition through timely, effective,
                               and economical resupply actions. If on-hand stock is insufficient, the
                               ICI’S cannot meet customer demands. On the other hand, if too much
                               stock is maintained, resources may be used to buy and hold assets that
                               may never be required. In either case, the Army incurs higher than nec-
                               essary investment costs to maintain its supply inventory.

                               As of September 1989, the Army’s ICPS managed about $14.4 billion
                               worth of secondary assets.2 Of this amount, $9.3 billion represented
                               new, repaired, or reconditioned assets ready for issue to users. The
                               remaining $5.1 billion represented unserviceable assets, that is, assets
                               awaiting repair or disposal. The Army received about $1.5 billion in
                               fiscal year 1990 to purchase new assets and about $1 billion to repair
                               unserviceable assets.


                               The Army’s unserviceable inventory increased from $3.2 billion in fiscal
Growth of the                  year 1985 to $5.1 billion in fiscal year 1989, or about 59 percent. For the
Unserviceable                  same period, the value of assets scheduled for repair increased from
Inventory   and   Plans   to   $.9 billion to $1.5 billion, or about 67 percent. In contrast, however, the
                               value of assets scheduled for repair compared to the total inventory has
Repair Assets                  increased only 1 percent above the 1985 amount.



                               ‘The Army’s six ICPs are the Armament, Munitions and Chemical Command (AMCCOM); the Avia-
                               tion Systems Command (AVSCOM);the Communications-Electronics Command (CECOM); the Missile
                               Command (MICOM); the Tank-Automotive Command (TACOM); and the Troop Support Command
                               (TROSCOM).
                               “Secondary assets include spare parts, repair parts, and supplies for principal assets such as helicop-
                               ters, tanks, vehicles, and weapon systems.



                               Page 9                                        GAO/NSIAD-91-23      Army’s   Unserviceable   Inventories
                                        Chapter 1
                                        Introduction




Table 1.1: Army’s Unserviceable Asset
Inventory and Repair Plans              Dollars in billions
                                                                                Total value of            Scheduled for               Percent
                                        Fiscal year                  unserviceable inventory               ______ repair           scheduled
                                                                                                                              _.---_--.__
                                        1985                                                  $3.2                     $.9                 28
                                        1986                                                   3.8                     1.0                 26
                                        1987
                                        --_-.-   .-..-.-__-----__        ___-.--__             4.1          ------.    1.0                 24
                                        1988                                                   4.3                     1.3                 30
                                        1989                                                   5.1                     1.5                 29


                                        In recent years, the military services have experienced an unprece-
                                        dented growth in inventory levels and numerous supply management
                                        problems. Congressional investigations, GAO reports, and Department of
                                        Defense (DOD) studies have identified multiple causes for the inventory
                                        growth and have suggested solutions for the services’ supply manage-
                                        ment problems. In doing so, they have also expressed concern that the
                                        military services do not have an efficient and effective defense supply
                                        system to maximize readiness at the least investment cost.

                                        For example, in its 1988 report, The Defense Department’s Costly
                                        Failure to Properly Manage Its Inventories Continues, the Senate Com-
                                        mittee on Governmental Affairs noted that “. . . growth in DOD’S sec-
                                        ondary inventory has simply overwhelmed DOD’s depots, warehouses,
                                        and accounting and control systems.” It added that “. . . the manage-
                                        ment of current inventories has not kept pace with DOD’S ability to spend
                                        money on new goods.” As evidence that this growth has been neither
                                        effective nor economical, the Committee pointed out that between 1981
                                        and 1985, GAO and DOD’S audit agencies issued over 300 reports critical
                                        of DOD’S inventory management. The Committee recommended that DOD
                                        reduce both the volume and the value of its secondary asset inventory.


                                        To maintain readiness at the least cost, decisions on replenishing stock
Repair of Assets                        must be timely and must consider economical factors. The Army uses
Offers an Economic                      depot-level maintenance programs3 to return unserviceable assets to a
Alternative to                          like-new condition whenever the repair cost is less than the purchase
                                        price of a new asset. As an alternative or supplement to procurement,
Procurement                             the repair of unserviceable assets (1) checks inventory growth by pro-
                                        moting the reuse of assets already on hand, (2) minimizes investment

                                        ‘7Depot-level maintenance programs, which involve complex repairs performed by contractors or at
                                        the Army’s depots (rather than in the field), include major overhaul or rebuilding of principal items,
                                        such as engines and related parts and equipment.



                                        Page 9                                        GAO/N&ID-91-23      Army’s Unserviceable     Inventories
Chapter 1
Introduction




costs because repairing an item generally costs less than buying a new
one and additional storage of new assets is not required, and
(3) improves readiness whenever the time to repair an item is less than
the time to buy it.

The decision to satisfy readiness requirements at the least investment
cost begins when an item is first introduced into the supply system. On
the basis of its dollar value, essentiality, and repairability, the Army
decides whether the item is more economical to repair and reuse than
replace and, for supply management purposes, designates the item as a
“reparable” asset. Items not intended for reuse are designated “consum-
able” assets and should be disposed of once they become inoperative.

The process of determining what, when, and how much to buy, repair,
or dispose of is based upon predicting future requirements for an asset,
considering historical data and known or anticipated future needs. The
ICPShave a standard automated inventory management system-the
Requirements Determination and Execution System (RnES)-which inte-
grates requirements, available resources, economic factors, and the
latest logistics policies to calculate the stock positions of secondary
assets. RDESprovides the ICPSthe capability to screen their inventories
and identify timely and cost-effective supply actions.

For effective inventory management, RDESperiodically provides the ICPS
comparisons of on-hand and due-in quantities of assets with authorized
requirements. Using this information, the item manager can determine
when actions should be initiated to (1) repair unserviceable assets and/
or procure new assets, (2) dispose of assets that are uneconomical to
repair, or (3) reduce quantities being procured or repaired because of
changes in requirements. The ICPSmay manually correct or modify an
asset’s data base if more current or accurate supply information is
available.

For repair recommendations, the ICPSgenerate schedules showing the
numbers of assets to be repaired and the dates the assets are needed.
When the work year begins, the repair facility receives the unservice-
able assets from the supply system, restores them to a serviceable condi-
tion, and returns the assets to supply for storage or issue. Repair
schedules often change for many reasons: the depots may lack repair
parts, the users may return fewer unserviceable assets to the depot than
projected, requirements may change, and contractors or depots may
encounter technical problems.



Page 10                         GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                        Chapter 1
                        Introduction




                        If repairing the assets is infeasible or additional assets are needed to
                        support requirements, the ICPS release directives to their procurement
                        staffs showing the number of assets needed and when they are required.
                        The procurement staffs begin the process of awarding contracts to pro-
                        duce and deliver the assets as requested. Like repair schedules, procure-
                        ment directives may be modified whenever changes occur in the
                        requirements for the assets. After production, the new assets are deliv-
                        ered to depots for storage until they are issued, or are shipped directly
                        to the user.

                        Operation and maintenance appropriations are used to fund depot
                        repair programs. These funds, which are l-year appropriations, must be
                        obligated on valid orders during the fiscal year in which they are appro-
                        priated, In contrast, procurement appropriations, which are 3-year
                        appropriations, may be obligated with valid orders for 3 years. Trans-
                        ferring funds from one appropriation account to another is prohibited
                        without statutory authority. The Congress provided DOD with authority
                        to transfer fiscal year 1990 funds for higher priority needs based on
                        unforeseen military requirements. Similarly, if imbalances exist between
                        repair and procurement requirements, DOD could request Congress to
                        authorize transfer of funds between the two accounts.


                        The Chairman of the Subcommittee on Readiness, House Committee on
Objectives, Scope,and   Armed Services, asked us to examine the Army’s plans for using its
Methodology             unserviceable assets, which included disposal of those assets that could
                        not be reused. Specifically, he asked whether the Army should be
                        screening its unserviceable assets to develop repair programs as an
                        alternative to procuring new assets needed to satisfy user demands.

                        We performed our work at AMC headquarters and at three of its ICPS-
                        the Aviation Systems Command, St. Louis, Missouri; the Communica-
                        tions-Electronics Command, Fort Monmouth, New Jersey; and the Mis-
                        sile Command, Huntsville, Alabama. We interviewed supply and
                        maintenance officials and item managers; reviewed pertinent DOD and
                        Army regulations, policies, procedures, and internal studies; and ana-
                        lyzed a program MICOM had developed to monitor the buying of assets
                        when unserviceable ones were on hand. Also, we visited Army depots
                        located in Tobyhanna, Pennsylvania, and Corpus Christi, Texas, to
                        verify the location of unserviceable assets and their potential for use in
                        depot repair programs.




                        Page 11                          GAO/NSIAD-91-23       Army’s   Unserviceable   Inventories




                                                                      ,.   :
Chapter 1
Introduction




Even though the Army had annual plans for repair, we tested whether it
was buying assets rather than repairing them at AVSCOM,CECOM, and
MICOM. Between June and November 1989, the ICPS identified 815 repa-
rable items with buys in process, valued at $216.8 million, and with
unserviceable assets on hand in depot warehouses. We examined docu-
mentation supporting initial buy decisions valued at $53.4 million and
subsequent changes in the asset positions for 140 randomly selected
items. We could not evaluate all CECOM'Sinitial decisions because it had
recently purged the item files.

After identifying unserviceable assets that could have been repaired, we
compared estimated procurement costs with repair costs and computed
the potential savings the Army could have achieved if it had repaired
the unserviceable assets rather than procured them. Also, for assets that
could not be repaired, we examined the Army’s plans for disposing of
them. Additional details on our methodology for identifying assets and
computing potential savings are contained in appendix I.

We used the Army’s computer programs, reports, records, and statistics
in making our review. We did not independently determine the relia-
bility of the Army’s unserviceable asset data base. To assess the ade-
quacy of internal controls, we identified the pertinent requirements for
replenishing depleted inventories with new or repaired assets. At each
location we visited, we examined the most recent annual assurance
statements available to determine whether material weaknesses
regarding unserviceable inventories had been reported.

Our work was performed from July 1989 through March 1990 in accor-
dance with generally accepted government auditing standards.




Page 12                         GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
Chapter 2

The Army Can ReduceProcurement Costs by
R&pairing Unserviceable Assets

                        The Army is purchasing spares and repair parts when it would be more
                        economical to repair available unserviceable assets. This practice is
                        inconsistent with Army policy, which requires unserviceable assets to
                        be repaired whenever the cost to repair them is more economical and
                        readiness-enhancing than purchasing new ones.

                        For 36 of the 140 items we sampled, the ICPS were buying new assets
                        when unserviceable assets were available for repair. Projecting on the
                        basis of our analysis, we estimate, at the 95-percent confidence level,
                        that between 167 and 285 of the total 815 items being bought could have
                        been repaired for less than the cost of purchasing new assets. By
                        repairing them, the ICPS could have saved $21.1 million to $35.9 million,
                        while at the same time enhancing readiness by making the assets avail-
                        able sooner.

                        Although each item had its own unique reason for not being repaired,
                        we believe that the Army’s desire to achieve a high level of stock availa-
                        bility and its desire to fully obligate procurement funds as soon as pos-
                        sible were major contributing causes for buying the items rather than
                        repairing them. These two factors may have inadvertently fostered a
                        presumption on the part of the ICPS that having more than enough stock
                        on hand creates fewer problems and is more important than minimizing
                        investment costs. In our opinion, the impact of this presumption is evi-
                        dent in supply management decisions that tend to favor the purchase of
                        new assets when more economical actions can be taken.


                        A logistics policy commonly accepted throughout the defense commu-
Army Policy Aimed at    nity is that repairing assets already owned is less costly and takes less
Minimizing Investment   time than buying new ones. By returning reparable assets to a mission-
                        ready condition, the Army saves the difference between the procure-
                        ment and the repair costs and reduces the need for additional stock.
                        Using existing assets that can be repaired allows the Army to avoid the
                        expense of storing excess stock and, because of quicker turnaround
                        times, to enhance readiness.

                        Although unserviceable assets may be designated as reparable, they
                        must meet certain conditions before they are repaired. Some of the eco-
                        nomic and operational considerations include (1) restrictions that limit
                        repair expenditures to less than replacement costs, (2) time require-
                        ments for having assets ready for issue, (3) the availability of parts to
                        support repair programs, and (4) the capabilities of repair facilities.



                        Page 13                          GAO/N&W-91-23   Army’s Unserviceable   Inventories
                       Chapter 2                                                                                        rl
                       The Army Can Reduce Procurement        Costs by
                       Repairing Unserviceable Assets




                       DOD’S policy on stocking and determining requirements to support opera-
                       tional and combat readiness provides that the military services will min-
                       imize investment costs in ordering and holding inventories. In
                       implementing DOD’S policy, the Army supply system relies on the repair
                       and reuse of assets that are economical to repair. For instance, Army
                       Regulation 710-1, “Centralized Inventory Management of the Army
                       Supply System,” effective March 1988, requires the ICPS to include
                       unserviceable assets that can be economically repaired and reissued
                       when computing the number of serviceable assets needed to meet fore-
                       casted requirements. In addition, it specifies the use of economic order
                       quantities to minimize investment costs for ordering and holding stock.’

