oversight

Defense Inventory: Problems in Managing Secondary Items

Published by the Government Accountability Office on 1990-03-06.

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

                         United States General Accounting Office              /f   B g 3 7
‘- G.0                 _’ Testimgny


                                                                                   111111
                                                                                     II11
                                                                                    140839

   Fbr Release   on       DEFENSE. IN'VE.NTORyi,         Problems        in
   Delivery               Managing   Seco.ridary       Items
   Expected   at
   3:30 a.m. EST
   March 6, 1990




                          Statement       of
                          Frank     C.   Conahan
                          Assistant       Comptroller       General
                          National       Security     and   International          Affairs
                             Division

                          Before    the
                          Committee      on Governmental            Affairs
                          United    States   Senate




   GAO/T-NSIAD-90-19
                                                                                    GAO Form 160 WWW
I am pleased to be here today to discuss the military               services'   and
the Defense Logistics       Agency's (DLA) management of their           supply
systems.      We discussed   some problems associated        with these systems
at a hearing before this Committee in 1987.              Although   the
Department of Defense (DOD) has recently            undertaken    important
initiatives      aimed at correcting      the problems,   I am sorry to report
that we do not see a great deal of progress.              Indeed, since we- last
testified,     problems have increased       to the point where we have
identified     the defense supply system as 1 of 14 federal           programs
that are highly vulnerable         to fraud,   mismanagement, and abuse.        You
may recall,      for example, that we expressed concern in 1987 that $30
billion     of DOD's inventory     consisted   of items for which there was
no current     requirement.    Now that figure      has qrown to $34 billion.

 Because of the limited     progress,    we will place increased    emphasis
 over the next couple of years on solving         the long-standing   problems
 in the defense supply system.        Even though we do not have all the
 answers, we believe    our efforts    to date show that the way for DOD
 to correct  the problems is through top management leadership,
.commitment,   and a specific    agenda for improvement.       I am
 encouraged by the logistics-related        defense management initiatives,
 and I have recently    met with Deputy Secretary       Atwood and we agreed
 to keep each other informed as the initiatives          proceed.

With this overview,    I will now turn to a discussion   of some
specific  problems we have identified    in the work you requested on
inventory  growth,  inventory  management practices,   and what we see
as the underlying   management problems in the defense supply system.

SIGNIFICANT INVENTORY GROWTH
IN SECONDARYITEMS SINCE 1986

The tetal value of DOD's inventory   increased  by $60 billion    from
1980 to September  1988, for a new total   of $103 billion,    as shown
                                       1
in the first         chart.    DOD stores supplies        for future   wars and 24
months or more of peacetime operations.                  These are referred      to as
required       stocks.      Unrequired   stocks are those supplies         which are
above required         needs.     We found that both required         and unrequired
stocks are being held for long term use.                   Over 90 percent of DOD's
increase        in inventory    occurred    in the three areas that are the
highest      bars on the second chart:            (1) aircraft     components and          .
parts,      (2) ship and submarine parts,            and (3) construction,
industrial,         and general supplies.         The third    chart shows that,       as
of September 30, 1988, S34 billion                of DOD's inventory     was in
unrequired        items, a 233-percent        increase   since 1980.     In addition
to the costs of this inventory,               there are costs associated        with
holding      it, and much of it is also likely              to become obsolete,      lost,
or stolen.

Althouqh     we found no dominant reason that caused inventory        growth,
we believe      the growth results    from a tendency to stock far into the
future.      This is fostered     by a management philosophy   that rewards
obligating      funds and filling    orders.   There is no correspondinq
emphasis     on economy or efficiency.       I would like to present some
examples     of this from our recent work.

--    The Air Force's    required   inventory  to satisfy    the need for
      aircraft   parts beyond the current     year has grown more than                   any
      other category.     It grew from $1.3 billion       in 1980 to $6.6
      billion  in 1988 and is now one-third       of the Air Force's
      aircraft   parts requirement.

