Defense Inventory
Analysis of Consumption of Inventory Exceeding Current Operating Requirements Since September 30, 2001
Gao ID: GAO-04-689 August 2, 2004
Since 1990, GAO has identified the Department of Defense's (DOD) inventory management as a highrisk area. Ineffective management practices--such as the use of inaccurate data, lack of inventory controls and visibility, and information system weaknesses--have contributed to high levels of inventory. DOD has reduced its inventory since 1990, from about $100 billion to about $67 billion as of September 30, 2002. However, at the start of Operation Enduring Freedom, about half of the inventory exceeded current operating requirements. GAO, under its statutory authority, analyzed the extent to which inventory that exceeded current operating requirements as of September 30, 2001, was consumed through cutoff dates ranging from March through October 2003 and identified three ineffective and inefficient inventory management practices.
GAO's analysis of 1.5 million items with $35.1 billion of inventory on hand that exceeded current operating requirements as of September 30, 2001, showed that about $4.0 billion was consumed--$2.5 billion was used, $0.5 billion was disposed of, and $1.0 billion was condemned--since the onset of Operation Enduring Freedom and through the initial phases of Operation Iraqi Freedom. GAO found that, once disposals and condemnations were accounted for, 539,000 items had inventory that was used, 18,000 had inventory gains, and 937,000 had neither inventory usage nor gains. Of the 1.5 million items, customers did not make demands for 923,000 items during the period of review. GAO also identified three ineffective and inefficient inventory management practices that may affect inventory levels, including the inventory exceeding current operating requirements. First, although Defense Logistics Agency (DLA) has begun to charge its customers for inventory storage based on the actual space occupied by items, the military components are not using the DLA storage cost data, and instead continue to use estimated storage costs in their inventory management decision-making processes. Second, the Air Force does not have a systemwide process for correcting the causes of discrepancies between the inventory for which item managers are accountable and the inventory reported by bases and repair centers. Third, Air Force item managers are not required to enter codes into the Air Force inventory system for items that are categorized as potential reutilization and/or disposal materiel, but that the Air Force wants to retain; thus, the items are not properly categorized and are at risk of disposal.
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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GAO-04-689, Defense Inventory: Analysis of Consumption of Inventory Exceeding Current Operating Requirements Since September 30, 2001
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
August 2004:
Defense Inventory:
Analysis of Consumption of Inventory Exceeding Current Operating
Requirements Since September 30, 2001:
GAO-04-689:
GAO Highlights:
Highlights of GAO-04-689, a report to Senate and House Committees on
Armed Services and the Subcommittees on Defense, Senate and House
Committees on Appropriations
Why GAO Did This Study:
Since 1990, GAO has identified the Department of Defense‘s (DOD)
inventory management as a high-risk area. Ineffective management
practices”such as the use of inaccurate data, lack of inventory
controls and visibility, and information system weaknesses”have
contributed to high levels of inventory. DOD has reduced its inventory
since 1990, from about $100 billion to about $67 billion as of
September 30, 2002. However, at the start of Operation Enduring
Freedom, about half of the inventory exceeded current operating
requirements.
GAO, under its statutory authority, analyzed the extent to which
inventory that exceeded current operating requirements as of September
30, 2001, was consumed through cutoff dates ranging from March through
October 2003 and identified three ineffective and inefficient inventory
management practices.
What GAO Found:
GAO‘s analysis of 1.5 million items with $35.1 billion of inventory on
hand that exceeded current operating requirements as of September 30,
2001, showed that about $4.0 billion was consumed”$2.5 billion was
used, $0.5 billion was disposed of, and $1.0 billion was condemned”
since the onset of Operation Enduring Freedom and through the initial
phases of Operation Iraqi Freedom. GAO found that, once disposals and
condemnations were accounted for, 539,000 items had inventory that was
used, 18,000 had inventory gains, and 937,000 had neither inventory
usage nor gains. Of the 1.5 million items, customers did not make
demands for 923,000 items during the period of review.
GAO also identified three ineffective and inefficient inventory
management practices that may affect inventory levels, including the
inventory exceeding current operating requirements. First, although
Defense Logistics Agency (DLA) has begun to charge its customers for
inventory storage based on the actual space occupied by items, the
military components are not using the DLA storage cost data, and
instead continue to use estimated storage costs in their inventory
management decision-making processes. Second, the Air Force does not
have a systemwide process for correcting the causes of discrepancies
between the inventory for which item managers are accountable and the
inventory reported by bases and repair centers. Third, Air Force item
managers are not required to enter codes into the Air Force inventory
system for items that are categorized as potential reutilization and/or
disposal materiel, but that the Air Force wants to retain; thus, the
items are not properly categorized and are at risk of disposal.
What GAO Recommends:
GAO recommends that DOD take actions to correct inventory management
practices related to the military components‘ use of inventory storage
cost estimates, the lack of an Air Force system-wide process for
correcting causes of inventory discrepancies, and the improper coding
of items that the Air Force wants to retain.
In its comments, DOD generally concurred with GAO‘s report and
recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-04-689.
To view the full product, 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:
Scope and Methodology:
Results in Brief:
Background:
About $4.0 Billion of the Inventory Exceeding Current Operating
Requirements Was Consumed Since September 30, 2001:
Some DOD Practices Contribute to Ineffective and Inefficient Inventory
Management:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Comments from the Department of Defense:
Table:
Table 1: Comparison of Differences between Estimated Storage Costs and
Storage Costs Charged by DLA for Army, Navy, and DLA Items:
Figures:
Figure 1: Categorization of Inventory for a Navy Power Supply:
Figure 2: Consumption of Inventory Exceeding September 30, 2001,
Current Operating Requirements:
Figure 3: Percent Distribution of Items and Value of Inventory
Exceeding Current Operating Requirements as of September 30, 2001, by
Usage Since That Date:
Abbreviations:
DLA: Defense Logistics Agency:
DOD: Department of Defense:
United States Government Accountability Office:
Washington, DC 20548:
August 2, 2004:
Congressional Committees:
The Department of Defense (DOD) maintains a secondary inventory of
spare and repair parts[Footnote 1] to support its war-and peace-time
missions. The effective and efficient management of this inventory is
critical to ensure that the warfighter is supplied with the right items
at the right time, especially as the department and the services are
called upon for new missions in locations such as Afghanistan, Iraq,
and the Philippines, as well as protecting the homeland.
