oversight

Defense Inventory: Spare and Repair Parts Inventory Costs Can Be Reduced

Published by the Government Accountability Office on 1997-01-17.

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

                  United States General Accounting Office

GAO               Report to the Secretary of Defense




January 1997
                  DEFENSE
                  INVENTORY
                  Spare and Repair Parts
                  Inventory Costs Can Be
                  Reduced




GAO/NSIAD-97-47
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division

                   B-275462

                   January 17, 1997

                   The Honorable William J. Perry
                   The Secretary of Defense

                   Dear Mr. Secretary:

                   This report discusses how the military services can reduce their spare and
                   repair parts storage and holding costs by consolidating and/or disposing of
                   inventory that is not needed to meet current operating and war reserve
                   requirements or is requested infrequently.

                   The scope and methodology of our review are described in appendix I.


                   The Army, the Navy, and the Air Force have about 632,000 line items of
Background         spare and repair parts inventory, valued at $83.5 billion,1 that are available
                   for general issue.2 The majority of the general issue spare and repair parts
                   items are stored at a few major locations that are managed and operated
                   by the Defense Logistics Agency (DLA), with the remaining being stored at
                   hundreds of other service-managed locations. To illustrate, over
                   95 percent of the value of the Army’s general issue inventory is stored at
                   7 major locations and the remaining 5 percent is at 110 other locations.
                   The Navy stores 81 percent of its inventory at 6 locations, the other
                   19 percent at 52 locations. The Air Force’s storage pattern is similar to the
                   other services. About 96 percent of its inventory is stored at 6 major
                   locations and the other 4 percent at 105 locations. At the DLA storage
                   locations, DLA performs the receipt, storage, and issue functions and bills
                   the services for performing these functions. The services are also billed for
                   the storage space assigned to them for their items. The storage costs range
                   from $0.48 a square foot to $5.15 a square foot depending on whether it is
                   open or covered storage. DLA’s accounting system tracks storage costs only
                   in total by type of storage space assigned, not item-by-item.


                   Most of the services’ inventory items stored at nonmajor locations are in
Results in Brief   small quantities. In fact, over 53 percent of the items were in quantities of


                   1
                    The value was determined by multiplying the inventory quantity shown in the inventory master data
                   files by the unit price.
                   2
                    General issue inventory is available for issue to the services’ customers. It does not include inventory
                   stored at contractor or the services’ maintenance facilities, inventory reserved for special projects, or
                   war reserve inventory.



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                                          3 or less, while only 25 percent were in quantities of 11 or more. However,
                                          the inventory at the nonmajor locations is valued at over $8.3 billion.

                                          The need for many of the items stored at nonmajor locations is
                                          questionable. Of the $8.3 billion of inventory at the nonmajor locations,
                                          $2.7 billion of it was not needed to meet the services’ current operating
                                          and war reserve requirements. Our analysis also showed that many of the
                                          Army items3 were infrequently issued over the 2-year period ending
                                          August 1996. Over 53 percent of the items at nonmajor storage locations
                                          had no issues and an additional 33 percent of the items had less than five
                                          issues during the same 2-year period.

                                          Maintaining inventory that is not needed is expensive and does not
                                          contribute to an effective, efficient, and responsive supply system. Based
                                          on our analysis, we estimate the services could save about $382 million
                                          annually in inventory holding costs by eliminating inventory at nonmajor
                                          locations that is not needed to meet current operating and war reserve
                                          requirements.


                                          The Army, the Navy, and the Air Force own and manage about 632,000 line
Services Have Small                       items of general issue spare and repair parts. These items have an
Quantities of                             inventory quantity of about 108 million, an inventory value of $83.5 billion,
Inventory Stored at                       and are stored at 229 different locations by service as shown in table 1.

Numerous Locations
Table 1: Storage Locations, Quantities,
and Value of Army, Navy, and Air          Dollars in millions
Force General Issue Inventory                                             Number of          Number of
                                          Service                   storage locations         line items      Quantities                Value
                                          Army                                      117           83,759      42,234,665           $10,185.8
                                          Navy                                        58        310,762       33,557,388             33,696.8
                                          Air Force                                 111         237,460       32,288,896             39,596.9
                                          Total                                     286a        631,981     108,080,949            $83,479.5
                                          a
                                            The same item may be stored at more than one location. As a result, the 286 storage locations
                                          actually represent 229 separate and distinct storage locations.



