oversight

Defense Inventory: Status of Inventory and Purchases and Their Relationship to Current Needs

Published by the Government Accountability Office on 1999-04-16.

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

                  United States General Accounting Office

GAO               Report to the Chairman, Subcommittee
                  on National Security, Veterans Affairs,
                  and International Relations, Committee
                  on Government Reform, House of
                  Representatives
April 1999
                  DEFENSE
                  INVENTORY

                  Status of Inventory
                  and Purchases and
                  Their Relationship to
                  Current Needs




GAO/NSIAD-99-60
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548                                                                               Leter




                   National Security and
                   International Affairs Division

                   B-279506                                                                                     Letter

                   April 16, 1999

                   The Honorable Christopher Shays
                   Chairman, Subcommittee on National Security,
                    Veterans Affairs, and International Relations
                   Committee on Government Reform
                   House of Representatives

                   As part of our ongoing analysis of the Department of Defense’s (DOD)
                   secondary inventory, we have updated our prior analyses of DOD’s
                   reported on-hand and on-order inventory.1 As requested, we determined
                   whether DOD (1) had on-hand inventory exceeding current requirements
                   as of September 30, 1996, and 1997, and (2) was buying inventory for which
                   it had no current requirement as of those same dates. Our analyses are
                   based on reported secondary inventory data relating to spare and repair
                   parts, clothing, medical supplies, and other items to support DOD’s
                   operating forces. The scope and methodology of our work are described in
                   appendix I.



Results in Brief   DOD reported reducing the secondary inventory we analyzed from about
                   $69.7 billion as of September 30, 1996, to $65.8 billion as of September 30,
                   1997. About $39.4 billion of this inventory exceeded DOD’s requirements
                   and represented about 60 percent of DOD’s total on-hand inventory. The
                   percentage of inventory that exceeded current requirements remained
                   about the same for the two periods we analyzed and was about the same as
                   of September 30, 1995.2

                   DOD could potentially reduce inventory that exceeded current
                   requirements where economical to do so. The Department had no demand
                   for about $11 billion, or 29 percent, of $37 billion of the inventory that
                   exceeded current requirements as of September 30, 1997, but did have
                   customer demands for the remaining $26 billion. Assuming customer
                   demands remain unchanged, $3.4 billion of this inventory would last 20 or


                   1Defense Logistics: Much of the Inventory Exceeds Current Needs (GAO/NSIAD-97-71, Feb. 28, 1997)
                   and 1998 DOD Budget: Operation and Maintenance Program (GAO/NSIAD-97-239R, Aug. 21, 1997).

                   2
                     In commenting on our past reports, DOD disagreed with our definition of current requirements. We
                   believe that the inventory DOD needs to prevent out-of-stock situations and to meet funded war
                   reserves represents current requirements. DOD adds inventory to cover unfunded war reserves and
                   demand for the time frame covered by the budget--2 years from the end of the fiscal year. About
                   $22.7 billion, or 34 percent, of on-hand inventory exceeded DOD’s measure as of September 1997.




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             more years and $658 million would last more than 100 years. Some portion
             of this inventory is more economical to retain than to dispose of and
             possibly repurchase. However, to the extent it is economical to dispose of
             the inventory, DOD’s cost of operations could be reduced.

             DOD must continue to purchase additional inventory to replenish supply
             shortages. However, DOD also ordered inventory that, if received, would
             add to the amount that exceeded current requirements as defined by DOD
             and us. As of September 30, 1997, DOD did not need about $1.5 billion, or
             18 percent, of the inventory it had ordered to meet current requirements.
             The requirements for these inventories frequently change after the items
             are ordered. However, while the services cancel some of the on-order
             inventory that is not needed, they miss many opportunities to cancel
             additional orders.

             We have made a number of recommendations in the past that DOD take
             actions to improve its inventory management processes and to adopt
             leading edge business practices. Therefore, we are making no additional
             recommendations in this report.



Background   In 1990, we identified DOD’s management of secondary inventory as a
             high-risk area because levels of inventory were too high and management
             systems and procedures were ineffective. While some improvements have
             been made, we reported in 19993 that these conditions still exist. Our
             August 1997 report stated that DOD had $8.6 billion of inventory on
             contract or on purchase requests as of September 30, 1996, of which
             $1.6 billion, or 18.8 percent, exceeded current requirements. Our prior
             work shows that in some cases purchases (1) were not based on valid
             needs, (2) were excess to needs because the requirements changed after
             orders were placed, and (3) occurred even though contracts could have
             been canceled.4 Notwithstanding these conditions, DOD must continue to
             purchase other inventory items to support the needs of its customers
             because some items are in short supply.




             3High-Risk   Series: An Update (GAO/HR-99-1, Jan. 1999).

             4
              Navy Inventory Management: Improvements Needed to Prevent Excess Purchases
             (GAO/NSIAD-98-86, Apr. 30, 1998) and Defense Logistics (GAO/NSIAD-97-71, Feb. 28, 1997).




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We have previously recommended that DOD adopt leading-edge practices,
such as prompt repair of items, supplier partnerships, and third-party
logistics, to improve its logistics operations. In our prior work, we found
that DOD recognized that it must improve its inventory management and
had initiated some pilot projects. To further this goal, DOD set out
objectives for continued inventory improvements in the 1998 Logistics
Strategic Plan. The plan includes objectives to reengineer business
practices to increase efficiency and reduce logistics resource requirements
and minimize levels of inventory, consistent with readiness objectives.