--    DOD and the      Air Force plan changes in inventory     reporting
      procedures      which may reduce the visibility    of unrequired
      stock,   and    thereby mask problems.     This would allow them to
      reduce their       terminations of orders of unneeded items and
      accumulate      more long term stock,   that it can classify      as
      ruequired.


                                            2
--   Because Navy records supporting        past decisions   were
     unavailable       and/or item managers were not sufficiently
     familiar    with items, neither     GAO nor the Navy were able to
     determine    why 54 of 100 sample items had unrequired          stock.
     For example, the Navy had 53 reactor        assemblies   for a sonar
     system.     Fifty     one, valued at about $160,000,   were unrequired.
     Neither,the       item manager nor the branch chief had records or
     knowledge of why the items were in the unrequired            category.

--   Eleven of the 100 items in the Navy sample were not only
     unrequired,     but could have been eliminated               from the inventory
     under Defense Inactive            Item Program criteria.          Another 57
     items had little        potential       for future    use.     The 57 items
     either    had no users, no demands in the past 2 years, no
     forecast    demands, or were being replaced.                 The Navy is
     spending millions        of dollars        annually   to store and manage many
     items that may never be used.                We believe    this is partly     due
     to overly    restrictive       criteria      that must be met before an item
     manager can consider         eliminatinq        an item from the inventory.
     In this case DOD and the Navy agree and are adjusting                     the
     criteria.

     We noted cases where the requisition        process was not stopped
     even though managers were notified        before a contract    was let
     that the items were not needed.         For example, as of September
     30, 1988, DLA reported     over $471 million      of excess material   on
     order at five of its supply centers.          Management procedures
     exist    for identifying  and cancelling     these orders,  but actions
     were often not taken to cancel them.          Managers frequently
     believed     there may be some use for them in the future.

--   At one of DLA's centers,       the Construction  Supply Center,
     contracts   fallinq   below $25,000 were not even considered     for
     $ermination    due to excess orders.      This excluded 98.5 percent
     of the center's     contracts.
                                        3
Attachments      to my statement       contain     additional     examples of these
types of problems.          These attachments        are summaries of the three
reports    that are being released           today and of work we have underway
at your request.         I would like to add that the problem may be
greater    than indicated       by the reported        $34 billion      of unrequired
inventory.       There are indications          from our work 'that portions'of
the $69 billion        of inventory     shown in the fourth           chart that DOD
identifies      as required     may be based on faulty           requirements.      We
have found numerous cases where DOD added or is planning                       to add
unnecessary      requirements.        For example, the Air Force is
considering      adding another year of requirements                to its
requirements       computations     to reduce the number of orders it would
have to cancel,       with the added effect          of reducing       the amount of
inventory     reported    as unrequired.          As you asked, we are doing more
work to analyze DOD's required             inventories.

CORRECTING THE PROBLEMS

Now let me turn to what we see as some necessary                steps   to
correcting the problems I have been discussing.

Fundamental to this process is strong            leadership and a change in
management philosophy.    A key element          is a management agenda that
places a greater   value on economy and          efficiency than exists today.
The agenda should include a number of            items.

me
      A commitment is needed to update the supply system                 and take
      advantage of management innovations and technologies                 that have
      taken place over the last 10 years.

--    Accurate and useful management information           should be available
      to managers.       Inaccurate   inventory  records,    coupled with poor
      physical    security,    make DOD's inventories     highly   vulnerable  to
      theft,   diversions,     and other abuses.     The Comptroller
                                         4
      General's  recent testimony before this Committee on problems
      in DOD financial  management systems is one illustration  of the
      need for improvement.

      Management incentives       should discourage         buying unnecessary
      inventory.     Our inventory       growth work showed that buying large
      quantities    of future    stock is very risky.           However, changing
      this propensity     to buy-large       amounts of inventory        will require
      a change in management philosophy.               DOD's supply system
      responds to the operational           imperative    to fill    orders within    a
      specific   time frame and to obligate            the funds allocated     to the
      supply mission.      However, a corresponding           emphasis on reducing
      costs and promoting      economy and efficiency           is lacking.    DOD
      needs to change its mind-set           and introduce      a new culture    into
      the way it manages its supply system.               This means both
      requiring    and rewarding     efficient      management practices      while
      satisfying    customer demands.