                                          Even though the services’ general issue inventories are stored at numerous
                                          locations, the vast majority of the items are concentrated at a few major

                                          3
                                           Information was not readily available from the Air Force and the Navy to determine the number of
                                          inventory issues on an item-by-item basis at each storage location.



                                          Page 2                                                      GAO/NSIAD-97-47 Defense Inventory
                                               B-275462




                                               locations. As shown in table 2, the value of the general issue inventory at
                                               the other-than-major storage locations is relatively small. However, it is
                                               still worth over $8.3 billion.


Table 2: Value of General Issue Inventory by Type of Storage Location
Dollars in millions
                                     Major storage locations                                            Other storage locations
                                                        Inventory                                                        Inventory
Service                   Number       Line items           Quantity        Value         Number          Line items        Quantity           Value
Army                             7         81,747         39,464,486     $9,642.2               110           11,159        2,770,179         $543.6
Navy                             6        239,781         16,631,104     27,359.3                  52       154,069       16,926,284          6,337.5
Air Force                        6        222,972         30,680,542     38,163.0               105           19,097        1,608,354         1,433.9
                                                    a                                                                a
Total                           19        544,500         86,776,132 $75,164.5                  267         184,325       21,304,817        $8,315.0
                                               a
                                               The same line item could be stored at both a major and nonmajor storage location. For that
                                              reason, the sum of line items at the major and nonmajor storage locations is greater than the
                                              number of line items shown in table 1.



                                               Our analysis of the items stored at nonmajor locations showed that the
                                               majority of items had small quantities on hand. As shown in table 3, over
                                               53 percent of the items (147,232 of the 276,750) had an on-hand inventory
                                               of 3 or less, while about 25 percent of the items (69,173 of the 276,750) had
                                               quantities of 11 or more.


Table 3: Number of Items Stored at Nonmajor Locations by Frequency of Inventory on Hand
                                Number of          Number of items stored at nonmajor locations with a quantity of:
Service                         line itemsa                  1                2                3              4-6             7-10               11+
Army                                  14,532              4,657          2,282            1,230             1,923            1,162             3,238
Navy                                 242,087            76,715          35,083           18,693            32,029           19,310            60,257
Air Force                             20,131              3,247          3,856            1,469             3,374            2,547             5,638
Total                                276,750            84,619          41,221           21,392            37,326           23,019            69,173
                                               a
                                               Because some items are stored at multiple locations with different quantities on hand, the
                                              number of line items in tables 2 and 3 will not agree.




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                                       B-275462




                                       Our analysis of the general issue inventory at nonmajor storage locations
Some Inventory at                      showed that over $2.7 billion of it was excess to the amount needed to
Nonmajor Storage                       meet current operating and war reserve requirements. For these items,
Locations Is Not                       there was sufficient inventory on hand at the major storage locations to
                                       meet the peacetime operating and war reserve requirements. If the items
Needed and Is Issued                   are not needed to meet current operating and war reserve requirements,
Infrequently                           then the question is why the services continue to store them and incur the
                                       inventory storage and holding costs.

                                       Table 4 shows the extent of the inventory at nonmajor storage locations
                                       that is not needed to meet current operating and war reserve
                                       requirements.

Table 4: General Issue Inventory at
Nonmajor Storage Locations Not         Dollars in millions
Needed to Meet Current Operating and                         Inventory at nonmajor storage locations that is excess to current
War Reserve Requirements                                                  operating and war reserve requirements
                                       Service               Number of line items    Inventory quantity        Inventory value
                                       Army                                 4,735               897,638                 $169.2
                                       Navy                                95,989            11,945,962                2,398.0
                                       Air Force                            2,981               298,260                  176.7
                                       Total                             103,705             13,141,860               $2,743.9

                                       The following is an example of inventory at a nonmajor storage location
                                       that is not needed to meet current operating and war reserve
                                       requirements. An Army truck engine for a commercial cargo vehicle, unit
                                       price of $7,010, has a current operating and war reserve requirement of
                                       214. There are 360 engines on hand at 4 major storage locations and an
                                       additional 543 engines on hand at 2 nonmajor storage locations. The truck
                                       engine and its container occupy about 53.6 cubic feet and the total storage
                                       space occupied by the 543 engines at the two nonmajor locations is
                                       29,104 cubic feet. Because the quantity of engines at nonmajor storage
                                       locations is not needed to meet the current operating and war reserve
                                       requirements, these engines could be disposed of, storage space could be
                                       freed up, and storage costs could be reduced.

