Defense Inventory
Overall Inventory and Requirements Are Increasing, but Some Reductions in Navy Requirements Are Possible Gao ID: GAO-03-355 May 8, 2003Changes in the Department of Defense's (DOD) mission can lead to changes in inventory requirements, which, in turn, determine the size of DOD's inventory. Since 1990, GAO has identified DOD's management of inventory as a high-risk area because levels of inventory were too high and management systems and procedures were ineffective. Furthermore, DOD has attributed readiness problems to parts shortages. In this report, GAO (1) provides information on changes in and make up of the department's inventory and (2) analyzes changes in inventory requirements, focusing on the Navy.
DOD reported a $5.6 billion increase in inventory on hand and a $1.7 billion increase in inventory on order between September 30, 1999, and September 30, 2001. The reported inventory increases were primarily due to the Navy reporting aviation parts held by ships and air squadrons that were previously not reported and to overall DOD inventory requirements increases. In addition, GAO identified large imbalances in the department's inventory; as of September 30, 2001, over 1.7 million items had $38 billion of inventory that exceeded the items' current inventory operating requirements of $24.9 billion. At the same time, there were 523,000 items that needed an additional $10.4 billion of inventory to meet the items' current inventory operating requirements. Generally, inventory increases are the result of increases in inventory requirements. DOD's overall inventory requirements increased by $10.6 billion, or 26 percent, between the end of fiscal years 1999 and 2001, with some of the Navy's requirements being overstated. The Navy was responsible for the largest dollar increase, $4.7 billion of the $10.6 billion increase. A large part of the Navy increase, $3.4 billion, was attributable to a change in the way the Navy accounted for aviation parts held by ships and air squadrons. The remaining Navy increase was attributable to a variety of reasons, such as price increases; increased demand and item wear-out rates; and, in some cases, inaccurate data. Also, since 1997 the Navy has reduced the amount of administrative lead time it takes to place inventory orders (the period between when the need to replenish an item through a purchase is identified and when a contract is let), yet it has not formally updated the data used to compute those requirements. For example, the Navy reduced the administrative lead time for medium-sized sole-source contracts for repairable items from 200 days to 130 days, but it did not recognize the reduction in its requirements computations. As a result, those requirements are inaccurate and overstated.
RecommendationsOur 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.
Director: Team: Phone:GAO-03-355, Defense Inventory: Overall Inventory and Requirements Are Increasing, but Some Reductions in Navy Requirements Are Possible
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Report to the Honorable Tom Harkin, U.S. Senate:
United States General Accounting Office:
GAO:
May 2003:
Defense Inventory:
Overall Inventory and Requirements Are Increasing, but Some Reductions
in Navy Requirements Are Possible:
GAO-03-355:
GAO Highlights:
Highlights of GAO-03-355, a report to the Honorable Tom Harkin, U.S.
Senate
Why GAO Did This Study:
Changes in the Department of Defense‘s (DOD) mission can lead to
changes in inventory requirements, which, in turn, determine the size
of DOD‘s inventory. Since 1990, GAO has identified DOD‘s management of
inventory as a high-risk area because levels of inventory were too
high and management systems and procedures were ineffective.
Furthermore, DOD has attributed readiness problems to parts shortages.
In this report, GAO (1) provides information on changes in and make up
of the department‘s inventory and (2) analyzes changes in inventory
requirements, focusing on the Navy.
What GAO Found:
DOD reported a $5.6 billion increase in inventory on hand and a $1.7
billion increase in inventory on order between September 30, 1999, and
September 30, 2001. The reported inventory increases were primarily
due to the Navy reporting aviation parts held by ships and air
squadrons that were previously not reported and to overall DOD
inventory requirements increases. In addition, GAO identified large
imbalances in the department‘s inventory; as of September 30, 2001,
over 1.7 million items had $38 billion of inventory that exceeded the
items‘ current inventory operating requirements of $24.9 billion (see
table below). At the same time, there were 523,000 items that needed
an additional $10.4 billion of inventory to meet the items‘ current
inventory operating requirements.
Generally, inventory increases are the result of increases in
inventory requirements. DOD‘s overall inventory requirements
increased by $10.6 billion, or 26 percent, between the end of fiscal
years 1999 and 2001, with some of the Navy‘s requirements being
overstated. The Navy was responsible for the largest dollar increase,
$4.7 billion of the $10.6 billion increase. A large part of the Navy
increase, $3.4 billion, was attributable to a change in the way the
Navy accounted for aviation parts held by ships and air squadrons. The
remaining Navy increase was attributable to a variety of reasons, such
as price increases; increased demand and item wear-out rates; and, in
some cases, inaccurate data. Also, since 1997 the Navy has reduced the
amount of administrative lead time it takes to place inventory orders
(the period between when the need to replenish an item through a
purchase is identified and when a contract is let), yet it has not
formally updated the data used to compute those requirements. For
example, the Navy reduced the administrative lead time for medium-
sized sole-source contracts for repairable items from 200 days to 130
days, but it did not recognize the reduction in its requirements
computations. As a result, those requirements are inaccurate and
overstated.
What GAO Recommends:
Because the long-standing logistical problems associated with
inventory excesses and shortages have been addressed in prior reports
as well as in GAO‘s Performance and Accountability Series reports, GAO
is not making any additional recommendations in regard to those
issues. However, to improve the accuracy of the Navy‘s inventory
requirements, GAO recommends that the Secretary of Defense require the
Navy to ensure that the most current data available for computing its
administrative lead time requirements are being used. DOD generally
concurred with GAO‘s report, and stated that the Navy formally updated
its system to begin using the most current data available to compute
administrative lead time requirements in March 2003.
www.gao.gov/cgi-bin/getrpt?GAO-03-355.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact William M. Solis at (202) 512-8365 or
solisw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Inventory Growth Reverses Past Reductions:
Requirements Are Increasing, but Some of Navy's Are Overstated:
Conclusions:
Recommendation for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: GAO Reports and Open Recommendations Relating to DOD's
Inventory Management Problems:
Appendix III: DOD and Military Component Inventory Requirements at the
End of Fiscal Years 1999 and 2001:
Appendix IV: Reasons for Requirements Increasing between
September 30, 1999, and September 30, 2001, for 90 Sample Items:
Appendix V: Comments from the Department of Defense:
Appendix VI: Staff Acknowledgments:
Tables:
Table 1: Value of DOD's Inventory On Hand and On Order for Items That
Had Too Much Inventory by Military Component as of September 30, 2001:
Table 2: Comparison of Inventory Requirements by Military Component as
of September 30, 1999, and September 30, 2001:
Table 3: Comparison of Requirements for 279,000 Items Managed by the
Navy at the End of Fiscal Years 1999 and 2001:
Table 4: Reasons for Navy Requirements Increases for Items Reviewed:
Table 5: Comparison of Inventory Requirements for the Department of
Defense at the End of Fiscal Years 1999 and 2001:
Table 6: Comparison of Inventory Requirements for the Defense Logistics
Agency at the End of Fiscal Years 1999 and 2001:
Table 7: Comparison of Inventory Requirements for the Army at the End
of Fiscal Years 1999 and 2001:
Table 8: Comparison of Inventory Requirements for the Navy at the End
of Fiscal Years 1999 and 2001:
Table 9: Comparison of Inventory Requirements for the Air Force at the
End of Fiscal Years 1999 and 2001:
Figures:
Figure 1: DOD's Reported Inventory On Hand at the End of Fiscal Years
1996 through 2001:
Figure 2: DOD's Reported Inventory On Order at the End of Fiscal Years
1996 through 2001:
Figure 3: DOD Inventory On Order and On Hand and Needed Purchases for
Items That Did Not Have Enough Inventory as of September 30, 2001:
Figure 4: Changes in Navy Inventory Requirements between September 30,
1999, and September 30, 2001:
Abbreviations:
DOD: Department of Defense:
GAO: General Accounting Office:
United States General Accounting Office:
Washington, DC 20548:
May 8, 2003:
Dear Senator Harkin:
The Department of Defense maintains a supply of spare and repair parts
in order to keep its equipment operational for war-and peace-time
missions. The management of this inventory is especially critical as
the department and the services are called upon for new missions
relating to combating terrorism worldwide and protecting the homeland.
Such changes in missions can lead to changes in inventory requirements,
which, in turn, determine the size of the inventory.
This report, in response to your interest in the Department of
Defense's inventory management, is one in a series on the department's
management of secondary inventory--that is, spare and repair parts,
clothing, medical, and other items that support the military's
operating forces. Since 1990, we have identified the department's
management of secondary inventory as a high-risk area because levels of
inventory were too high and management systems and procedures were
ineffective. While some improvements have been made, in January 2003 we
reported that these conditions still existed and that over half of the
department's inventory is not needed to satisfy current operating
requirements.[Footnote 1] Nevertheless, the department has attributed
readiness problems to parts shortages. In response to your request,
this report (1) provides information on changes in and make up of the
department's inventory and (2) analyzes changes in inventory
requirements, with a focus on causes of requirements changes derived
from a sample of Navy inventory items.