                       Similarly, Army Regulation 750-1, “Army Materiel Maintenance Policy
                       and Retail Maintenance Operations,” effective April 1988, requires
                       unserviceable assets to be reused when, after considering economy and
                       operational effectiveness, repair is more cost-effective than replace-
                       ment. AMC Regulation 750-51, “Maintenance of Supplies and Equip-
                       ment,” dated April 1987, requires the ICPS to be cost-effective
                       (economical and readiness enhancing) in choosing whether to reuse
                       unserviceable assets or to replace them with new ones. The ICPS are sup-
                       posed to avoid excessive repair costs by following established expendi-
                       ture limits and are not to exceed these limits unless a waiver is
                       authorized.2


                       For the most part, the ICPS had valid reasons for buying new items even
Opportunities for      though unserviceable ones were available. However, for 36 of the
Minimizing Inventory   140 items we sampled, the Army was maintaining economically repa-
Management Costs       rable assets in depot storage that the three ICPS had not used to reduce
                       the number of items being purchased.

                       After examining supporting documentation and discussing the repair
                       issues with the item managers, their supervisors, and management, we
                       believe that the ICPS could have reduced procurement quantities for the
                       36 sample items by the number of unserviceable assets on hand that
                       could have been repaired. Buying the new assets could cost the ICPS
                       $4.8 million more in procurement costs than it would to repair a like

                       ‘The “Economic Order Quantity” principle is a mathematical device used to determine the purchase
                       quantity that will result in the lowest total costs for ordering and holding inventory to meet expected
                       supply requirements.
                       2Expenditure limits are based upon a percentage of the asset’s replacement cost. The Army fre-
                       quently uses 66 percent of the asset’s replacement cost as the limitation for many of its secondary
                       items.



                       Page 14                                       GAO/N&W-91-23        Army’s Unserviceable    Inventories
                                       Chapter 2
                                       The Army Can Reduce Procurement     Costs by
                                       RepairIng Unserviceable Assets




                                       number of unserviceable assets. On the basis of our sample results, we
                                       projected, at the 95-percent confidence level, that for the 815 items
                                       being bought, the ICPS could have saved between $21.1 million and $35.9
                                       million in procurement costs by repairing the available unserviceable
                                       assets, rather than buying new ones. Table 2.1 summarizes our analysis
                                       of the repair savings in 36 of the 140 buys.

Table 2.1: Comparison of Procurement
Costs and Repair Costs for 36 Sample   Dollars in millions                                                                   .--
Items                                                               Number of                                                         cost
                                       ICP                                 buys       Procurement
                                                                                          ~.-~    cost    Repair cost              savings
                                       k/t%OM                                 16                  $5.8           $2.1               ___$3.7
                                       CECOM
                                       Nl,c.~.~. .____.~-..--.--.-~~-~-.---4- 16  ___--
                                                                                 -.._____           1.5     ---   0.6                   0.9
                                                                                                   0.3            0.1                   0.2
                                       Total                                  36                  $7.6           $2.6                  $4.6



Purchases Initiated With               Our analysis showed that for 22 of the 36 sample items, assets were
Depot-Level Unserviceable              reparable at the depot level. The following examples illustrate some of
                                       the reasons the ICPS cited for not repairing the assets and our rationale
Assets in Storage                      for determining that the assets could have been used to offset the
                                       planned buys.

Scroll Assemblies for Helicopter       In November 1988, AVSCOMinitiated a buy for 152 scroll assemblies
Engines                                (national stock number (NSN) 2840-00-244-1774). The RDESstudy showed
                                       that 167 unserviceable assets were at the Corpus Christi Army Depot
                                       and could be repaired. However, the item manager excluded 117 of the
                                       167 because the item had a “possible very high scrappage rate,” i.e., a
                                       large portion of the unserviceable assets may not have been suitable for
                                       repair. He used only 50, which were in a repair program, to reduce the
                                       number of new items being bought. He decided not to schedule another
                                       repair program until the contractor provided data on the number of
                                       assets that could be repaired.

                                       Notwithstanding his rationale, Army Regulation 710-l provides that, in
                                       the absence of actual data, consideration should be given to setting the
                                       number of serviceable assets expected from repair at 100 percent. Thus,
                                       the item manager could have used all the 117 unserviceable assets in
                                       reducing the number of items being bought.

                                       We estimated total procurement costs for the 117 items at $384,228,
                                       compared to estimated repair costs of $236,457. Repairing these assets



                                       Page 15                                   GAO/NSIAD-91-23    Army’s   Unserviceable   Inventories
                               Chapter 2
                               The Army Can Reduce Procurement   Costs by
                               Repairlag Unserviceable Assets




                               would have saved $147,771 and made them available for use 27 months
                               sooner,

                               At the time of our review in November 1989, the   RDESstudy showed that
                               all 60 scroll assemblies had been repaired. Based upon the October 1989
                               RDESrecommendation to cut back, the item manager canceled the
                               planned procurement and scheduled the other 117 scroll assemblies for
                               repair. According to the item manager, the buy was canceled because
                               program demands had dropped and current requirements could be sup-
                               ported through repair programs.

Receiver Subassemblies for a   In December 1987, CECOMinitiated a buy for 2,600 receiver subassem-
Tactical Radio System          blies (NSN 5820-00-087-006 1). Documentation was not available to deter-
                               mine how many unserviceable assets were on hand at the time of the
                               buy, but as of September 1989,5,363 unserviceable items were at
                               Tobyhanna Army Depot. The August 1989 RDESstudy showed that the
                               item’s average repair cost was 65 percent of its purchase price, but the
                               item manager disregarded these assets in computing available stock on
                               hand. According to the item manager, repairing them was too costly.

                               To document that repair was uneconomical, we asked the item manager
                               to update the average repair cost. After questioning ICP and depot main-
                               tenance staff, she found that the repair cost was less than the 65-per-
                               cent limitation. She initiated a repair program for the unserviceable
                               assets but did not cancel the buy because it was part of a 5-year package
                               program.

                               At the time of our review, CECOMhad 18,619 subassemblies on hand and
                               due in from procurement, exceeding authorized quantities by about
                               8,000 assets. The 8,000 excess assets represented almost 3 years of
                               stock at a monthly demand of 235.

                               We believe that the item manager should have canceled the buy because
                               of the excess stock and the large number of unserviceable assets avail-
                               able for repair. Repairing rather than buying would have saved
                               $236,600 (total procurement costs were $517,400 compared with esti-
                               mated repair costs of $280,800) and would have provided these subas-
                               semblies for use about 25 months sooner.




                               Page 16                                GAO/NSLAlMl-23   Army’s Unserviceable   Inventories
                              chapter 2
                              The Army Can Beduee Procurement   Costs by
                              &dring    thetdceable hwta




Purchases Initiated With      For 14 of the 36 sample items, unserviceable assets on hand were desig-
Field-Level Unserviceable     nated for repair below the depot level (they were field-level reparables).
                              Rather than initiating the repair of these assets, the ICPS ordered new
Assets in Storage             ones to satisfy customer demands, The following example illustrates
                              their actions in choosing not to repair, together with our analysis of why
                              the quantities procured should have been reduced by the number of rep-
                              arable assets.

Landing Yoke Assemblies for   In November 1989, AVSCOMhad four buys in process for 629 landing
Helicopter Aircraft           yoke assemblies (NSN 1620-01-082-0688). AVSCOMinitiated the buys
                              between October 1988 and September 1989. The November 1989 RDES
                              study showed that, of the 255 unserviceable assets in storage primarily
                              at the Lexington-Blue Grass Depot, 191 assets (75 percent) had been dis-
                              regarded in computing available stock on hand. The item manager said
                              that AVSCOM'Spolicy was to disregard 75 percent of field-level assets in
                              resupply decisions because management believed that unserviceable
                              field-level assets at the depots were beyond economic repair.

                              This local policy became effective for landing yoke assemblies in
                              December 1988 after AVSCOMdetermined that the field could repair them.
                              Prior to that, they were repaired at the depots and all unserviceable
                              assets were added to other stock due in and on hand to reduce the quan-
                              tity of assets being bought in October 1988. Although the assemblies’
                              designation for repair level changed in December 1988 to field-level, all
                              the unserviceable assets were counted in the quantity of stock due in
                              and on hand to offset procurement quantities for the second buy in Jan-
                              uary 1989 and the third buy in May 1989. RDESdid not exclude 75 per-
                              cent of the unserviceable assets in accordance with AVSCOM'Slocal policy
                              until the fourth buy in September 1989.

                              Changing the item status to field-level reparable was a sound manage-
                              ment decision, but excluding most of the on-hand unserviceable assets
                              because of this change was unreasonable. AVSCOMaccepted the repair
                              potential of these assets in reducing the number of new items needed in
                              prior buys. Because this potential had not changed for the unserviceable
                              assets already at the depot, we believe that AVSCOMshould have reduced
                              its procurement by the 225 unserviceable assets on hand in November
                              1989 rather than by 25 percent of the unserviceable assets available.

                              Procurement costs for the 191 items were $657,804, compared to esti-
                              mated repair costs of $427,649. By repairing the assets, AVSCOMwould
                              have saved $230,155. Also, it took about 27 months longer to procure
                              these assets than it would have to repair them.


                              Page 17                                 GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                                                                                       I

                       -2
                       TheAnnyC811ReduceProcurementCotat~by
                       bpahing   Uneerviceable  Asseta




                       At the time of our review, the November 1989 RDES study showed that
                       the stock on hand and due in exceeded the requirements objective by
                        123 items. We calculated that, with the 191 unserviceable assets on
                       hand, AVSCOM had 314 items above the quantity authorized, about
                       2.5 years’ supply at the average monthly demand of 10.32. AVSCOM did
                       not accept our recommendation to reduce the number of new items being
                       bought, but approved a repair program for fiscal year 1990.

                       Although we found that the item managers were using lower exclusion
                       rates for some field-level assets, officials in AVEKOM'S Materiel Manage-
                       ment Directorate told us that its policy applied to all field-level
                       reparables because they expected that very few could be repaired at the
                       depot level. Supply management representatives from the Army’s Office
                       of the Deputy Chief of Staff for Logistics and AMC said that they were
                       not in a position to question the validity of AVSCOM'S local policy. How-
                       ever, we question whether AVSCOM should arbitrarily establish a low
                       repair rate for unserviceable assets already at the depots unless actual
                       data demonstrates that a low rate is necessary.

-_--

MICOM Approach for     MICOM  uses RDIB to identify situations in which repair would be more
Minimizing Inventory   appropriate than buying. Its Materiel Management Directorate quarterly
                       matches items due in from procurement with reparable unserviceable
costs                  assets on hand. Item managers must either justify the procurement or
                       repair the unserviceable assets to offset the buy. According to repre-
                       sentatives from the Directorate’s Technical Staff Office, this program,
                       begun in 1986, was initiated because the potential existed for buying
                       assets unnecessarily instead of repairing them. The information pro-
                       vided by the program helps to promote greater visibility over assets that
                       could be repaired rather than purchased.


                       During our review, we noted that the Army had directed its ICPS to
Impact of Stockage     achieve a high level of stock availability and to fully obligate all or most
Goals and Funding      of available procurement funds before year end. In our opinion, goals
Plans on Stock         for maximizing stock levels and obligating funds for valid requirements
                       can encourage effective supply management. However, the ICPS have not
Management Decisions   always responded to such goals with a balanced concern for economy
                       when restocking their inventories to meet customer requirements.

                       During the large-scale military buildup of equipment in the 198Os, the
             Y
                       Army responded with aggressive actions to improve readiness by
                       increasing the availability of secondary assets. To do so, the Army


                       Page 18
                                          chapter2
                                          TheAnnycauReduceprulmmmtcustaby
                                          Rep&lnguNservieeableAsseta




                                          required its ICPSto attain an 85-percent stock availability goal (a mea-
                                          sure of how often demands for assets are filled with stock on hand).
                                          Table 2.2 shows that, for five of the six ICPS, stockage levels have met or
                                          exceeded the 85-percent goal since fiscal year 1986.

Table 2.2: Percentage of Demands Filled
by On-Hand Stock                                                                                  Fiscal year
                                          ICP                               1988              1987                1988               1989
                                          AMCCOM                              86                 89                  90                 89
                                          _..- . .._.
                                                   -- -~~ .- .--~
                                          AVSCOM                               77
                                                                      .-..---_____~              78                   78                80
                                          CECOM                               66                 60                  90                 91


                                                                               ____-
                                          TROSCOM                             87
                                                                               _____...-.-       89                  89                 92
                                          AMC average                         84                 88                  88                 87


                                          Each of the three ICPS we visited had set goals to use the majority of
                                          procurement funds appropriated in fiscal year 1990 before the end of
                                          that year. The ICPS had no similar goals for obligating operations and
                                          maintenance funds for repair because, as l-year appropriations, the
                                          funds must be obligated during the applicable fiscal year.