We reported in February 1997 that DOD had achieved some inventory
reductions; however, about 60 percent of the on-hand inventory exceeded
current requirements as defined by us. In that report, we recognized that
DOD is always going to have inventory that exceeds current requirements
and that some should be retained for economic or contingency reasons.
However, our data showed that DOD had potential for further reductions.

The inventory that we refer to as current requirements in this report and
our previous reports represents the maximum authorized amount of
inventory required to prevent out-of-stock situations. DOD defines this
amount as its requirements objective. The major components of the
requirements objective are

• war reserves that are authorized to be purchased to ensure fast
  mobilization in the event of war,
• customer requisitions that have not been filled,
• a safety level to be on hand in case of minor interruptions in the
  resupply process or unpredictable fluctuations in demand,
• items to be issued during the period between when a need to buy an
  item is identified and when it is received (lead time),
• minimum quantities for designated items (insurance items),
• items to be issued during the repair period for repairable items, and
• an economic order quantity to ensure the quantity ordered results in the
  lowest total costs to order and hold inventory.

DOD matches on-hand and on-order inventory by individual item to their
requirements objective to determine if there is an excess or shortage of
inventory. In this report, we present summaries of our analyses of the
item-level and summary-level budget stratification reports that the military
services and Defense Logistics Agency (DLA) use to prepare budget




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                       requests and to review funding.5 We address the on-hand and on-order
                       inventory items that exceed the requirements. This report does not address
                       DOD’s shortages of items that it uses to support its budget request. We did
                       not independently determine the reliability of the data; however, our prior
                       evaluations show that some of the data used by DOD and the services were
                       not entirely accurate and reliable. Notwithstanding the concerns we have
                       about the data reliability, we believe that the records and reports can be
                       used to monitor the status of on-hand and on-order inventory at the macro
                       level.



Much of DOD’s          DOD reported reducing the secondary inventory we analyzed by
                       $3.9 billion, from $69.7 billion as of September 30, 1996, to $65.8 billion as
Inventory Is Above     of September 30, 1997. However, $39.4 billion of the $65.8 billion in
Current Requirements   secondary inventory for September 30, 1997, exceeded the current
                       requirements shown in DOD’s requirements objective. In other words,
                       based on the requirements at September 30, 1997, DOD would not have
                       bought $39.4 billion, or about 60 percent, of the inventory it had on hand.
                       The percentage of inventory that exceeded current requirements was about
                       the same as of September 30, 1995.

                       Although the requirements objective represents the maximum amount of
                       inventory authorized to sustain current operations, including the funded
                       war reserves, DOD officials prefer to use the approved acquisition
                       objective as the measure of requirements for on-hand inventory. The
                       approved acquisition objective is generally the requirements objective plus
                       inventory to cover unfunded war reserves and to meet demand for the time
                       period that DOD is budgeting--2 years from the end of a fiscal year. Using
                       DOD’s calculation of approved acquisition objective, we calculated that
                       $22.7 billion, or 34 percent, of the $65.8 billion in inventory exceeded
                       DOD's requirements as of September 1997. The following table compares
                       the on-hand inventory with both the requirements objective and the
                       approved acquisition objective.




                       5
                         We use DOD’s budget stratification reports to make our analyses because item-level information is
                       available from each service and DLA. DOD also reports summary statistics on the status of its on-hand
                       inventory in the Supply System Inventory Report. See appendix III for summary statistics and methods
                       of valuing inventory.




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Table 1: DOD Inventory That Exceeded Current Requirements as of September 30,
1996, and 1997

Dollars in billions
                                                           On-hand inventory exceeding
                                       On-hand
                                      inventory              Requirements Approved acquisition
                                      analyzeda                  objective           objective
Year ending                                Value           Value     Percent            Value     Percent
Sept. 30, 1996                              $69.7          $41.3            59          $25.4            36
Sept. 30, 1997                               65.8           39.4            60           22.7            34
Change                                     ($3.9)          ($1.9)                       ($2.7)
a
 We reviewed most of the inventory in the budget stratification records for the Army, the Navy, the Air
Force, and DLA but not for the Marine Corps. We did not analyze data for in-transit stock, some retail
inventory, and some consumable inventory, including fuel, because the inventory either was not
stratified or represented a small portion of the total inventory. The items are priced at latest acquisition
cost.


The detail by DOD component is shown in tables II.1 and II.2 of
appendix II.

We previously reported6 that DOD’s on-hand inventory exceeded current
requirements for many reasons. Some of the reasons were demands
decreased, fluctuated, or did not materialize; items became obsolete when
weapon systems became obsolete or were phased out of service; and some
of the initial requirements and demand forecasts were not accurate.

DOD officials told us that once the inventory exceeds current
requirements, they must decide whether to keep it or dispose of it. To
make this decision, DOD uses models to determine how much of the
inventory will be needed beyond the 2 years of demand shown in the
approved acquisition objective. On the bases of these models, DOD divides
its inventory into groupings that (1) are more economical to retain than
dispose of and possibly repurchase, (2) are held to support specific
contingencies, and (3) have potential for reutilization or disposal. While it
may need to retain some of this inventory, DOD has the potential for
further inventory reductions, as the following sections indicate.




6
    See Related GAO Products at the end of this report.




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Some Items Have No   DOD reported reducing the amount of inventory that exceeded current
                     requirements and did not have demands from $12.5 billion as of
Projected Demands    September 30, 1996, to $10.9 billion as of September 30, 1997. However, the
                     amount that had no projected demand still represented about 30 percent of
                     DOD’s inventory that exceeded the current requirements. (See table 2.)