--    Annual goals must be established       for reducing existing
      inventory    to minimize  the system’s    overall  vulnerability to
      fraud,    waste, and abuse.   The sheer size of the inventory
      complicates     the management of an already cumbersome system.

These are a few of our broad ideas and require                    the commitment and
involvement       of senior defense managers and executives.                  The
specific     problem areas we have identified              in DOD's supply system
cover a wide range of issues,             including     inventory     growth,
inaccurate       records,  physical      security,    outdated      computer systems,
inadequate       control  over material        and equipment furnished         to
government contractors,           overflowing      warehouses,      and unnecessary
levels of inventory.           I must reiterate       that DOD and services        have
recently     undertaken    initiatives       that appear to be steps in the
right    direction.



                                           5
We   will  be issuing   a report in the next couple of weeks to,the
Secretary     of Defense which summarizes the results     of our large body
of work on defense inventory       management.  We hope it will     help DOD
plan its approach to reforming       the supply system.    We believe    it
will    complement the Defense Management Report initiatives        and, as I
said at the outset,      we will be working with DOD as implementation
progresses.      I will  be happy to answer any.questions    you might
have.




                                     6
ATTACHMENT I                                                            ATTACHMENT I
                        GROWTHIN UNREQUIRED AIR FORCE
                           AND NAVY AIRCRAFT PARTS

Principal      items include        such items'as      aircraft     and ships,    and
secondary      items include        such minor end items as compressors and
turbines     and repair      parts.      DOD cateqorizes        its secondary
inventories       into six classifications.             Two represent      current
requirements,        that is, required        stocks held to meet war reserve and
peacetime      operatins     requirements       over a 24-month period.           The
remaininq      four represent        unrequired     inventory--stocks       that are not
needed to meet current           requirements       but are held, in most cases, to
satisfy     potential     future     reauirements      and possible     continqencies.

DOD‘s inventory        of aircraft    parts qrew from $17.3 billion      in 1980
to $53.6 billion         in 1988.   Some the increase     was due to unrequired
stock.      We identified      (1) the current    and past causes for qrowth in
unrequired     stock,      (2) DOD actions   that could minimize    qrowth in
unreauired     stock in the future,        and (3) qrowth in required      stock
inventories      that are not needed for wartime or current-year
operations.

The inventory     of unreauired      aircraft  parts has increased      at     a
faster   rate than reauired      stocks.      The Air Force's    required        stock
qrew 179 percent and the unrequired           stock qrew 295 percent,          from $2
billion    in March 1980 to $7.9 billion         in 1988.   The Navy's       required      '
stock grew 151 percent,        and the unrequired     stock qrew about         240
percent,     from $1.5 billion     in 1980 to $5.1 billion     in 1987.

Amonq the major causes of unreauired           inventory  qrowth for aircraft
items, we found procurement      management practices        contributed  to
growth in unrequired    stock.    Moreover,       some DOD and Air Force
initiatives  to improve their      reports     could reduce visibility    over
unrequired  stock and, consequently,          mask the need for management
atte,ntion.  Furthermore,    required      stocks held to meet other than
                                          7
ATTACHMENT I                                                           ATTACHMENT I
current-year      requirements   have grown significantly         and are more
likely    to become obsolete     or experience  declining        demand before
they.are     needed.

Direct   Causes for    Unrequired    Stock

Our evaluation      of the growth in the unrequired           inventories   of 51
judgmentally      selected     secondary aircraft    items showed that the most
common causes for the growth were overestimated                 use rates and
modifications      of aircraft      and equipment.     Other contributing
factors    included    faster    than expected phase-out       of older aircraft
and decreasing      war reserve and safety level requirements.              Some of
these factors      have been the subject       of prior    reports    by GAO and
DOD.