                                       Our analysis of the general issue inventory at nonmajor storage locations
                                       also showed that many of the items are issued infrequently. DLA classifies
                                       inventory items that have not been requested in the past 24 months as
                                       dormant. DLA routinely requests the services to review their dormant stock
                                       to determine if the stock is still needed. Our analysis of the frequency of
                                       inventory issues at nonmajor storage locations showed that over 53



                                       Page 4                                               GAO/NSIAD-97-47 Defense Inventory
                                              B-275462




                                              percent of the Army items,4 with an inventory value of $144 million, had no
                                              issues for the 2-year period ending August 1996. Another 33 percent of the
                                              items, with an inventory value of $132 million, had 5 or fewer issues during
                                              the same 2-year period. The fact that the number of items issued from
                                              these storage locations is relatively small raises the question of why the
                                              Army continues to store the inventory items there. Table 5 shows the
                                              frequency of issues for the Army’s general issue inventory items at the
                                              nonmajor storage locations.


Table 5: Frequency of Army Inventory Issues for the 2-Year Period Ending August 1996
                             Number of                                  Number of items with:
Service                          itemsa              0 issues          1-5 issues         6-10 issues        11-15 issues 16 or more issues
Army                             11,159                  5,950               3,695                  894                 416                     541
                                              a
                                               The number of line items will not agree with the total number of issues because the same item
                                              may be stored at more than one location and could have had a different number of issues at each
                                              location. In such cases, the number of issues would be cumulative.



                                              The following example illustrates the type of items that are stored at the
                                              nonmajor storage locations and have not had any issues during the past
                                              2 years.

                                          •   An electronics unit, unit price of $12,532, which is used on the multiple
                                              launch rocket system has an on-hand balance of 11 at 4 nonmajor storage
                                              locations. This item has not been issued from the four locations during the
                                              past 2 years. Therefore, there is no need to maintain these items at the four
                                              storage locations and incur storage costs.


                                              Maintaining inventory that is not needed or is issued infrequently is
Maintaining Unneeded                          expensive. DLA’s charge for covered storage is $5.15 a square foot. The
Inventories Is                                charge is not based on the space the particular item occupies but rather
Expensive and Does                            the square footage assigned to it. To illustrate, if a pack of washers is being
                                              stored in a bin, the storage cost is based on the bin size and not the
Not Contribute to                             number of washer packs in the bin. Therefore, if washers are being stored
Supply Effectiveness                          at numerous locations, a storage cost is charged at each location even
                                              though all the washers could be consolidated into one location.

                                              According to DLA officials, the Base Realignment and Closure
                                              Commission’s reductions in force structure have resulted in the depots

                                              4
                                               The Navy and the Air Force does not maintain inventory issue data by storage location. As a result, we
                                              could not determine the number of issues for the Navy and the Air Force items stored at nonmajor
                                              storage locations.



                                              Page 5                                                        GAO/NSIAD-97-47 Defense Inventory
    B-275462




    experiencing considerable increases in materiel returns and redistribution
    orders. As a result, the Department of Defense’s storage space occupancy
    goal of 85 percent5 is being exceeded by some depots.

    In an attempt to address this problem, DLA performed a study to identify
    ways to free up storage space and reduce storage costs by disposing of
    items that are not needed. The DLA Defense Distribution Region West’s
    analysis of 3,130 dormant line items of inventory at its storage facilities
    showed that by eliminating the dormant line items, over 126,000 square
    feet of storage space could be freed up and the services could save an
    estimated $989,000 in storage costs—an average savings of about $316 per
    line item.6 It should be noted that the DLA analysis only covered one of its
    regions and only addressed the dormant stock. It did not address those
    situations where inventory quantities could be consolidated into fewer
    storage locations. Therefore, the potential savings in storage costs would
    be much greater on a DLA-wide basis.

    During our visit to a storage location, we noted numerous examples where
    storage bins capable of holding many items contained only a few. Our
    analysis of the services’ inventory data showed that 31 percent of the
    276,750 items stored at nonmajor locations had only 1 unit on hand. In
    total, 53 percent of the items stored at these locations had three or less on
    hand. In addition, the same items were also stored at other locations and
    the on-hand quantities at all the locations often exceeded the current
    operating and war reserve requirements. The following examples illustrate
    the inefficiencies of storing small quantities of items, many of which are
    unneeded, at multiple storage locations.