&ock Management                           Documentation supporting the 140 procurement decisions we examined
                                          showed that item managers had not always followed established Army
Decisions Inconsisten.t                   stock policies and regulations. Their decisions sometimes favored pro-
With Army Policy                          curement actions and showed a reluctance to change such decisions even
                                          if the stock was no longer needed. Our analysis illustrated that item
                                          managers complied with local management’s instructions even when
                                          these instructions contradicted the Army’s supply policies and regula-
                                          tions for minimizing inventory investment costs.

                                          For example, item managers obtained recommendations from RDESto cut
                                          back the procurement quantities for 80 of the 140 sample buys.
                                          According to Army Regulation 710-1, when requirements are reduced,
                                          cutbacks should be made if they are more economical than continuing
                                          the procurement. The item managers cut back 17 procurements (10 of
                                          these involved MICOM) but did not include evidence to document their
                                          decisions that continuing the buys for the remaining 63 was less costly
                                          than cutting them back. On the basis of our analysis, we suggested that
                                          the item managers process cutback recommendations in 50 items with
                                          quantities due in from procurement totaling $20.2 million. For seven



                                           Page 19                                    GAO/NSlAD.!U-23   Army’s   Unaervi~le   Inventories
                           The Army Can Reduce Procurement   Costa by
                           RepaIring Unserviceable Assets




                           buys, they cut back procurement quantities totaling $5.9 million. How-
                           ever, as the following case illustrates, they relied upon local instructions
                           rather than cost to justify continuing the remaining buys.

                           In May 1989, AVSCOMinitiated the purchase of 78 elapsed time clocks
                           (NSN 6645-01-164-8097) for helicopter aircraft. In November 1989, the
                           HDESstudy showed that requirements had dropped and that the entire
                           quantity was no longer needed. The item manager did not cancel the buy
                           because he projected that canceling it would have caused another
                           purchase during the first quarter of fiscal year 1991-about 2 years
                           from the date of our review. Army Regulation 710-l requires the item
                           manager to decide whether the cost to cut back is less than the cost to
                           procure and hold. However, AVSCOM'Slocal instructions allow its item
                           managers to continue buying if a cutback would cause RDESto forecast
                           another purchase during the current or following year. At the time of
                           our review, AVSCOMhad 116 clocks on hand and due in from procurement
                           that were above its authorized requirement. This represented about 50
                           months of stock based on projected average monthly demands.

                           Item managers at all three ICPS received local instructions to complete
                           action on RDESstudies with procurement recommendations before taking
                           action on studies with other stock management recommendations. The
                           ICPS required item managers to maintain inventory sufficient to meet
                           stock availability goals and to make minimal changes to resupply
                           actions already in process. Several item managers told us that they gave
                           priority to studies with procurement actions and, as time permitted,
                           acted upon those with other recommendations.


Manual Adjustments ’Tend   Our analysis of the item managers’ adjustments to RDESsupply control
to Emphasize Stock         studies showed that the adjustments were directed primarily toward
                           improving stock availability by purchasing additional assets, In ana-
Availability Through       lyzing HDESstudies for 88 of the 140 buys in our sample (studies for the
Procurement                remaining 52 buys had either been destroyed or had never been gener-
                           ated), we observed a tendency on the managers’ part not to accept the
                           automated recommendations.

                           For example, the studies showed 64 “buy” recommendations and
                           24 “no-buy” recommendations- 5 recommending repair, 15 recom-
                           mending cutbacks, and 4 recommending no purchase because require-
                           ments and inventory were in balance. The item managers accepted 27
                           recommendations with no changes, or about 31 percent. For the
                           remaining 61, they “manually” changed the recommended procurement


                           Page 20                                 GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
              Chapter 2
              The Army Can Reduce Procurement   Cwts   by
              Repairing Unserviceable Assete




              quantities in 37 buys (decreasing 15 and increasing 22), and changed all
              24”no-buy” recommendations to “buy” actions.

              In our opinion, some manual adjustments should be anticipated as a
              result of normal file maintenance, such as when the item manager has
              more current data available on requirements than RDEShas in making a
              supply recommendation. Item managers and their supervisors told us
              that adjusting study recommendations was necessary because the RDES
              data base did not always contain current data. However, we reviewed
              subsequent studies at AVSCOMto test whether the changes had been later
              incorporated into the RDESdata base. Of the 30 studies that were manu-
              ally adjusted, changes were incorporated in only 11.


              The Army is not using its on-hand unserviceable stock to the maximum
Conclusions   extent possible to achieve maximum readiness at minimal investment
              costs. Because top management’s goals imply that acceptable stock man-
              agement means having enough inventory to satisfy customer requisi-
              tions in almost all instances and never being out of stock or never failing
              to obligate procurement funds, the ICPS have not always made econom-
              ical and efficient decisions in restocking their supply inventories. ICP
              guidance further reinforces that message to item managers, who are
              required to decide how best to meet these goals in restocking the Army’s
              inventories.

              To help make sound investment decisions, item managers have the RDES,
              which tracks an item’s supply position and tells them when an action is
              required and what that action should be. However, our analysis indi-
              cated that item managers frequently made manual changes to the auto-
              mated RDESrecommendations in order to improve stock availability by
              purchasing additional assets. Such practices undermine the integrity
              and usefulness of the RDES. MICOM has been successful in using the RDES
              to monitor buys in process of items for which assets are on hand to
              determine whether items are being bought unnecessarily. AMC should
              determine whether MICOM'S approach could be implemented at other ICPS.

              Because of its emphasis on the availability of supplies and the early
              obligation of funds, the Army has missed opportunities to maximize the
              use of its unserviceable inventory. On the basis of our analysis, we esti-
              mate that the three ICPS could have saved millions in procurement costs
              by repairing on-hand unserviceable assets rather than buying new ones.
              When the Army repairs existing inventory rather than buying what it
              needs, it reduces procurement costs and improves military readiness


              Page 21                                  GAO/NSIAD91-23   Army’s   Unserviceable   Inventories
                          Chapter 2
                          The Army Can Reduce Procurement   Costa by
                          Repairing Unserviceable Assets




                          because repairing takes less time and assets are available for customer
                          use sooner.


                          We recommend that the Secretary of the Army direct the Commander of
Recommendations           AMC to take the following actions:

                      . Establish the means to monitor the ICPS' compliance with Army policy
                        and regulations that require unserviceable assets to be repaired when it
                        is more economical than purchasing new ones.
                      . Evaluate the program developed by the Army’s Missile Command to
                        match assets due in from procurement with on-hand unserviceable
                        assets and determine whether the other ICPS should be using it.


                          The Department of Defense concurred with our recommendations and
Agency Comments and       noted that, within 90 days, the Secretary of the Army will direct the
Our Evaluation            Commander of the Army Materiel Command to take the recommended
                          actions. DOD said that AMC compliance review teams were visiting the
                          ICPS to evaluate compliance with supply management policy and proce-
                          dures. DOD also said that one of these review teams would evaluate the
                          Army Missile Command’s program for managing buy or repair decisions
                          as part of a planned supply management review.

                          DOD partially  concurred with our estimate of procurement cost savings
                          resulting from repairing assets rather than buying new ones. Although
                          DOD agreed that there would be some savings, it suggested that field-
                          level assets cannot be economically repaired at depots and that initiating
                          repair programs would have been either impractical or uneconomical for
                          small quantities of these types of unserviceable assets.

                          We believe that our estimate of cost savings is valid. We agree with DOD
                          that repairing unserviceable assets at the lowest maintenance level pos-
                          sible generally is the most cost-effective approach. However, the Army
                          sometimes performs field-level repairs at the depots’if repair require-
                          ments cannot be satisfied at lower-level facilities. We included these
                          assets in the estimate of procurement savings because (1) the unservice-
                          able assets were already in depot storage facilities without any apparent
                          restrictions on repairing them, (2) the Army had not considered the
                          potential for repairing them in its decisions to purchase new assets, and
                          (3) the estimated costs to repair them did not exceed established mainte-
                          nance expenditure limits.



                          Page 22                                GAO/NSLAD-91-23   Army’s   Unserviceable   Inventories
Chapter2
The Army Cm Be&we Procurement   Costs   by
lhdrlng  Unwxdceable h&a




In scheduling repair programs for unserviceable assets, the Army must
consider several factors in addition to the unserviceable assets available
in depot storage, such as the number of assets projected to become
unserviceable before a repair program is initiated, the asset’s dollar
value, and customer demands for serviceable assets. Notwithstanding
the actual scheduling of repair programs, Army Regulation 710-l
requires item managers to reduce purchases of new assets by the
number of unserviceable assets which are available to be repaired.
Therefore, based on this requirement, we included unserviceable field-
level assets sent to the depot for repair in our procurement savings
estimate.




Page 23                                 GAO/NSIAD-91-23   Army’s Unserviceable   Inventories
The Army Can Increase the Disposal of Ass&s
in Storage

                                         The Army is storing considerable amounts of reparable and consumable
                                         assets that should be disposed of. For example, for 30 of our sample
                                          140 reparable items, we found that unserviceable assets on hand were
                                         candidates for disposal because they were uneconomical to repair. At
                                         the time of our review, item managers had not disposed of these assets
                                         because, under current Army policies, they believed that as long as the
                                         assets were applicable to an active weapon system, they could hold on to
                                         them. Although Army policies require keeping stock that applies to
                                         these weapon systems, they also permit disposal if the assets are
                                         uneconomical to repair or if storage space becomes crowded. Holding on
                                         to unserviceable assets unnecessarily contributes to the overcrowding of
                                         storage facilities and increased costs to operate and maintain them.


                                         To effectively manage unserviceable inventories, item managers must
Unserviceable Assets                     examine the circumstances surrounding the need for each asset in deter-
in Army Depots                           mining whether to repair the asset or to dispose of it. In making this
                                         decision, item managers need to know whether the Army has either
                                         repaired the asset in prior years or has plans to repair it. We asked AMC’S
                                         Depot System Command to identify the dollar value of unserviceable
                                         assets held in inventories in fiscal years 1988 and 1989 that had no past
                                         or present repair program for those years. As table 3.1 shows, the Army
                                         is holding a significant amount of unserviceable assets with no plans to
                                         repair them.

Table 3.1: Value of Army Unserviceable
Assets With No Past or Present Repair    Dollars in millions
                                         .._______--
Program                                                                                         Fiscal year
                                         Type of   asset                             1988                                     1989
                                         Depot-reparable                            $892.7                                  $949.1
                                         Field-Able                                  300.6                                   161.1
                                         Consumable                                   30.7              -                     17.3
                                         ~known
                                         -.-                                         237.6                                   259.5
                                         Total                                   $1.461.8                               $1.387.0


                                         As shown by the table, the dollar value of the four categories of unser-
                                         viceable assets with no past or present repair program has decreased
                                         from fiscal year 1988 to fiscal year 1989, particularly for inventories of
                                         field-level reparable and consumable items. On the other hand, the
                                         inventories of depot-reparable items and-items for which the repair level
                                         is unknown have increased during the same period.




                                         Page 24                          GAO/N&W-91-23      Army’s   Unserviceable   Inventories
                                      Chapter a
                                      TheArmyCanImeaaeth0Mspoeal0f
                                      As&a ln Storage




                                      Our review offers some insight into the actions the Army should take
                                      regarding unserviceable wets designated as either reparable or con-
                                      sumable. However, for those assets which have no known designation,
                                      the Army has to first determine whether the assets are reparable or con-
                                      sumable before a decision can be made to keep them in storage at its
                                      depots or dispose of them.


                                      Unserviceable assets designated for repair can be disposed of if, for
    Opportunities to                  instance, the Army finds that the costs to repair them are greater than
    Dispose of Some                   the costs to replace them. Item managers had data showing that, in 30 of
    Reparable Assets                  our sample 140 items, unserviceable assets valued at $485,391 were
                                      beyond economic repair, but they had not taken any actions to dispose
                                      of them. When we suggested that they dispose of these assets, they
                                      agreed to initiate disposal actions for 19 items with assets valued at
                                      $366,256. They decided to hold the others on the basis that a need could
                                      arise for them. The following examples illustrate this condition.

                                      In August 1989, MICOM had nine electrical components (NSN 5999-01-018-
                                      9789) in storage for the Tube-Launched, Optically-Tracked, Wire-Guided
                                      (nrw) system, which were valued at about $4,600. The Army had desig-
                                      nated them as field-level reparables. According to MICOM management,
                                      MICOM'S maintenance staff determined that repairing these assets would
                                      be too costly. After we questioned the need to retain these assets, the
                                      item manager agreed with our suggestion to dispose of them and initi-
                                      ated action in September 1989.

                                      In December 1989, AVSCOMhad 14 turbine rotors for helicopter engines-
                                      a part associated with a turbine nozzle (NSN 2840-01-295-8125). These
                                      rotors, valued at $70,000, were in storage at the Red River and Lex-
                                      ington-Blue Grass Army depots. The item manager had determined that
                                      these rotors could not be modified to meet current configuration specifi-
                                      cations, but she had taken no action to dispose of them. We pointed out
                                      that the rotors had no repair potential, and after we discussed it with
                                      the item manager, she agreed to dispose of them in November 1989.
                                      However, her supervisor decided to retain the rotors because AVSCOMhad
                                      not yet designated the items as obsolete or fully evaluated them for
                                      potential use.