Procurement   Practices     Contribute
to Unrequired   Stock

We examined 36 items which had recent contracts               for replenishment
buys where on-order      quantities     were later   identified      for potential
termination      because they were excess to requirements.              Air Force
guidance tended to discourage         terminations.       Also, the lack of an
effective     process to identify     and act on potential        terminations     at
one of the Navy's inventory         control   points   also impeded
terminations.

For five items the Air Force procured and received           the materials
sooner than required.      This practice     results in premature     inventory
investment    and unnecessary   holding    costs and increased   risks that
material   might become obsolete      before it is used.

The Navy procured three consumable items in excess of requirements
using DOD's technique   for determining   the purchase quantity that
will  result in the lowest total    cost.  We have previously
                                    8
ATTACHMENT I                                                              ATTACHMENTI
recommended that the Navy stop its practice       of buying more than
that quantity  without   specific  justification   because it contributes
to the Navy's unrequired    stock.    DOD, however, disagreed.

Reporting Changes Impede Efforts
to Reduce Unrequired Stock

Some Air Force and DOD inventory             reporting   initiatives       may
aggravate     problems with unrequired          stocks.    The Air Force
temporarily      authorized     adding items to stock requirements              and
therefore     on-order     material   that should have been reported             as
unneeded was not reported.            It is also considering         adding an
additional     year of requirements        to its system for determining
requirements.        Similarly,     DOD proposed adding a year of
requirements      to its reporting       system, and also requirements             for
purchases to obtain discounts            or ensure parts for the life            of a
system.     According      to DOD and Air Force representatives,              the
actions    are intended to recognize          that obtaining       unrequired     assets
can be in the government's           best interest.

Identifying      the reasons for buying unrequired   stocks can help
prevent unnecessary growth.        However, the above changes to
reporting    criteria    would mask the extent of growth.    They could
also reduce the quantities       of unneeded orders eligible   for
termination.

Increases in Air Force Required Stock
Could Cause More Unrequired  Stock

The growth in the Air Force's required        stock held to meet peacetime
requirements    beyond the current    year may result     in continued   high
levels   of unrequired   stocks.   High levels    increase   the risk of
reduced demand or obsolescence      because requirements      may decline
when end items are phased out or Are modified.            The inventory
                                      9
ATTACHMENT I                                                      ATTACHMENTI
available      to satisfy    requirements    beyond the current   year has grown
more than      other requirements--     from $1.3 billion   in 1980 to $6.6
billion   in     1988.    One-third   of the Air Force's required     inventory
is excess      to wartime or current       year operations.     _

Many of the problems contributing        to unrequired inventories      have
also contributed      to inventory  growth in required   stocks beyond
current-year     needs.   Such items could become unrequired       inventory.




                                       10'
ATTACHMENT II                                                      ATTACHMENTII


             GROWTHIN UNREQUIRED SHIP AND SUBMARINE PARTS

The Navy's inventory        of ship and submarine parts increased          by 249
percent,    from about $2.7 billion         in 1980 to about $9.3 billion      in
1988.    This attachment       identifies     (1) the major causes for
unrequired     inventory,     (2) opportunities       to minimize growth in
unrequired     stock,    and (3) inventory       with little   potential for
future   use.

Under the Defense Inactive      Item Program, the Navy reviews its
inventory   once a year to identify     inactive items for possible
elimination    from the inventory.    Items are identified       as inactive
when they have (1) been on the master data file         for 7 years,      (2)
had no demand in the last 2 years7 (3) no current          requirement,      and
(4) no current     application.

In 1988, 40 percent       ($3.7 billion)     of the Navy's inventory       of ship
and submarine parts was unrequired.             We sampled the 183,000 items
that include     such stocks and found that the major causes for the
unrequired    inventory    were requirements      that did not materialize,
deactivation     of older ships,      and replacement      and phasing out of
equipment.      However, we could not determine          why unrequired
inventory    exists   for over half the sample items, since (1)
documents justifying       past procurement      decisions     are not available,
(2) the Navy has no record of events affecting               the demand for these
items, and (3) sometimes        the managers     are not familiar     with the
procurement     or demand history      of their   items.