•   One $2.96 nonmetallic bumper that is used on the main gun of the Bradley
    fighting vehicle was the only item in a standard, small storage bin. The bin,
    which occupies 1.83 square feet of space, can hold 259 nonmetallic
    bumpers. Based on the least expensive form of covered storage of
    $5.15 per square foot, it costs the Army $9.42 a year to store the $2.96 item.
    Our review of Army inventory records showed that there are 1,675 stored
    at 2 other locations. The Army’s requirement for this item is 1,271.
    Therefore, 404 of the items are excess to the Army’s needs. Additionally,
    over the past 2 years, there have been only three issues of this item and


    5
    When the storage occupancy rate exceeds 85 percent, warehousing efficiency is affected as items
    must be moved and relocated in order to make room for incoming items. In turn, the frequent
    movement of items can result in items being lost or misplaced.
    6
     The storage cost savings ($989,000) divided by the number of dormant line items (3,130) equals a line
    item cost of about $316.



    Page 6                                                        GAO/NSIAD-97-47 Defense Inventory
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    none of the issues were from the storage location where the single item
    was stored.
•   Two small bolts, unit price of $9.30, were being stored in a bin capable of
    holding 200 bolts. The bolt, which is used on the MQM 107 target drone, is
    also stored at 2 other locations and the total on-hand quantity is 499 versus
    a current operating and war reserve requirement of 8. During the last
    2 years, there has only been 1 issue for 20 of the bolts and that was from a
    storage location other than the one visited.
•   One ring spacer with a unit price of $0.93 was being stored in a bin that
    could accommodate 177 spacers. This item, which is used on the engine
    for the OH-58 helicopter, is also stored at 2 other locations and the
    on-hand quantity is 137 versus a current operating and war reserve
    requirement of 102. In the past 2 years, there have been two issues for a
    total quantity of six, none of which were from the storage location visited.
•   Two nonmetallic grommets with a unit price of $2.33 were being stored in
    a bin that can accommodate 20 items. The item, which is used on air
    delivery equipment, is also stored at another location and the total
    on-hand quantity is 480 versus a current operating and war reserve
    requirement of 54. During the past 2 years, there have been 4 issues of the
    grommet for a total quantity of 20. None of the issues were from the
    storage location visited.

    DLA  officials said that from a cost-effectiveness and supply responsiveness
    standpoint, it is not necessary to store items at multiple locations. They
    said that the services should not be concerned where the stock is
    physically located if DLA can meet the services’ response requirements.
    However, under the services’ current inventory stocking policies, the
    services direct where the items are stored. Consequently, this does not
    always result in the most economical and cost-effective storage decisions.
    The DLA officials believed that if the decision as to where the stock should
    be stored was vested with DLA, better stocking decisions would be made
    and storage costs would be reduced. Based on our analysis of the number
    of items stored at nonmajor storage locations, the number of items not
    needed to meet current operating and war reserve requirements, and the
    number of items that are issued on an infrequent basis, we would agree
    that better decisions are needed concerning where inventory should be
    stored.

    In addition to the cost to store inventory, the services incur holding costs.
    The services calculate a variable holding cost on an item-by-item basis to




    Page 7                                         GAO/NSIAD-97-47 Defense Inventory
                                        B-275462




                                        identify those items that are more economical to stock than not to.7 Using
                                        the services’ data, we estimate that the services could save about
                                        $382 million in holding costs by eliminating inventory at nonmajor
                                        locations that is not needed to meet current operating and war reserve
                                        requirements as shown in table 6.

Table 6: Annual Inventory Holding
Cost for Items Not Needed to Meet       Dollars in millions
Current Operating and War Reserve       Service                              Number of line items                      Annual holding cost
Requirements
                                        Army                                                    4,735                                     $57.7
                                        Navy                                                   95,989                                     319.5
                                        Air Force                                                 822a                                       4.5
                                        Total                                                101,546                                     $381.7
                                        a
                                         The Air Force only calculates holding costs for consumable items; the other services calculate
                                        holding costs for reparable as well as consumable items. For this reason, the number of Air Force
                                        items shown above does not agree with the number of items shown in table 4.




