Defense Inventory

This report examines the cost considerations underlying the Defense Department's (DOD) inventory decisions for secondary items. Through the economic order quantity formula, the cost of ordering and holding secondary items influences the size of individual orders for items with frequent or high demand. The purchase of infrequently used items is based on military need rather than optimum order quantities. In the past, DOD retained secondary item inventory, regardless of its quantity, that pertained to active weapon systems. Recently, DOD revised its policies to encourage disposal of more excess items. As a result, disposals have been increasing. Excess property is sold for a fraction of its value. In fiscal year 1990, DOD sold excess property valued at $9.1 billion for $138.5 million.

GAO found that: (1) through the DOD economic quantity formula, ordering and holding costs influence order quantities; (2) ordering cost includes the costs of determining supply needs, processing purchases, and receiving orders; (3) holding costs include the costs of having funds tied up in inventory, storage, material obsolescence, and inventory losses; (4) an increase in ordering cost or demand causes a larger computed order quantity, while an increase in the holding cost or the replacement price causes a smaller quantity for any given order; (5) in June 1990, DOD revised its policy to retain secondary item inventory, regardless of quantity, that pertained to an active weapons system, to encourage disposal of items that exceeded reasonable quantities; and (6) in fiscal year 1991, DOD sold excess property valued at $9.1 billion for $138.5 million.