To accomplish this review, we expanded on previously reported
analyses[Footnote 2] to cover inventory data from fiscal year 1996
through 2001 for the Army, the Navy, the Air Force, and the Defense
Logistics Agency. We also analyzed inventory data as of September 30,
2001, to show the number of items that had more than or less than
enough inventory to satisfy requirements. We compared September 30,
1999, inventory requirements to September 30, 2001, inventory
requirements for the military services[Footnote 3] and the Defense
Logistics Agency. We used data as of September 30, 2001, because that
was the most recent end of fiscal year data available when we began our
examination. We did not revalue the inventory that needs to be repaired
to recognize the repair cost, and we did not value inventory that is to
be disposed of at salvage prices. Also, our analyses did not include
fuel, certain inventories held by units, and Marine Corps inventory.
Fuel and inventories held by units are not stratified by requirement,
and the Marine Corps inventory represents a small part of the universe.
Because the Navy had the largest increase in inventory requirements
during the period, we analyzed a sample of selected Navy inventory
items to identify key causes of increased inventory requirements. We
conducted our review from June 2002 through March 2003 in accordance
with generally accepted government auditing standards. We provide the
details of our scope and methodology in appendix I.
Results in Brief:
The Department of Defense reported a $5.6[Footnote 4] billion and a
$1.7 billion increase in inventory on hand and on order, respectively,
between September 30, 1999, and September 30, 2001. The on-hand and on-
order inventories had increased to $69.8 billion and $9.9 billion,
respectively. The reported inventory increases were primarily due to
the Navy reporting aviation parts held by ships and air squadrons that
were previously not reported and to overall Department of Defense
inventory requirements increases. In addition, large imbalances in the
department's inventory continue to exist. As of September 30, 2001,
over 1.7 million items had $38 billion of inventory on hand or on order
that exceeded the items' current inventory operating requirements of
$24.9 billion. At the same time, 523,000 items needed an additional
$10.4 billion of inventory to meet the items' current inventory
operating requirements. In 1997, we reported that requirements
decreases contributed to items having inventory on hand that exceeded
current requirements.[Footnote 5] Similarly, in 2000, we reported that
while inventory managers made inventory purchases that were supported
by requirements, subsequent requirement decreases resulted in the
purchases being in excess of requirements.[Footnote 6] The current data
indicate that many of these long-standing and systemic inventory
management problems--which have been consistently identified as a high-
risk area in our Performance and Accountability Series reports--
continue to exist. Although the services are implementing management
changes--initiatives to transfer the management and oversight of some
of the department's inventory to parts contractors and to implement new
inventory management systems--that will reduce the size of the
department's reported inventory, these changes do not address the long-
standing and systemic problems.
The department's overall inventory requirements increased by $10.6
billion, or 26[Footnote 7] percent, between the end of fiscal years
1999 and 2001, with some of the Navy's requirements being overstated.
The Navy was responsible for the largest dollar increase, $4.7 billion
of the $10.6 billion increase. A large part of the Navy increase, $3.4
billion, corresponded to its reporting of requirements associated with
aviation parts held by ships and air squadrons that were not previously
reported. The remaining Navy increase was due to a variety of reasons,
such as price increases; increased demand, inventory lead
time,[Footnote 8] and item wear-out rates that increased safety levels;
and, in some cases, inaccurate data. Also, since 1997 the Navy has
reduced the amount of administrative lead time it takes to place
inventory orders, yet it has not formally updated the data used to
compute those requirements. For example, the Navy reduced the
administrative lead time for medium-sized sole-source contracts for
repairable items from 200 days to 130 days, but it did not recognize
the reduction in its requirements computations. As a result, those Navy
requirements are inaccurate and overstated.
Many of the long-standing and systemic logistical problems associated
with having both too much inventory for some items and not enough
inventory for others have been addressed in our prior reports as well
as in our Performance and Accountability Series, and we therefore are
not making any new recommendations in regard to those issues. We
provide a list of those reports and past recommendations in appendix
II. However, to improve the accuracy of the Navy's inventory
requirements, we are recommending that the Secretary of Defense require
the Navy to use the most current data available for computing its
administrative lead time requirements. In commenting on a draft of the
report, the department generally concurred with the report. With regard
to our recommendation, the department noted that item managers use the
most current data available to manually compute administrative lead
time requirements when making management decisions for individual items
and that in March 2003, the Navy formally updated its automated
inventory system to begin using the most current data available to
compute administrative lead time requirements for all items. This
action to update the Navy's automated inventory system responds to our
recommendation.
Background:
The Department of Defense (DOD) refers to the amount of secondary
inventory that it needs to have on hand or on order to support current
operations as the requirements objective. The requirements objective
includes inventory requirements for a reorder point and an economic
order quantity. The reorder point is the point at which inventory
replenishment will normally prevent out-of-stock situations from
occurring. The economic order quantity is the amount of inventory that,
when ordered and received, results in the lowest total cost for
ordering and holding inventory.
When the combined total of on-hand and on-order inventories falls to or
below the reorder point, an item manager generally places an order for
additional inventory so that the total of on-hand and on-order
inventories is equal to the requirements objective. Subsequently, on-
hand inventory is used to satisfy customer requisitions that are
received after the item manager orders new inventory, and thus the
total of on-hand and on-order inventories is generally less than the
requirements objective. Furthermore, an item's reorder point can move
up or down over time and--depending on the item--may include one or
more of the following:
* war reserves,[Footnote 9]
* unfilled requisitions,
* a safety level to be on hand in case of minor interruptions in the
resupply process or unpredictable fluctuations in demand,
* minimum quantities for essential items for which demand is not
normally predicted (also referred to as insurance items),
* inventory to satisfy demands while broken items are being repaired,
* inventory to satisfy demands during the period between when the need
to replenish an item through a purchase is identified and when a
contract is let (also referred to as administrative lead time), and:
* inventory to satisfy demands during the period between when a
contract for inventory is let and when the inventory is received (also
referred to as production lead time).
Because the reorder point provides for inventory to be used during
the time needed to order and receive inventory and for a safety level,
item managers are able to place orders so that the orders arrive before
out-of-stock situations occur. Generally, an item manager orders an
amount of inventory needed to satisfy both the reorder point
requirement and the economic order quantity.
Inventory Growth Reverses Past Reductions:
Between September 30, 1999, and September 30, 2001, DOD's inventory
on hand increased by $5.6 billion and inventory on order increased by
$1.7 billion, reversing past inventory reductions. These inventory
increases were primarily due to the Navy reporting aviation parts held
by ships and air squadrons that were previously not reported and to
overall DOD inventory requirements increases. In addition, large
imbalances in the inventory continue to exist. As of September 30,
2001, over 1.7 million items had $38 billion of inventory on hand or on
order that exceeded the items' current inventory operating requirements
of $24.9 billion. We also identified 523,000 items that did not have
enough inventory on hand or on order to meet the items' current
inventory operating requirements. While the services are implementing
management changes that will reduce the size of DOD's inventory, long-
standing and systemic inventory management problems continue to exist.
Inventory On Hand and On Order Has Begun to Increase:
As of September 30, 2001, DOD's on-hand inventory was $69.8 billion, up
$5.6 billion, or 9 percent, since September 30, 1999, and on-order
inventory was $9.9 billion, up $1.7 billion, or 21 percent (see figs. 1
and 2).
Figure 1: DOD's Reported Inventory On Hand at the End of Fiscal Years
1996 through 2001:
[See PDF for image]
[End of figure]
Figure 2: DOD's Reported Inventory On Order at the End of Fiscal Years
1996 through 2001:
[See PDF for image]
[End of figure]
As indicated in figures 1 and 2, the period September 30, 1996, to
September 30, 1999, shows a decline in on-hand and on-order
inventories. During this period, inventory on hand dropped $5.5 billion
and inventory on order dropped $0.7 billion.
Inventory Growth Caused by Reporting Changes and Requirements
Increases:
A Navy inventory reporting change and increased DOD inventory
requirements contributed significantly to the growth in DOD's
inventory. In 1996, the Navy began including aviation inventories held
by ships and air squadrons in its inventory reports. Most of the change
occurred in 1999 when the Navy began reporting parts held by aircraft
carriers. Previously, the Navy considered these inventories as having
been sold to ships and installations and not as reported inventory.
Based on Navy records, we estimate that parts valued at about $3.3
billion[Footnote 10] were added to the reported inventory as a result
of the accounting change. A similar change by the Army resulted in an
inventory increase of $0.3 billion between September 30, 1999, and
September 30, 2001. These Navy and Army inventory reporting changes
correspond to the reporting methods already in use by the Air Force.
In addition, overall DOD inventory requirements increased from
$40.6 billion as of September 30, 1999, to $51.2 billion as of
September 30, 2001. Increased requirements can affect an item's reorder
point and economic order quantity. Consequently, an increase in
requirements can affect when item managers place orders and the amount
of inventory they purchase and can affect how much inventory is on
hand. For example, if the requirements increase and enough inventory is
not on hand or on order to satisfy the requirements, an item manager
will place an order for additional inventory. When the additional
inventory is received, inventory levels will also be increased.
Large Inventory Imbalances Still Exist:
Since 1995 we have reported on imbalances in DOD's inventory, and
our current work shows that these imbalances continue to
exist.[Footnote 11] Our comparison of September 30, 2001, on-hand and
on-order inventories to the requirements objectives for 2.4 million
items showed that 1.7 million items, or 70 percent, had inventory on
hand or on order that exceeded the requirements, and 523,000 items, or
21 percent, did not have enough inventory on hand or on order to
satisfy all of the requirements. The remaining 209,000 items, or 9
percent, had the right amount of inventory on hand and/or on order to
satisfy all requirements.