DOD's inventory management comprises several major functions, including
determining what is needed; buying needed items; and storing,
maintaining, distributing, and disposing of inventory. DOD retains
inventory that exceeds items' requirements objectives[Footnote 2] for
different reasons, including: (1) to satisfy projected demands for 2
fiscal years beyond the current operating requirements; (2) for
economic reasons, because it would be less costly to retain rather than
dispose of and repurchase the items; and (3) for specific
contingencies, such as when the source of supply for an item--a
specific parts manufacturer, for example--is no longer available.
Since 1990, we have identified the department's management of its
inventory as a high-risk area and have reported on and made
recommendations to address issues that contribute to ineffective and
inefficient inventory management.[Footnote 3] We have reported on such
issues as inaccurate data, not canceling orders for inventory that is
no longer needed, lack of controls and visibility over inventory, and
information system weaknesses. For example, in May 2001, we
reported[Footnote 4] that the military components[Footnote 5] did not
have sound analytical support for determining when it is economical to
retain or dispose of inventory that exceeds current operating
requirements. Taken together, these and other issues have contributed
to the accumulation of high levels of inventory.
DOD maintains that, while it does not purchase inventory that exceeds
current operating requirements, much of the inventory, once purchased,
will eventually be needed. Nevertheless, in response to our work and to
congressionally mandated inventory-reduction goals, DOD reduced its
overall inventory levels throughout the 1990s--from over $100 billion
in 1990 to a low of about $61 billion as of September 30, 1998.
However, in recent years the trend has been reversed, with inventory
levels increasing to about $67 billion as of September 30, 2002.
DOD further maintains that seeking inventory-reduction goals leads to
inefficient management. However, in response to our May 2001 report,
and because Congress had directed[Footnote 6] the department to examine
its retention practices, DOD is reviewing its policies and procedures
for retaining inventory that exceeds the items' current operating
requirements.
In May 2003,[Footnote 7] we reported a snapshot of DOD's inventory as
of September 30, 2001. We reported that large imbalances in the
department's inventory continued to exist as of that date--
523,000 items needed additional inventory to satisfy current operating
requirements while 1.7 million items had inventory on hand and on order
that exceeded current operating requirements. Our work showed that
about 1.6 million items had about $36.0 billion of inventory on hand
that exceeded the items' current operating requirements, which amounted
to roughly half of DOD's inventory at that time.
We prepared this report under our statutory authority and are providing
it to you because of your oversight responsibilities for defense
issues. In this report we (1) analyze the extent to which inventory on
hand exceeding current operating requirements as of September 30, 2001,
was consumed during subsequent operations; and (2) discuss three
practices we identified that further contribute to the ineffective and
inefficient management of inventory.
Scope and Methodology:
To determine how much of the inventory that exceeded current operating
requirements as of September 30, 2001, was consumed (used, disposed of,
or condemned) since that date, we obtained and analyzed data from the
military components for the items that we had identified in our May
2003 report that had inventory exceeding the items' current operating
requirements as of September 30, 2001. We interviewed DOD, Defense
Logistics Agency (DLA), and service inventory management officials to
discuss the data needed and our analytical approach. As a result of
these discussions, we requested the following consumption-related data
for each item that had inventory exceeding current operating
requirements as of September 30, 2001:
* inventory demanded from the supply system (demands);
* inventory returned to the supply system for repair (returns);
* inventory condemned because the parts could not be repaired
(condemnations); and:
* inventory that was otherwise processed for disposal (disposals).
The data we obtained covers different periods, depending on the
military component providing the data. Although the period of review
for all of the military components began on October 1, 2001, the data
we obtained had different cutoff dates as follows:
* For the Navy and Air Force, the cutoff date was March 31, 2003.
* For the Army, the cutoff dates ranged from June 2003 through
October 2003, depending on the inventory control location that provided
the data.
* For DLA, the cutoff date was September 30, 2003.
According to the officials providing the data, 119,000 items of the
1.6 million items that had on-hand inventory exceeding current
operating requirements as of September 30, 2001, were no longer in the
military components' inventory systems as of the data cutoff dates. The
119,000 items had about $966 million of on-hand inventory that exceeded
current operating requirements as of September 30, 2001. Therefore, our
analysis only concerns the remaining 1.5 million items with
$35.1 billion of on-hand inventory exceeding current operating
requirements as of September 30, 2001.
Our analysis to determine how much of the inventory that exceeded
current operating requirements was consumed since September 30, 2001,
involved several steps. For each of the 1.5 million items:
* We first subtracted the quantity that was disposed of from the
quantity that exceeded current operating requirements.
* Next, we subtracted the quantity of inventory that was condemned.
* For each item, we also computed net demands by subtracting the
inventory returns from inventory demands.
* To determine how much of the inventory was used, we then compared the
net demands to the inventory exceeding current operating requirements
that had not been disposed of or condemned.
We limited the quantities of inventory that were disposed of,
condemned, or used to the inventory that exceeded current operating
requirements as of September 30, 2001. We considered items with more
returns than inventory disposals, condemnations, and demands to have
inventory gains; items with returns equal to disposals, condemnations,
and demands were considered to have neither inventory usage nor gains.
We used the above methodology to determine how many of the items had
their entire inventory exceeding current operating requirements
consumed. We further used the demand data provided to determine how
many of the items had and did not have demands during the period of our
review. In our analyses, unless otherwise indicated, inventory values
are expressed in billions of dollars, and items are rounded to the
nearest thousand. 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 inventory held in 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. In addition, to ascertain some of the reasons why
inventory exceeding current operating requirements was being retained,
we selected non-representative samples of 78 Army items and 118 Air
Force items with inventory that exceeded current operating requirements
as of September 30, 2001, prepared detailed questionnaires for item
managers, and visited the Army Aviation and Missile Command,
Huntsville, Alabama, and Warner Robins Air Logistics Center, Warner
Robins, Georgia, to collect and analyze the responses. We selected
these inventory control locations based upon the value of the inventory
they managed that exceeded current operating requirements as of
September 30, 2001, when compared to other Army and Air Force inventory
control locations. Because we used non-representative samples, we
cannot project these observations to the universe. Although our work
highlights the large amount of inventory exceeding current operating
requirements that DOD retains, we neither performed detailed analyses
of DOD's policies and procedures relating to that inventory, nor
selected samples of Navy and DLA items, because we have initiated a
separate review of DOD inventory retention policies.