                                      Army supply management policies provide that consumable assets are
    ConsumableAssets                  not intended for repair. They generally should be disposed of once they
    Should Be Disposed of             become inoperative. However, the information provided by the Depot


                                      Page 26                                  GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories



_    . ._- ..- ..-   ..~. .-.- .---     _-~.-_-.--             __-___   -   -.. .-.__-~-   _._
                          Chapter 3
                          The Army Can Increase   the Disposal   of
                          Assets In Storage




                          System Command disclosed that, as of September 1989, the Army had
                          unserviceable assets valued at $17.3 million which were designated as
                          consumable assets. Although our statistical sample was limited to the
                          140 reparable assets, we did judgmentally select 21 consumable assets,
                          valued at $701,065 in the three commands’ inventories, to test the
                          Army’s rationale for holding them in storage.

                          For 13 of these assets, valued at $174,153, we found that the item man-
                          agers had not justified holding them in storage. They agreed with our
                          suggestions to dispose of them. The following example illustrates that
                          most of these types of assets should not have been held in storage.

                          In September 1989, CECOMhad 166 unserviceable reel unit cables (NSN
                          8130-00-656-1090) valued at $16,600, which were used in tactical com-
                          munication systems. RDES inventory records showed that the most recent
                          supply activity for the majority of the cables occurred in February 1989.
                          In reviewing the case file, we found no reason for holding the cables at
                          the Tobyhanna Army Depot and suggested to the item manager that dis-
                          posing of them appeared proper. The item manager initiated disposal of
                          these cables after her supervisor agreed that CECOMhad no reason to
                          keep them.


                          We identified several reasons why item managers had ncot disposed of
I-u13 vvALbIIuubAng       unserviceable assets that they had no justification to keep. Item man-
to Keeping More Stock     agers at the three inventory control points we visited gave us the fol-
in Storage Than           lowing rationale for their actions:
Necessary             . Changes in asset disposal policies during the 1980s contributed to the
                        holding of assets in storage even though there were no plans to repair
                        them. The changes caused a surge in inventory levels at the depots that
                        resulted in serious storage problems. The Army recently initiated
                        actions to increase disposal of unneeded materiel in order to alleviate
                        depot storage problems.
                      . There was confusion over what assets the item managers could dispose
                        of as long as they believed that Army Regulation 710-l would not allow
                        the disposal of assets applicable to an active weapon system. Item man-
                        agers were unaware that this regulation authorizes such disposal if
                        assets are uneconomical to repair or if storage space becomes crowded.
                      . Disposal actions had low priority and were time-consuming to perform
                        because of the manual administrative processing required to initiate
                        them. Additionally, before a disposal action could take place, Army



                          Page 26                                     GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                            Chapter 3
                            The Army Can Increaee the Di.epoeal of
                            Am&e ln Storage




                            depot staff were supposed to challenge the recommendations to ensure
                            that no requirements existed for the assets.


Keeping Stock               According to Army studies, overcrowded warehouses can increase
Unnecessarily Can           inventory costs and adversely affect readiness. The Army has deter-
                            mined that, with an 85-percent occupancy rate, its depots have reached
Increase
- _. Costs and Impair       the maximum efficient capacity. According to Army space management
Headiness                   reports, however, depots reached that capacity by September 1985 and,
                            as of September 1989, have remained at or exceeded it.

                            AMC space management reports show that, since 1985, average use has
                            exceeded the maximum rate and, as of September 1989, averaged
                            86 percent. Another report showed that, as of March 1990, AMC'S three
                            major supply depots have reached 95-percent capacity, but two of the
                            three, New Cumberland and Red River, are at or above 99-percent
                            occupancy.

                            Holding on to more stock than necessary is costly. For instance,
                            according to the Army, the annual cost associated with storing and
                            maintaining stock is equal to 13 percent of the value of the on-hand
                            inventory. Also, operating costs are increased when inventory must be
                            shifted around to locate needed stock and when orders must be filled
                            from multiple storage sites. Likewise, readiness is adversely affected
                            because delivery times increase and stock is unavailable when needed.


                            Aware of warehouse space problems, DOD and the Army have initiated
Actions to Encourage        actions to improve methods of determining whether to retain assets for
Increased Asset             repair or to dispose of them. For example, in November 1988, AMC
Disposal                    directed its ICPS to examine their unserviceable inventories with no past
                            or current repair programs and to dispose of unneeded assets.

                            In his March 1990 testimony before the Senate Committee on Govern-
                            mental Affairs, the Deputy Secretary of Defense said that, beginning
                            with unserviceable and obsolete items, materiel returned to the depots
                            as a result of restrictive retention policies would be reduced. Through its
                            Defense Management Review, DOD is seeking to encourage greater dis-
                            posal. For its part, the Army has proposed the following actions:

                        l   Dispose of stock that it has previously retained on the basis that dis-
                            posal was neither feasible nor economical. These types of assets are
                            known as “numeric retention-level” stocks.


                            Page 27                                  GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                                                                                                                                  II
                                          Chapter 3
                                          The Army Can Increase       the Disposal   of
                                          Assets in Storage




                                      . Prohibit field units from returning assets with a dollar value of $50 or
                                        less.
                                      l Reduce the inventory of obsolete end items.

                                          DOD is working on an implementation plan it expected to complete by
                                          September 30, 1990. According to officials in AMC'S Office of the Deputy
                                          Chief of Staff for Supply, Maintenance, and Transportation, these pro-
                                          posals could result in the disposal of millions of dollars of unneeded
                                          assets and could help prevent the unserviceable inventory from
                                          growing.

                                          The Army’s efforts to encourage the disposal of unneeded items have
                                          brought about increases in the value of assets disposed. For example, as
                                          shown in table 3.2, the value of disposed inventory increased from a low
                                          of $7.0 million in fiscal year 1985, at the height of restricted disposal, to
                                          $524.5 million in 1989.

Table 3.2: Dollar Value of Disposed
Assets                                    Dollars in millions
                                          Year
                                          --.-                                                                                               Value
                                          1985                                                                                                $7.0
                                          1986                                                                                                 19.9
                                          1987                                                                                                498.5
                                          1988
                                          ----~-                                                                                              319.0
                                          1989                                                                                                524.5


                                          To implement AMC'S initiatives and to help its item managers identify
                                          items for disposal, MICOM has developed an automated system to identify
                                          unserviceable assets that were (1) not reparable after use, (2) desig-
                                          nated as below-depot-level reparable items with no planned repair pro-
                                          gram, or (3) above authorized retention levels. MICOM'S Materiel
                                          Management Directorate Technical Staff Office developed this system at
                                          an estimated cost of about $34,000 to automate the administrative pro-
                                          cess for identification and disposal of unneeded assets. At MICOM'S sug-
                                          gestion, AMC is evaluating whether such a system should be incorporated
                                          by all the ICPS.


                                          Our review indicates that the Army is holding unserviceable assets that
Conclusions                               it may never repair. It has an inventory of unserviceable assets valued
                       Y                  at about $1.4 billion that has not been included in prior or current repair
                                          programs. Because the Army is concerned that storage warehouses are



                                          Page 28                                         GAO/NSIAD91-23   Army’s   Umervkeable        Inventories



                                                     ..-.       ---                                -_         _-                                     -.-.
                          Chapter 3
                          The Army Can Increase   the Meposal   of
                          Assets in Storage




                          exceeding maximum efficient capacity, it has recently taken initiatives
                          to increase the disposal of unneeded stock. However, some item man-
                          agers are relying on their belief that current asset retention policies jus-
                          tify holding these assets despite the need to alleviate storage capacity
                          problems.

                          Our analysis indicates that, to make effective inventory management
                          decisions, the Army must encourage its item managers to identify unser-
                          viceable assets that are candidates for disposal and initiate action
                          accordingly. MICOM has already proposed and developed an automated
                          means to help item managers identify unneeded stock and to initiate dis-
                          posal action. Because AMC is currently evaluating this proposal, the
                          Army needs to determine whether it provides all its ICPS with the type of
                          automated assistance that will encourage greater disposal of unservice-
                          able assets that the Army does not intend to repair.


                          We recommend that the Secretary of the Army direct the Commander of
Recommendations           AMC to take the following actions:

                      l Clarify to item managers that existing regulations allow them to dispose
                        of items the Army (1) has determined to be uneconomical to repair or (2)
                        does not plan to include in a repair program.
                      . If MICOM'S program to identify candidates for disposal proves unaccept-
                        able, develop an effective automated procedure for use Army-wide that
                        will identify and initiate the disposal of assets that the Army does not
                        plan to repair.


                          The Department of Defense agreed with our recommendations. DOD
Agency Comments and       stated that the Secretary of the Army, within 90 days, will direct the
Our Evaluation            Commander of the Army Materiel Command to take the recommended
                          actions.

                          In commenting on our findings, DOD stated that a June 1990 change in its
                          retention policy will prompt additional inventory reductions by dis-
                          posing of assets which are not essential to the operation of a weapon
                          system. DOD noted that AMC is monitoring how well the ICPS are managing
                          stock disposal actions and is planning to implement RDESchanges in
                          fiscal year 1991 to improve the disposal of unneeded stock. DOD said
                          that, in addition to the Army Missile Command’s program, other system
                          changes will be evaluated as a means to improve automated disposal
                          procedures. DOD also said that implementing such improvements could


                          Page 29                                    GAO/NSLAD-91-23   Army’s   Unserviceable   Inventories
Chapter 3
The Amy Can Increase   the Disposal   of
Assets ln Storage




depend upon available funding and whether DOD decides to replace the
Army’s materiel management systems with other DOD-wide interim
systems.




Page 30                                    GAO/N&W-91-23   Army’s   Unserviceable   Inventories
Internal Controls Should Be Strengthened to
Beelude Recurring Inventory
Management Deficiencies
-
                            The issues relating to the Army’s practices of buying new assets instead
                            of repairing unserviceable ones and holding unneeded stock are not new.
                            Congressional investigations, DOD studies, and Army Audit Agency and
                            GAO reports have identified similar issues and numerous others that
                            result in stock management inefficiencies. Although DOD and the Army
                            have taken some corrective measures, our review indicates that effec-
                            tive follow-up actions are needed to ensure that planned improvements
                            are implemented.


                            The Federal Managers’ Financial Integrity Act (31 USC. 3512(b) and
Recurring Problems          (c)) requires agency management to have adequate internal controls to
Have Not Been               ensure effective control and accountability for the agency’s assets.
Corrected                   Therefore, the Army must ensure that the government’s inventory
                            investments are prudent and that assets are properly used or disposed
                            of when no longer needed. An important step in strengthening internal
                            controls is verifying that planned actions have been implemented as
                            envisioned and that corrective actions have been effective.

                            During our review, we found that prior studies and audits had docu-
                            mented that the Army had not acted promptly to encourage compliance
                            and to promote inventory management practices that balance economy
                            with readiness goals. Needed corrective actions have been thoroughly
                            identified but, by not following through on them, the Army has lost
                            opportunities to effectively manage many aspects of its inventory,
                            including the repair of existing assets and disposal of unneeded mate-
                            riel. Because of the large volume of studies and reports on these issues,
                            we have selected some examples to illustrate the long-standing nature of
                            the conditions discussed in this report.


Unserviceable Inventories   A 1987 House Surveys and Investigations Staff report on Army depot
Without Repair Programs     maintenance operations found that, as of September 1986, the Army’s
                            inventory of unserviceable assets was valued at about $5.6 billion, of
                            which about $1.1 billion had no past or planned depot repair program.
                            The report concluded that the Army’s apparent overreaction to DOD'S
                            moratorium on property disposal had caused many field-level reparable
                            assets to accumulate at the depots and that three ICPS were buying new
                            assets without attempting to repair unserviceable ones. DOD agreed that
                            tightening retention polices had caused a surge in assets at the depot
                            level, which contributed to some loss of in-transit visibility and an
                            imbalance of procurement and repair actions. However, in DOD's view,



                            Page 31                         GAO/NSLAD-91-23   Army’s   Unserviceable   Inventories
                          Chapter 4                                                                                    1
                          Internal Controla Should Be Strengthened   to
                          Preclude Recurring Inventory
                          Management Deficiencies




                          the situation had stabilized, and item managers routinely reduced or
                          canceled procurement actions whenever repair was feasible.

                          In November 1986, AK’s Commander became concerned about
                          uneconomical supply management practices and tasked AMC’S Army
                          Materiel Readiness Support Activity to study the causes of excess stock
                          at the depot level. Noting the backlog in unserviceable inventories with
                          no repair programs, the Activity’s October 1987 report identified a
                          number of causes, among which were discontinuing the automatic dis-
                          posal of unneeded materiel and creating the numeric retention level to
                          avoid the disposal of unneeded stock. Also, Army restrictions on the dis-
                          posal of unneeded stock was creating storage problems. The Activity
                          made 14 recommendations to help preclude the generation of excess
                          assets.