The 1.7 million items had $22.1 billion of inventory on hand and $2.8
billion of inventory on order that satisfied requirements and an
additional $36 billion of inventory on hand and $2.0 billion[Footnote
12] on order that exceeded requirements (see table 1).
Table 1: Value of DOD's Inventory On Hand and On Order for Items That
Had Too Much Inventory by Military Component as of September 30, 2001:
Dollars in billions.
Army: Inventory satisfying requirements: On hand: $2.6:
Inventory satisfying requirements: On order: $0.2:
Inventory exceeding requirements: On hand: $3.7:
Inventory exceeding requirements: On order: $0.0[A].
Navy: Inventory satisfying requirements: On hand: 7.0:
Inventory satisfying requirements: On order: 0.3:
Inventory exceeding requirements: On hand: 8.8:
Inventory exceeding requirements: On order: 0.0[A].
Air Force: Inventory satisfying requirements: On
hand: 10.1: Inventory satisfying requirements: On
order: 0.4: Inventory exceeding requirements: On
hand: 18.8: Inventory exceeding requirements: On
order: 0.6.
Defense Logistics Agency: Inventory satisfying
requirements: On hand: 2.4: Inventory satisfying
requirements: On order: 1.9[B]: Inventory
exceeding requirements: On hand: 4.7: Inventory
exceeding requirements: On order: 1.4[B].
Total: Inventory satisfying requirements: On hand:
$22.1: Inventory satisfying requirements: On
order: $2.8: Inventory exceeding requirements: On
hand: $36.0: Inventory exceeding requirements: On
order: $2.0.
Source: DOD.
[A] The amount is less than $50 million.
[B] The data provided by the Defense Logistics Agency did not
distinguish between inventory on order and inventory that was in
transit. We estimate that $400 million was in-transit inventory.
[End of table]
Overall, the amount of DOD's inventory that exceeds current operating
requirements has decreased since 1996. On-hand inventory that
exceeds current operating requirements decreased from $41.3 billion, or
59 percent, of on-hand inventory on September 30, 1996, to $36.1
billion, or 52 percent, of the $69.8 billion inventory on hand on
September 30, 2001. During the same period, DOD's inventory on order
that exceeds requirements decreased from $1.7 billion, or 19 percent,
of on-order inventory to $1.6 billion, or 16 percent, of the $9.9
billion inventory on order. In 1997, we reported that requirement
decreases contributed to items having inventory on hand that exceeded
current requirements. Similarly, in 2000, we reported that while
inventory managers made inventory purchases that were supported by
requirements, subsequent requirement decreases resulted in the
purchases being in excess of requirements.[Footnote 13]
We identified 523,000 items that did not have enough inventory on hand
or on order to satisfy all of the requirements that make up the
requirements objective. The items had requirements valued at $23.4
billion that were partially satisfied by $7.7 billion of inventory on
hand and $5.3 billion of inventory that was on order (see fig. 3). The
remaining $10.4 billion of requirements could be satisfied by
purchases.
Figure 3: DOD Inventory On Order and On Hand and Needed Purchases for
Items That Did Not Have Enough Inventory as of September 30, 2001:
[See PDF for image]
[End of figure]
The amount of inventory exceeding or failing to meet inventory
requirements indicates that many of the long-standing and systemic
inventory management problems previously identified in our Performance
and Accountability Series still exist.[Footnote 14] We recommended in
these reports that DOD address the long-standing weaknesses that limit
the economy and efficiency of its logistics operations, including
having too much inventory on hand and on order and shortages of key
spare parts. Appendix II lists past reports and recommendations
relating to DOD's long-standing inventory management problems.
Management Changes Will Reduce the Size of the Department's Inventory:
The services are implementing management changes that will reduce
the size of DOD's reported inventory and the amount of inventory that
satisfies requirements. These changes include an initiative to transfer
the traditional DOD inventory and technical support function to parts
contractors and initiatives to implement new inventory management
systems.
The services have initiatives that will transfer the traditional DOD
inventory and technical support function to parts contractors. For
example, as of September 30, 2001, the Navy had about 22,000 items
that were managed by contractors. In some cases, Navy-owned inventory
is being replaced by contractor-owned inventory. The Navy was paying
$330 million for contractors to manage the 22,000 items, and the Navy
planned to increase that amount to over $700 million for the next
fiscal year. According to an official from the Office of the Secretary
of Defense, contractor-owned inventories used to support military
operations are not included in its inventory report. Consequently, the
use of contractor-owned inventories will decrease the growth of DOD's
inventory.
In addition, new inventory management systems that the military
components are implementing may also affect the amount of DOD's
reported inventory. For example, the Air Force's requirements for
insurance items[Footnote 15] decreased by $600 million between 1999 and
2001. According to the Air Force, the requirements decreased as a
result of implementing a new requirements determination system that
changed the way in which it computed those requirements. The Army, the
Navy, and the Defense Logistics Agency are also in the process of
developing new inventory management systems. However, the impact of the
implementation of these new inventory management systems on the size of
DOD's inventory is not yet known.
Although the initiatives described above will reduce the size of
DOD's inventory, they do not address the long-standing and systemic
problems that are limiting the economy and efficiency of the
department's logistics operations.
Requirements Are Increasing, but Some of Navy's Are Overstated:
DOD's overall inventory requirements increased by $10.6 billion, or
26 percent, between the end of fiscal years 1999 and 2001, with some of
the Navy's requirements being overstated. The Navy was responsible for
$4.7 billion of the overall $10.6 billion increase. A large part of the
Navy increase, $3.4 billion, was due to the Navy reporting change we
discussed in the previous section--that is, reporting aviation parts
held by ships and air squadrons as inventory that were previously not
reported. Consequently, the Navy also began reporting the associated
requirements. The remaining $1.3 billion Navy increase was due to a
variety of reasons related to inventory cost and usage. However, some
Navy increases were caused by inaccurate data used to compute
administrative lead time requirements, and as a result, those
requirements are overstated.
Overall DOD Inventory Requirements Are Increasing:
DOD's overall inventory requirements increased from $40.6 billion as of
September 30, 1999, to $51.2 billion as of September 30, 2001, an
increase of $10.6 billion, or 26 percent. Army, Navy, and Defense
Logistics Agency inventory requirements increased significantly while
the Air Force's requirements decreased (see table 2). The Navy was
responsible for the largest share of DOD's overall inventory
requirements increase, with $4.7 billion of the $10.6 billion inventory
change.
Table 2: Comparison of Inventory Requirements by Military Component as
of September 30, 1999, and September 30, 2001:
Dollars in billions.
Navy: 1999: $10.5: 2001: $15.2: Dollar: change: $4.7: Percent change:
44.
Defense Logistics Agency: 1999: 9.1; 2001: 12.4: Dollar: change: 3.3;
Percent change: 36.
Army: 1999: 6.0: 2001: 9.1; Dollar: change: 3.1: Percent
change: 52.
Air Force: 1999: 14.9: 2001:
14.5: Dollar: change: -.5:
Percent change: -3.
Total: 1999: $40.6: 2001:
$51.2: Dollar: change: $10.6:
Percent change: 26.
Source: DOD.
Note: Numbers may not add due to rounding.
[End of table]
All requirements that comprise DOD's requirements objective increased
except for unfilled requisitions and nonrecurring lead time
requirements used by the Air Force. Requirements for safety levels,
items held as insurance against outages; economic order quantities; and
production lead time increased most significantly. Appendix III
provides a detailed comparison of the military components' inventory
requirements as of September 30, 1999, and September 30, 2001.
Table 2 shows a decrease in the Air Force's requirements. According to
an Air Force Materiel Command official:
* Higher congressional funding levels allowed the Air Force to buy and
repair more of the items that were needed and reduce requirements for
unfilled requisitions.
* Requirements for items held as insurance against outages decreased as
a result of implementing a new requirements determination system that
changed the way in which the Air Force computed those requirements.
* Requirements for war reserves decreased as a result of decreased need
for F-16 fuel tanks.
Navy Inventory Requirements Increased for a Variety of Reasons:
Navy requirements increased $4.7 billion between September 30, 1999,
and September 30, 2001, primarily due to a change in how the Navy
accounts for aviation inventory requirements. The remaining Navy
increase was due to such reasons as price increases and increased usage
of items. Also, because the Navy has not updated the data used to
compute administrative lead time requirements for some aviation items,
those requirements are overstated.
Navy Requirements Increased $4.7 Billion:
The Navy's $4.7 billion increase was not uniform across all
requirements. Safety level, repair cycle, production lead time,
economic order quantity, and insurance items requirements all increased
by approximately $5.0 billion. However, requirements for Navy war
reserves, unfilled requisitions, and administrative lead time actually
decreased during this period, by $331 million (see fig. 4).
Figure 4: Changes in Navy Inventory Requirements between September 30,
1999, and September 30, 2001:
[See PDF for image]
[End of figure]
A large part of the Navy's increase was due to a change in the way the
Navy accounts for aviation inventory requirements for parts held by
ships and air squadrons. According to the Navy, prior to 1996, aviation
items that inventory control points[Footnote 16] sold to customers
onboard ships and at installations were not accounted for in its
inventory. In 1996, the Navy began accounting for aviation items held
by ships and installations by recognizing these requirements and assets
in its inventory system and recording them as insurance item
requirements. The Navy made the change in order to provide item
managers visibility of the inventory and associated requirements and
assets. Most of the increase in requirements and inventory occurred
after 1999 when the Navy began to include aviation parts held on
aircraft carriers. Generally, the change in accounting for these
requirements resulted in a $3.4 billion increase in Navy insurance item
requirements,[Footnote 17] from $2.4 billion on September 30, 1999, to
$5.8 billion on September 30, 2001.