To address the inventory management practices that we identified in the
course of assessing our non-representative samples, we obtained
information and data from DLA about how it determines what to charge
the military components for storing secondary inventory, and
interviewed responsible officials from the military components to
determine whether they were using this data to make relevant management
decisions. We also reviewed Air Force policies related to, and
interviewed responsible Air Force officials about, the reconciliation
of inventory discrepancies, and the retention of inventory categorized
as potential reutilization and/or disposal materiel. Through our
analysis of the DLA storage cost charges and by examining our non-
representative sample of Air Force items, we identified specific
examples of these inefficient and ineffective management practices. We
also obtained information from the 2001 Supply System Inventory Report
to get a rough estimate of how the department revalues inventory held
as potential reutilization and/or disposal materiel.
We assessed the reliability of the data used in this report by
(1) performing electronic testing of required data elements,
(2) reviewing existing information about the data and the systems that
produced them, and (3) interviewing officials knowledgeable about the
data. We determined that the data were sufficiently reliable for the
purposes of this report. We performed our review from June 2003 through
May 2004 in accordance with generally accepted government auditing
standards.
Results in Brief:
Our analysis of approximately 1.5 million items with inventory on hand
valued at $35.1 billion that exceeded current operating requirements as
of September 30, 2001, showed that about $4.0 billion was consumed--
including $2.5 billion that was used, $0.5 billion disposed of, and
$1.0 billion condemned--since the onset of Operation Enduring Freedom
and through the initial phases of Operation Iraqi Freedom. Additional
analyses of the 1.5 million items showed that:
* After we accounted for parts that were disposed of or condemned,
(1) about 539,000 items had demands that exceeded the amount of parts
returned for repair by about $2.5 billion; (2) nearly 18,000 items had
inventory gains of $0.9 billion, where more broken parts were returned
for repair than were demanded, condemned, or disposed of; and (3) about
937,000 items with $24.4 billion of on-hand inventory exceeding current
operating requirements as of September 30, 2001, had neither inventory
usage nor inventory gains.
* About 199,000 items had their entire $1.8 billion of on-hand
inventory exceeding current operating requirements as of September 30,
2001, used, disposed of, or condemned since that date.
* About 923,000 items with on-hand inventory of $14.8 billion exceeding
current operating requirements as of September 30, 2001, had no demands
during the period of review, while the remaining 571,000 items with
$20.2 billion of on-hand inventory exceeding current operating
requirements as of September 30, 2001, had demands.
Our analysis of non-representative samples of Army and Air Force items,
performed to ascertain some of the reasons why the 1.5 million items
with on-hand inventory exceeding current operating requirements were
being retained, showed that the items in the samples supported a
variety of weapon systems and that most of the items (1) had inventory
categorized as either economic or contingency retention stock; and
(2) had been in the inventory system for 15 or more years, including
several that had been first placed into service during the 1960s.
While reviewing Air Force and Army items to determine why inventory
exceeding current operating requirements was being retained, we
identified three inventory management practices that may affect
inventory levels, including the inventory exceeding requirements. These
inefficiencies do not necessarily lead to the accumulation of inventory
exceeding current operating requirements. Instead, they can lead to
having critical items in short supply, to persistent difficulties in
accurately and reliably forecasting the availability of assets, and to
the inappropriate disposal of inventory.
* First, the military components use storage cost estimates rather than
actual storage cost data in making key decisions, such as determining
the levels of inventory that are needed to be retained or ordered. DLA
now determines how much to charge the military components for storage
on a per-item basis and provides this data to the components. Because
computations based on the actual storage cost data would be more
accurate, the military components could be purchasing or retaining
inappropriate amounts of inventory. For example, depending on the item,
DLA's actual charges for storage could be either less than or greater
than the item's estimated storage costs, which would make it more or
less economical to retain the same amount of inventory. To assess the
significance of these differences, we compared the actual storage costs
charged by DLA to the Army, Navy, and DLA with the components' storage
cost estimates for about 1.5 million inventory items and found that,
for about half of the items reviewed, the estimated storage costs were
at least 10 times greater than the costs charged by DLA. However,
because DLA has only recently begun to compute the storage charges on a
per-item basis, the Army, Navy, and DLA have not determined whether it
would be beneficial to use the DLA storage cost data rather than
estimated storage costs in their inventory management decision-making
processes.
* Second, the Air Force does not have a systemwide process for
correcting the causes of discrepancies between the inventory for which
item managers are accountable and the inventory reported by bases and
repair centers.[Footnote 8] Because accurate data is necessary to make
accurate decisions, item managers--who are responsible for purchasing
inventory--must persistently deal with inventory discrepancies, cannot
accurately determine the number of available assets, and cannot
reliably forecast the availability of assets. Consequently, in some
instances the Air Force is at risk of buying inventory that it does not
need and in other instances of not buying enough inventory. At the
Warner Robins Air Logistics Center, we identified 35 out of 118 items
with inventory valued at $135 million that was recorded on item
managers' records, but was not accounted for by bases and repair
centers.
* Third, Air Force item managers are not required to enter codes into
the Air Force inventory system for items that are categorized as
potential reutilization and/or disposal materiel, but that the Air
Force wants to retain.[Footnote 9] As a result, the items are not
properly categorized and the Air Force is at risk of disposing
inventory that it may need to later repurchase. Air Force policy allows
item managers to retain inventory categorized as potential
reutilization and/or disposal materiel when there is a valid reason for
doing so. Item managers, when justified, are authorized but are not
required to enter a deferred disposal code that will result in the
inventory being recategorized as contingency retention stock. We
observed at the Warner Robins Air Logistics Center that
$277 million[Footnote 10] of inventory remained categorized as
potential reutilization and/or disposal materiel even though the Air
Force expressed a valid reason for retaining it. For example, the
center had 50 transmitter drivers used on an electronic warfare system
for the B-1B aircraft that were categorized as potential reutilization
and/or disposal materiel. The center was retaining the drivers to
support the aircraft until the year 2040 when the Air Force expects to
remove the last of the aircraft from its inventory. However, no code
was entered into the system. Additionally, DOD reports the value of
inventory categorized as potential reutilization and/or disposal
materiel at a rate of approximately 2 percent of its latest acquisition
cost and, therefore, is significantly understating the amount of
inventory it is retaining in a key inventory management report.
Because we have initiated a separate review of DOD's inventory
retention policies, we are not making recommendations regarding the
retention of inventory exceeding current operating requirements that
had no demands. We are, however, recommending that the Secretary of
Defense take actions to improve the inventory management practices we
identified, including the components' use of inventory storage cost
estimates, the lack of an Air Force systemwide process for correcting
causes of inventory discrepancies, and the improper coding of items
that the Air Force wants to retain.