                     Table 2: Comparison of Items Without Projected Demand and the Value of Inventory
                     Exceeding Current Requirements

                     Dollars in billions
                                                 On-hand inventory
                                                        exceeding
                                                     requirements                Inventory exceeding requirements
                                                        objectivea                   objective that had no demand
                     Date                                        Value                    Value              Percentage
                     Sept. 30, 1996                              $39.8                     $12.5                        31
                     Sept. 30, 1997                                37.0                     10.9                        29
                     Change                                      ($2.8)                   ($1.6)
                     aThe amounts in this table differ from table 1 primarily because we excluded inventory called numeric
                     stockage objective items that DLA manages based on criteria other than demand. In addition, data
                     were not available to make the analysis for the approved acquisition objective for all services.


                     We further analyzed this inventory by service (see tables II.3 and II.4 of
                     app. II) and found that the Navy and the Air Force held about $11.8 billion
                     of the $12.5 billion in inventory with no projected demand as of September
                     1996 and $10.4 billion of the $10.9 billion in inventory as of September 1997.
                     While this macro measure shows that all of this inventory has no projected
                     customer demand, it does not show the extent that DOD has determined it
                     is more economical to keep the inventory rather than dispose of and
                     possibly repurchase. We provided, however, in our February 1997 report,
                     several examples where items with no demand may never be used.

                     We excluded about $3 billion of DLA’s inventory that exceeded the
                     requirements objective from each year of this analysis because DLA does
                     not manage these items based on demand. Although these items are not
                     managed based on demand, they are similar to items with no demand and
                     have potential for inventory reductions. According to a DLA official, the
                     services transferred about 60 percent of this inventory to DLA. He said that
                     these items have infrequent and erratic demands, making forecasting
                     extremely difficult and disposal somewhat problematic.




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Inventory Exceeding     Of the $37 billion in secondary inventory that exceeded current
                        requirements as of September 30, 1997, $26 billion had projected customer
Current Requirements    demands. Using the projected demand data, we grouped the $26 billion to
Represents Many Years   show years of supply based on current demand data (see fig. 1). This
                        analysis assumes demand patterns across the summary of items will
of Projected Supply     remain unchanged. Increases or decreases in actual demand by item do
Needs                   occur; consequently, this data is only an indicator of potential excess
                        inventory held by DOD.



                        Figure 1: Value of Items With Inventory Exceeding the Requirements Objective
                        Shown by Years of Supply for September 30, 1996, and 1997
                        Dollars in billions
                        10


                         9


                         8


                         7


                         6


                         5


                         4


                         3


                         2


                         1


                         0
                              Less than 2     2 to 5 years   5 to 10 years    10 to 20 years   20 to 50 years   50 to 100 years   100 or more
                                 years                                                                                               years
                                                                             Years of supply
                                                                September 30, 1996     September 30, 1997

                        Note: The amounts in this figure also exclude the DLA inventory items that are not managed based on
                        demand.


                        The detail by DOD component is shown in tables II.7 and II.8 of
                        appendix II.




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                        These data show

                        • about $9.3 billion (36 percent of $26 billion) represented the first 2 years
                          of demand that exceeded the requirements objective but would
                          generally be included in the approved acquisition objective,
                        • the remaining items represented about $16.7 billion (64 percent of
                          $26 billion) that would last more than 2 years after the requirements
                          objective was met, and
                        • about $3.4 billion would last 20 or more years and $658 million would
                          last 100 or more years after the requirements objective was met.



Some Inventory on       DOD must order inventory on a routine basis to meet supply shortages. To
                        do this, DOD orders inventory based on the requirements objective. We
Order Exceeds Current   found that as of September 30, 1996, and September 30, 1997, some of the
Requirements            on-order inventory was no longer needed. We previously reported in
                        February 1997, August 1997, and April 1998 that ordering inventory that
                        was beyond requirements was a continuing problem. For example, our
                        work showed that in some cases purchases (1) were not based on valid
                        needs, (2) were excess to needs because the requirements changed after
                        orders were placed, or (3) were for weapon systems that had not been
                        activated. We reported that some of the changes could not have been
                        anticipated, but DOD could have done a better job of canceling those
                        purchases that exceeded requirements.

                        A DOD official told us that while the services cancel some orders that
                        exceed current requirements, sometimes it is more economical to receive
                        the orders than to cancel them. However, we reported in April 1998 that
                        ineffective and inefficient inventory management practices result in
                        purchasing resources being applied to items where there is already
                        sufficient inventory to support needs. Furthermore, to the extent that DOD
                        receives these orders, it increases the on-hand inventory that exceeds
                        current requirements and DOD must determine whether it is more
                        economical to keep or dispose of.

                        As of September 30, 1997, the services and DLA had $8 billion of inventory
                        on order, of which $1.5 billion would not have been ordered based on
                        current requirements. This is slightly better than September 30, 1996, when
                        the amount was $8.9 billion of inventory on order or on purchase request,
                        of which $1.7 billion would not have been ordered based on current
                        requirements. In both cases, the portion that exceeded current
                        requirements stayed at about 18 percent. Using DOD’s approved



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acquisition objective, $609 million, or 8 percent, of its purchases exceeded
current requirements as of September 30, 1997. (See table 3.)



Table 3: Inventory on Order That Exceeded Current Requirements as of
September 30, 1996, and 1997

Dollars in millions
                                                     On-order inventory exceeding
                               On-order
                              inventory                  Requirements        Approved acquisition
                               analyzed                      objective                  objective
Date                               Value               Value     Percent              Value Percent
Sept. 30, 1996                 $8,852.2             $1,711.6            19           $708.4            8
Sept. 30, 1997                   8,002.7            1,470.6a            18            608.9            8
Change                          ($849.5)             ($241.0)                       ($99.5)
a
 Eighty percent of the $1.5 billion as of September 1997, was "on-order: contract," which is due in from
procurement for which funds have been obligated, and 20 percent was "on-order: commitment," for
which a procurement request had been initiated but a contract had not been awarded.