Filling Customer Orders   In March 1990, the Deputy Secretary of Defense told the Senate Com-
and Obligating Funds      mittee on Governmental Affairs that the culture in inventory manage-
                          ment, which sometimes resulted in overbuying to ensure that DOD
                          customers were never found wanting, must be reformed if DOD was to
                          have an efficient and effective supply management system. Also he said
                          that, as part of several initiatives to reduce what DOD buys, annual
                          purchases were no longer authorized.

                          In its 1988 report, the Senate Committee on Governmental Affairs con-
                          cluded that the provision of far more money for supplies than the ser-
                          vices could efficiently spend had generated a significant increase in
                          assets that exceeded military requirements. The Committee noted that
                          both military officers and civilian employees had stated that more
                          money was available than could be intelligently spent and, rather than
                          maximizing their needs, the services over-purchased-illustrating     their
                          desire and need to obligate all their appropriated funds before the end
                          of the fiscal year.

                          In its December 1988 Report of Audit of the Requirements Determina-
                          tion and Execution System at the Army’s Armament, Munitions and
                          Chemical Command, the Army Audit Agency noted that item managers
                          were not using the system as effectively as possible to manage sec-
                          ondary items. Their supply management 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, they frequently did not respond appropriately to RDES studies to
                          reduce or cancel planned purchases. The Command agreed with audit


                          Page 32                                    GAO/NSIAD-91-23   Army’s Unserviceable   Inventories
                      Chapter 4
                      Internal Control  Should Be Strengthened   to
                      Preclude Recurring Inventory
                      Management Deficiencies




                      recommendations to improve the item managers’ use of the automated
                      system, The recommendations included requiring supervisors to more
                      closely review manual adjustments to studies, particularly those done to
                      avoid making recommended reductions in planned purchases.

                      The Army Audit Agency, in a May 1986 Report of Audit on the Require-
                      ments Determination and Execution System at the Army’s Tank-Auto-
                      motive Command, stated that item managers there also did not make the
                      most effective use of the automated system. Their supply management
                      decisions were directed primarily toward improving stock availability
                      and often were done at the expense of supply economy. The report
                      showed that they had not followed RDESrecommendations for 94 percent
                      of the items reviewed and that their alternative decisions initiated about
                      $5.1 million in unnecessary acquisitions. Moreover, they generally did
                      not update the RDESdata base and were reluctant to act on cutback rec-
                      ommendations. The Command agreed with audit recommendations
                      which included (1) requiring supervisors to more closely review the item
                      managers’ adjustments to automated studies and (2) establishing a feed-
                      back system to monitor the effectiveness of the automated requirements
                      system and the item managers’ responsiveness to recommended actions.


Need for Management   In prior reports, we have made numerous specific recommendations to
Emphasis on Economy   improve the services’ inventory management practices. In a recent
                      report, Army Inventory: Growth in Inventories That Exceed Require-
                      ments (GAOINSIAD-90-68, Mar. I999), we concluded that the Army was
                      buying and maintaining more inventory than it needed to meet military
                      requirements. We recommended that the Army establish a systematic
                      approach to aggressively pursue cutback and cancellation recommenda-
                      tions and dispose of unneeded stock. DOD cited several corrective mea-
                      sures to improve this situation, including automated procedures to help
                      item managers decide when it was economical to reduce or cancel
                      purchases in process.

                      Another recent report, Defense Inventory: Top Management Attention Is
                      Crucial (GAO/NSIAD-90-146, Mar. 199(l), summarizes past work we have
                      done on DOD'S inventory management and several DOD actions to improve
                      supply management activities. In that report, we identified critical
                      actions DOD should take to improve the defense supply system. Foremost
                      among these actions was top management’s need to focus on economy
                      and efficiency. In addition, we reported that top management must
                      follow up on planned corrective actions to ensure successful
                      implementation.


                      Page 33                                    GAO/NSIAD91-23   Army’s   Unserviceable   Inventories
                       Chapter 4
                       Internal Controla Should J3e Strengthened   to
                       Preclude Recurring Inventory
                       Management Deficiencies




                       Existing WD and Army policy and guidance appear sufficient to pro-
Compliance Needed      mote maximum readiness at the least possible cost and to dispose of
With Existing Policy   unneeded stock. However, local guidance and emphasis on filling cus-
and Guidance           tomer orders and obligating funds are undermining DOD'S goal to have
                       the right part at the right place at the right time without incurring
                       unnecessary costs. Resolving these problems will require compliance
                       with existing policies and regulations and a greater emphasis on
                       economy and efficiency than currently exists.

                       As required by the Federal Managers’ Financial Integrity Act, the Army
                       is annually required to review and report on its internal control systems,
                       Weaknesses in controls are considered “material” when, among other
                       things, they exist in a majority of agency components and risk or result
                       in the loss of at least $10 million. AMC'S assessment of internal controls
                       for fiscal years 1988 and 1989 did not identify the potential savings to
                       be achieved by deferring the purchase of new assets when unserviceable
                       assets are on hand. The 1988 assessment noted that the problem of over-
                       crowded storage space did not warrant reporting to Army headquarters,
                       but that it was a continuing concern for AMC.

                       Likewise, none of the three ICPS we visited had reported these issues as
                       material weaknesses in their reports on internal controls. AVSCOMdid
                       identify insufficient staff as a material weakness and as a reason for (1)
                       not properly using RDESstudies and (2) not processing many recommen-
                       dations to cut back procurement or declaring items excess.


                       The Army is not effectively managing its unserviceable inventory to
Conclusions            maximize reuse through repair and to dispose of unneeded stock.
                       Although existing policy and guidance require economy and efficiency
                       in decisions to repair, buy, or dispose of items, the long-standing
                       emphasis on filling customer orders and obligating funds shows that the
                       Army has not corrected problems that prior audits have identified.

                       Timely and responsive action to correct these deficiencies is required by
                       internal control standards. The Army’s resolution of these problems
                       should have been prompt and the corrective actions adequately moni-
                       tored to ensure that the improvements needed for an effective, efficient,
                       and economical Army supply system were made.

                       To ensure that a disciplined internal control system is maintained, the
                       Army must require compliance with its policies. AMC is resuming on-site
                       reviews to monitor compliance and that should help determine the


                       Page 34                                     GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
 I                    Chapter4
                      Iuterxud Controls Should Bc Strengthened   to
                      Preclude ltemdng    Inventory
                      Management Deficiencies




                      extent to which the ICPS have improved their management of unservice-
                      able inventories.


                      We recommend that the Secretary of the Army direct the Commander of
Recommendation        AMC to regularly follow up on planned corrective actions that have
                      responded to audit findings and recommendations to ensure that the
                      actions have been successfully implemented.


                      DOD agreed with our recommendation to follow up on corrective actions
Agency Comments and   in response to audit findings and recommendations. DOD said that the
Our Evaluation        Secretary of the Army will direct the Commander of the Army Materiel
                      Command to implement the recommendation within 90 days.

                      DOD acknowledged that deficiencies in AMC'S management of unservice-
                      able inventories is a material weakness in the Army’s system of internal
                      controls, but indicated that this weakness was a subset of a larger mate-
                      rial weakness on inventory excess and growth that has already been
                      reported and for which corrective action is planned. According to DOD,
                      these corrective actions will address the growth of excess inventory,
                      unnecessary procurements, and ineffective use of inapplicable assets
                      (categories of assets above current operating requirements), including
                      unserviceable inventories.

                      We continue to believe that the potential for reducing inventory costs
                      through better use of existing assets is an area that should not be
                      obscured among the many issues that affect sound supply management.
                      However, because the Army believes that AMC will give this area the top
                      management attention needed to bring about improvements in the
                      Army’s decisions to repair unserviceable assets instead of buying new
                      ones and to dispose of unneeded stock, we now agree that separate
                      reporting on this internal control deficiency is not needed.




                      Page 35                                    GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
Appendix I

Methodology for Identif~g the Procuremerit of
On-Hand Assets and for Computing
Potential Savings
               To identify items most likely to be procured while already on hand, we
               requested the three ICPS to screen their unserviceable inventories and
               match reparable assets on hand and not scheduled for repair with buys
               in process. To eliminate items for which a small number of unservice-
               able assets would have no impact on procurement, we excluded items
               for which the on-hand inventory was less than 10 percent of the pro-
               curement quantity. Also, we adjusted total procurement dollars for our
               sample because our review showed that, for some items, the Army had
               not identified the total number of item quantities that were being pro-
               cured. These inconsistencies in the data base were not significant
               enough to affect our sample methodology, but we added the quantities
               and dollar amounts to our sample to correct for them.

               After making these adjustments, we computed the savings in procure-
               ment costs for items that the ICPS could have repaired to reduce or
               cancel procurement. First, we calculated the number of assets that could
               be repaired by multiplying the total number of assets on hand by the
               Army’s final “recovery rate” (that is, the percentage it expects to
               repair) for that specific item. We then multiplied this number by the
               item’s estimated repair cost to determine total repair cost. Likewise, for
               total procurement costs, we multiplied this number by the item’s most
               recent unit price.

               As a result of our work, we projected statistically that chances are
               19 out of 20 (95 percent) that between 167 and 285 reparable items at
               the three ICPS had assets that could have been repaired for less than the
               costs of purchasing new items. Also, we projected that chances are
               19 out of 20 that between $21.1 million and $35.9 million could be saved
               by repairing the unserviceable assets. Table I. 1 summarizes the results
               of our analyses.




               Page St?                         GAO/NSIAD-91-23   Army’s   Unserviceable   Invent&es
                                            Appendix I
                                            Methodology   for ~dendf’ying the Procurement
                                            of On-Hand Aeaete and for Computing
                                            Potential Savings




Table 1.1: Estimated Procurement Savings Resulting From Repairing Unserviceable Assets
                                                                               Number of Procurement                                             cost
ICP
A”~CoM              NSN
                    6625-oo:,                           Item name -..-..- ..--
                              33:7891- ...-- .._-......-Transducer                assets         cost                                     difference
                                                                                            1             $12,042
                                                                                                       -_______--.                             $10,115
                  2840-00-244-1774               Scroll Assembly                         117              384,228        88,372                295,856
                                                                                                                                          ---..--~
                  2945-00-l 09-2364          ..- Particle     Separator
                                                  . _.-...-.---‘L  .~- ..-.. -...         43               83.893        20.134                  63.759
                  1560-00-152-3463               Passenger Panel
                                                    Assembly                                23               29,371        7,049                22,322
                  1650-00-907-l 796              Cylinder Assembly                         44                33,660        8,078                25,582
                  8145-01-128-1739               Rotor Head Container                       25              106,250
                                                                                                     ..-.____---.         23,375                82,875
                  2840-01-295-8125               Turbine Nozzle                             54            2,993,922   1,578,582              1,415,340
                  5945-01-289-2695               Relay Assembly                               9              58,950       12,380                46,570
                  1620-01-082-0688               Landing Yoke Assembly                    191               657,804     151,295                506,509
                  1630.01.089.2873         '- Landi~&~~~~~~&~-
                                                                      ~~~-- --. -~   --.-.. .----~--...-.. 74,538
                                                                                          101                            -17,889                56,649
                  1560-01-231-1755               Aircraft Floor Assembly                      4              22,332        4,913                17,419
                  1560-01-246-6760               Gunners Window                             34               72,114       16,586                55,528
                  2840-00-960-0174              Manifold Assembly                      50                 172,750        39,733                133,017
                  1615-00.057-l 827             Main Grip Assembly-
                                                 . Main Rotor Blade.-                  70                 250,390
                                                                                                        -___~-.          57,590
                                                                                                                          .-                   192,800
                  1610-00-001-4129              Propeller Blade and
                                                   Heater                               9                 831,645        99,797                731,848
                  1620-00-939-6418              Nose Landing Gear
                                                   Actuator                             8                   7.800          1.128                  6.672
CECOM             6625-01-072-4610              Circuit Card Assemblv                   3                   2,355          1,178                  1,177
                  5840-01.072-4600              Circuit Card Assembly
                                                   Firefinder                          10                   15.680           6.272      ----_ A- 9.408
                  6625-01-088-9514              Circuit Card Assembly
                                                                  . ...--~~ --.....     5                .-   31520  ...     1,760
                                                                                                                           _-____-           ...- ~.1,760
                  5840-00-970-9078              Generator Assembly ..____               6                     2,418          1,209            _-----1,209
                  6625-01-030-5341              Ammeter                                 5                     2,210          1,105                  1,105
                  4895.01-l 97-4604             Circuit Card Assemblv                  13                   36.257          14.503                21.754
                  5895-01-165-7317              Punch Head Assembly                    33                 433,785         130,136                303,649
                  5895-01-050-0717              Switching Unit                          4                  104,568       ..-31,370
                                                                                                                            .~____~.              73,198
                  5805-01-l 86-3664             Digital Conference Unit                 1                     3,500          1,400                  2,100
                  5805-00-876-9571              Carrier Support Selector                4                     1,828
                                                                                                        .-.-.~-.--.            914                    914
                  6130-00-I 35-4570             Power Supply                           23                   38,732          15,493                23,239
                  5820-00-087-0061              Receiver Subassembly                2,600                 517,400         280,800                236,600
                  5895-01-090-9439              TWT Simulator                          10                  181.250
                                                                                                   -.-._A-.-.-~--.-.        54.375               126.875
                  5985-00-631-4778              Radio Frequency _~~ ~~.____ ___-__10                        87,000
                                                                                                 --.... -..-~               34,800
                                                                                                                     --...._ -- --..--.           52,200
                                                                                                                                               --~~~~.~
                  5905Ol- 120-3125              C&uit Card Assembly                    10                     9,800          4,900                  4,900
                  5895-01-044-5332              Electric Test Set                      15                   21,000           8,400                12,600
MICOM             6150-01-136-8857              Cable Assemblv                          4                     9.964          2.092                  7.872
                  6650-07-I 20-0433             Navigator Computer                     46                 268,686           92,506               176,180
                                                                                                                                            (continued)