To gain insight into why increases in the Navy's inventory requirements
occurred, we compared the 307,000 items the Navy managed as of
September 30, 1999, to the 309,000 items managed as of September 30,
2001, and identified 279,000 items that were managed in both
years.[Footnote 18] Overall, the value of the 279,000 items increased
$4.2 billion between September 30, 1999, and September 30, 2001 (see
table 3). Of this amount, $3.1 billion was the result of increased
inventory requirement quantities and $1.1 billion was due to price
changes. About 37,000 items accounted for $4.3 billion in inventory
requirements increases, and another 37,000 items accounted for a $1.2
billion decrease in inventory requirements decreases. There was no
change in inventory requirement quantities for the remaining 205,000
items during the same period of review.
Table 3: Comparison of Requirements for 279,000 Items Managed by the
Navy at the End of Fiscal Years 1999 and 2001:
Dollars in billions.
Increased: Items: 37,000: Change in requirement quantity: $4.3: Change
in price: $0.8: Total change: $5.1.
Stayed the same: Items: 205,000; Change in requirement quantity: NA:
Change in price: 0.2: Total change: 0.2.
Decreased: Items: 37,000:
Change in requirement quantity: -1.2: Change in
price: 0.2: Total change: -1.0.
Total: Items: 279,000: Change
in requirement quantity: $3.1: Change in price:
$1.1: Total change: $4.2.
Source: DOD.
Legend: NA = Not Applicable.
Notes: GAO's analysis of DOD data.
Totals do not add due to rounding.
[End of table]
We also reviewed in more detail 90 of the 279,000 items. We selected
the 90 items because they had large increases in requirements and
accounted for $1.1 billion of the $4.2 billion of the requirements
increase associated with the 279,000 items. For 37 of the 90 items,
insurance requirements increases accounted for $454 million of the 90
items' $1.1 billion total requirements increase between 1999 and 2001.
Of the $454 million, $428 million of the increase was attributable to
including existing aviation requirements and $26 million was
attributable to new aviation requirements. For example, the insurance
requirement for an aviation radar transmitter, valued at $446,000 each
and used on the F-18 and the AV-8B aircraft, increased from 44
transmitters on September 30, 1999, to 196 on September 30, 2001. The
requirement caused an increase of 128 transmitters by recognizing
existing aviation requirements in the Navy's inventory and an increase
of another 24 transmitters as a result of new requirements for these
transmitters in newer versions of the F-18 aircraft.
In addition to the $454 million increase in insurance item
requirements, our analysis of the 90-item sample identified a wide
variety of additional reasons for the increases in requirements. For
example, increased usage of items resulted in requirements increasing
by $294 million for 46 items. Increased usage was often the result of
changes in demand for an item, defective parts needing to be replaced,
and items wearing out at a faster rate than expected. Changes in the
Navy's stock, overhaul, or operational policies; the inability to find
a commercial source for an item; and the unavailability of material
needed to manufacture items were among the other reasons for
requirements increases. Table 4 summarizes the reasons identified for
the requirements increases. Additional information and examples are
discussed in more detail in appendix IV.
Table 4: Reasons for Navy Requirements Increases for Items Reviewed:
Dollars in millions.
Increase in insurance item requirements: Number of
items affected: 37: Increase in requirements:
$454.
Usage of the item increased: Number of items
affected: 46: Increase in requirements: 294.
Navy changed stock, overhaul, or operational policies; Number of items
affected: 36: Increase in requirements: 126.
Source or repair issues: Number of items affected:
29: Increase in requirements: 137.
Uncertainty of demand, lead time or wear-out rate increased safety
levels: Number of items affected: 22; Increase in requirements: 72.
Increases were not valid: Number of items
affected: 7: Increase in requirements: 98.
Data anomalies: Number of items affected: 2; Increase in
requirements: 2.
Source: DOD.
Notes: GAO's analysis of DOD data.
[End of table]
Because some items had more than one reason for requirements increases,
the number of items and value of the increased requirements exceeds 90
and $1.1 billion, respectively.
Navy Administrative Lead Time Requirements Are Not Accurately Computed
and Are Overstated:
The Navy has not formally updated the data it uses to project
administrative lead time[Footnote 19] requirements for aviation parts
since 1999, and thus these requirements are overstated. Before 1999,
the Navy used the actual administrative lead time from an item's
previous procurement as a basis for projecting its future
administrative lead time requirements for aviation parts. In 1999, the
Navy began using an administrative lead time matrix for computing the
requirements. Under this approach, the Navy places aviation items into
matrix cells based on the type of item being purchased, the size of the
potential purchase, and the type of contract to be used to purchase the
item. The Navy believes that items that are similar and are purchased
in a similar manner will have similar lead times. As of September 30,
2001, the Navy had computed $895 million of administrative lead time
requirements for its 101,000 aviation parts.
When the Navy implemented the matrix approach for computing
administrative lead time requirements in 1999, it based the
requirements on actual fiscal year 1997 lead time data. Since 1997 the
Navy has generally reduced its actual administrative lead time. While
the Navy has recomputed its administrative lead times using statistical
techniques aimed at reducing fluctuations from year to year, it has not
formally updated the administrative lead time matrix used to compute
requirements to reflect the most current, lower data. However, in
response to our inquiries, the Navy, in December 2002, reviewed the
administrative lead time data used to compute requirements and found
that the data had been revised. Item manager reviews and the purchase
of items that had not recently been purchased led to changes to the
lead time data in the files.
Our analysis of the changes showed that the revised data had lowered
the administrative lead times for most of the matrix cells and that the
Navy-computed lead times would be further reduced for most matrix
cells. For example, revised data reduced the lead time from 200 days to
183 days for medium-sized sole-source contracts for repairable items.
The Navy-computed lead time further reduced the lead time to 130 days.
In contrast, for large-sized sole-source contracts for repairable
items, the revised data reduced the lead time from 280 days to 183 days
while the Navy-computed lead time set it at 195 days.
Navy officials responsible for aviation parts have been reluctant to
use the lower Navy-computed lead time data. Even though the Navy uses a
technique to reduce fluctuations in its computed lead time from year to
year, the officials believe that annual changes in the lead time will
result in terminating contracts for parts in 1 year and possibly having
to repurchase the same items the next year.
Conclusions:
The Navy is overstating its administrative lead time requirements for
aviation items by not using the most current data available for
computing those requirements. Because the most current data reflects
the Navy's reduced administrative lead time, using old data
unnecessarily results in inaccurate and overstated requirements that
can lead to unnecessary purchases. The Navy is concerned that using the
most current data will result in cycles of ordering inventory,
canceling the orders, and subsequently reordering the items. We believe
that using the most current data that is based on statistical
techniques aimed at reducing potential fluctuations in the requirements
will result in stable and more accurate administrative lead time
requirements and help the Navy avoid unnecessary purchases.
Recommendation for Executive Action:
To improve the accuracy of the Navy's secondary inventory requirements,
we recommend that the Secretary of Defense direct the Secretary of the
Navy to require the Commander, Naval Supply Systems Command,
require its inventory managers to use the most current data available
for computing administrative lead time requirements.
Agency Comments:
In commenting on a draft of the report, DOD generally concurred with
the report. With regard to our recommendation, DOD noted that item
managers use the most current data available to manually compute
administrative lead time requirements when making management decisions
for individual items and that in March 2003, the Navy formally updated
its automated inventory system to begin using the most current data
available to compute administrative lead time requirements for all
items. This action to update the Navy's automated inventory system
responds to our recommendation.
DOD's comments can be found in appendix V.
As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the issue date. At that time, we will send copies of this report
to the Secretary of Defense; the Secretaries of the Army, the Navy, and
the Air Force; the Director, Defense Logistics Agency; the Director,
Office of Management and Budget; and other interested congressional
committees. We will also make copies available to others upon request.
In addition, the report will be available at no charge on the GAO Web
site at http://www.gao.gov/.
Please contact me on (202) 512-8365, if you or your staff have any
questions concerning this report. Staff acknowledgments are listed in
appendix VI.
Sincerely yours,
William M. Solis,
Director
Defense Capabilities and Management:
Signed by William M. Solis:
[End of section]
Appendix I: Scope and Methodology:
To identify changes in the Department of Defense's (DOD) on-hand and
on-order inventories for fiscal years 1996 through 2001, we used data
developed in prior reviews and inventory stratification reports. We
analyzed on-hand and on-order inventories as they related to the
military components' requirements objectives. We held meetings to
discuss these observations with officials from the Army Materiel
Command, Alexandria, Virginia; the Naval Supply Systems Command,
Mechanicsburg, Pennsylvania; the Air Force Materiel Command, Dayton,
Ohio; and the headquarters of Defense Logistics Agency, Alexandria,
Virginia. To determine the number of items that had more than or less
than enough inventory to satisfy requirements, we obtained computerized
inventory records from the military components as of September 30,
2001, the most recent end of fiscal year data at the time we began our
examination. We did not test the reliability of the data. We used the
computerized records to compare on-hand and on-order inventories to
requirements on an item-by-item basis to determine if items had
sufficient inventory available to satisfy requirements. DOD reported
that its secondary inventory was valued at $63.3 billion in its
September 30, 2001, Supply System Inventory Report. For our analyses,
we used inventory stratification files and reports. We did not revalue
the inventory that needs to be repaired to recognize the repair cost,
and we did not value inventory that is to be disposed of at salvage
prices. Also, our analyses did not include fuel, certain inventories
held by units, and Marine Corps inventory. Fuel and inventories held by
units are not stratified by requirement, and the Marine Corps inventory
represents a small part of the universe.