Tables II.5 and II.6 of appendix II detail our analysis for each of the military
services and DLA.

This analysis does not show how much of the on-order inventory could
economically be canceled. In our April 1998 report on the Navy’s
purchases, we provided reasons that on-order inventory became excess to
current requirements.

• Some requirements to purchase items were not valid.
• Customer demands decreased or did not materialize after the order was
  placed.
• Engineering estimates for requirements had not materialized.
• The item or system on which the item was used became obsolete.

We reported that in some cases, the changes could not have been
anticipated. However, in other cases, better management could have
eliminated or reduced the accumulation of inventory that exceeded
requirements. For example, we reported that while the Navy canceled
some orders, it missed many opportunities to cancel additional orders for
inventory that was no longer needed.




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Conclusions           The data indicate that DOD has made some progress in reducing its total
                      inventory; however, it still has substantial on-hand inventory that exceeds
                      current requirements. The portion that exceeded current requirements
                      stayed at about 60 percent of total inventory for the time periods we
                      analyzed. In addition, about $11 billion of on-hand inventory that exceeded
                      current requirements had no demand, and more than $3 billion of on-hand
                      inventory would last 20 or more years after current requirements were met.
                      DOD uses models to evaluate this inventory to determine if it should be
                      kept for economic reasons, for contingencies, or disposed of. However,
                      our data indicate the potential for further reductions.

                      DOD must continue to routinely order inventory to meet supply shortages.
                      However, DOD ordered some inventory that, if received, would add to the
                      amount that exceeded current requirements. Our April 1998 report
                      indicates there are opportunities to improve DOD’s buying practices to
                      avoid buying items that may not be used.

                      We have previously recommended that DOD take actions to improve the
                      effectiveness and efficiency of its inventory activities and to adopt new
                      leading-edge business practices. DOD has identified various initiatives in
                      response to these recommendations. Therefore, we are making no
                      recommendations in this report. We will continue to review DOD’s
                      inventory management practices to identify further actions to improve the
                      inventory management systems.



Agency Comments and   DOD provided comments to clarify its position on the contents of our draft
                      report. (See app. IV for DOD’s complete comments.) DOD’s comments
Our Evaluation        focused on our approach to considering inventory requirements when
                      measuring inventory levels and an explanation of the just released Supply
                      System Inventory Report (SSIR) for the end of fiscal year 1998.

                      DOD expressed disagreement with our approach to measuring inventory
                      against requirements. DOD noted that to discuss the budget stratification
                      reports used to determine purchase requirements and the SSIR used to
                      report inventory on hand is not an accurate comparison. Also, DOD stated
                      that the draft report refers to overages in budget stratification reports but
                      does not address the shortages in those same reports. According to DOD,
                      ignoring the shortages, while citing the overages, does not give a balanced
                      picture of what the stratification reports actually show.




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DOD also stated that the SSIR should be the only source for inventory data.
However, we noted that DOD uses both the budget stratification and the
SSIR reports to make management decisions. Our report recognizes the
differences in the two reports. Item-level analysis is needed to identify the
characteristics of inventory that exceeds current requirements, such as
(1) inventory that has no projected customer demand, (2) years of supply
that exceeds current requirements, and (3) inventory on order that is no
longer needed to meet current requirements. To do that analysis, we used
the item-level records that are the basis for both the budget stratification
and the SSIR reports. The analyses in our report cannot be made from the
SSIR, which is a summary level report.

Our report was revised to more clearly recognize that DOD has supply
shortages. Although we concentrated on inventory that exceeds current
needs, we realize that DOD must continue to purchase other inventory
items to support the needs of its customers because some items are in
short supply. Replenishing inventory is a normal part of the supply system
process and DOD uses analyses of these needs to support budget requests.

Additionally, DOD stated that the SSIR is its official report on inventory and
provided just released statistics showing $61.2 billion of secondary
inventory in current dollars for the end of fiscal year 1998--$3.6 billion
better than DOD’s National Performance Review goal. Our review focused
on the 1997 inventory because that was the most recent data available at
the time of our work. Appendix III shows the SSIR statistics for the end of
fiscal year 1997.


We are sending copies of this report to the appropriate congressional
committees; to the Honorable William S. Cohen, Secretary of Defense; the
Honorable Louis Caldera, Secretary of the Army; the Honorable Richard
Danzig, Secretary of the Navy; the Honorable F. Whitten Peters, Acting
Secretary of the Air Force; Lieutenant General Henry T. Glisson, Director,
DLA; and the Honorable Jacob J. Lew, Director, Office of Management and
Budget.




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Please contact me at (202) 512-8412 if you have any questions. The major
contributors to this report are listed in appendix V.

