Continuing Problems in the Department of Defense's Inventory Management

Published by the Government Accountability Office on 1990-03-28.

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


                               United States General Accounting Of&e                /“/Q 773
    L GAO

        "or   Release           Continuing        Problems     in    the    Department       of
          I Delivery            Defense's        Inventory     Management
        Lxpected      at
        9:30   a.m.      EST
        March    28. 1990

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

                                Before    the
                                Subcommittee     on Readiness
                                Committee     on Armed Services
                                House of Representatives

        GAO/T-;4SIAD-90-26                                                               GAO Form 160 (12187)
Mr. Chairman            and Members of            the     Subcommittee;

I am pleased            to be here        today     to discuss                inventory        management
issues      in    the Department              of Defense          (DOD).          Over the         last      20 years,
we have      issued       more than           100 reports          dealing         with       specific        aspects
and problems            in DOD's inventory              management.                   In fact,      we see the
problems         to be of such magnitude                   that     we have identified                     defense
inventory        management          as 1 of 14 government                      activities          that      are
highly      vulnerable        to mismanagement,                   fraud,        and abuse.

Today,      I will       discuss      some of       the       long-standing               problems         in DOD's
inventory        management,          some of the             fundamental              solutions          to those
problems,        and the possibilities                  for       making        budget        reductions.            DOD
has recently            undertaken       important            initiatives              aimed at correcting
these     problems.          I have met with              Deputy         Secretary            Atwood       to discuss
these     initiatives         and we have agreed                   to stay         in contact             as DOD's
efforts      progress.            Effective        implementation                of     the    initiatives           is
what will        make the difference                and that           will      require         continuing
management         leadership,         commitment,             and follow-through.                        DOD's
track     record        in that      regard      is not        good,
LONG-STANDING PROBLEMS IN                                     DOD’S         INVENTORY MANAGEMENT

This       week we issued                    a report             to the           Secretary          of Defense         that
summarizes               our evaluations                       of DOD's inventory                     management.              The
problem           areas        we identified                    include            growth         in untequired          inventory,
buying           spare        parts         too early,                not     terminating             contracts         for      excess
on-order           material,                duplicative                 inventory           due to multiple               inventory
levels,           inaccurate                records,            inadequate              controls         over     material           and
equipment              furnished                to government                 contractors,              inadequate            physical
security,              lax     controls                over     shipments,              deficiencies             in supply
cataloging,               and computer                   system          delays         and cost         overruns.

The sheer              size         of    the      supply         system           and its         inventory       complicates
its    management                   and increases                 its        vulnerability              to mismanagement,
fraud,           and    abuse.              The following                    are    examples          of the problems                we
and others              have         identified:

1.     DOD's secondary                       inventory,                 such as spare                and repair         parts,
       grew oy 138 percent                              in the          1980s,       while        unrequired           inventory
         increased             by 233 percent.                          As of       September          30,     1988,     about         $34
       billion           of DOD's secondary                             inventory           was in unrequired                  stock,
         i.e.,         stock         that         is    above         requirements             for     current       needs and
       reserves               for        future         wars.           In a report            issued        to you last
       week,           we said            that         the Army's             unrequired             inventory       grew by 168
       percent  between                      1983 and 1988,                    compared           to 96 percent            for       all
       DOD inventories.                            The largest                growth,        in      terms     of dollars,            of

unrequired             inventory             occurred          at    the Aviation                Systems           Command,
one of       the       six        Army buying           commands.              Its      unrequired             inventory
increased            from         $207 million            in    1983 to $804 million                          in    1988.
We found         that         the primary              reasons         the Command’s unrequired
inventory            had increased                 were because             (1)       the Army has continued
to stock        items             for     systems       being        phased          out,       (2) demands
forecasted            for         items     often       did     not materialize,                       and    (3)    the
database        that         computed           requirements               contained             erroneous           data.
We also       found          the Army was not                   reducing             or canceling              planned
procurements                when the           items     were not           needed.              For example,              a
contract        for         149 electronic               actuators,               costing             $259,376,       was
awarded       in February                  1988.        The item           manager           had asked             about
canceling            this         procurement           in November               1987,        but      no action          was
taken      because           procurement               personnel           said       that       the contract              was
already       “out          for     bids.”

We also       reported              this       month     that        (1)    the Air            Force         and Navy
aircraft        parts             inventories           grew from           $17.3           billion          in 1980 to
$53.6      billion           in     1988,       and that            unrequired              aircraft         parts
increased          at a faster                 rate     than        required          parts       and (2)           the
Navy’s      inventory               of ship           and submarine             parts          increased            249
percent       between              1980 and 1988 to $9.3                       billion.                In 1988,       40
percent,        or $3.7             billion,           of the        Navy’s        inventory             of ship          and
submarine          parts           was unrequired.

