Inventory Management

GAO has included defense inventory management in its list of 25 government programs at high risk for waste, fraud, abuse, and mismanagement. (See GAO/HR-97-5, Feb. 1997.) This testimony focuses on the Defense Department's (DOD) management of consumable items, which represent $18.7 billion, or 27 percent, of the total secondary inventory dollar value. GAO discusses (1) DOD's success in using prime-vendor-type programs for medical, food, and clothing; (2) the feasibility of using prime vendor systems for hardware, such as bearings, valves, and bolts; and (3) recently introduced legislation that seeks to strengthen DOD's inventory management practices.

GAO noted that: (1) DOD has successfully applied best practices to improve the management of medical and food items, which account for 2 percent of the consumable items DOD manages; (2) DOD's prime vendor program for medical supplies, along with other DOD inventory reduction efforts, has resulted in savings that GAO estimates exceed $700 million; (3) more importantly, this program has moved DOD out of the inventory storage and distribution function for these supplies, emptying warehouses, eliminating unnecessary layers of inventory, and reducing the overall size of the DOD supply system; (4) also, DOD buys only the items that are currently needed because consumers can order and receive inventory within hours of the time the items are used; (5) despite the success of its prime vendor program for medical supplies and, to a lesser extent, food items, DOD has made little progress in adopting best practices for hardware supplies, which account for 97 percent of the consumable items; (6) DOD continues to manage hardware items using inefficient and outdated business practices, which have resulted in excessive inventory levels, poor customer service, and delays in the repair of expensive military equipment; (7) although the private sector has developed solutions to these problems, DOD's efforts to adopt such practices are limited in scope and represent only a small part of its logistics operations; (8) since 1991, GAO has issued a series of reports highlighting best practices GAO believes have direct application to DOD's operations; (9) however, DOD has not applied these best practices to the majority of DOD consumable items, and inefficiencies in DOD's logistics systems remain; (10) in this context, proposed legislative initiatives, if enacted, would encourage DOD to change its inventory management practices; (11) also, congressional oversight will continue to be a critical element as DOD establishes plans, goals, objectives, and milestones for addressing its inventory management processes; (12) GAO strongly supports the need to improve DOD's business practices and further reduce the logistics infrastructure; and (13) because of the potential impact improved business practices would have on DOD inventory levels, operating costs, and the repair of weapon systems and component parts, GAO believes DOD must be more aggressive in expanding the use of new management techniques for these items.