Unrequired   inventory  can be minimized by ensuring   that items being
replaced   or phased out are not purchased or repaired     unnecessarily.

We esCimate that 109,000 ship and submarine .parts which have
unrequired  inventory have little potential for future  use because
                                       11
ATTACHMENT II                                                         ATTACHMENTII
the items have no users, past demands, or forecast         demands.    These
parts meet some, but not all four of the DOD's criteria         for being
considered  for elimination   from the inventory.    We believe     the
requirement   to meet all four criteria   is too restrictive.

We also estimate    that another 31,000 ship and submarine items for
which the Navy has unrequired       stocks meet current     Defense Inactive
Item Program criteria      for possible   elimination   from the inventory,
but few items are being considered.          The Navy's last inactive     item
review eliminated     about 1,500 items and a special       project
eliminated   another 3,200 items.

We estimate that the Navy is spending $24 million annually   to
store and manage these 140,000 items which may be of no use.

REASONS FOR UNREQUIRED STOCK

We identified      the causes of unrequired         inventory   for 45 of 100
randomly chosen items.        We could not determine          why an additional
54 sample items had unrequired           inventory     (one item was determined
not to have unrequired       inventory).        Either   records were not
available     or item managers were not sufficiently            familiar   with the
54 items to explain      why the items had'unrequired           inventory.

Based on its sample,. we estimate           that about $900 million        of the
unrequired   inventory    resulted      from requirements      that changed.
Reasons for the changes included            planned program requirements         and
demands that changed or did not materialize.                We also estimate
that about $1.7 billion       of unrequired       inventory   resulted     from the
Navy's fleet    modernization      efforts,     which included     replacing   and
phasing out equipment and deactivating              ships.

We estimate     that the Navy would not be able to explain   why about
$1.2  billion    worth of the inventory was unrequired.    The Navy does
                                         12
ATTACHMENT II                                                            ATTACHMENTII
not require     item managers to keep records justifying          purchase
decisions     beyond when the material     is received.       In addition,   many
item managers have been responsible          for their   items Cnr only a
short period of time.      As a result,      information    is not available    to
identify    the basis for past purchases or to identify           events
causing items to have unrequired        inventory.

We believe  that the lack of information       can hinder item managers
in that they are not aware of why items were purchased,        why the
items have unrequired     inventory,   or even why the items are being
retained.   Having such information      could help item managers to                    .
recognize  causal factors     and thus minimize   the purchase of items
that could become unneeded, and would help them to decide which
items should be retained.

MINIMIZING     UNREQUIRED INVENTORY

We found that the Navy does not systematically            notify   inventory
control    points   that items are being replaced or phased out.             Even
when notified,      inventory     records often contained    no information     to
alert   the responsible       item managers that items are being replaced
or phased out.       We believe      that procedures to disseminate     and
record data on items being phased out are necessary to keep
unrequired     inventory-to      a minimum.

The purchase of one sample item was finalized        after  the inventory
control   point was notified    that the item was obsolete.      We believe
that terminating    that contract    effort before the contract    was
finalized    would have avoided acquiring    unneeded inventory.

INACTIVE ITEMS

In   1988,   the Navy only   eliminated        about   1,500   items   under   the

                                          13
ATTACHMENT II                                                       ATTACHMENTII
Defense    Inactive   Item   Program and another    3,200   under   a special
project.

Our sample included     57 items that did not meet all four DOD
criteria    for being considered    inactive      for elimination,      but had one
or more characteristics      that indicate     little     potential   for future
use.     For example, 15 items had no users, 45 items had no demands
in the past 2 years, and 33 items had no forecast                demands.     We
estimate    that of the 183,000-item      population,      about 109,000 items,
valued at S2.3 billion     could be evaluated         for elimination      if items
did not have to meet all four criteria           to be considered       inactive.

We found that 11 sample items met all four DOD criteria             for    being
classified     inactive   and should be considered    for elimination       from
the inventory.        We estimate  that an additional    31,000 items      should
be considered      under existing    criteria.