                                            Page 37                                       GAO/NSIAD91-23        Army’s   Unserviceable     Inventories
                           Appendix I
                           Methodology    for Identifying the Procurement
                           of On-Hand Asseta and for Computing
                           Potential savings




                                                                       Number of         Procurement            Repair                   cost
ICP     NSN                   item name                                   assets                 cost             cost            difference
        4810-00-886-3044      Solenoid
                               -_- .-..- - Valve
                                             .-. ~-. .. ~---... ~-- -. .._.~ --.    4               6,540        1,831
                                                                                                                  --            _____-__4,709
        6150-01-123-3982
                  -.          Cable Assembly                                       13   _____.      6,600        2,470                  4,030
Total                                                                                      $7,544,662 $2,616,342                -~____
                                                                                                                                 $4,726,340




                           Page 38                                                 GAO/NSIAD91-33      Army’s   Uuserviceable     Inventories
    Appendix II

    Comments From the Department of Defense


~   .-._._   l~_“.-.-_.-~-_--~




Note GAO comments
supplementing those rn the
report text appear at the
end of thts appendix.                                       ASSISTANT    SECRETARY     OF DEFENSE
                                                                   WASHlNGTON.  D.C. 20301-8000




                                                                                       September 25, 1990



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

                                            This is the Department of Defense (DOD) response to the General
                                     Accounting Office      (GAO) draft report,  "ARMY LQGISTICS: Better
                                     Management of the Army's Unserviceable        Inventories  Could Save
                                     Millions,"    &ted July 30, 1990 (GAO Code 393354, OSD Case 8434).       The
                                     Department agrees that, when practical       and economical,   available
                                     unserviceable    inventory  should be repaired instead of buying new
                                     items.     The DOD further   agrees with the need to dispose of assets
                                     that are uneconomical to repair.

                                           As observed by the GAO, the Army generally            complies with repair
                                     versus buy decision guidelines      and often Army inventory           control
                                     points have valid reasons for buying new items even though
                                     unserviceable   ones are available.       The Department nevertheless
                                     recognizes,   however, that inventory      efficiencies       can be achieved by
                                     emphasizing the cost effective      repair of unserviceable          items and,
                                     where repair is not appropriate,       inventory      reductions    can be achieved
                                     through more aggressive disposal actions.

                                           Detailed DOD comments on the report findings  and recommendations
                                     are provided in the enclosure.    The Department appreciates the
                                     opportunity   to comment on the draft report.

                                                                                       Sincerely,


                                                                                      A&f&
                                                                                      David J. Berteau
                                                                                      Principal Deputy

                                     Enclosure
                                 Y




                                         Page 39                                GAO/NSIAD91-23      Army’s   Unserviceable   Inventories
        Appendix II
        Comments   From the Department     of Defense




                   GAGDRAETRGPORT- DATED SJDLY 30, 1990 '
                      GAO CDDE 393354 - GSD CASE 0434
    "ARMY IOGISTICS:     DElTERMWXDWNTDR'THEARMY'SUNSEF.VICEABLE
                       INVENTORIES       COULD SAVE MILLIONS”

                       DEPARTMENTOFDEI'ENSE (XX9%NTS
                                     l    ****


                                         FINDINGS
.    $'INDING A: Wmv Sup~lv Svstem . TheGAO observed that Army
     forces world-wide must have acontinuous     resupply of assets to
     support operational    and combat readiness requirements.      The GAO
     noted that, to meet the demand, the Army maintains a large
     inventory   of assets (1) to replenish stock depleted through day
     to day operations and (2) to replace equipment parts that become
     inoperative   through normal use. The GAOfurther     observed that
     the Army Materiel    Commandadministers the Army supply system and
     establishes   management polices and procedures forits     six
     inventory   control points.

     The GAO explained that the six Army inventory           control points are
      (1) the Armament, Munitions     and Chemical Command, (2) the
     Aviation   Systems Command, (3) the Communications-Electronics
     Command, (4) the Missile      Command, (5) the Tank-Automotive
     Command, and (6) the Troop Support Command. According to the
     GAO, to satisfy   user demands, those inventory         control points
     forecast   stock requirements    and initiate     supply actions to ensure
     that sufficient   assets are available        when needed.

     The GAO emphasized that Military         capability  can be hindered if
     assets are not available        when users need them. The GAO noted
     that the inventory     control points are, thus, challenged to
     maintain adequate asset inventories         in a mission-ready    condition
     through timely,    effective,     and economical resupply actions.        The
     GAO stressed that, if on-hand stock is insufficient,           the
     inventory   control points cannot meet customer demands. The GAO
     also emphasized, however, that on the other hand, if too much
     stock is maintained,       resources may be used to buy and hold assets
     that may never be required.         The GAO concluded that, in either
     case, the Army incurs higher than necessary investment costs to
     maintain its supply inventory.




        Page 40                                     GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                           Appendix   II
                           CommentsFrom the Department   of Defense




                       The GAO reported that, as of September 1989, the Army inventory
                       control    points managed about $14.4 billion          worth of secondary
                       assets.      The GAO explained that secondary assets include spare
                       parts, repair parts, and supplies for principal              assets such as
                       helicopters,      tanks, vehicles,       and weapon systems.     The GAO
                       calculated     that, of the total amount, $9.3 billion           represented
                       new, repaired,       or reconditioned      assets ready for issue to users.
                       According to the GAO, the remaining $5.1 billion               represented
                       unserviceable       assets--that    is, assets awaiting     repair or
                       disposal.      The GAO indicated       that the Army received about
                       $1.5 billion      in FY 1990 to purchase new assets and about
Now on pp. 3, 8.       $1 billion     to repair unserviceable        assets.  (pp. 2-3,
                       pp. 11-lS/GAO Draft Report)

                       pOD m:              Concur.
                   .   WING       8: BclIIy PQL&v Is to M&&mize InveStment,. The GAO
                       observed that a logistics      policy commonly accepted throughout the
                       defense community is that repairing       assets already owned is less
                       costly and takes less time than buying newones.            The GAO noted
                       that, by returning     repairableassets    to a mission-ready
                       condition,    the Army saves the difference     between the procurement
                       and the repair costs and reduces the need for additional           stock.
                       The GAO observed that using existing       assets that can be repaired
                       allows the Army to avoid the expense of storing          excess stock and,
                       because of quicker turnaround times, to improve its readiness
                       position.

                       The GAO pointed      out that although unserviceable     assets may be
                       designated     as repairable,  the assets must meet certain conditions
                       before being repaired.      According to the GAO, some of the
                       economic and operational      considerations     include  (1) restrictions
                       that limit    repair expenditures      to less than replacement costs,
                        (2) actual time requirements       for having assets ready for issue,
                        (3) the availability   of parts to support repair programs, and
                        (4) the capabilities   of repair facilities.

                       The GAO indicated    that the DOD policy on stocking and determining
                       requirements    to support operational   and combat readiness provides
                       that the Military    Services will minimize investment costs in
                       ordering and holding inventories.       The GAO found that, in
                       implementing    the DOD policy,   the Army supply system relies on the
                       repair and reuse of assets that are economical to repair.        The




                           Page 41                                GAO/NSlAD91-23   Army’s Unserviceable   Inventories
                              Appendix II
                              Comments From the Department     of Defense




                           GAO referred      to Army Regulation    710-1, "Centralized    Inventory
                           Management of the Army Supply System," effective            March 1988,
                           which requires the inventory        control points to include
                           unserviceable       assets that can be repaired and reissued when
                           computing the number of assets needed to replenish            depleted stock
                           levels.       The GAO also pointed out that Army Regulation        710-l also
                           specifies      the use of economic order quantities.

                           The GAO explained that the "Economic Order Quantity"                     principle  is
                           a mathematical           device used to determine the purchase quantity
                           that will         result in the lowest total costs for ordering and
                           holding inventory            to meet expected supply requirements,           thus
                           minimizing         investment costs.        The GAO also referred to Army
                           Regulation          750-1, "Army Materiel      Maintenance Policy and Retail
                           Maintenance Operations,"            effective    April 1988, which requires
                           unserviceable           assets to be reused whenever repair is more
                           cost-effective           than replacement.      In addition,     the GAO indicated
                           that Army Materiel             CommandRegulation      750-51, "Maintenance of
                           Supplies and Equipment," dated April 1987, requires the inventory
                           control        points to be cost-effective         in choosing whether to reuse
                           unserviceable           assets or to replace them with new ones. The GAO
                           noted that the inventory            control points are supposed to avoid
                           excessive repair costs by following                established     expenditure
                           limits.         According to the GAO, the expenditure            limits   are based
                           upon a percentage of the asset's replacement cost.                      The GAO
                           observed that the Army frequently               uses 65 percent of the asset
                           replacement cost as the limitation                for many of its secondary
                           items.         The GAO explained that the inventory            control points are
                           not to exceed these limits             unless a waiver is authorized.
Now on pp. 9, IO, 13, 14    (pp. 3-4, pp. 18-20, pp. 29-3O/GAO Draft Report)
                           ~PONS&:              Concur.    It should be recognized,      however, that
                           Army supportability       policy continues to be readiness driven,
                           optimized by minimum investment levels.            Repair is faster than
                           procurement when there is an available,           funded maintenance
                           capability.       Also, maintenance is dependent on an adequate number
                           of unserviceables       to justify    workload priority    cost effectively.
See comment 1.             The absence of any of these factors can extend the repair lead
                           time beyond the procurement lead time.            Accordingly,    inventory
                           control     point decisions to buy vs. repair are based on multiple
                           factors and constraints,          not solely on minimum investment
                           criteria.




                                                                   3
                       Y




                               Page 42                                   GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                               Canments   From the Department   of Defense




                          .   -:
                              &&R.       The GAO observed that, for the most part, the inventory
                              control    points had valid reasons for buying new items, even
                              though unserviceable       ones were available.    The GAO found,
                              however, that for 36 of the 140 items it sampled, the Army was
                              maintaining     economically   repairable   assets in depot storage the
                               inventory    control points had not used to reduce the number of
                              itema being purchased.

                              The GAO examined supporting     documentation and discussed the
                              repair issues with the item managers, supervisors,           and
                              management. The GAO concluded that the inventory           control points
                              could have reduced procurement quantities         for the 36 sample items
                              by the number of unserviceable       but reparable assets on hand.
                              The GAO estimated that buying the new assets could cost the Army
                              $4.8 million  more in procurement costs than it would to repair a
                              like number of unserviceable      assets.     The GAO projected   (at the
                              9%percent confidence level)       that, for the 815 items being
                              bought, the inventory    control points could have saved between
                              $21.1 million   and $35.9 million      in procurement costs by repairing
                              the available  unserviceable    assets, rather than buying new ones.
Now on pp, 2,3, 14, 15.        (pp. 4-5, pp. 20-25, pp. 29-3O/GAO Draft Report)

                              pOD m:             Partially     concur. The Department agrees that
                              some, but not all of the 36 items in the GAO sample should
                              have been repaired rather than purchased.          And while the DOD
                              also agrees there would be some savings, the Department does
                              not agree with the GAO estimate that between $21.1 million          and
                              $35.9 million     could have been saved in procurement costs by
                              repairing   available      unserviceable assets rather than buying new
                              assets.    Any savings would be considerably       less than those
                              estimated   by the GAO.

                              As the GAO recognizes,         the Army often has valid reasons for
                              buying new items even though unserviceable             ones are available    for
                              repair.     Of the 36 items       that the GAO maintains should have been
                              repaired rather than purchased, 14 were field level reparables
                              retained at depots.          DOD policy is to not repair at depots field
                              level reparables which cannot normally be economically              repaired
                              there.     Additionally,      17 of the 36 items were present in such
                              small quantities         (10 or less),   it is likely   that item manager
                              judgment, based on policy flexibility,            would have deemed
                              initiating    depot repair was either not practical          or not
                              economical.