In written comments on a draft of this report, DOD generally concurred
with the report and our recommendations. Our evaluation of DOD's
comments is discussed on page 23.
Background:
DOD defines the requirements objective (current operating requirements)
as the amount of inventory needed to be on hand or on order to support
current operations. The current operating requirements includes
inventory requirements for a reorder point and an economic order
quantity.[Footnote 11] The reorder point is the point at which
inventory replenishment will normally prevent out-of-stock situations
from occurring and includes:
* war reserves, requisitions that have not been filled, and a "safety
level" of stock;[Footnote 12]
* stock to satisfy demands while broken items are being repaired; and:
* stock to satisfy demands during the "lead time"--the period between
the placement of orders and their receipt.
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 purchases an amount of inventory needed to
satisfy the reorder point and an economic order quantity--a quantity
that, when ordered and received, results in the lowest total cost for
ordering and holding inventory.
The approved acquisition objective defines the amount of inventory that
DOD budgets for and includes inventory needed to satisfy the current
operating requirements, 2 years of demand above the current operating
requirements, and, if applicable, additional war reserves. While DOD
budgets funds to purchase inventory to satisfy the approved acquisition
objective, item managers do not purchase inventory unless an item's
inventory falls to or below its reorder point; therefore, item managers
do not purchase inventory to satisfy the approved acquisition
objective.
Inventory that exceeds the approved acquisition objective is
categorized as economic retention, contingency retention, and potential
reutilization and/or disposal materiel:
* Economic retention inventory exceeds the approved acquisition
objective and has been determined to be more economical to keep than to
dispose of because it is likely to be needed in the future.
* Contingency retention inventory exceeds the economic retention
inventory and would normally be categorized as potential reutilization
and/or disposal materiel, but is instead retained for specific
contingencies.
* Potential reutilization and/or disposal materiel exceeds contingency
retention inventory and has been identified for possible disposal but
with potential for reutilization.
A Navy computer power supply used on the radar for the FA-18 aircraft
demonstrates the above inventory categories. On September 30, 2003,
the Navy had 147 of the $353,000 power supplies on hand. As shown in
figure 1, 52 of the power supplies satisfied the item's current
operating requirements. Of the remaining 95 power supplies, 56 were
designated to satisfy the 2 years of additional demand, 11 were held as
economic retention stock, 2 were held as contingency retention stock,
and 26 were categorized as potential reutilization and/or disposal
materiel.
Figure 1: Categorization of Inventory for a Navy Power Supply:
[See PDF for image]
[End of figure]
Overall, the amount of DOD's inventory exceeding current operating
requirements has decreased since 1996. On-hand inventory that exceeded
current operating requirements decreased from $41.3 billion, or
59 percent, of the $69.7 billion of on-hand inventory on September 30,
1996, to $36.0 billion, or 52 percent, of the $69.8 billion inventory
on hand on September 30, 2001.
DOD annually summarizes its secondary inventory in its Supply System
Inventory Report. This report is based on financial inventory and other
inventory reports prepared by the military components. The report
summarizes inventories by DOD component and inventory category. DOD
officials use the report as a management tool to monitor changes in the
levels of its inventory. These officials include the Under Secretary of
Defense for Acquisition, Technology, and Logistics, who is responsible
for developing and ensuring the uniform implementation of DOD inventory
management policies throughout the department, for monitoring the
overall effectiveness and efficiency of the DOD logistics system, and
for continually developing improvements. In addition, the Secretaries
of the Army, the Navy, and the Air Force, and the Director, DLA, are
responsible for implementing DOD inventory policies and procedures.
About $4.0 Billion of the Inventory Exceeding Current Operating
Requirements Was Consumed Since September 30, 2001:
Our analysis of approximately 1.5 million items with inventory on hand
valued at $35.1 billion[Footnote 13] that exceeded current operating
requirements as of September 30, 2001, showed that about $2.5 billion
of the inventory was used, $0.5 billion was disposed of, and
$1.0 billion was condemned since the onset of Operation Enduring
Freedom and through the initial phases of Operation Iraqi Freedom. As
illustrated in figure 2, the inventory exceeding current operating
requirements that was consume[Footnote 14]d since September 30, 2001--
that is, the sum of the inventory used, disposed of, or condemned--
amounted to $4.0 billion. Roughly $31.0 billi[Footnote 15]on of the
on-hand inventory that exceeded current operating requirements as of
September 30, 2001, was not used, disposed of, or condemned during the
period of our review.
Figure 2: Consumption of Inventory Exceeding September 30, 2001,
Current Operating Requirements:
[See PDF for image]
[A] Inventory amounts do not total to $35.1 billion because of
rounding.
[End of figure]
Our analysis also identified how many of the 1.5 million items had
inventory that was used, how many had inventory gains, and how many had
neither inventory that was used nor inventory gains. As depicted in
figure 3, our analysis showed:
* About 539,000 items with $7.2 billion of on-hand inventory that
exceeded current operating requirements as of September 30, 2001, had
$2.5 billion of that inventory used since then. That is, once disposals
and condemnations were accounted for, demands exceeded returns by
$2.5 billion. For example, the Navy had seven infrared receivers, used
on FA-18 E/F aircraft, which exceeded current operating requirements as
of September 30, 2001. Through March 2003, two of the $1,610 receivers
were disposed of, four were condemned, and one was used as a result of
demands exceeding returns. The 539,000 items, or 36 percent of the
1.5 million items reviewed, had 21 percent of the $35.1 billion of on-
hand inventory that exceeded current operating requirements as of
September 30, 2001.
* About 18,000 items with $3.5 billion of on-hand inventory exceeding
current operating requirements as of September 30, 2001, had
$0.9 billion in inventory gains as a result of more broken parts
returned for repair than demands, disposals, or condemnations during
the period of review. For example, the Army had two AH-64 helicopter
capacitor assemblies, each valued at $554, which exceeded current
operating requirements as of September 30, 2001. Through August 2003,
one of the assemblies was condemned and the other was demanded.
However, four assemblies were returned for repair, resulting in a gain
of two assemblies to the inventory. The 18,000 items, or 1 percent of
the 1.5 million items, had 10 percent of the $35.1 billion of on-hand
inventory that exceeded current operating requirements as of
September 30, 2001.