                                        We recommend that the Secretary of Defense direct the service secretaries
Recommendations                         to:

                                    •   Begin to consolidate the warehousing of identical items that are not
                                        needed or infrequently issued at fewer storage locations. This can be
                                        accomplished over time by filling item requests by depleting the stock at a
                                        particular location or locations, disposing of unneeded items, and not
                                        restocking the items at those locations.
                                    •   After consolidating the warehousing of items not needed or infrequently
                                        requested, determine whether all storage facilities are needed. If facilities
                                        are no longer needed, take actions to close them.


                                        The Department of Defense concurred with a draft of this report. It said
Agency Comments                         that DLA was coordinating with the military services to reengineer the
                                        distribution system with the objectives of providing greater
                                        responsiveness to the customer and increasing efficiencies in receiving,
                                        storing, and shipping spare parts inventories. The Department also stated
                                        that these increased efficiencies should reduce the number of required
                                        storage facilities. To accomplish these objectives, the military services will
                                        be requested to review the items stored in multiple locations, which are


                                        7
                                         The annual holding cost for an item represents the unit cost of an item multiplied by the variable cost
                                        to hold factor (cost of funds invested in inventory, losses due to obsolescence, other inventory losses,
                                        and storage costs) multiplied by the quantity on hand.



                                        Page 8                                                          GAO/NSIAD-97-47 Defense Inventory
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either not needed or infrequently issued in order to identify opportunities
for consolidation.


As you know, 31 U.S.C. 720 requires the head of a federal agency to submit
a written statement on actions taken on our recommendations to the
House Committee on Government Reform and Oversight and the Senate
Committee on Governmental Affairs not later than 60 days after the date of
this report. A written statement must also be submitted to the House and
Senate Committees on Appropriations with the agency’s first request for
appropriations made more than 60 days after the date of the report.

We are sending copies of this report to the Secretaries of the Army, the
Navy, and the Air Force; the Commander of DLA; and the Director, Office of
Management and Budget. Copies will also be sent to the Chairmen and
Ranking Minority Members, House Committee on Government Reform and
Oversight, Senate Committee on Governmental Affairs, House and Senate
Committees on Appropriations, House Committee on National Security,
Senate Committee on Armed Services, and House and Senate Committees
on the Budget.

Please contact me on (202) 512-5140 if you have any questions concerning
this report. Major contributors to this report are listed in appendix II.

Sincerely yours,




Mark E. Gebicke
Director, Military Operations
  and Capabilities Issues




Page 9                                        GAO/NSIAD-97-47 Defense Inventory
Appendix I

Scope and Methodology


             We reviewed and analyzed master data files from the Army, the Navy, and
             the Air Force to identify the number of spare and repair parts they
             manage. From these files, we determined the on-hand inventory available
             for general issue and the storage locations of the general issue inventory.
             We arrayed the inventory by storage location and dollar value in
             descending order to identify natural break points for determining which
             storage locations should be considered major storage locations and which
             nonmajor.

             Using the above information for the inventory at the nonmajor storage
             locations, we determined whether the on-hand inventory was excess to the
             current operating and war reserve requirements. In making this
             determination, we first applied the inventory at the major storage
             locations to the requirements. In those cases where the inventory at the
             major locations was not sufficient to satisfy the requirements, we then
             applied inventory from the nonmajor storage locations. Any remaining
             inventory at these storage locations was considered excess to the current
             operating and war reserve requirements.

             We used the item transaction history data files, which show all requests
             for an item for the past 24 months, to assess the frequency of requests for
             items at the nonmajor storage locations. We then compared the results of
             this analysis to a similar analysis of frequency of request for the same
             items at the major storage locations in order to determine the extent that
             items at the nonmajor storage locations are infrequently requested.

             We also interviewed service and DLA officials and reviewed internal studies
             and reports to determine their views on the potential for consolidating
             and/or eliminating inventory items that are not needed or are infrequently
             requested.

             Our review was conducted between March and November 1996 in
             accordance with generally accepted government auditing standards.




             Page 10                                       GAO/NSIAD-97-47 Defense Inventory
Appendix II

Comments From the Department of Defense




              Page 11        GAO/NSIAD-97-47 Defense Inventory
Appendix III

Major Contributors to This Report


                        Sharon A. Cekala
National Security and   Robert J. Lane
International Affairs
Division, Washington,
D.C.
                        Leonard C. Hill1 Robert C. Sommer
Kansas City Field       Richard E. Burrell
Office                  Mark T. Amo




(703136)                Page 12                             GAO/NSIAD-97-47 Defense Inventory
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