To ascertain the causes for increases in inventory requirements, we
compared September 30, 1999, inventory requirements to September 30,
2001, inventory requirements for the military components. Because the
Navy had the largest dollar increase in requirements, we analyzed the
Navy requirements in more detail. For items that the Navy managed in
both 1999 and 2001, we compared the requirements to determine if the
requirements increased, stayed the same, or decreased. We selected 90
items for detailed review based on how much their requirements
increased between 1999 and 2001. The 90 items accounted for about $1.1
billion of the Navy's $4.7 billion increase in requirements. We met
with appropriate personnel from the Philadelphia and Mechanicsburg,
Pennsylvania, offices of the Naval Inventory Control Point to identify
the specific reasons for the items' increase in requirements.
[End of section]
Appendix II: GAO Reports and Open Recommendations Relating to DOD's
Inventory Management Problems:
Defense Inventory: Better Reporting on Spare Parts Spending Will
Enhance Congressional Oversight, GAO-03-18, Oct. 24, 2002:
DOD's reports on spare parts spending--called Exhibit OP-31, Spares and
Repair Parts, and submitted as part of the President's annual budget
submission--do not provide an accurate and complete picture of spare
parts funding as required by financial management regulation. As a
result, the reports do not provide Congress with reasonable assurance
about the amount of funds being spent on spare parts. Furthermore, the
reports did not always contain actual expenditure data: all of the
Army's annual operations and maintenance appropriations data and most
of the services' commodity amounts were shown as estimates. Without
actual data, the reports are of limited use to Congress as it makes
decisions on how best to spend resources to reduce spare parts
shortages and improve military readiness.
Open Recommendations:
We recommended that the Secretary of Defense:
* issue additional guidance on how the services are to identify,
compile, and report on actual and complete spare parts spending
information, including supplemental funding, in total and by commodity,
as specified by Exhibit OP-31; and:
* direct the Secretaries of the military departments to comply with
Exhibit OP-31 reporting guidance to ensure that complete information is
provided to Congress on the quantities of spare parts purchased and
explanations of deviations between programmed and actual spending.
Defense Inventory: Improved Industrial Base Assessments for Army War
Reserve Spares Could Save Money, GAO-02-650, July 12, 2002:
The Army, in its approach for assessing wartime spare parts industrial
base capability, still does not use current data from industry.
Instead, the Army uses historical parts procurement data because its
prior efforts to collect current data from industry were not successful
due to poor response rates. The Army's assessments depend on historical
data and resulting lead-time factors to project industry's contribution
to satisfying wartime spare parts requirements. Without current data on
industry's capability, assessments could be unreliable, resulting in
reduced readiness due to critical spare parts shortfalls in wartime or
inflated and costly war reserve spare parts inventories in peacetime.
Moreover, the Army's budget requests to Congress for war reserve spare
parts risk being inaccurate.
We identified a program in the Defense Logistics Agency that has
several attributes reflecting sound management practices that are
required for reliable industrial base capability assessments. Our
analysis of the approach used by the Army compared to the Defense
Logistics Agency's spare parts industrial base assessment program
revealed that the Army's approach can be improved in three areas--data
collection, data analysis, and management strategies.
Open Recommendations:
We recommended that the Secretary of Defense direct the Army to:
* establish an overarching industrial base capability assessment
process that considers the attributes in this report;
* develop a method to efficiently collect current industrial base
capability data directly from industry itself;
* create analytical tools that identify potential production capability
problems such as those due to surge in wartime spare parts demand; and:
* create management strategies for resolving spare parts availability
problems, for example, by changing acquisition procedures or by
targeting investments in material and technology resources to reduce
production lead times.
Defense Inventory: Air Force Needs to Improve Control of Shipments to
Repair Contractors, GAO-02-617, July 1, 2002:
We reported that Air Force and contractor personnel had largely not
complied with DOD and Air Force inventory control procedures designed
to safeguard material shipped to contractors, placing items worth
billions of dollars at risk of fraud, waste, and abuse.
Open Recommendations:
We recommended that the Secretary of Defense direct the Air Force to:
* Improve processes for providing contractor access to government-
furnished material by:
* listing specific stock numbers and quantities of material in repair
contracts (as they are modified or newly written) that the inventory
control points have agreed to furnish contractors;
* demonstrating that automated internal control systems for loading and
screening stock numbers and quantities against contractor requisitions
perform as designed;
* loading stock numbers and quantities that the inventory control
points have agreed to furnish to contractors into the control systems
manually until the automated systems have been shown to perform as
designed; and:
* requiring that waivers to loading stock numbers and quantities
manually are adequately justified and documented based on cost-
effective and/or mission-critical needs.
* Revise Air Force supply procedures to include explicit responsibility
and accountability for:
* generating quarterly reports of all shipments of Air Force material
to contractors, and:
* distributing the reports to Defense Contractor Management Agency
property administrators.
* Determine, for the contractors in our review, what actions are needed
to correct problems in posting material receipts.
* Determine, for the contractors in our review, what actions are needed
to correct problems in reporting shipment discrepancies.
* Establish interim procedures to reconcile records of material shipped
to contractors with records of material received by them, until the Air
Force completed the transition to its Commercial Asset Visibility
system in fiscal year 2004.
* Comply with exiting procedures to request, collect, and analyze
contractor shipment discrepancy data to reduce the vulnerability of
shipped inventory to undetected loss, misplacement, or theft.
Military Aircraft: Services Need Strategies to Reduce
Cannibalizations, GAO-02-86, November 21, 2001:
All the military services extensively use cannibalization--that is,
removing serviceable parts from one piece of equipment and installing
them in another--as a routine aircraft maintenance practice. In fiscal
years 1996 through 2000, the Navy and the Air Force reported about
850,000 cannibalizations, requiring about 5.3 million additional
maintenance hours. Cannibalizations have several adverse impacts. They
increase maintenance costs by increasing mechanics' workloads, affect
morale and personnel retention, and sometimes take expensive aircraft
out of service for long periods of time. Cannibalizations can also
create additional mechanical problems. The services have many reasons
for cannibalizing aircraft and strong incentives for continuing to do
so. However, with the exception of the Navy, they do not consistently
track the specific reasons for cannibalizations. As a result, much of
the information on causes is anecdotal. In the broadest sense,
cannibalizations are done because of pressures to meet readiness and
operational needs and because of shortcomings in the supply system.
Open Recommendations:
We recommended that the Secretary of Defense direct the Army, the Navy
and the Air Force to take the following actions:
* Establish standardized, comprehensive, and reliable cannibalization
data-collection procedures and systems for cannibalizations.
* Measure and report the number of maintenance hours associated with
cannibalizations.
* Develop strategies to reduce the number of maintenance hours spent on
cannibalization, ensure that cannibalized aircraft do not remain
grounded for long periods of time, and reduce the adverse effects of
cannibalizations on maintenance costs and personnel. At a minimum, the
strategies should include criteria to determine (1) which
cannibalizations are appropriate, (2) cannibalization-reduction goals,
and (3) the actions to be taken to meet those goals. The services must
assign responsibility for ensuring that goals are being met and
allocate resources for this purpose.
Defense Inventory: Navy Spare Parts Quality Deficiency Reporting
Program Needs Improvement, GAO-01-923, August 16, 2001:
The Navy's Product Quality Deficiency Reporting Program has been
largely ineffective in gathering the data needed for analyses so that
Navy managers can determine the full extent of spare parts quality
deficiencies affecting maintenance activities. Without these data,
managers lose opportunities to initiate important corrective and
preventive action with parts and suppliers.
Open Recommendations:
We recommended that the Secretary of Defense direct the Secretary of
the Navy to:
* increase the program's levels of (1) training, describing what
quality deficiencies to report, how to report them, and why it is
important to the Navy; (2) incentives, including financial credits back
to the reporting unit where appropriate to encourage participation; (3)
automation support, to simplify and streamline reporting and analysis;
and (4) management emphasis provided to the program, as necessary, to
determine the causes, trends, and responsibilities for parts failures
and achieve greater compliance with joint-service requirements,
including reporting on parts that fail before the end of their design
life; and:
* require program officials to measure and periodically report to the
appropriate Defense and Navy managers the results of the program in
such areas as actions taken to correct parts quality deficiencies,
prevent recurrences, and obtain credits or reimbursements from
suppliers for deficient products.
Navy Inventory: Parts Shortages Are Impacting Operations and
Maintenance Effectiveness, GAO-01-771, July 31, 2001:
Spare parts shortages for the EA-6B and the F-14 aircraft adversely
impacted the Navy's readiness to perform assigned missions and the
economy and efficiency of its maintenance activities. The shortages
also contributed to problems retaining personnel. The primary reasons
for spare parts shortages were that more parts were required than the
Navy originally anticipated and problems in identifying, qualifying, or
contracting with a private company to produce or repair the parts.