                                                                      4




                               Page 43                                       GAO/NSL4D-91-23   Army’s   Unserviceable   Inventories
                            Appendix II
                            Comments From the Department   of Defense




                      .   WING     p: -act     of Stockaue on Coals and Fundinq.         The GAO
                          noted that the Army had directed    its inventory      control points to
                          achieve a high level of stock availability         and to obligate     fully
                          all or most of available   procurement funds before year end. The
                          GAO agreed that goals for maximizing stock levels and obligating
                          funds for valid requirements    can encourage effective       supply
                          management. The GAO found, however, that the inventory             control
                          points have not always responded to such goals with a balanced
                          concern for economy when restocking      inventories     to meet customer
                          requirements.

                          The GAO pointed out that, during the large-scale        Military  buildup
                          of equipment in the 19809, the Army responded with aggressive
                          actions to improve readiness by increasing       the availability    of
                          secondary assets.    The GAO explained that, to do so, the Army
                          required its inventory    control points to attain an 85 percent
                          stock availability   goal (a measure of how often demands for
                          assets are filled   with stock on hand).      The GAO found that at
                          five of the six inventory     control points,   stockage levels have
                          met or exceeded the 85 percent goal since FY 1986.

                          The GAO also found that the inventory       control points had set
                          goals to use the majority      of procurement funds before the end of
                          FY 1990. The GAO cited an example where the Army Materiel
                          Command directed the Missile Commandto obligate          100 percent of
                          its procurement funds during FY 1989 and 83 percent of its
                          procurement funds during FY 1990 for missile        spares.   According
                          to the GAO, the inventory      control points had no similar     goals for
                          obligating  operations     and maintenance funds for repair because,
                          as l-year appropriations,      the funds must be obligated    during the
                          applicable  fiscal   year.

                          The GAO concluded that, even with the obligation    plans and the
                          decreasing Army procurement funds for secondary assets, the
                          inventory    control points have been unable to use all the funds
Now on pp. 3, 18-21       appropriated    to meet requirements. (pp. 4-5, pp. 26-3O/GAO Draft
                          Report)

                          QQD RNSPONSN: Partially   concur.     The DOD stockage availability
                          goal of 85 percent is long-standing     and supports weapon system
                          readiness objectives.   However, during the hollow force era,
See comment 2             which led to the 1980s buildup,    the goal was frequently    not
                          achieved and readiness suffered.



                                                               5




                            Page 44                                     GAO/NSLAD-91-23   Army’s   Unserviceable   Inventories
                              Appendix II
                              Comments From the Department   of Defense




                           The DOD procurement obligation          rate goal is 92 percent for
                           replenishment       spares and 80 percent for initial        spares, not
                           100 percent.        In the Army Missile     Command example, the 100
                           percent goal applies only to fiscal           year 1987 procurement
                           dollars    obligated     in fiscal year 1989. While budgets are
                           predicated     only on projected     requirements,     generally   100 percent
                           obligation      rates are unattainable      in the first   year of execution
                           because some funding must be retained for unanticipated
                           requirements       at the end of the fiscal      year and the procurement
                           process usually delays some obligations.
                       .   $INDINO  a: pnserviceable   Aeaeta in Annv Dewtg.        The GAO
                           explained that, to manage unserviceable     inventories     effectively,
                           item managers must examine the circumstances       surrounding      the need
                           for each asset in determining    whether to repair the asset or to
                           dispose of it.   According to the GAO, item managers need to know
                           whether the Army has either repaired the asset in prior years or
                           has current plans to repair the item.      The GAO asked the Depot
                           System Commandto identify     the dollar value of unserviceable
                           assets held in inventories    in FY 1988 and FY 1989 that had no
                           past or present repair program for those years.         The GAO found
                           that the Army is holding about $1.4 billion      of unserviceable
                           assets with no plans to repair the items.

                           The GAO indicated     that the four categories   of unserviceable
                           assets with no past or present repair program have decreased
                           from FY 1988 to FY 1989, particularly       for inventories   of
                           field-level   repairable   and consumable items.     The GAO noted, on
                           the other hand, that the inventories      of depot-repairable     items
                           and items for which the repair level is unknown have increased
                           during the same period.

                           The GAO concluded that, for those assets which have no known
                           designation,   the Army has to first   determine whether the assets
                           are repairable    or consumable before a decision can be made to
                           keep them in storage at its depots or dispose of the assets.
Now on pp. 3,4,24,25       (pp. 5-6, pp. 32-33, p. 39/GAO Draft Report)

                           DOD RESPONSP;: Concur.
                       .   gmlxcNG P: @portunities    to Diswse            of Some ReDairsble Asset S.
                           The GAO explained that unserviceable           assets designated for repair
                           can be disposed of if the Army finds           that the costs to repair are



                                                                 6




                              Page 46                                 GAO/NSIAD-91-23   Army’s Unserviceable   Inventories
     Appendix II
     Commenta Prom the Department   of Defense




greater    than  the costs to replace.       The GAO found that item
managers    had data showing that, in 30 of the sample of 140 items,
unserviceable      assets valued at $485,391 were beyond economic
repair,    but the managers had not taken any actions to dispose of
the assets.      The GAO pointed out that, when the auditors
suggested that the managers dispose of these assets, the managers
agreed to initiate       disposal actions for 19 items with assets
valued at $356,255.         According to the GAO, the managers decided
to hold the other items on the basis that a need could arise for
the assets.      The GAO listed      several examples to illustrate      that
condition    and the item managers' rat.ionale       for allowing    these
assets    to remain in the unserviceable       asset inventory.     (pp. 5-6,
pp. 33-34, p. 39/GAO Draft Report)

WD m:               Concur. As part of the Defense Management Review,
decisions     have been made to ease restrictive        retention    policy and
reduce inapplicable        inventories.     Disposal of many unserviceable
assets    are resulting      from the retention    and disposal policy
change contained in a Deputy Secretary of Defense memorandum of
June 13, 1990. From September 1989 through March 1990, total
Army inapplicable       inventories     have decreased $1.5 billion.

lXtSU&Q:      ConrMuble.                                        The GAO
pointed out that Army supply management policies          provide that
 consumable assets are not intended for repair.          According to the
GAO, such assets    should generally     be disposed of once they become
 inoperative.    The GAO learned from Depot System Commandofficials
 that, as of September 1989, the Army had unserviceable           assets
valued at $17.3 million      designated as consumable assets.        The GAO
 sample was limited    to the 140 repairable     assets; however, the GAO
 judgmentally  selected 21 consumable assets, valued at $701,065,
 to test the Army rationale      for holding these assets in storage.

The GAO found that, for 13 of the consumable assets valued at
$174,153, the item managers had not justified   holding the items
in storage.   According to the GAO, the item managers agreed with
the GAO suggestions to dispose of those assets.     The GAO cited
the following  example to illustrates  that most of these types of
assets should not have been held in storage.

The GAO observed that, in September 1989, the              Communications-
Electronics  Commandhad 166 unserviceable   reel             unit cables, NSN
8130 00 656 1090, valued at $16,600 applicable               to tactical
communication systems.  According to the GAO,              the Requirements



                                     7




     Page 46                                 GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                              Appendtill
                              CommentePromtheDepartmentofDefense




                             Determination  and Execution   System inventory    records showed that
                             the most recent supply activity     for the majority    of the cables
                             occurred in February 1989. The GAO found no reason for holding
                             the cables at the Tobyhanna Army Depot and suggested to the item
                             manager that disposing of these assets appeared proper.         The GAO
                             reported that the item manager initiated      disposal of the cables
                             after her supervisor  agreed that Communications-Electronics
Now on pp, 4,25,26           Command had no reason to keep the assets.       (pp. 5-6, pp. 34-35,
                             p. 39/GAO Draft Report)

                             poD RESPONSE: Concur.            Unserviceable        consumables       generally
                             should not be retained.
                         .   FINDING   g:    Padorr     Contributina       to   Keenina     More    Stock   in   Storauq
                                              . The GAO identified   several               reasons why item
                             managers had not disposed of unserviceable                   assets that they had
                             no justification    to keep. According to the                 GAO, item managers at
                             the three inventory    control points visited                said the following:

                                   changes in asset disposal policies         during the 1980s
                                   contributed   to the holding of assets in storage even though
                                   there were no plans to repair them (the GAO confirmed that
                                   those changes caused a surge in inventory          levels at the
                                   depots, which resulted      in serious storage problems, but the
                                   Army recently   initiated     actions to increase disposal of
                                   unneeded materiel      in order to alleviate     depot storage
                                   problems);

                                   there was confusion over what assets the items managers
                                   could dispose of, as long as they believed that Army
                                   Regulation    710-l would not allow the disposal of assets
                                   applicable    to an active weapon system (the GAO learned item
                                   managers were unaware that this regulation      authorizes
                                   disposal   if assets are uneconomical to repair or if storage
                                   space becomes crowded): and

                                   disposal actions had low priority and were time consuming
                                   to perform because of the manual administrative processing
                                   required to initiate them.

                             The GAO also noted that, before a disposal action could take
                             place, the Army depot staff were supposed to challenge the
                             recommendations to ensure that no requirements   existed   for the
                             assets.   The GAO concluded that, in order to make effective



                                                                       8
                     Y




                              Page47                                       GAO/NSlAD-91-23Army'sUnservlceablelnventorles
                            Appendlxil
                            CknnmentsFromtheDepartmentofDefenee




                         inventory  management decision,      the Army must encourage its item
                         mangers to identify    unserviceable    assets that are candidates for
Now on pp. 4,26,27       disposal  and initiate   action accordingly.     (pp. 5-6, pp. 35-31,
                         p. 39/GAO Draft Report)

                         gOD RESPONS&:          Concur.    In 1985, the DOD adopted a policy to
                         retain all serviceable           and economically        reparable materiel
                         having application         to a weapon system in active use by U.S.
                         forces.       Effective    June 13, 1990, the retention            policy was
                         changed so that inventory             quantities     will be reduced in
                         proportion       to any reduction       in the number of systems in use.
                         This should greatly alleviate               depot storage problems.
                         Additionally,        the Army has taken steps to reduce inapplicable
                         and unserviceable         assets    in storage.       In August 1990, the
                         Requirements,        Determination      and Execution System was modified to
                         eliminate       automatic retention.           Item managers now must act to
                         hold stock in these levels when justified;                   otherwise,   by
                         default,      the stock is identified            as excess.
                     .   FINDING     T&:   &&ions   to   Encouraae       Increased     Asset    Distwsal.
                         The GAO that the DOD [the Office of the Secretary of Defense] and
                         the Army have initiated      actions to improve methods of determining
                         whether to retain assets for repair or to dispose of the assets.
                         The GAO explained that, in November 1988, the Army Materiel
                         Command directed     its inventory   control points to examine their
                         unserviceable    inventories   with no past or current repair programs
                         and to dispose of unneeded assets.

                         The GAO noted that, in his March 1990 testimony before the
                         Senate Committee on Governmental Affairs,        the Deputy Secretary
                         of Defense said that, beginning with unserviceable         and obsolete
                         items, materiel     returned to the depots as a result of
                         restrictive    retention    policies would be reduced.   The GAO noted
                         that, according to the Deputy Secretary,       the DOD is seeking to
                         encourage greater disposal through the Defense Management
                         Review.     In keeping with that policy,    the GAO found that the
                         Army has proposed to do the following:

                               dispose of stock that it has previously   retained on the
                               basis that disposal was neither  feasible  nor economic (a
                               type of asset known as "numeric retention    level" stocks);

                               prohibit field units from returning                   assets    with   a dollar
                               value of $50 or less; and



                                                                     9




                            Page48                                        GAO/NSIAD-91-23Army'sUnservlceableInventorles
                        Appendix II
                        Comments From the Department   of Defense




                            reduce the inventory       of obsolete       end items.

                       The GAO further     found that the DOD is currently  working on an
                       implementation    plan, which it expects to complete by
                       September 30, 1990. According to the GAO, officials        in the
                       Army Materiel    CommandOffice of the Deputy Chief of Staff for
                       Supply, Maintenance,      and Transportation, stated that the
                       proposals could result in the disposal of millions       of dollars
                       of unneeded assets and could help prevent the unserviceable
                       inventory    from further   growth.