* About 937,000 items with $24.4 billion of on-hand inventory exceeding
current operating requirements as of September 30, 2001, had neither
inventory usage nor gains during the period of review--these items had
an equal amount of inventory returned for repair as was disposed of,
condemned, and demanded. For example, DLA had 294 men's overcoats,
valued at $265 apiece, that exceeded current operating requirements as
of September 30, 2001. Through September 2003, these overcoats had no
disposals, no condemnations, and no demands. The 937,000 items, or
63 percent of the 1.5 million items, had 70 percent of the on-hand
inventory that exceeded current operating requirements as of
September 30, 2001.
Figure 3: Percent Distribution of Items and Value of Inventory
Exceeding Current Operating Requirements as of September 30, 2001, by
Usage Since That Date:
[See PDF for image]
[A] Percent total does not add to 100 due to rounding.
[End of figure]
We also analyzed the 1.5 million items to determine if the entire
inventory exceeding current operating requirements was consumed for any
of the items. Our analyses showed that, for about 199,000 of the
1.5 million items, all inventory that exceeded the items'
September 30, 2001, current operating requirements was used, condemned,
or disposed of since that date. The 199,000 items had on-hand inventory
valued at about $1.8 billion that exceeded current operating
requirements. For about 1.3 million items, either some or none of the
inventory exceeding current operating requirements was consumed.
Further, 923,000 of the 1.5 million items had no customer demands.
These items represented about $14.8 billion of inventory on hand that
exceeded current operating requirements as of September 30, 2001. The
remaining 571,000 items had $26.0 billion of demands and $20.7 billion
of broken parts returned for repair. These items represented about
$20.2 billion of inventory that exceeded current operating
requirements, as of September 30, 2001.
To ascertain some of the reasons why the 1.5 million items with on-hand
inventory exceeding current operating requirements was being retained,
we selected non-representative samples of Army and Air Force items. We
found that most of these sample items had inventory categorized as
either economic or contingency retention stock and had been in the
inventory system for 15 or more years. At the Army and Air Force
inventory control locations that we visited, we observed that 121 out
of 190 items, or 64 percent of the items reviewed, had been placed in
service prior to 1989. These items had about $1.6 billion of inventory
that exceeded the current operating requirements as of September 30,
2001. Seventeen of the items, with about $107 million of inventory on
hand that exceeded current operating requirements, were placed in
service during the 1960s. These items included antennae, aircraft
rudders, auxiliary power units, propeller blades, and circuit card
assemblies that were used on versions of the Air Force's C-130 and F-15
aircraft, the Army's UH-60 helicopter, and other weapon systems.
Some DOD Practices Contribute to Ineffective and Inefficient Inventory
Management:
While reviewing Air Force and Army items to determine why inventory
exceeding current operating requirements was being retained, we
identified three ineffective and inefficient inventory management
practices that may affect inventory levels, including the inventory
exceeding current operating requirements. First, although DLA has begun
to charge its customers for inventory storage based on the actual space
occupied by items, the military components are not using the DLA
storage cost data, and instead continue to use estimated storage costs
in their inventory management decision-making processes. Second, the
Air Force does not have a systemwide process for correcting the causes
of discrepancies between the inventory for which item managers are
accountable and the inventory reported by bases and repair
centers.[Footnote 16] Third, Air Force item managers are not required
to enter codes into the Air Force inventory system for items that are
categorized as potential reutilization and/or disposal materiel, but
that the Air Force wants to retain; thus, the items are not properly
categorized and are at risk of disposal.[Footnote 17] The
inefficiencies we identified do not necessarily lead to the
accumulation of inventory exceeding current operating requirements;
however, they can lead to having critical items in short supply, to
persistent difficulties in accurately and reliably forecasting the
availability of assets, and to inappropriately disposing of inventory.
Military Components Are Not Using Actual Storage Cost Data in Making
Inventory Management Decisions:
Although DLA has begun to charge its customers for inventory storage
based on the actual space occupied by items, the military components
are not using the DLA data, and instead continue to use estimated
storage costs in their inventory management decision-making processes.
We noted that the estimated storage costs ranged from being over 1,000
times more than the actual costs charged to customers, to being up to
10 times less than the actual charges. Because using actual storage
cost data would result in more accurate computations, the military
components could be purchasing or retaining inappropriate amounts of
inventory. However, because DLA only recently began to compute the
storage charges on a per-item basis, the Army, Navy, and DLA have not
determined whether it would be beneficial to use actual data rather
than estimated storage costs in their inventory management decision-
making processes.
The Defense Logistics Agency is responsible for storing inventory for
the military services and for its own defense supply centers. Beginning
in fiscal year 2003, DLA began charging for inventory stored in its
warehouses by (1) determining the cubic-feet of space occupied by an
individual item, (2) multiplying the space occupied by a single item by
the number of items stored to yield the total space occupied, and
(3) multiplying the stored items' total occupied space by a rate
charged for the type of storage space used (open, covered, or
specialized). As a result, the DLA computes storage costs charged to
its customers on a per-item basis.
According to DLA officials, the agency provides data to the military
services and the DLA supply centers on a quarterly basis that would
allow them to take these charges into account when making inventory
management decisions. Such decisions might include:
* determining how much inventory to retain for safety level
requirements, which is the amount of inventory held in case of minor
interruptions in the resupply process or fluctuations of demand;
* computing economic order quantities, which are the quantities of an
item that are purchased that results in the lowest cost for ordering
and holding inventory;
* determining when it is more economical to retain extra inventory, as
opposed to disposing of it and then satisfying future requirements
through new procurements and/or repairs of broken items; and:
* determining whether orders for inventory that is no longer needed are
economical to cancel.
The consideration of storage costs as a factor in making these kinds of
inventory management decisions varies among the components. For
example, the Army, Navy, and DLA factor in storage costs when computing
economic order quantities. The Air Force's requirements computation
system does not compute an economic order quantity. The Army and Navy
models for determining economic retention levels factor in storage
costs, whereas the Air Force and DLA set economic retention levels
based on years of supply. And, the Army, Air Force, and DLA factor in
storage costs when determining whether it is economical to cancel or
cut back orders for inventory that is no longer needed to satisfy
requirements.
When the military components factor in storage costs to make inventory
management decisions, they use estimated storage costs--as they have
done historically--rather than the actual, per-item costs now charged
by DLA. For example, the Army, Navy, and DLA estimate storage costs to
be equal to 1 percent of the inventory value. According to an Air Force
Materiel Command official, the Air Force uses estimated charges from
the DLA Storage Occupancy Report. However, according to a DLA official,
the report, which is no longer issued, identifies the space occupied
by items, but not the cost of storing a specific item.
