Defense Inventory

Applying Commercial Purchasing Practices Should Help Reduce Supply Costs Gao ID: NSIAD-93-112 August 6, 1993

The Pentagon's materiel inventory--the world's largest--includes spare parts and operating supplies for airplanes, ships, tanks, and other complex weapons systems. This report examines the cost considerations underlying the Defense Department's (DOD) inventory decisions for these items. GAO discusses DOD's inability to buy quantities of secondary items that deliver the lowest total cost for ordering and holding. GAO also identifies commercial inventory practices that have substantially cut supply costs at several private sector firms.

GAO found that: (1) the Air Force does not use the DOD replenishment formula to establish reparable order quantities because it is impracticable; (2) the Defense Logistics Agency (DLA) uses a modified replenishment formula when ordering secondary items because of the formula's cost constraints; (3) the DOD replenishment formula, which is based on the economic order quantity formula, is flawed due to unreliable cost estimates and invalid procedures for determining obsolescence costs; (4) noncost constraints, such as maximum and minimum order limits, limit the use of the DOD replenishment formula and increase ordering costs; (5) the private-sector companies surveyed do not use the economic order quantity formula, since some of its underlying assumptions are invalid and it foregoes possible efficiency gains; (6) the companies successfully use alternative purchasing methods tailored to their operations; (7) three companies are implementing a new logistics system that integrates the efforts of the supplier, distributor, and customer; (8) the success of alternative purchasing methods depends on the cooperation of suppliers and the retraining of employees to maintain lower inventories; (9) two formulas based on economic order quantity principles recognize fluctuations in demand which significantly reduces ordering and holding costs; and (10) DOD is implementing commercial inventory practices to address its inventory problems.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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