                       The GAO concluded that Army efforts   to encourage the disposal of
                       unneeded items have brought about increases in the value of
                       assets disposed.    As an example, the GAO noted that the value
                       of disposed inventory   increased from a low of $7.0 million   in
                       FY 1985, at the height of restricted    disposal, to $524.5 million
                       in FY 1989, as follows:

                                     Dollar     Value of Disposed Assets
                                              (Dollars in millions)

                                              Year               Value

                                              1985                $7.0
                                              1986                19.9
                                              1987               498.5
                                              1988               319.0
                                              1989               524.5

                       The GAO pointed out that, in order to implement the Army
                       Materiel   Command initiatives    and to help its item managers
                       identify   candidate items for disposal,       the Missile   Command
                       developed an automated system to identify         unserviceable     assets
                       that were (1) not repairable      after use, (2) designated as
                       below-depot-level    repairable   items with no planned repair
                       program, or (3) above authorized       retention   levels.     According to
                       the GAO, the Missile       Commanddeveloped that system at an
                       estimated cost of about $34,000 to automate the administrative
                       process for identification      and disposal of unneeded assets.          The
                       GAO noted the Army Materiel      Command is evaluating      whether such a
                       system should be incorporated       by all the inventory     control
Now on pp.4, 27, 28.   points.   (pp. 5-6, pp. 37-39/GAO Draft Report)




                                                            10




                         Page 49                                    GAO/NSIAD-91-23   Army’s   Unserviceable   inventories
       Appendix JJ
       Comments From the Department          of Defexwe




    MIp:            Concur.    The Army has already implemented actions
    to effect rapid and timely disposal of unserviceable        and
    uneconomically  repairable   items.   System changes were approved in
    April 1990 to remove any system blocks impeding disposal of
    unnecessary stocks with implementation      scheduled in FY 1991.
    Additionally,  Army Regulation    110-2, "Retail    Supply Policy," has
    been revised to authorize    local disposal of items valued at less
    than $50. The regulation     is currently   in final draft,    with
    scheduled issuance in January 1991. In the interim,         letter
    guidance has been issued to the field.
.   ~XNDINGJ:       Jnternal      Controls--Recurrina          Problems Have Not Been
    Corrected.     The GAO explained that the Federal Managers'
    Financial   Integrity   Act (31 U.S.C. 3512(b) and (c)) requires
    agency management to have adequate internal          controls  to ensure
    that the Government inventory        investments are prudent and that
    assets are properly used or disposed of when no longer needed.
    According to the GAO, an important step in strengthening
    internal   controls   is verifying     that planned actions have been
    implemented as envisioned        and that corrective   actions have been
    effective.
    The GAO found that prior studies and audits documented that the
    Army had not acted promptly to encourage compliance and to
    promote inventory      management practices   that balance economy with
    readiness goals. The GAO further found that the needed
    corrective    actions had been thoroughly     identified--but,      by not
    following   through, the Army lost opportunities          to manage many
    aspects of its inventory      effectively,  including      the repair of
    existing   assets and disposal of unneeded materiel.            The GAO
    selected   some examples from the large volume of studies           and
    reports on these issues to illustrate       the long-standing       nature of
    the conditions     discussed in its current report.          The GAO provided
    several examples for each of the following          issues:
          unserviceable        inventories       without   repair       programs;

          filling   customer orders           and obligating        funds;

         the need for management emphasis on economy.

    The GAO concluded, that since               timely and responsive action to
    correct the cited deficiencies                is required by internal  control
    standards, the Army resolution                of those problems should have been



                                               11




       Page 50                                        GAO/NSIAD-91-23     Army’s    Unserviceable   Inventories
                              Appendix II
                              Cmnments From the Department   of Defense




                          prompt and the corrective actions adequately monitored to ensure
                          that the improvements needed for an effective, efficient, and
                          economical defense supply system were made. (pp. 41-46/GAO Draft
Now on pp, 4,31-35.
                          Report)
                          gOD RBSPONSE:      Partially   concur.  In its FY 1989 Statement of
                          Assurance, the Department of the Army identified          an internal
                          control material     weakness addressing excess inventory         and
                          inventory    growth (ID) DCSLCG-89-001). As a result,        corrective
                          actions are already required regarding unnecessary procurements
                          and ineffective     use of inapplicable   assets.   Additionally,       the
                          DOD Inventory     Management Program announced by the Under Secretary
See comment    3
                          of Defense for Acquisition       on May 21, 1990, provides performance
                          measures and monitoring      to assess and verify   execution of
                          inventory    management improvements.     The unserviceables       will also
                          be monitored as a part of the DOD Inventory        Management Program.
                      .   -IWO      6: -al          Controls-CcnnoIiance   Needed With Existing
                          PolicyLBbd Guidance.       The GAO observed that the existing      DOD
                           [Office of the Secretary of Defense] and Army policy and guidance
                          appear sufficient      to promote maximum readiness at the least
                          possible   cost and to dispose of unneeded stock.       The GAO found,
                          however, that local guidance and emphasis on filling         customer
                          orders and obligating      funds is undermining the DOD goal to have
                          the right part at the right place at the right time, but without
                          incurring    unnecessary costs.      According to the GAO, resolving   the
                          local situation     will require compliance with existing     policies
                          and regulations     and a greater emphasis on economy and efficiency
                          than currently    exists.

                          The GAO pointed out that the Army is required by the Financial
                          Managers' Integrity      Act to review and report annually on its
                          internal   control   systems.   The GAO emphasized that weaknesses in
                          controls   are considered %aterial~V when, among other things,         they
                          exist in a majority      of agency components and risk or result in
                          the actual loss of at least $10 million.         The GAO observed that
                          the Army Materiel     Commandassessment of internal      controls  for
                          FY 1988 and FY 1989 did not identify       the potential   for buying new
                          assets with unserviceable      assets on hand. The GAO indicated       that
                          the FY 1988 assessment noted that overcrowded storage space did
                          not warrant reporting      to Army headquarters,   but that it was a
                          continuing    concern for Command.




                                                                 12




                              Page 51                                     GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories




                                                             1
                                                                                                              II

                                                                                                                         ”
                            Appendix II
                            Comments From the Department    of Defense




                         The GAO further      noted that none of the inventory        control points
                         it visited    had reported the cited      issues as material weaknesses
                         in their reports on internal       controls.     The GAO acknowledged that
                         the Aviation     Systems Commanddid identify       insufficient      staff as a
                         material   weakness and as a reason for (1) not properly using the
                         Requirements Determination       and Execution System studies and
                          (2) not processing many recommendations to cut back procurement
                         or declaring     items excess.    The GAO concluded that, although
                         existing   policy and guidance require economy and efficiency              in
                         decisions    to repair or buy or dispose of items, the long-standing
                         emphasis on filling       customer orders and obligating        funds show
                         that the Army has not corrected its problems and should consider
                         these problems as weaknesses to be reported under the Financial
Now on p, 34.            Managers' Integrity       Act. (pp. 45-46/(X0 Draft Report)

                         POP RESPONSE : Partially     concur.    The existing  Department of the
                         Army internal    control material    weakness (ID# DCSLOG-89-001)
See comment     4.       regarding excess inventory     and inventory    growth is sufficient  to
                         track corrective     actions in this area.
                                                           *****




                     .                       : The GAO recommended that the Secretary of the
                         Army direct the Commander of the Army Materiel      Commandto
                         establish    the means to monitor the inventory   control points'
                         compliance with Army policy and regulations     that require
                         unserviceable    assets to be repaired when it is more economical
Now on pp. 5,22          than purchasing new ones. (p. 7, p. 31/GAO Draft Report)

                         POD RESPONSE: Concur.       The Secretary of the Army will issue the
                         direction    within ninety days. Headquarters,    Army Materiel
                         Command Compliance Review Teams are currently       conducting on-site
                         visits    at all Army Materiel  CommandMajor Subordinate Commands to
                         review compliance with supply policy and procedures in many
                         areas, including    managing unserviceable  assets.
                     l   ~C~ATION        2: The GAO recommended that the Secretary of the
                         Army direct the Commander of the Army Materiel   Commandto
                         evaluate the program developed by the Army Missile  Commandto
                         match assets due in from procurement with on-hand unserviceables




                                                                   13




                            Page 62                                     GAO/NSIAD91-23   Army’s   Unserviceable    Inventories
                      Appendix II
                      Comments From the Department   of Defense




                     and determine whether the other inventory control points                  should
Now on p. 22         be using the system. (p. 7, p. %/GAO Draft Report)
                     POD RESPONSE:     Concur. The Secretary of the Army will issue the
                     direction   within ninety days. A review of the recommended Army
                     Missile   Commandprogram is being added as a topic to the supply
                     management area for the upcoming Headquarters Army Materiel
                     CommandCompliance Review Team visit     to Army Missile Command.
                 .   pECOWlENDATION3: The GAO recommended that the Secretary of the
                     Army direct the Commander of the Army Materiel   Commandto clarify
                     to item managers that existing  regulations allow the managers to
                     dispose of items the Army (1) has determined to be uneconomical
Now on pp 5,29
                     to repair or (2) does not plan to include in a repair program.
                      (p. I, p. 39/GAO Final Report)

                     DOD RESPONSE:        Concur.  The Secretary of the Army will issue the
                     direction     within ninety days.     Headquarters Army Materiel        Command
                     has already implemented actions to effect rapid and timely
                     disposal of unserviceable        and uneconomically   repairable     items.
                     System changes were approved in April 1990 to remove any system
                     blocks impeding disposal of unnecessary stocks, with
                     implementation       scheduled in FY 1991. Further,     the Army Materiel
                     Command has implemented management controls         to monitor disposal
                     effectiveness       by Major Subordinate   Commands. These actions
                     conform to, and support the disposal objectives           prescribed     by the
                     DOD Inventory       Management Program.
                 .   P3XXMMENDATION
                                 4: The GAO recommended that            the Secretary of the
                     Army direct the Commander of the Army Materiel         Commandto
                     develop an effective      automated procedure for use Army-wide that
                     will identify    and initiate     the disposal of assets that the Army
                     does not plan to repair,       if the Missile  Commandprogram to
Now on p 29          identify   candidates for disposal proves unacceptable.        (p. 4,
                     p. 29/GAO Final Report)

                     DOD RESPONSE: Concur.        The Secretary of the Army will issue the
                     direction     within ninety days. Pending completion of the Army
                     Materiel     Commandevaluation   of the Army Missile  Commandprogram,
                     system change proposals will continue to be evaluated to foster a
                     more automated means of providing       stock data summaries to
                     managers as a tool to support disposal management.
                     Implementation      of such change proposals is subject to funds
                     availability      and may become unnecessary if the DOD decides, as



                                                         14




                       Page 53                                GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
                         Appendix    II
                         CommentsFrom the Department of Defense




                       part of the DOD Corporate Information   Management Initiative, to
                       replace Army materiel  management systems with other DOD-wide
                       Interim systems.
                   .                     : The GAO recommended that the Secretary of the
                       Army direct the Commander of the Army Materiel      Commandto follow
                       up regularly   on planned corrective   actions that have responded to
                       audit findings   and recommendations to ensure that the actions
Now on pp. 5,35        have been successfully    implemented.   (p. 47/GAO Draft Report)

                       -RESPONSE:      Concur.      The Secretary     of the Army will       issue    the
                       direction within ninety      days.
                   .   -6:                   The GAO recommended that the Secretary of the
                       Army direct    the Commander of the Army Materiel  Commandto report
                       the deficiencies    in managing the unserviceable  inventories  as a
                       material   weakness in the Army system of internal    controls.
See comment   5.        (p. 47/GAO Draft Report)

                       pOD RESPONSE: Concur.        The recommendation is moot, however.            In
                       its FY 1989 Statement of Assurance, the Department of the Army
                       already Included an internal       control material     weakness
                        (IDW DCSLOG-89-0011, which addresses excess inventory             and
                       Inventory    growth, and which already requires corrective           actions
                       regarding unnecessary procurements and ineffective            use of
                       inappllcable    assets, including    unserviceable    inventories.
                       Further reporting     is, therefore,    not required.




                                                           15




                         Page 64                                GAO/NSIAD91-23   Army’s   Unserviceable     Inventories
               Appendix II
               Comments   From the Department   of Deiense




               The following are GAO'S comments on the Department of Defense’s letter
               dated September 25, 1990.


               1. The text of the report has been revised to incorporate DOD'S position.
GAO Comments
               2. Same as comment 1 above.

               3. For the reasons explained in Chapter 4 under the heading “Agency
               Comments and Our Evaluation,” we now agree that separate reporting
               on this internal control deficiency is not needed.

               4. Same as comment 3 above.

               5. Recommendation deleted based on comment 3.




               Page 55                                   GAO/NSIAD-91-23   Army’s   Unserviceable   Inventories
Appendix III

Major Contributors to This Report


                                   n, Associate Director
National Security and   Fzik$’f’zzLWICP
                                    UVV)“I
                                        Jr *,**UV*YVw*.”
                                             Add-ant   --AuvYv^
                                                       nirwtnr
International Affairs
Division, Washington,
DC.

                        Waylon Catrett, Regional Management Representative
Atlanta Regional        Bobby Worrell, Evaluator-in-Charge
Office                  Danny Owens, Site Senior
                        Carol Mebane, Evaluator
                        Sharon Kirby, Evaluator




               Y




(898354)                Page 56                       GAO/NSIAB91-23   Army’s Unserviceable   Inventories
                                  ‘I


,l-.--   ~--   --l_“l--“.l-
                              \
x
    Ordt~riug Iuforrnat.iou

F   ‘I’htb first five copies of each GAO report art> free. Additional   copies
    art’ $2 taach. Orders should be seul. t,o t,he ft~llowiug address, ac~com-
    pauitd by a check or money ordt~r made out, t,o the Sup~rint.endent,
    of I)ot*uu~euts, when utxessary. Orders for 100 or more copies t,o be
    mailtd to a single address are discount,td 25 pf3cenL

    1J.S. Gmeral Accouu~iug Office
    I’.(). hx tie 15
    Gaithtbrsburg, MD 20877

    Orders tuay also be placed by calliug   (202) 2756241.