We did not make any recommendations in this report because of our prior
recommendations on improving the Navy's management framework for
implementing commercial practices and DOD's efforts to develop an
overarching integration plan.
Army Inventory: Parts Shortages Are Impacting Operations and
Maintenance Effectiveness, GAO-01-772, July 31, 2001:
Aviation spare parts shortages for the Apache, Blackhawk, and Chinook
helicopters adversely affected operations and led to inefficient
maintenance practices that have lowered morale of maintenance
personnel. Specifically, while the helicopters generally met their
mission-capable goals, indicating that parts shortages have not
affected their mission capability, supply availability rates and
cannibalization of parts from one aircraft to another indicate that
spare parts shortages have indeed been a problem. The reasons for the
unavailability of the 90 parts we reviewed included actual demands for
parts that were greater than anticipated, delays in obtaining parts
from a contractor, and problems concerning overhaul and maintenance.
For example, because a cracked gear in a Chinook transmission was
discovered during an overhaul, the entire fleet was grounded in August
1999. As a result, the demand for the part has been much greater than
anticipated. The Army and the Defense Logistics Agency have initiatives
under way or planned that are designed to improve the availability of
aviation parts. The initiatives generally address the reasons we
identified for spare parts shortages. Additionally, the Army has
developed a Strategic Logistics Plan that is designed to change its
current approach to one that is more effective, efficient, and
responsive. The plan's initiatives for resolving spare parts shortages
are linked to the asset management process under the Army's planned
change in approach. Some of these initiatives are new or in the
planning stages. Once the initiatives are more fully developed, we plan
to review them to determine whether there are opportunities to enhance
them.
Because we previously reported problems with the way the Army has
implemented its logistics initiatives and recommended that it develop a
management framework for its initiatives, to include a comprehensive
strategy and performance plan, we did not make recommendations in
this report.
Air Force Inventory: Parts Shortages Are Impacting Operations and
Maintenance Effectiveness, GAO-01-587, June 27, 2001:
Spare parts shortages on the E-3 and C-5 aircraft and F-100-220 engines
have adversely affected the performance of assigned missions and the
economy and efficiency of maintenance activities. Specifically, the Air
Force did not meet its mission-capable goals for the E-3 or C-5 during
fiscal years 1996-2000, nor did it meet its goal to have enough F-100-
220 engines to meet peacetime and wartime goals during that period. The
majority of reasons cited by item managers at the maintenance
facilities for spare parts shortages were most often related to more
spares being required than were anticipated by the inventory management
system and delays in the Air Force's repair process as a result of the
consolidation of repair facilities. Other reasons included (1)
difficulties with producing or repairing parts, (2) reliability of
spare parts, and (3) contracting issues. The Air Force and the Defense
Logistics Agency have numerous overall initiatives under way or planned
that may alleviate shortages of the spare parts for the three aircraft
systems we reviewed. The initiatives generally address the reasons we
identified for the shortages. To ensure that the initiatives are
achieving the goals of increasing efficiencies in the supply system,
the Air Force has developed a Supply Strategic Plan that contains
specific goals and outcome-oriented measures for the initiatives.
Because the Air Force's plan is in keeping with our previous
recommendations to improve overall logistics planning, we did not make
recommendations in this report. We will separately review the overall
approach and initiatives, once they are more fully developed, to
determine whether there are opportunities to enhance these efforts.
Defense Inventory: Approach for Deciding Whether to Retain or Dispose
of Items Needs Improvement, GAO-01-475, May 25, 2001:
DOD's components do not have sound analytical support for determining
when it is economical to retain or dispose of the $9.4 billion in
inventory the department is holding for economic reasons. The
components' decision-making approaches for retaining economic
retention inventory have evolved from the use of economic models to the
use of judgmentally determined levels. In addition, the department did
not have sound analytical support for the maximum levels they selected.
Also, although the department requires annual reviews of the analyses
supporting economic retention decisions, the components have generally
not done such reviews. As a result of these weaknesses, the department
is vulnerable to retaining some items when it is uneconomical to do so
and disposing of others when it is economical to retain them.
Open Recommendations:
We recommended that the Secretary of Defense direct the Secretaries of
the Army, the Navy, and Air Force and the Director of the Defense
Logistics Agency to:
* establish milestones for reviewing current and recently used
approaches for making decisions on whether to hold or dispose of
economic retention inventory to identify actions needed to develop and
implement appropriate approaches to economic retention decisions; and:
* annually review their approaches to meet department regulations to
ensure that they have sound support for determining economic retention
inventory levels.
Defense Inventory: Army War Reserve Spare Parts Requirements Are
Uncertain, GAO-01-425, May 10, 2001:
In the October-December 2000 time frame, the Army reported that it had
about 35 percent of its prepositioned spare parts on hand and a $1-
billion shortfall in required spare parts for its war reserves.
Notwithstanding the reported shortages, we identified uncertainties
about the accuracy of the Army's requirements. For example, we
identified a potential mismatch between the Army's methodology for
determining parts requirements and the Army's planned battlefield
maintenance practices.
Open Recommendations:
We recommended that the Secretary of Defense:
* Assess the priority and level of risk associated with the Army's
plans for addressing the reported shortfall in Army war reserve spare
parts.
* Direct the Army to provide accurate calculations of the Army's war
reserve spare parts requirements by:
* developing and using the best available consumption factors in
calculating all spare parts requirements for the Army's war reserves;
* eliminating potential mismatches in how the Army calculates its war
reserve spare parts requirements and the Army's planned battlefield
maintenance practices; and:
* developing fact-based estimates of industrial base capacity to
provide the needed spare parts in the two major theater war scenarios
time frames.
* Include in future industrial capabilities reports more comprehensive
assessments on industry's ability to supply critical spare parts for
two major theater wars.
Defense Inventory: Process for Canceling Inventory Orders Needs
Improvement, GAO/NSIAD-00-160, June 30, 2000:
Requirements for the 490 items we reviewed often changed after the
orders were placed, which caused the items to exceed requirements.
Further, because of inaccurate inventory records, 182 of the 490 items
(valued at $170 million) were reported as excess, but were not actually
excess to requirements. Because of the large number of inaccurate
records, neither DOD nor the military components know whether managers
are efficiently focusing their efforts to cancel excess inventory on
order, and the department does not have an accurate view of the total
value of its excess inventory on order. Each component's process for
canceling orders that exceeded requirements differs and cannot be
relied on to consistently identify orders to be considered for
cancellation or to terminate orders when economical.
Specifically:
* The components use different criteria for the amount of excess
inventory on order they consider for cancellation.
* Only the Defense Logistics Agency consistently uses its computer
model to determine whether it is more economical to cancel orders or
not. However, of the $696 million its model referred for consideration
during a 3-month period in 1999, less than $11 million in orders were
canceled.
* The military components' frequency in reviewing orders of excess
inventory for cancellation ranges from monthly to quarterly. The longer
components wait to consider an item for cancellation, the less likely
cancellation will be cost-effective because they have to pay the
contractor for costs incurred until the order is canceled.
* The components' goals for reducing excess inventory on order vary and
are not comparable. Thus, the department cannot evaluate the
components' progress in reducing excess inventory on order in a
consistent way.
Open Recommendations:
We recommended that the Secretary of Defense, in conjunction with the
Secretaries of the Army, the Navy, and the Air Force, and the Director
of the Defense Logistics Agency review and improve the processes for
identifying and canceling orders, focusing on areas such as:
* the accuracy of inventory management records;
* the level at which the services and the Defense Logistics Agency
identify excess inventory on order that is subject to cancellation
review, including low-dollar excess inventory on order that is excluded
from cancellation review;
* the timeliness and frequency of reviews for identifying excess items
on-order; and:
* the validity and use of the military components' termination models
in making economic analyses.
We also recommended that the Secretary of Defense require the
Secretaries of the Army, the Navy, and the Air Force, and the Director
of the Defense Logistics Agency to report on the amount of all excess
inventory on order, identifying inventory on order that exceeds both
the requirements objective and the approved acquisition objective.
[End of section]
Appendix III: DOD and Military Component Inventory Requirements at the
End of Fiscal Years 1999 and 2001:
Table 5: Comparison of Inventory Requirements for the Department of
Defense at the End of Fiscal Years 1999 and 2001:
Dollars in billions.
War reserves: Fiscal year 1999 requirements: $2.9;
Fiscal year 2001 requirements: $3.3;
Increase/ decrease since fiscal year 1999: $0.4;
Percent change since fiscal year 1999: 13.
Depot requirements objective: Fiscal year 1999
requirements: a: Fiscal year 2001 requirements:
0.3: Increase/ decrease since fiscal year 1999:
0.3: Percent change since fiscal year 1999: b.
Unfilled requisitions: Fiscal year 1999
requirements: 3.2: Fiscal year 2001 requirements:
3.1: Increase/ decrease since fiscal year 1999: -
0.1: Percent change since fiscal year 1999: -3.
Safety level: Fiscal year 1999 requirements: 5.9;
Fiscal year 2001 requirements: 8.2;
Increase/ decrease since fiscal year 1999: 2.3;
Percent change since fiscal year 1999: 39.