2.   All     the       services        buy spare           parts         too early           and in amounts                     that
     exceed        current         needs.          For example,                we recently               reported              that
     two Army buying                  commands had initiated                       item          purchases              earlier
     than       they     should        have and also               made purchases                    exceeding
     authorized              requirements.             In August               1989,        we reported                 that      31
     items       with        an estimated           cost      of    $87 million                  procured          by the
     Army Tank-Automotive                      Command had been bought                            prematurely.                    Of
     these       buys,        about      $30 million,              or more than                  34 percent              of     the
     original           purchase         amount,       was no longer                   needed           to meet
     requirements              that      had been projected                     at the           time     the purchases
     were       initiated.             We found        this        practice            is    still        occurring               and
     in February              1990 issued           a letter             to the Army about                      this.           In
     January         1988,      we reported            that        of $1 billion                  in procurement
     actions        made by the             Navy's         Aviation            Supply        Office,            $133.7
     million        had been bought                 that      was excess               to its         needs.             We have
     also      periodically              pointed      out where                the Air           Force     was buying
     items       too early.

3.   Tne services              often      have millions               of dollars                 of excess          material
     on order.               In November           1989,      DOD's Office                  of    the     Inspector
     General         issued        a summary report                 of past        DOD and GAO reports                                on
     excess        on-order           material       for      the Army,           Navy,           and Air          Force.
     These reports                identified         excess         assets        totaling               $1.8      billion.
     We have also              found      cases      where         the     Defense           Logistics             Agency
     (DLA) was not              canceling           purchases            for     unneeded            material.                  As of
     September           30,         1988,        its         supply         centers             reported           $471 million                of
     excess        material              on order.

4.   The services                  returned             about         8.5 percent                 of the material                   they
     bought        from       DLA from              1981 to 1988.                         For     fiscal         years      1985
     through        1989,           we found             that         the services                 spent         about      $1.7
     billion        of       their        operations                  and maintenance                      funds,        excluding
     transportation                  costs,             buying            items         they      did      not    need from              DLA
     which      were         later        returned.

5.   Excess        stock           is purchased                    to supply             unnecessary              multiple
     inventory           levels.                 Item         managers            at one level               often        have not
     reported          all      of       their          excess            items;         consequently,                managers            at
     another        level          bought           items           unnecessarily.                       For example,               in
     January        1990,          we reported                     that     13 Army activities                        had $184
     million        worth           of spare             and repair                    parts      that      were excess              to
     their      needs and had not                             been reported                    to the buying              commands.
     At the        same time,               we found                that         three         Army buying            commands were
     buying        1,669        items        worth             $66.9        million,             which       were the          same
     items      that         were excess                 to needs.                 One retail               level        activity          had
     an inoperable                 M-l      tank         because            it     needed          a tank         turbine           engine
     (unit      price         of     $316,912).                     The unCt had requisitioned                                the        item
     from      a buying            command.                   At    the     same         time,      there        were       18 such
     turbine        engines,              valued              at    $5.7 million,                  excess         at other           retail
     activities.               However,                 because            the buying              command was not                   aware
     of*the        excess          engines,              it        could         not     redistribute               an engine             to

     the    unit       that        needed         it.    DOD agreed               that         a single          integrated
     supply        system          for      the Army would               improve          the efficiency                   of   item
     management,              and when implemented,                       should          reduce         or prevent             such

6.   Inventory           records            are     inaccurate.                For example,              at      two naval
     air    stations,              we recently           found         that       38 and 21 percent,
     respectively,                 of    the      inventory          records        we sampled                  had errors.
     One air          station’s             records      showed an on-hand                       quantity          of      28
     turbine          seals        costing         $760 each.             We counted              20 seals,             or 8
     less      than      the       records         showed.           The air        station             could      not
     explain       the difference.

7.   Control       over        material            and equipment                furnished           to government
     contractors              is    inadequate.                As of      September              1988,        contractors
     reported          to DOD they                had $56.5          billion        of property.                   However,
     contractors’              records            do not,         in many cases,                 adequately             account
     for    this       property,             and DOD and the                   services          currently           have no
     overall       management                or financial             systems            in place          that      could
     independently                 verify         contractor          records.

8.   The physical              security            of DOD’s inventory                     is     lax.         According          to
     an October           1989 DOD physical                       security        master          plan,         military
     installations                 have a high           annual         property           loss         rate.       We have
     issued a number of reports dealing  with lax physical    security.
     For example, in January 1989, we repor ted that security

      personnel           at Clark           Air       Base did          not     take     basic         security
      precautions,               such as controlling                        visitor       entry         and departure
      from      the      supply        compound,             properly          installing           security
      equ,ipment,             properly         inspecting             all      packages          carried           through
      pedestrian              gates,      and repairing                 many large              holes        in the
      perimeter           fence.          We have ongoing                    work       looking         at    the      theft          of
      weapon parts               in    New    York and military                       equipment,             such as F-16
      engines,           in Utah.

9.    Controls          over      inventory             in transit             between          locations             are      lax.
      In July          1988,      we reported                that     supply          depots      did        not      accurately
      report          receipts         and that          DOD could             not     confirm          receipt          for      87
      of    453 shipments                in our         sample.