Generally, storage costs charged to customers are lower than the
estimated costs (1 percent of inventory value) currently used by the
Army, Navy, and DLA. In order to ascertain the significance of using
estimated costs in lieu of actual charges, we compared the actual
storage costs charged by DLA to the Army, Navy, and DLA with 1-percent
cost estimates for about 1.5 million inventory items. We found that for
about half of the items, the estimated storage costs were at least 10
times greater than the costs charged by DLA for storing the inventory.
For over 242,000 items, about 16 percent of the items in our analysis,
the estimated storage costs were at least 100 times greater than the
costs charged for storing the items (see table 1).
Table 1: Comparison of Differences between Estimated Storage Costs and
Storage Costs Charged by DLA for Army, Navy, and DLA Items:
Estimated storage cost was 1,000 or more times greater than actual
charge;
Number of items: Army: 1,829;
Number of items: Navy: 4,247;
Number of items: DLA: 39,950;
Number of items: Total: 46,026;
Percent: 3%.
Estimated storage cost was 100 times up to 1,000 times greater than
actual charge;
Number of items: Army: 4,094;
Number of items: Navy: 18,368;
Number of items: DLA: 173,900;
Number of items: Total: 196,362;
Percent: 13%.
Estimated storage cost was 10 times up to 100 times greater than actual
charge;
Number of items: Army: 13,525;
Number of items: Navy: 43,101;
Number of items: DLA: 456,508;
Number of items: Total: 513,134;
Percent: 34%.
Estimated storage cost was 0 times up to 10 times greater than actual
charge;
Number of items: Army: 15,495;
Number of items: Navy: 32,044;
Number of items: DLA: 516,160;
Number of items: Total: 563,699;
Percent: 37%.
Estimated storage cost was up to 10 times less than actual charge;
Number of items: Army: 6,132;
Number of items: Navy: 8,183;
Number of items: DLA: 192,778;
Number of items: Total: 207,093;
Percent: 14%.
Estimated storage cost was Total;
Number of items: Army: 41,075;
Number of items: Navy: 105,943;
Number of items: DLA: 1,379,296;
Number of items: Total: 1,526,314;
Percent: 100[A]%.
Source: GAO analysis of DOD data.
Notes: We used 1 percent of the September 30, 2001, inventory values to determine the estimated storage costs, and DLA's fiscal year 2003 storage rates to determine the actual storage cost charges.
[A] Percent total does not add to 100 due to rounding.
[End of table]
A change in the storage cost factor used by the components could affect
inventory management decisions. For example, depending on the item, the
actual storage cost charged by DLA could be either less than or greater
than the item's estimated storage cost, which would make it more or
less economical to retain the same amount of inventory. Therefore, by
not using the actual storage costs charged by DLA, the military
components that take storage costs into account when making inventory
management decisions may be recommending the acquisition or retention
of an inappropriate amount of inventory.
According to Army and Navy officials, it may not be cost effective to
use the storage cost data provided by DLA, even if using the data
resulted in more accurate calculations. Several factors besides storage
costs are considered in making inventory decisions. Depending on the
calculation, these other factors can include: the cost of an item; the
demand for an item; the cost to reduce an order; and other holding cost
factors,[Footnote 18] such as obsolescence and storage loss rates.
According to one Navy official, some of these factors have more of an
impact on such calculations than do storage costs. Although the Navy
and Army have recently concluded that their 1-percent estimates are
sufficiently accurate for some of their inventory management decisions,
neither service nor DLA has determined if it would be beneficial to use
the newly available storage cost data instead of estimated costs in
their inventory management decision-making processes.
Air Force Does Not Systematically Correct the Causes of Inventory
Discrepancies:
The Air Force does not have a systemwide process for correcting the
causes of discrepancies between the inventory for which item managers
are accountable and the inventory reported by bases and repair centers.
Because accurate data is necessary to make accurate decisions, item
managers--who are responsible for purchasing inventory--must
persistently deal with inventory discrepancies, cannot accurately
determine the number of available assets, and cannot reliably forecast
the availability of assets. Consequently, in some instances the Air
Force is at risk of buying inventory that it does not need and, in
other instances, of not buying enough inventory.
Air Force policy provides for asset reconciliation on a quarterly
basis. The reconciliation process compares the quantity of inventory
for which the item manager is responsible to the quantity that bases
and repair centers report as being on hand, in order to identify any
variances between the quantities. If there are three consecutive plus
or three consecutive minus variances, the policy allows item managers
to adjust the inventory quantity by the smallest of the three
variances. According to an Air Force Materiel Command official, in
instances where an item manager's records account for more inventory
than was being reported on hand by bases and repair centers, the
variance is recorded on requirement computations and inventory
stratification reports as "due in other" inventory.
At Warner Robins Air Logistics Center, we noted that item manager
inventory records for 35 of 118 items we reviewed showed $135 million
of "due in other" inventory as of March 31, 2003, that was not
accounted for by the bases and repair centers. One item, a
countermeasure receiver subassembly valued at about $58,000,
demonstrates the persistent nature of inventory variances. From
December 2000 through June 2003, the reconciliation process
consistently showed that the item manager was accountable for more
assets than were being reported by repair centers and bases. According
to inventory records, the item manager reduced by eight the quantity
that the item manager was responsible for. A first adjustment, which
the item manager performed in September 2002, reduced the quantity
by six. The adjustment was made because of erroneous data reported by
the contractor. A second adjustment, performed in September 2003,
occurred because, at the time of the adjustment, the item manager did
not have access to all of the condemnation data for the item. Another
Air Force official entered this data into a system that feeds the main
Air Force inventory system. Had this data been entered before the item
manager reviewed the file, there would have been no need for the
adjustment.
Because consistent adjustments indicate that there is something wrong
with the reported information, Air Force policy instructs item managers
to research historical records whenever variances exist and make every
effort to identify and correct the underlying problems, when possible.
According to an Air Force Materiel Command official, some variances are
to be expected. But items that are continuously in variance, or for
which particularly large variances exist, are problematic. In such
cases, item managers cannot accurately determine the number of
available assets and cannot reliably forecast the availability of
assets. Knowledge of the correct number of available assets is critical
when deciding whether to buy inventory, and determining how much to
buy.
According to an Air Force Materiel Command official, the Air Force has
sought to identify and correct variances that result from systemic
reasons, such as data interface problems between two inventory systems.