Insurance items: Fiscal year 1999 requirements:
4.6: Fiscal year 2001 requirements: 7.4;
Increase/ decrease since fiscal year 1999: 2.8;
Percent change since fiscal year 1999: 62.
Repair cycle: Fiscal year 1999 requirements: 3.6;
Fiscal year 2001 requirements: 4.2;
Increase/ decrease since fiscal year 1999: 0.6;
Percent change since fiscal year 1999: 18.
Production lead time: Fiscal year 1999
requirements: 6.1: Fiscal year 2001 requirements:
8.1: Increase/ decrease since fiscal year 1999:
2.0: Percent change since fiscal year 1999: 32.
Administrative lead time: Fiscal year 1999
requirements: 3.5: Fiscal year 2001 requirements:
4.4: Increase/ decrease since fiscal year 1999:
0.9: Percent change since fiscal year 1999: 26.
Lead time nonrecurring demand[C]: Fiscal year 1999
requirements: 2.7: Fiscal year 2001 requirements:
1.6: Increase/ decrease since fiscal year 1999: -
1.1: Percent change since fiscal year 1999: -39.
Economic order quantity: Fiscal year 1999
requirements: 8.1: Fiscal year 2001 requirements:
10.5: Increase/ decrease since fiscal year 1999:
2.4: Percent change since fiscal year 1999: 30.
Total: Fiscal year 1999 requirements: $40.6;
Fiscal year 2001 requirements: $51.2;
Increase/ decrease since fiscal year 1999: $10.6;
Percent change since fiscal year 1999: 26.
Source: DOD.
[A] The Army is the only component that uses this requirement for
reporting retail level requirements and inventory. It began its use in
fiscal year 2000.
[B] This percentage calculation is not meaningful since comparable data
were not available for fiscal year 1999.
[C] The Air Force is the only component that reports lead time
nonrecurring demand as a separate requirement.
[End of table]
Table 6: Comparison of Inventory Requirements for the Defense Logistics
Agency at the End of Fiscal Years 1999 and 2001:
Dollars in billions.
Unfilled requisitions: Fiscal year 1999
requirements: $0.8: Fiscal year 2001 requirements:
$1.0: Increase/ decrease since fiscal year 1999:
$0.2: Percent change since fiscal year 1999: 21.
Safety level: Fiscal year 1999 requirements: 1.0;
Fiscal year 2001 requirements: 1.6;
Increase/ decrease since fiscal year 1999: 0.6;
Percent change since fiscal year 1999: 62.
Production lead time: Fiscal year 1999
requirements: 2.9: Fiscal year 2001 requirements:
3.5: Increase/ decrease since fiscal year 1999:
0.6: Percent change since fiscal year 1999: 21.
Administrative lead time: Fiscal year 1999
requirements: 1.9: Fiscal year 2001 requirements:
2.6: Increase/ decrease since fiscal year 1999:
0.7: Percent change since fiscal year 1999: 39.
Economic order quantity: Fiscal year 1999
requirements: 2.6: Fiscal year 2001 requirements:
3.8: Increase/ decrease since fiscal year 1999:
1.2: Percent change since fiscal year 1999: 46.
Total: Fiscal year 1999 requirements: $9.1;
Fiscal year 2001 requirements: $12.4;
Increase/ decrease since fiscal year 1999: $3.3;
Percent change since fiscal year 1999: 36.
Source: DOD.
Note: Percentages were calculated prior to rounding.
[End of table]
Table 7: Comparison of Inventory Requirements for the Army at the End
of Fiscal Years 1999 and 2001:
Dollars in billions.
War reserves: Fiscal year 1999 requirements: $0.9;
Fiscal year 2001 requirements: $1.1;
Increase/: decrease since fiscal year 1999: $0.2;
Percent change since fiscal year 1999: 20.
Depot requirements objective: Fiscal year 1999
requirements: [A]: Fiscal year 2001 requirements:
0.3: Increase/: decrease since fiscal year 1999:
0.3: Percent change since fiscal year 1999: [B].
Unfilled requisitions: Fiscal year 1999
requirements: 0.8: Fiscal year 2001 requirements:
0.9: Increase/: decrease since fiscal year 1999:
0.2c: Percent change since fiscal year 1999: 23.
Safety level: Fiscal year 1999 requirements: 0.3;
Fiscal year 2001 requirements: 0.9;
Increase/: decrease since fiscal year 1999: 0.6;
Percent change since fiscal year 1999: 203.
Insurance items: Fiscal year 1999 requirements:
0.0[D]: Fiscal year 2001 requirements: 0.0[D];
Increase/: decrease since fiscal year 1999: 0.0d;
Percent change since fiscal year 1999: 67[D].
Repair cycle: Fiscal year 1999 requirements: 0.6;
Fiscal year 2001 requirements: 0.9;
Increase/: decrease since fiscal year 1999: 0.3;
Percent change since fiscal year 1999: 52.
Production lead time: Fiscal year 1999
requirements: 1.0: Fiscal year 2001 requirements:
1.6: Increase/: decrease since fiscal year 1999:
0.6: Percent change since fiscal year 1999: 59.
Administrative lead time: Fiscal year 1999
requirements: 0.3: Fiscal year 2001 requirements:
0.4: Increase/: decrease since fiscal year 1999:
0.2c: Percent change since fiscal year 1999: 64.
Economic order quantity: Fiscal year 1999
requirements: 2.1: Fiscal year 2001 requirements:
2.9: Increase/: decrease since fiscal year 1999:
0.8: Percent change since fiscal year 1999: 35.
Total: Fiscal year 1999 requirements: $6.0;
Fiscal year 2001 requirements: $9.1;
Increase/: decrease since fiscal year 1999: $3.1;
Percent change since fiscal year 1999: 52.
Source: DOD.
Note: Percentages were calculated prior to rounding.
[A] The Army did not use this requirement for fiscal year 1999.
[B] Because there was no data for fiscal year 1999, this percentage
could not be computed.
[C] Differences are due to rounding.
[D] The Army reported insurance items valued at less than $50 million.
[End of table]
Table 8: Comparison of Inventory Requirements for the Navy at the End
of Fiscal Years 1999 and 2001:
Dollars in billions.
War reserves[A]: Fiscal year 1999 requirements:
$0.0: Fiscal year 2001 requirements: $0.0;
Increase/: decrease since fiscal year 1999: $0.0;
Percent change since fiscal year 1999: -32.
Unfilled requisitions: Fiscal year 1999
requirements: 0.7: Fiscal year 2001 requirements:
0.5: Increase/: decrease since fiscal year 1999: -
0.3[B]: Percent change since fiscal year 1999: -
35.
Safety level: Fiscal year 1999 requirements: 0.6;
Fiscal year 2001 requirements: 0.8;
Increase/: decrease since fiscal year 1999: 0.2;
Percent change since fiscal year 1999: 35.
Insurance items: Fiscal year 1999 requirements:
2.4: Fiscal year 2001 requirements: 5.8;
Increase/: decrease since fiscal year 1999: 3.4;
Percent change since fiscal year 1999: 142.
Repair cycle: Fiscal year 1999 requirements: 1.2;
Fiscal year 2001 requirements: 1.6;
Increase/: decrease since fiscal year 1999: 0.4;
Percent change since fiscal year 1999: 30.
Production lead time: Fiscal year 1999
requirements: 1.1: Fiscal year 2001 requirements:
1.6: Increase/: decrease since fiscal year 1999:
0.5: Percent change since fiscal year 1999: 50.
Administrative lead time: Fiscal year 1999
requirements: 1.1: Fiscal year 2001 requirements:
1.0: Increase/: decrease since fiscal year 1999: -
0.1: Percent change since fiscal year 1999: -6.
Economic order quantity: Fiscal year 1999
requirements: 3.4: Fiscal year 2001 requirements:
3.8: Increase/: decrease since fiscal year 1999:
0.5[B]: Percent change since fiscal year 1999: 14.
Total: Fiscal year 1999 requirements: $10.5;
Fiscal year 2001 requirements: $15.2;
Increase/: decrease since fiscal year 1999: $4.7;
Percent change since fiscal year 1999: 44.
Source: DOD.
Note: Percentages were calculated prior to rounding.
[A] The Navy reported war reserve items valued at less than $50
million.
[B] Differences are due to rounding.
[End of table]
Table 9: Comparison of Inventory Requirements for the Air Force at the
End of Fiscal Years 1999 and 2001:
Dollars in billions.
War reserves: Fiscal year 1999 requirements: $2.0;
Fiscal year 2001 requirements: $2.2;
Increase/: decrease since fiscal year 1999: $0.2;
Percent change since fiscal year 1999: 11.
Unfilled requisitions: Fiscal year 1999
requirements: 0.9: Fiscal year 2001 requirements:
0.7: Increase/: decrease since fiscal year 1999: -
0.2: Percent change since fiscal year 1999: -22.
Safety level: Fiscal year 1999 requirements: 4.1;
Fiscal year 2001 requirements: 5.0;
Increase/: decrease since fiscal year 1999: 0.9;
Percent change since fiscal year 1999: 22.
Insurance items: Fiscal year 1999 requirements:
2.2: Fiscal year 2001 requirements: 1.5;
Increase/: decrease since fiscal year 1999: -0.6[A];
Percent change since fiscal year 1999: -28.