Based on DOD cost estimates,     we estimate  that it costs          the Navy
$24 million     to store and manage items that meet criteria             to be
considered    for elimination  and that could be considered            if fewer
criteria    were required.




                                       14
'ATTACHMENT III                                                      ATTACHMENT'III


                         DLA SUPPLY MANAGEMENTISSUES

Our work at DLA addressed issues which can contribute        to inventory
qrowth in excess of reauirements.         We have issued our report on
excess materiel     on order,   and our work is almost complete on the
Diminishins   Manufacturinq     Sources Proqram, customer returns,        .
procurement   leadtimes,     and items for which status  is unknown.

DLA EXCESS ON ORDER

To avoid buying unneeded supplies,                 DLA's computer system
 identifies     items for possible          termination    that are on order but,
based on current          information,      may no lonqer be needed.       When the
computer identifies            items that are potentially        excess, item
managers are to review the computer data and, if appropriate,
direct      the contractinq        officer    to terminate    the contract   if no
costs are involved.              If termination      costs are involved,   the
contractinq       officer      is to obtain     the costs from the contractor.
Then item managers are to evaluate                 the costs and determine      if
terminating       the contract        or reducinq     the order is in the
qovernment's        best interest.

Item Manaqers Make Few
Termination  Recommendations

Based on our random sample at three supply centers,               we estimate
that from a universe       of $683.1 million,       the value of excess
materiel     on order for contracts       over $5,000 was between $204
million    and $449.1 million.       For 'these contracts,     item manaqers
requested     terminations   valued at only $49.9 million.          We found that
these supply centers       purposely    avoided making some additional
terminations.        For example, if the Construction        Supply Center had
adopted a S5,000-threshold        similar     to other supply centers,     the
                                         15
ATTACHMENT III                                                               ATTACHMENT III
Center would have considered               an additional      879 contracts       valued     at
$8.5 million for termination.

We also found instances            when item manaqers questioned             requirements
but recomputed reauirements             usinq incorrect       data.      In these cases,
supervisors      either     did not review or chanqe the item manager's
decision.       These cases resulted           in a l-year     to 33-year oversupply
of such items as solenoid            valves,      hospital   gowns, women's dress
shirts,      and utility     trousers.       Item manaqers also simply increased
requirements      to stop the computer from reportinq                 items as beinq
excess and on order.            For example, the item manaqer increased
reauirements      for fire retardant           shirts    to avoid computer
identification         of the item as excess.            Consequently,     the supply
center purchased a 7-year supply of shirts                   valued at S8.7 million.

Contracts Not Terminated            When
Some Costs are Involved

Durinq the last half of fiscal                 year 1988, the six supply centers
reported     terminated       contracts      valued at $65.8 million,            even thouqh
item manaqers requested             that $253 million          in excess materiel         be
terminated.        The low termination            rate is attributed         in larqe part
to the practice          of not terminatinq          contracts     when costs are
involved.        Contractinq      officers      are not providinq         information      on
estimated      termination       cost to item manaqers.              For example, in May
1988, the aircraft           yoke subassembly item manaqer recommended to the
contractinq       officer     that 586 subassemblies            valued at $251,980         be
terminated.        The contracting         officer     took no action on this
recommendation         because (1) the contract             administrator       was
negotiating       a delivery      extension      and (2) the contractor           would not
accept a no-cost          termination.         However, another option           existed.
The contract       may have been terminated              without    cost to the U.S.
qovernment because the contractor                  could not meet the delivery             terms
of fhe contract.           The unneeded subassemblies              represented      almost a
lo-year     supply.
                                             16
ATTACHMENT III                                                     ATTACHMENT III


Neither    DOD nor DLA has developed        adeauate quidance for item
managers to follow       when evaluatina     the economics of contract
terminations.        Item manaqers need to consider       such factors      as
amount    of termination    cost, the degree unneeded items exceed actual
reeuirements,      the cost of the items, and the storaqe         cost    for
accept ina unneeded items.        Until   item manaqers'consider       these
factors     in doinq cost benefit     analysis,    supply centers    will
continue      to purchase items not in the government's        best interest.

DIMINISHING MANUFACTURINGSOURCES
AND MATERIEL SHORTAGESPROGRAM.

DOD’s     proqram objectives     are to (1) minimize      the impact of
diminishing       sources parts,    (2) improve operational      readiness    by
 identifyins      and implementins     the most effective    solutions     to
diminishing       sources problems,      (3) ensure such parts are not
desiqned      into new systems, and (4) develop procedures            to ensure an
integrated       approach to improve responsiveness        to diminishing
sources situations.         Each DOD component was to set up focal points
to implement the DOD policy.

DOD's solutions     to minimize the impact of parts non-availability
include   encouraqinq     the existing    source to continue      production,
findinq    another source, substitutinq        a part,  redesiqninq     or
replacins    the item on which the part is used, and makins life-of-
type buys (one-time       buys for the total     future   requirement     of parts
only after     all cost-effective      and prudent alternatives       have been
exhausted).

When a life-of-type        buy is the only alternative      available   to a
diminishins      supply   situation,  DLA requests   the   services   to provide
future    requirements      for the part.  The services     do not always
    *
                                        17
ATTACHMENT III                                                    ATTACHMENT III
provide adeauate information.         Conseauently,    DLA buys based on past
demands which does not ensure        proper quantities    are bouqht.

DLA used various   ways to calculate     life-of-type       buy auantities.
Some of these methods overstated      the needs and resulted         in too much
stock beinq bouqht.    From a random sample, we found that for 122
buys the Defense Electronics     Supply Center made, it had an average
of about a 58-year supply on hand.         Much of this stock is
potentially  excess and may never be used.            Attachment  IV shows
years of stock on hand that is manaqed by the center.

Procurement    Leadtimes

Overstated      leadtimes  can cause increased    investment    for larqer
inventories,       qreater chances of buyinq excess materiel,        and
increased     termination   costs if reauirements     chanqe.     Understated
leadtimes    can cause shortaqes      of needed supplies,     which could
affect    the operational    readiness   of weapon systems or their
components.

As of September 30, 1989, the averaqe procurement       leadtimes   for DLA
supply centers  ranqed from 4 to 17 months.     This reauired     DLA to
maintain on-hand and on-order   inventory levels    valued at about $5.4
billion.

Our preliminary     results indicate   that DLA has not implemented
controls   adequate to manaqe and minimize      procurement   leadtimes   as
directed   by the DOD. Our sample items at the two supply centers
had leadtimes    that were either    overstated  or understated,     thus
increasinq    the risk of buyinq too much or-too      little  stock.

Even thouqh DLA has taken measures to reduce the time it takes to
award contracts,   it has not tried     to reduce production    and delivery
times by obtaininq    the best delivery    dates from contractors.
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ATTACHMENT III                                                            ATTACHMENT III
Production       and delivery     times   account     for   60 percent    of   total
procurement       leadtime.

Materiel      Returns

Customer     returns     to DLA, excludina       fuel and subsistence          items,
totaled    S3.1 billion        for fiscal'years      1981 throuqh      1988 and
averased about 8.5 percent of its sales.                   For the same period,.
DLA's total       inventory      increased   $5.7 billion,     from 53.1 billion          to
$8.8 billion,        or about 184 percent.          Stocks excess to its current
operations      and war reserve needs more than tripled                from Sl billion
to $3.5 billion.          However, there is no way to determine                how much
materiel    returns      contributed      to DLA's inventory      qrowth and excess
materiel    because     of the high number of transactions               involved     and
the inability        of the inventory       and accountinq     systems      to provide
such data.

DLA and the services        have implemented and have underway numerous
initiatives      to avoid excess and reduce returns.        The initiatives
are desiqned to reduce not only the returns            but also  excess
materiel.      In addition,    the services    have proqrams to improve their
internal    redistribution     procedures   for excess materiel.