Sincerely yours,




David R. Warren, Director
Defense Management Issues




Page 12                                     GAO/NSIAD-99-60 Defense Inventory
Page 13   GAO/NSIAD-99-60 Defense Inventory
Contents


Letter                                                                                          1


Appendix I                                                                                     17
Scope and
Methodology

Appendix II                                                                                    20
Inventory Analyses by
Service and DLA for
September 30, 1996,
and 1997

Appendix III                                                                                   24
DOD Secondary
Inventory Reports

Appendix IV                                                                                    28
Comments From the
Department of Defense

Appendix V                                                                                     30
Major Contributors to
This Report

Related GAO Products                                                                           32


Tables                  Table 1: DOD Inventory That Exceeded Current Requirements as of
                          September 30, 1996, and 1997                                          5
                        Table 2: Comparison of Items Without Projected Demand and the
                          Value of Inventory Exceeding Current Requirements                     6
                        Table 3: Inventory on Order That Exceeded Current Requirements
                          as of September 30, 1996, and 1997                                    9



                        Page 14                                  GAO/NSIAD-99-60 Defense Inventory
          Contents




          Table II.1: DOD Inventory That Exceeded Current Requirements by
            Component as of September 30, 1996                                        20
          Table II.2: DOD Inventory That Exceeded Current Requirements by
            Component as of September 30, 1997                                        20
          Table II.3: Items Without Projected Demand and the Value of
            Inventory Exceeding Current Requirements by Component as of
            September 30, 1996                                                        21
          Table II.4: Items Without Projected Demand and the Value of
            Inventory Exceeding Current Requirements by Component as
            of September 30, 1997                                                     21
          Table II.5: Inventory on Order That Exceeded Current Requirements
            by DOD Component as of September 30, 1996                                 22
          Table II.6: Inventory on Order That Exceeded Current Requirements
            by DOD Component as of September 30, 1997                                 22
          Table II.7: Years of Supply That Exceeded Current Requirements
            as of September 30, 1996                                                  23
          Table II.8: Years of Supply That Exceeded Current Requirements
            as of September 30, 1997                                                  23
          Table III.1: DOD Reduces Secondary Inventory—Fiscal Year 1995
            Constant Dollars                                                          26
          Table III.2: DOD Reduces Secondary Inventory—Current-Year
            Dollars                                                                   27


Figures   Figure 1: Value of Items With Inventory Exceeding the
            Requirements Objective Shown by Years of Supply for
            September 30, 1996, and 1997                                               7
          Figure III.1: Relationship of the SSIR to the Budget Stratification
            Records Provided to Us as of September 30, 1997                           25




          Abbreviations

          DLA        Defense Logistics Agency
          DOD        Department of Defense
          SSIR       Supply System Inventory Report




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Page 16   GAO/NSIAD-99-60 Defense Inventory
Appendix I

Scope and Methodology                                                                          AppenIx
                                                                                                     di




             We analyzed September 30, 1996, and September 30, 1997, inventory
             stratification reports for the Army, the Air Force, the Navy, and the Defense
             Logistics Agency (DLA) to determine whether the Department of Defense
             (DOD) bought and retained more inventory than it needed to meet current
             requirements. We used analyses that we had developed in two prior
             reviews to determine the extent that DOD’s inventory exceeded its current
             requirements as defined by the requirements objective and the approved
             acquisition objective. We determined the percentage of each category to
             overall inventory and measured the change between the two time periods.
             We analyzed records of inventory valued at $69.7 billion for September 30,
             1996, and $65.8 billion for September 30, 1997. Appendix III explains how
             this inventory is valued and the relation between the two reports that DOD
             uses to manage secondary inventory.

             We reviewed $65.8 billion of secondary inventory stratified by the Army, the
             Navy, the Air Force, and DLA for September 30, 1997. We did not analyze
             about $17.3 billion of the secondary inventory, including (1) the Marine
             Corps’ secondary inventory; (2) in-transit stock; (3) retail inventory; and
             (4) DLA’s fuel supply, subsistence, and base operating support inventory.
             The Marine Corps’ inventory represented a small part of the universe and
             the retail inventory, in-transit stock, and fuel are not stratified. All of the
             inventory items were priced at latest acquisition cost.

             Generally, we used computerized individual item records and summary
             stratification reports for the two time periods. However, to make a detailed
             analysis of demand rates, DLA provided us computerized data that were as
             of August 31, 1996, and June 30, 1998, rather than the September dates
             requested. The information represents the requirements, demand rates,
             and asset positions of the inventory as of these specific points in time.
             Although the information can change daily for individual items, our
             analyses over more than one time period indicate that the position of the
             total inventory is relatively stable. We revalued Army and Navy inventory
             to the latest acquisition cost by removing surcharges prescribed by the
             Defense Finance Accounting Service to cover the costs to operate the
             supply system. Air Force and DLA inventory were already priced at latest
             acquisition cost.

             To make our analysis, we did the following.

             • Compared requirements reported for individual items with on-hand
               assets to identify inventory in excess of requirements. We used both the
               requirements objective and the approved acquisition objective



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Appendix I
Scope and Methodology




  whenever possible. The Army and DLA did not provide us sufficient
  information to make some of the analyses for the approved acquisition
  objective.
• Determined whether the reported on-hand inventory that exceeded the
  requirements objective had projected demand in the automated item
  records. We reported the value of the items without demand; however,
  we excluded DLA’s inventory items that have intermittent demands but
  it considered essential to stock (numerical stock objective). To
  determine the years of supply for the items with demand, we divided the
  total inventory on hand by the annual demand.
• Determined how much of the inventory on-order contract and on-order
  commitment exceeded the requirements objective and approved
  acquisition objective.

We discussed inventory requirements and procurement issues and
inventory reduction initiatives with inventory management officials at the
Office of the Assistant Deputy Under Secretary of Defense (Materiel and
Distribution Management), and the Army, the Navy, the Air Force, and the
DLA headquarters.

We did not validate the accuracy of the inventory items, requirements, or
asset quantities and values DOD reported in the computerized records or
summary stratification reports. While neither we nor DOD made a
comprehensive assessment of the databases underlying the stratification
reports, we knew from this review, and our previous reviews of DOD
inventory management, that the stratification reports contained some
inaccurate data. Our previous evaluations show that DOD has a history of
some data accuracy problems with its inventory and requirements
information.1 Thus, while the data DOD and the services use in the
day-to-day management of secondary inventory are not entirely accurate
and reliable, it is the basis for DOD’s budget requests for all of the services,
and the reports were the best source of data available to us at the time of
our review. Notwithstanding these concerns about data reliability, the
records and reports can be used to monitor the status of on-hand and on-
order inventory at the macro level.




1
  We reviewed 46 of our reports and found that we questioned some aspect of the accuracy of
information in over 50 percent of the reports. The information was either directly from the inventory
stratification database or from other inventory records that directly or indirectly provided input to the
inventory stratification.




Page 18                                                        GAO/NSIAD-99-60 Defense Inventory
Appendix I
Scope and Methodology




We performed our review between January 1998 and December 1998 in
accordance with generally accepted government auditing standards.




Page 19                                  GAO/NSIAD-99-60 Defense Inventory
Appendix II

Inventory Analyses by Service and DLA for
September 30, 1996, and 1997                                                                      AppeInx
                                                                                                        Idi




               Table II.1: DOD Inventory That Exceeded Current Requirements by Component as of
               September 30, 1996

               Dollars in billions
                                                           On-hand inventory exceeding
                                               On-hand
                                              inventory     Requirements Approved acquisition
                                               analyzed         objective           objective
               Component                         Value    Value      Percent        Value   Percent
               Army                                $8.1    $3.9           48         $2.3       28
               Navy                                18.2    11.1           61          7.3       40
               Air Force                           35.0    22.0           63         12.9       37
               DLA                                  8.4     4.3           51          2.9       35
               Total                             $69.7    $41.3           59        $25.4       36




               Table II.2: DOD Inventory That Exceeded Current Requirements by Component as of
               September 30, 1997

               Dollars in billions
                                                          On-hand inventory exceeding
                                     On-hand inventory     Requirements        Approved acquisition
                                              analyzed         objective                  objective
               Component                        Value     Value     Percent        Value    Percent
               Army                               $7.5     $3.5          47          $1.6       21
               Navy                               16.6      9.7          58           6.1       37
               Air Force                          32.7     21.3          65          11.8       36
               DLA                                 9.0      4.9          54           3.2       36
               Total                             $65.8    $39.4          60         $22.7       35




               Page 20                                            GAO/NSIAD-99-60 Defense Inventory
Appendix II
Inventory Analyses by Service and DLA for
September 30, 1996, and 1997




Table II.3: Items Without Projected Demand and the Value of Inventory Exceeding
Current Requirements by Component as of September 30, 1996

Dollars in billions
                           On-hand inventory
                                  exceeding
                               requirements               Inventory exceeding requirements
                                  objectivea                  objective that had no demand
Date                                      Value                    Value            Percentage
Army                                        $3.9                    $0.6                          15
Navy                                        11.1                      4.0                         36
Air Force                                   22.0                      7.8                         35
DLAa                                         2.8                      0.1                         4
Total                                     $39.8                    $12.5                          31
a
 DLA’s data exclude inventory called numeric stockage objective items that are managed based on
criteria other than demand.




Table II.4: Items Without Projected Demand and the Value of Inventory Exceeding
Current Requirements by Component as of September 30, 1997

Dollars in billions
                           On-hand inventory
                                  exceeding
                               requirements               Inventory exceeding requirements
                                  objectivea                  objective that had no demand
Date                                      Value                    Value            Percentage
Army                                        $3.5                    $0.3                          9
Navy                                         9.7                      2.9                         30
Air Force                                   21.3                      7.5                         35
DLAa                                         2.5                      0.2                         8
Total                                     $37.0                    $10.9                          29
a
 DLA’s data exclude inventory called numeric stockage objective items that are managed based on
criteria other than demand.




Page 21                                                   GAO/NSIAD-99-60 Defense Inventory
Appendix II
Inventory Analyses by Service and DLA for
September 30, 1996, and 1997




Table II.5: Inventory on Order That Exceeded Current Requirements by DOD
Component as of September 30, 1996

Dollars in millions
                                                        On-order inventory exceeding
                                  On-order
                                 inventory                 Requirements         Approved acquisition
                                  analyzed                     objective                   objective
Component                             Value             Value      Percent             Value     Percent
Army                              $1,443.9              $78.3              5           $52.9                4
Navy                                1,647.6             120.6              7            45.7                3
Air Force                           2,435.5             843.6            35            359.2            15
DLAa                                3,325.2             669.1            20            250.6                8
Total                             $8,852.2           $1,711.6            19          $708.4                 8
a
    DLA did not provide us records for on-order inventory that is held to meet numeric stock objectives.




Table II.6: Inventory on Order That Exceeded Current Requirements by DOD
Component as of September 30, 1997

Dollars in millions
                                                         On-order inventory exceeding
                                    On-order
                                   inventory                Requirements        Approved acquisition
                                    analyzed                    objective                  objective
Component                               Value             Value     Percent            Value     Percent
Army                                $1,300.2            $171.8            13          $124.8            10
Navy                                  1,322.9              76.7             6            34.5               3
Air Force                             1,732.9             408.9           24           136.8                8
DLAa                                  3,646.7             813.2           22           312.8                9
Total                               $8,002.7          $1,470.6            18          $608.9                8
aDLA     did not provide us records for on-order inventory that is held to meet numeric stock objectives.




Page 22                                                           GAO/NSIAD-99-60 Defense Inventory
Appendix II
Inventory Analyses by Service and DLA for
September 30, 1996, and 1997




Table II.7: Years of Supply That Exceeded Current Requirements as of
September 30, 1996

Dollars in millions
Years of supply             Army            Navy    Air Force        DLA          Total
Less than 2               $595.4       $2,016.5      $5,556.5      $517.9      $8,686.3
2 to 5                    1,239.6       2,196.4       3,144.9       687.0       7,267.9
5 to 10                     780.6       1,375.5       1,890.7       372.9       4,419.7
10 to 20                    316.1           702.4     1,476.5       426.5       2,921.5
20 to 50                    247.1           507.9     1,309.8       325.7       2,390.5
50 to 100                    44.3           174.7      444.9        143.6        807.5
100 or more                  70.4           143.0      376.1        211.4        800.9
Total                    $3,293.5      $7,116.4     $14,199.4     $2,685.0   $27,294.3




Table II.8: Years of Supply That Exceeded Current Requirements as of
September 30, 1997

Dollars in millions
Years of supply             Army            Navy    Air Force        DLA          Total
Less than 2               $827.2       $1,918.7      $6,119.4      $478.5      $9,343.8
2 to 5                    1,195.7       2,268.5       3,137.5       497.1       7,098.8
5 to 10                     703.2       1,256.3       1,487.3       443.4       3,890.2
10 to 20                    199.0           650.9     1,063.1       373.4       2,286.4
20 to 50                    138.7           406.6     1,080.2       282.7       1,908.2
50 to 100                    27.7           145.9      570.6          91.2       835.4
100 or more                  36.9           150.8      328.6        141.8        658.1
Total                    $3,128.4      $6,797.7     $13,786.7     $2,308.1   $26,020.9




Page 23                                               GAO/NSIAD-99-60 Defense Inventory
Appendix III

DOD Secondary Inventory Reports                                                                             AppIeInx
                                                                                                                   di




                         DOD uses the Supply System Inventory Report (SSIR) to monitor on-hand
                         inventory and the budget stratification report to support its secondary item
                         inventory budget and to perform reporting and funding reviews. Although
                         both are developed from the same source records, the items are valued
                         differently and not all items in the SSIR are stratified. The following
                         sections show (1) the relationship of the value of items in the two reports
                         and (2) the dollar value of DOD’s inventory reduction goals and actual
                         reductions as shown in the SSIR for September 30, 1996, and 1997.



Relationship of SSIR     In the SSIR, DOD values serviceable inventory that is ready for issue at
                         latest acquisition cost; repairable inventory that is not ready for issue at the
and Budget               latest acquisition cost less the expected repair cost; and inventory that can
Stratification Reports   be disposed of at an annual salvage rate, which was 2.7 percent of latest
                         acquisition cost in 1997. On the other hand, the value of items we reviewed
                         in the stratification reports (also called Central Secondary Item
                         Stratification Report), including those needing repair and potential
                         disposal, was at latest acquisition cost.

                         The data that the services and DLA provided to us did not include all the
                         items in the SSIR. (See additional detail in scope and methodology
                         section.) Figure III.1 shows the comparison of the value of the inventory
                         reported in the SSIR to the inventory reported in the stratification reports
                         that we used for our analysis. We determined that the full latest acquisition
                         cost of the $64.8 billion in the SSIR as of September 30, 1997, was about
                         $83.1 billion. The services and DLA provided us budget stratification
                         records for $65.8 billion of the $83.1 billion of items at latest acquisition
                         cost.




                         Page 24                                         GAO/NSIAD-99-60 Defense Inventory
                   Appendix III
                   DOD Secondary Inventory Reports




                   Figure III.1: Relationship of the SSIR to the Budget Stratification Records Provided
                   to Us as of September 30, 1997
                   Dollars in billions
                                                                                 83.1
                    90


                    80
                                                                              17.3                                 65.8
                                              64.8
                    70

                                                                               65.8
                    60                      12.8


                    50
                                             52

                    40


                    30


                    20


                    10


                     0                      SSIR                         Revalued SSIR                       Stratification


                                                          Inventory analyzed       Inventory not analyzed
                   Legend
                   Bar 1: SSIR inventory with latest acquisition cost values discounted for repair costs and potential
                   excess. We analyzed about $52 billion of the $64.8 billion of inventory in the SSIR.
                   Bar 2: SSIR inventory valued at full latest acquisition cost was about $83.1 billion. We analyzed about
                   $65.8 billion of the inventory reported in the SSIR at full value.
                   Bar 3: $65.8 billion of inventory in the budget stratification reports provided to us at full value.




DOD Inventory      DOD uses the SSIR to measure the extent it meets its logistics goals for
                   on-hand inventory. In its 1998 Logistics Strategic Plan, DOD set objectives
Reductions as      across a broad range of areas to reduce the total cost of logistics. One of
Measured in SSIR   the guiding principles is that inventories and inventory costs at all echelons
                   will be established at the minimal levels that are required to meet customer-
                   driven support objectives. Specifically, it set a goal to reduce secondary




                   Page 25                                                           GAO/NSIAD-99-60 Defense Inventory
Appendix III
DOD Secondary Inventory Reports




inventory by $3 billion per year from September 1996 to September 1997.
DOD set this goal in fiscal year 1995 constant dollars to remove the impact
of inflation.

The SSIR showed that DOD exceeded its goal by reducing its secondary
item inventory by $4.7 billion in fiscal year 1995 constant dollars
($3.7 billion in current-year dollars) from September 30, 1996, to
September 30, 1997. DOD reported that (1) some inventory reductions
were made using a number of better business practices, such as direct
vendor deliveries; (2) demand for items decreased as the force structure
was reduced; (3) inventory was held for shorter periods in retention
categories before being transferred to disposal; and (4) less inventory was
bought with smaller budgets. A DOD official also told us that much of the
reductions prior to fiscal year 1996 were based on reduced demands from a
smaller force structure. However, starting in fiscal year 1996, the
reductions must be made by changing the criteria for buying or retaining
stock or through reduced budgets.

About 60 percent of DOD’s inventory value exceeds current requirements
(requirements objective) using the latest acquisition cost. About
50 percent exceeds current requirements, assuming the reduced costs
shown in the SSIR.

The following table shows the change in inventory value by service for
September 1996 and September 1997 in fiscal year 1995 constant dollars.



Table III.1: DOD Reduces Secondary Inventory—Fiscal Year 1995 Constant Dollars

Values in billions
Component                         Sept. 1996      Sept. 1997            Change
Army                                  $10.6           $10.1                ($.5)
Navy                                    18.0            16.3               (1.7)
Air Force                               28.8            26.3               (2.5)
DLA                                      9.4             9.5                 0.1
Marine Corps                             0.5             0.4               (0.1)
Total                                 $67.3           $62.6               ($4.7)

According to the accomplishments section of the DOD 1998 Logistics
Strategic Plan, the Navy reduced its inventory by $1.7 billion by decreasing
safety levels and retention levels, transferring some consumable items to



Page 26                                        GAO/NSIAD-99-60 Defense Inventory
Appendix III
DOD Secondary Inventory Reports




DLA for management, implementing management improvements such as
direct vendor deliveries, and taking other budget reductions. The Air Force
made a significant reduction of $2.5 billion by changing its inventory
retention criteria in calculating the amount of inventory it considers more
economic to retain than surplus from 13 years to 8 years and by reducing
war reserves and other changes. The other services did not make
significant reductions. DLA officials said they made $1.2 billion in
reductions that were offset by $1.3 billion in transfers from the military
services.

The SSIR is published with values in current-year dollars. The following
table, as shown in the September 30, 1997, report, shows a $3.7-billion
reduction in current-year dollars.



Table III.2: DOD Reduces Secondary Inventory—Current-Year Dollars

Values in billions
Component                             Sept. 1996     Sept. 1997             Change
Army                                      $10.8           $10.5                ($.3)
Navy                                        18.3           16.8                (1.5)
Air Force                                   29.3           27.2                (2.1)
DLA                                          9.5            9.8                  0.3
Marine Corps                                 0.5            0.4                (0.1)
Total                                     $68.5a         $64.8a               ($3.7)
a
    Numbers do not add due to rounding.




Page 27                                            GAO/NSIAD-99-60 Defense Inventory
Appendix IV

Comments From the Department of Defense                      AppeV
                                                                 nx
                                                                  Idi




              Page 28        GAO/NSIAD-99-60 Defense Inventory
Appendix IV
Comments From the Department of Defense




Page 29                                   GAO/NSIAD-99-60 Defense Inventory
Appendix V

Major Contributors to This Report                                        AppenV
                                                                              x
                                                                              di




National Security and   Charles Patton
                        James Murphy
International Affairs
Division, Washington,
D.C.

Kansas City Field       Gary Billen
                        Leonard Hill
Office                  Robert Sommer
                        Michael Buell




                        Page 30          GAO/NSIAD-99-60 Defense Inventory
Page 31   GAO/NSIAD-99-60 Defense Inventory
Related GAO Products


                   High-Risk Series: An Update (GAO/HR-99-1, Jan. 1999).

                   Major Management Challenges and Program Risks: Department of Defense
                   (GAO/OGC-99-4, Jan. 1999).

                   Inventory Management: More Information Needed to Assess DLA’s Best
                   Practices Initiatives (GAO/NSIAD-98-218, Sept. 2, 1998).

                   Defense Inventory: Action Needed to Avoid Inappropriate Sales of Surplus
                   Parts (GAO/NSIAD-98-182, Aug. 3, 1998).

                   Navy Inventory Management: Improvements Needed to Prevent Excess
                   Purchases (GAO/NSIAD-98-86, Apr. 30, 1998).

                   Inventory Management: DOD Can Build on Progress by Using Best
                   Practices for Reparable Parts (GAO/NSIAD-98-97, Feb. 27, 1998).

                   Department of Defense In-Transit Inventory (GAO/NSIAD-98-80R,
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                   Defense Inventory Management: Expanding Use of Best Practices for
                   Hardware Items Can Reduce Logistics Costs (GAO/NSIAD-98-47,
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                   Defense Inventory: Inadequate Controls Over Air Force Suspended Stocks
                   (GAO/NSIAD-98-29, Dec. 22, 1997).

                   Defense Inventory: Management of Surplus Usable Aircraft Parts Can Be
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                   1998 DOD Budget: Operation and Maintenance Program
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                   Inventory Management: The Army Could Reduce Logistics Costs for
                   Aviation Parts by Adopting Best Practices (GAO/NSIAD-97-82,
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                   Defense Logistics: Much of the Inventory Exceeds Current Needs
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                   Defense Inventory: Spare and Repair Parts Inventory Costs Can Be
                   Reduced (GAO/NSIAD-97-47, Jan. 17, 1997).



(709307)   Leter   Page 32                                    GAO/NSIAD-99-60 Defense Inventory
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