10.   Supply          items      are     listed         in    the     supply          catalog       two or more
      times.           As a result,               excessive           amounts          of stocks             are      purchased.
      Besides          duplicative            stock,          millions          of dollars              has been spent
      needlessly              to enter        and maintain                  the duplicate               items         in the
      catalog          system.

11.   Development              of computerized                 systems          to support              logistics
      activities              have experienced                 significant               cost     growth           and
      development              delays.            For example,               we reported            in May 1989 that
      the     Naval       Aviation           Logistics              Command Information                      System         had
      increased           in estimated-cost                    by $89 million                   between         1987 and
      1988.        The system             began development                     in 1977 and was to be

         implemented        in    1992.            Program        officials             estimated        that       the
       system       would     be operational                 at     103 of            503 sites       by 1999.


DOD has promised              corrective              actions        in        response       to our
recommendations             in these             areas,      and it            has made some improvements,
such as amending              policies             and procedures                to      increase      inventory

accuracy       by determining                   and correcting                 the cause        of    inventory
inaccuracies.              Such initiatives                  are encouraging,                   but    substantial
problems        in DOD's inventory                    management               remain      because       of     inadequate
follow-up        to make sure              corrective             actions          are     implemented             by the
services       and DLA.

A strong       leadership            commitment             and a change                in management
philosophy          are needed            for      corrective            action.           Another       key element
is a management             agenda         that       places        greater           value     on economy and
efficiency          than    exists         today.           We believe             the     focus      on filling
orders       and obligating               funds       interferes            with        the ability           to
function       in a cost-effective                     manner.            For example,               in July        1986,
the Army Materiel                Command challenged                      the     buying       commands to
obligate       75 percent            of    their        fiscal       year        1987 funds           by March        31,
1987--halfway          through            the      fiscal        year;          In March 1987,            the Command
directed       the buying          commands to initiate                          procurement           before        the
reorder       point    whenever            possible.              According             to Command officials,
they     provided      this       direction            because           DOD had reduced               the      Command's

budget          because          the Command had not                   spent         the      funds      authorized            for
spares          and repair          parts         in prior          years.

We recently               convened         panels           of experts          in    the      logistics         area         from
private           industry,         academia,               and retired          military             flag    officers          and
civilian           government             employees           to comment on what                      they    see as the
main       issues         in DOD logistics.                    These panels                 reinforced         our      view         of
the     need to change                   DOD's corporate               culture         and place             more emphasis
on economy and efficiency                            in DOD's inventory                       management.             They also
cautioned              that      DOD needs         to consider            the        interrelationship                  of
logistics              functions          and look           at the     total         picture          when making
changes.               They were particularly                       concerned          about          the need for
timely,          accurate,          and responsive                  management              information          systems,
and a well-trained                       and motivated              logistics          work      force        to deal          with
logistics              issues      in the         1990s.         DOD needs            to take          advantage         of
private          sector         management           innovation           and technologies                    that      have
taken       place        over      the     last      10 years.

The recent              Defense          Management           Report      emphasis             on streamlining                 is     a
step       in    the     right      direction.                However,          too often             in the     past        good
intentions              have produced              little       change.              With      the     Defense
Management              Report      focusing           on consolidation                    and reducing              costs,
care       needs        to be taken           to ensure             that-the          final      result        is a supply
system          that     operates          smoothly           and efficiently,                  does not         degrade
readiness,              and has substantially                       improved          controls          to prevent
       *                        fraud,      and abuse.


Given      that         there       is        so much unrequired                    inventory,        it     is natural                to
ask where           DOD's budget                  for     inventory             items      can be cut.           This         is a
particularly                  pertinent           question            in view        of    the   recent        events         in       the
Soviet       Union            and Eastern               Europe,           the   likely       reduction         in force
levels,          and the          increasing              warning           time     for     a conventional             war in
Europe.           The question                   of where            to make cuts            seems answerable--
they      should         be across               the board.                We have found          inefficient               and
uneconomical              practices               and unrequired                   inventories        at all         the
services          and DLA.

The question              of how much to cut                          is more difficult               to answer.
Nevertheless,                  unacceptable               practices             and excesses          continue,
despite          past     recommendations                      by us and others.                  Because        of     this           and
changing          world         conditions,               there        would        seem to be little                risk         at
this      time     were         the Congress               to reduce             DOD's budget              request      for
inventory          to force              it      to amend its               practices.           Private        industry
found      that         the     first          step      to reducing               inventory      was to establish
inventory          reduction                  goals.       They worked,                  and inventories             were
reduced.           Though not                  a direct         correlation,               one measure          of how much
DOD's budget              might          be reduced             is     the amount           of excess          items        that
are     on order          at any one time.                        The excess-on-order                    material           for        the
Army a;d          DLA represented                      about      10 percent              of orders         as of
September          30,         1988.           Such orders            continue.             Perhaps         some reduction,

such as 10 percent,      would    encourage     DOD to cost-effectively       manage
its    inventory.

This    concludes   my prepared    statement.       I would   be happy    to answer
any questions.