We do not plan to make recommendations            on materiel returns,  because
(1) the services'     corrective     actions   are too new to evaluate    their
impact on returns     to DLA and (2) the September 1989 DOD Inspector
General's   report   contains    recommendations,     which if implemented,
would reauire     a DOD returns     proaram manaqed by the wholesale
inventory  manaqers,     which includes      DLA.

Stock      of Unknown Status

Stocks that      cannot be issued because           their     condition     is unknown do
notucontribute      to military  capability          but    still    result    in holding
                                            19
ATTACHMENT III                                                                 ATTACHMENT III
costs.     Also, DLA and the military        services    may purchase new items
when items on hand could have filled             their needs.    Consequently,
DOD has set deadlines         for resolvinq    the status of such stock.
Resolution     consists    of determininq    the condition     of the items and
deciding    on their    disposition,     such as placinq    them in inventories
of usable items or disposinq          of them.

 Our preliminary          tests     indicate    that many items remain in an unknown
 status    long past mandated deadlines.                  Inventory       policies     and
 procedures        may not be fully          adeuuate to ensure timely             resolution    of
 these suspensions,           nor to ensure the use of such items once their
 status    has been resolved.              For example, defense policies               and their
 implementation         instructions         do not address orqanizational
'responsibilities,           criteria      for assiqninq       status codes, or priority
 for reduction        of such stock.           We did not find procedures              to ensure
 followins      up on stock that has been suspended for a lonq time.
 Instead,      each activity          is directed    to develop its own quidance for
 such matters.         At the activities           we visited,       preliminary
 indications        were that local quidance was sometimes weak, and in
 some cases none had been prepared.

We will     report    our   final    results     to you when our         work is complete.




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                ATTACHMENT IV                                                                            ATTACHMENT IV
                                   YEARS OF DIMINISHING MANUFACTURINGSOURCES
                             STOCK MANAGEDBY THE DEFENSE ELECTRONICS SUPPLY CENTER
                                               AS OF JUNE 25, 1988
                      Years of               Number            Percent                                        Percent
                  stock on hand              of parts          of tota.               Total     assets       .of total
                          0       .-            662                9.51           S      107,692.94             0.04
                         TO 1.0
                        .l                      373                 5.36             2,061,399.18               0.68
                      1.1TO 2.0                 310                4.45              2,0.47,695.48              0.68
                     2.1 TO 3.0                 330                4.74              2,728,920.37               0.90
                      3.1TO 4.0                 243                 3.49             2,336,119.60               0.77
                     4.1 TO 5.0                 244                3.50              4,590,229.03                1.52
                     5.1'TO 7.5                 512                7.35            24,369,325.25                8.05
                     7.6 TO 10.0                468                6.72            31,558,508.57               10.42
                    10.1 TO 25.0             1,525                21.90           102,229,876.30               33.76
                   25.1  TO 50.0                913               13.11            55,753,763.84               18.41
                   50.1  TO 100.0               625                8.97            34,826,032.09               11.50
                  100.1  TO 200.0               374                5.37            15,275,239.34                5.04
                  200.1  TO 300.0               139                2.00              5,386,252.34                1.78
                  300.1  TO 700.0               157                2.25              8,662,441.22               2.86
                 700.1   TO 900.0                 27               0.39              2,979,450.14               0.98
                 900.1   TO 1000                  10               0.14                 411,475.43              0.14
                1000.1   TO 1500                  24               0.34              1,674,819.25               0.55
                1500.1   TO 2000                  11               0.16              1,499,132.54               0.50
                2000.1   TO 3000                  12               0.17              1,479,411.26               0.49
                3000.1   TO 4000                   2               0.03                  136,386.05             0.05
                4000.1   TO 5000                   0               0.00                                  0      0.00
                5000.1   TO 7500                   2               0.03                   338,635.87            0.11
                   .OVER 7500                       la             0.01                2,381,943.28             0.79

                       TOTAL                 6,964             100.00            $302,834,749.37             100.00


                Source:        DMSMS stock   status      report      dated       June 25,        1988.

                aThis part had about a 22-year supply on hand.                                  The Center's
                report was erroneous  because the computer data                               file  did not reflect
                actual demand data for the part.




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