However, officials from Warner Robins Air Logistics Center and from Air
Force Materiel Command say that the Air Force has not systemically
addressed and corrected the causes of variances that item managers
identify during the reconciliation process.
Air Force Item Managers Are Not Required to Code Items to Prevent
Their Disposal:
Air Force item managers are not required to enter codes into the Air
Force inventory system for items that are categorized as potential
reutilization and/or disposal materiel, but that the Air Force wants to
retain. As a result, the inventory is not properly categorized, and the
Air Force is at risk of disposing of inventory that it may need to
later repurchase. Additionally, because DOD reports the value of
inventory categorized as potential reutilization and/or disposal
materiel at a rate of approximately 2 percent of its latest acquisition
cost, the amount of inventory it is retaining is significantly
understated in a key inventory management report.
Inventory categorized as potential reutilization and/or disposal
materiel is subject to being sent to the Defense Reutilization and
Marketing Service, for (1) reutilization by other DOD components or by
other federal, state, or local government agencies; or (2) disposal
through sale to the public. However, Air Force policy allows potential
reutilization and/or disposal materiel to be retained if there are
valid reasons for doing so. Item managers, when justified, are
authorized but are not required to enter a deferred disposal code into
the Air Force inventory system. The deferred disposal code will result
in potential reutilization and/or disposal materiel being recategorized
as contingency retention stock. Although entering codes is not
mandatory, officials from Warner Robins Air Logistics Center, in
response to our questions, said that doing so is preferred and that the
center intended to mandate that item managers use the codes.
As of March 2003, we found that item managers at the Warner Robins Air
Logistics Center had not entered deferred disposal codes for 12 of
27 items that had potential reutilization and/or disposal materiel--
valued at $277 million based on the items' latest acquisition cost--
that the Air Force wanted to retain. These 12 items thus remained coded
as potential reutilization and/or disposal materiel. According to
letters and memoranda justifying the retention of the items, the Air
Force wanted to retain the items for a variety of reasons, including
for potential future use and for foreign military sales. The following
are examples of the items that the center had decided to retain, but
were not properly coded:
* Inventory retained for Air Force use. Warner Robins Air Logistics
Center had 50 transmitter drivers used on an electronic warfare system
for the B-1B aircraft that were categorized as potential reutilization
and/or disposal materiel. The drivers were valued at $644,000 each.
Even though the fleet of B-1B aircraft is being reduced, the center was
retaining the drivers because the Oklahoma City Air Logistics Center,
responsible for management of the B-1B aircraft, had requested that the
parts be retained to support the aircraft until the year 2040 when the
Air Force expects to remove the last of the aircraft from its
inventory. However, no code was entered into the inventory system that
would recategorize the inventory as contingency retention stock.
* Inventory held for foreign military sales. According to the item
manager responsible for receiver transmitters used on the E-3 aircraft,
the items were no longer used by the Air Force. The center had 87
receiver transmitters, valued at about $410,000 each, that were
categorized as potential reutilization and/or disposal materiel and
were being retained for foreign military sales.
Warner Robins officials explained that it could take up to 3 months for
an item manager to input the code after receiving the request to retain
the inventory. Nevertheless, we identified items that had letters
justifying their retention dating back to 2001 for which no code had
been entered.
Because the Air Force is retaining inventory that it has categorized as
potential reutilization and/or disposal materiel, the value of this
inventory is significantly understated in the Supply System Inventory
Report, a key inventory management report prepared annually. Inventory
is reported at approximately 2 percent of its latest acquisition cost
in these reports, and the $277 million inventory that we identified for
our analysis is valued in the reports at approximately $6 million.
Conclusions:
The large number of items with no demands during Operation Enduring
Freedom and through the initial phases of Operation Iraqi Freedom
indicates that further attention to DOD's inventory retention policies
may be merited. However, because we have initiated a separate review of
these policies, we are not at this time making recommendations
regarding the retention of inventory exceeding current operating
requirements that had no demands.
While the ineffective and inefficient inventory management practices we
identified do not necessarily lead to the accumulation of inventory
exceeding current operating requirements, they can affect whether the
warfighter is receiving the right items at the right time. For example,
the military components are using estimated storage costs to make key
management decisions even though more accurate storage cost data are
available from DLA. While Army and Navy officials have said that their
estimates provide sufficient accuracy, we believe that using more
accurate data is a better business practice. Until the services and DLA
determine whether it would be beneficial to use the more accurate
storage cost data in their computations instead of using estimated
storage costs and include that data in their decision-making models as
appropriate, they risk having critical items in short supply when they
are needed. Similarly, until the Air Force implements a systemwide
process to correct the causes of inventory records discrepancies
identified by item managers, the Air Force remains at risk of being
unable to fill critical needs, and item managers will continue to
encounter difficulties in their efforts to accurately determine the
number of available assets and reliably forecast the availability of
assets. Moreover, by not requiring item managers to code inventory so
that it is properly categorized, the Air Force is at risk of disposing
of inventory that it wants to retain.
Recommendations for Executive Action:
To address the inventory management shortcomings that we identified, we
recommend that the Secretary of Defense take the following three
actions:
* direct the military services and the Defense Logistics Agency to
determine whether it would be beneficial to use the actual storage cost
data provided by DLA in their computations, instead of using estimated
storage costs, and include that data in their systems and models as
appropriate;
* direct the Secretary of the Air Force to establish and implement a
systemwide process for correcting causes of inventory discrepancies
between the inventory for which item managers are accountable and the
inventory reported by bases and repair centers; and:
* direct the Secretary of the Air Force to revise its policy to require
item managers to code inventory so that the inventory is properly
categorized.
Agency Comments and Our Evaluation:
In commenting on a draft of this report, the Acting Deputy Under
Secretary of Defense for Logistics and Materiel Readiness generally
concurred with this report and all three of our recommendations. DOD's
comments also included compliance dates for each of our
recommendations. DOD's comments are included in appendix I of this
report.
In concurring with our recommendation to direct the Secretary of the
Air Force to revise its policy to require item managers to code
inventory so that the inventory is properly categorized, DOD stated
that this policy already exists for the Air Force. To ensure the
implementation of our recommendation, the DOD stated that Air Force
Materiel Command would report on how the policy is being implemented.