Repair cycle: Fiscal year 1999 requirements: 1.8;
Fiscal year 2001 requirements: 1.7;
Increase/: decrease since fiscal year 1999: 0.0[A];
Percent change since fiscal year 1999: -2.
Production lead time: Fiscal year 1999
requirements: 1.1: Fiscal year 2001 requirements:
1.4: Increase/: decrease since fiscal year 1999:
0.2[A]: Percent change since fiscal year 1999: 20.
Administrative lead time: Fiscal year 1999
requirements: 0.3: Fiscal year 2001 requirements:
0.4: Increase/: decrease since fiscal year 1999:
0.1: Percent change since fiscal year 1999: 29.
Lead time nonrecurring demand: Fiscal year 1999
requirements: 2.7: Fiscal year 2001 requirements:
1.6: Increase/: decrease since fiscal year 1999: -
1.1: Percent change since fiscal year 1999: -39.
Total: Fiscal year 1999 requirements: $14.9;
Fiscal year 2001 requirements: $14.5;
Increase/: decrease since fiscal year 1999: $-0.5[A];
Percent change since fiscal year 1999: -3.
Source: DOD.
Note: Percentages were calculated prior to rounding.
[A] Differences are due to rounding.
[End of table]
[End of section]
Appendix IV: Reasons for Requirements Increasing between
September 30, 1999, and September 30, 2001, for 90 Sample Items:
Navy Usage Increased:
Increased usage resulted in requirements increasing by $294 million for
46 items. Usage of the items increased for a variety of reasons,
including:
* recurring demand for items increased,
* defective parts needing to be replaced,
* demands being received for items that are not normally stocked,
* increases in the number of ships or aircraft using items,
* items reaching the end of their useful life,
* unplanned foreign military sales,
* usage shifting from other items,
* items wearing out at a faster rate than expected, and:
* items being new to the inventory system.
For example, unfilled requisitions, safety level, repair cycle, and
production and administrative lead time requirements for the hub used
on the AH-1W (Cobra) helicopter increased from 24 on September 30,
1999, to 48 on September 30, 2001. During that time, many of the hubs
reached the end of their 1,100-hour life and had to be replaced. As a
result, demand for the $275,000 hub increased from 31 a year in 1999 to
74 a year in 2001.
Navy Changed Stock, Overhaul, or Operational Policies:
Changes in stock, overhaul, or operational policies resulted in
requirements increases of $126 million for 36 items. For example,
repair cycle requirements for a radio transmitter modulator increased
from 10 in September 1999 to 22 in September 2001. The increase was a
result of the Navy requiring that the transmitter modulator, valued at
$136,000 each, be operational 100 percent of the time. Previously,
ships were permitted to operate in a degraded status with the modulator
not operational.
Source or Repair Issues:
Source and repair issues for 29 items resulted in requirements
increases of $137 million. A wide variety of reasons fell into this
category, including entering requirements for an item that would no
longer be available to provide support for a weapon system for its
remaining life, difficulties in identifying a commercial source for an
item, unavailability of material needed to manufacture items, and
increased time needed to repair or buy an item. For example, economic
order quantity requirements for a data module used in a submarine
control panel increased from 75 in September 1999 to 410 in September
2001. The item manager explained that the manufacturing source of
supply for the data module was being lost, and the requirement was
increased to protect the 419 on-hand modules from being subject to
disposal. In August 2002, the Navy had 229 of the $10,000 modules on
hand.
Uncertainty of Demand, Lead Time, or Wear-Out Rate:
Uncertainty of demand, lead time, and the rate at which items wear out
for 22 items resulted in safety level requirements increasing by $72
million. Safety level requirements are intended to compensate for
unplanned increases in demand, lead times, and the rate at which items
wear out. For example, the safety level requirement for an inertial
navigational unit used on several aircraft such as the AV-8B, the F-
14D, and several versions of the F-18 increased from 2 in September
1999 to 15 in September 2001. The increased requirement was the result
of demands for the $170,000 unit increasing from 155 to 205 a year.
Increases Were Not Valid:
Requirements increases, valued at $98 million, were not valid for seven
items. The reasons for the invalid requirements included overstating
the 2001 requirement, understating the 1999 requirement, and
inappropriately recording nonrecurring requirements. For example, the
September 2001 requirements requiring replacement for an electron tube
for a transmitter used on the EA-6B aircraft were overstated because
the requirements were inappropriately based on demand for the tube
instead of the rate at which the tube was failing and needed to be
replaced. As a result, safety level, repair cycle, administrative and
production lead times and economic order quantity requirements were
overstated by 2,124 tubes for the $57,500 item.
Data Anomalies:
Data anomalies for two items resulted in a requirement increase of $2
million. For both of the items, requirements increased for unfilled
requisitions. The item manager for the items explained that the items'
requirements, as of September 30, 2001, reflected back orders as of
that date and that the back orders were not the result of any
particular reason--just the status as of that date. The item manager
explained that the back orders went away when material was shipped a
few days after September 30th.
[End of section]
Appendix V: Comments from the Department of Defense:
DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS
3500 DEFENSE PENTAGON WASHINGTON, DC 20301-3500:
APR 15 2003:
Mr. William M. Solis:
Director, Defense Capabilities and Management U.S. General Accounting
Office:
Washington, D.C. 20548:
Dear Mr. Solis:
This is the Department of Defense (DoD) response to the General
Accounting Office (GAO) draft report, GAO-03-355: "DEFENSE INVENTORY:
Overall Inventory and Requirements Are Increasing, but Some Reductions
in Navy Requirements Are Possible," dated March 14, 2003 (GAO Code
350227). The DoD generally concurs with the report.
Detailed comments on the draft report recommendation are included in
the enclosure. The DoD appreciates the opportunity to comment on the
draft report.
Sincerely,
Diane K. Morales:
Signed for Diane K. Morales
Enclosure:
GAO DRAFT REPORT GAO-03-355 DATED MARCH 14, 2003 (GAO CODE 350227):
"DEFENSE INVENTORY: OVERALL INVENTORY AND REQUIREMENTS ARE INCREASING,
BUT SOME REDUCTIONS IN NAVY REQUIREMENTS ARE POSSIBLE":
DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATION:
RECOMMENDATION: The GAO recommended that the Secretary of Defense
direct the Secretary of the Navy to require the Commander, Naval Supply
Systems Command require its inventory managers to use the most current
data available for computing administrative lead time requirements.
(Page 19/Draft Report).
DOD RESPONSE: Partially Concur. The Navy inventory managers use the
most current data available to manually compute administrative lead
time when making management decisions such as procurement. However, we
concur that the Navy should formally update the administrative lead
time matrix. In March 2003, the Navy implemented an updated
administrative lead time matrix utilizing the most current data
available. This action is complete.
[End of section]
Appendix VI: Staff Acknowledgments:
Key contributors to this report were Lawson Gist, Jr., Louis
Modliszewski, David Epstein, and R.K. Wild.
FOOTNOTES
[1] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: Jan.
30, 2003).
[2] U.S. General Accounting Office, Defense Inventory: Status of
Inventory and Purchases and Their Relationship to Current Needs, GAO/
NSIAD-99-60 (Washington, D.C.: Apr. 16, 1999).
[3] In this report, we refer to the Army, the Navy, and the Air Force
as military services; when referring to the Army, the Navy, and the Air
Force, and the Defense Logistics Agency, we use military components.
[4] In this report, all numbers over 1,000 are rounded. Inventory and
requirement values are in current dollars.
[5] U.S. General Accounting Office, Defense Logistics: Much of the
Inventory Exceeds Current Needs, GAO/NSIAD-97-71 (Washington, D.C.:
Feb. 28, 1997).
[6] U.S. General Accounting Office, Defense Inventory: Process for
Canceling Inventory Orders Needs Improvement, GAO/NSIAD-00-160
(Washington, D.C.: June 30, 2000).
[7] In this report, percentages are rounded to the nearest whole
number.
[8] The inventory lead time refers to the time elapsed between when the
need to replenish inventory through a purchase is identified and when
the order is received.
[9] War reserves are authorized to be purchased to facilitate fast
mobilization in the event of war.
[10] While requirements increased by $3.4 billion, on-hand inventory
increased by $3.3 billion. On-order inventory also increased.
[11] U.S. General Accounting Office, Defense Inventory: Shortages Are
Recurring, but Not a Problem, GAO/NSIAD-95-137 (Washington, D.C.: Aug.
7, 1995); GAO/NSIAD-97-71; and GAO/NSIAD-00-160.
[12] Based on Defense Logistics Agency data, we estimate that this
amount includes about $400 million of Defense Logistics Agency
inventory that was in transit. Files provided by the Defense Logistics
Agency did not distinguish between on-order and in-transit inventories.
[13] GAO/NSIAD-00-160.
[14] GAO-03-98.
[15] Insurance items are minimum quantities for essential items for
which demand is not normally predicted.
[16] An inventory control point is responsible for the management of a
group of items, including the computation of requirements and the
purchase of inventory.
[17] While the aviation items held by ships and installations are not
insurance items, the Navy began reporting them as such in order to
retain their visibility to item managers.
[18] About 28,000 items that the Navy managed as of September 30, 1999,
were discontinued by September 30, 2001; however, the Navy added about
30,000 new items after September 30, 1999.
[19] Administrative lead time is the time between when the need to buy
an item is identified and when a contract is let.
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