However, our review of the policy citations provided by DOD indicates
that the Air Force policy, as stated, does not contain language that
would require the use of codes that would properly categorize the
inventory. Therefore, even if the Air Force ensures compliance with its
existing policy, it will remain at risk of disposing of inventory that
it may need to later repurchase, and the value of the improperly
categorized inventory will remain significantly understated in a key
inventory management report. Thus, we continue to believe that our
recommendation to revise the Air Force policy to require item managers
to code inventory so that the inventory is properly categorized is
valid.
We are sending copies of this report to interested congressional
committees; the Secretary of Defense; the Secretaries of the Army, the
Navy, and the Air Force; the Director, Defense Logistics Agency; and
the Director, Office of Management and Budget. We will also make copies
available to others on request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions, please call me at (202) 512-
8365. Key contributors to this report were Lawson Gist, Jr; Louis
Modliszewski; Kevin O'Neill; and R.K. Wild.
Sincerely,
Signed by:
William M. Solis,
Director Defense Capabilities and Management:
List of Congressional Committees:
The Honorable John W. Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Duncan Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable Ted Stevens:
Chairman:
The Honorable Daniel K. Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Jerry Lewis:
Chairman:
The Honorable John P. Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
Appendix I: Comments from the Department of Defense:
DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS
3500 DEFENSE PENTAGON
WASHINGTON, DC 20301-3500:
July 1, 2004:
Mr. William M. Solis:
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-04-689, "DEFENSE INVENTORY:
Analysis of Consumption of Inventory Exceeding Current Operating
Requirements Since September 30, 2001, dated June 2, 2004 (GAO Code
350392). The DoD generally concurs with the report.
Detailed comments on the draft report recommendations are included in
the enclosure. The DoD appreciates the opportunity to comment on the
draft report.
Sincerely,
Signed by:
Bradley Berkson
Acting:
Enclosure
As stated:
GAO DRAFT REPORT - DATED JUNE 2, 2004
GAO CODE 350392/GAO-04-689:
"DEFENSE INVENTORY: Analysis of Consumption of Inventory Exceeding
Current Operating Requirements Since September 30, 2001":
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Military Services and the Defense Logistics Agency (DLA) to
determine whether it would be beneficial to use the actual storage cost
data provided by DLA in their computations, instead of using estimated
storage costs. (p. 23/GAO Draft Report):
DOD RESPONSE: Concur. The Military Services and DLA will review storage
cost data provided by DLA to determine if it would be feasible to use
this data instead of an estimated storage cost in their computations.
If it is determined that the DLA provided storage costs should be used
in computations, this change would be included in the modernized
systems efforts of the Military Services and DLA. The review will be
finalized not later than January 2005.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the Secretary of the Air Force to establish and implement a
systemwide process for correcting causes of inventory discrepancies
between the inventory for which item managers are accountable and the
inventory reported by bases and repair centers. (p. 23/GAO Draft
Report):
DOD RESPONSE: Concur. The new logistics systems being procured by the
Air Force (Expeditionary Combat Support System) scheduled for FY 09-11
implementation will eliminate discrepancies between systems. In the
interim, the AFLMA will work with the Major Commands and Air Force
Materiel Command to resolve erroneous inventory discrepancies between
retail and wholesale data systems. An update on the interim solution
will be available January 2005.
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
direct the Secretary of the Air Force to revise its policy to require
item managers to code inventory so that the inventory is properly
categorized. (p. 23/GAO Draft Report):
DOD RESPONSE: Concur. This is already included in existing policy in
AFMAN 23-110, Vol 3, Part 1, Chapter 9 (9.49, 9.63, 9.64.2, 9.64.3, and
Attach D-6). Air Force (Installation & Logistics) will direct Air Force
Materiel Command to report how they will ensure compliance. Status will
be reported September 2005.
[End of section]
FOOTNOTES
[1] DOD's inventory consists of a wide variety of parts that includes
communication and detection equipment; electrical and electronic
equipment components; engines, turbines, and their components; aircraft
components and accessories; instruments and laboratory equipment;
aircraft and airframe structural components; fire control equipment;
guided missiles; electric wire and power and distribution equipment;
medical supplies; and clothing and textiles.
[2] DOD refers to the amount of inventory that it needs to have on hand
or on order to support current operations as the requirements
objective. Hereinafter, we refer to an item's requirements objective as
its current operating requirements.
[3] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.:
January 2003).
[4] U.S. General Accounting Office, Defense Inventory: Approach for
Deciding Whether to Retain or Dispose of Items Needs Improvement, GAO-
01-475 (Washington, D.C.: May 25, 2001).
[5] In this report, we refer to the Army, Navy, and Air Force
collectively as the military services, and the Army, Navy, Air Force,
and the Defense Logistics Agency as the military components.
[6] National Defense Authorization Act for Fiscal Year 2000, Pub. L.
No. 106-65, § 362 (1999).
[7] U.S. General Accounting Office, Defense Inventory: Overall
Inventory and Requirements Are Increasing, but Some Reductions in Navy
Requirements Are Possible, GAO-03-355 (Washington, D.C.: May 8, 2003).
[8] We did not identify discrepancies in the Army inventory records
based on the review of our non-representative sample of Army items.
Therefore, this analysis is limited only to the Air Force.
[9] While we selected a non-representative sample of Army items, the
available Army data did not identify items categorized as potential
reutilization and/or disposal materiel. Therefore, this analysis is
limited only to the Air Force.
[10] Inventory valued at latest acquisition cost.
[11] The Air Force requirements computation system does not include an
economic order quantity.
[12] War reserves are authorized to be purchased to ensure fast
mobilization in the event of war. A safety level is stock kept on hand
in case of minor interruptions in the resupply process or unpredictable
demand.
[13] While we identified 1.6 million items with $36.0 billion of
inventory on hand that exceeded current operating requirements as of
September 30, 2001, in our prior work, the analysis in this report did
not include about 119,000 items with about $966 million of inventory on
hand that exceeded current operating requirement as of September 30,
2001, because the items were no longer in the inventory as of the data
cutoff dates.
[14] According to a DOD official, DOD considers an item to be consumed
when a demand for an item occurs, regardless of whether or not a broken
part is returned.
[15] The total inventory consumed and the total not consumed do not add
to $35.1 billion because of rounding.
[16] This analysis is limited only to the Air Force, because our
analysis of our Army sample did not identify inventory records
discrepancies as a problem in the Army.
[17] This analysis is limited only to the Air Force, because the
available Army data did not identify items categorized as potential
reutilization and/or disposal materiel.
[18] Storage costs are one of the factors used to compute holding
costs.
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Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548: