Defense Inventory
Opportunities Exist to Save Billions by Reducing Air Force's Unneeded Spare Parts Inventory Gao ID: GAO-07-232 April 27, 2007At a time when U.S. military forces and their equipment are in high demand, effective management of the Department of Defense's (DOD) inventory is critical to ensure that the warfighter has the right items at the right time. The Air Force is the largest contributor to DOD's total on-hand inventory on the basis of inventory value. Under the statutory authority of the Comptroller General to conduct evaluations on his own initiative, GAO determined the extent to which (1) the Air Force's on-order and on-hand inventory reflect the amount of inventory needed to support required inventory levels from fiscal years 2002 through 2005, and (2) the Air Force had shortages in its inventory needed to support required levels during this period. To address these objectives GAO analyzed Air Force secondary inventory data (spare parts such as engines and guided missiles) from fiscal years 2002 through 2005.
More than half of the Air Force's secondary inventory (spare parts), worth an average of $31.4 billion, was not needed to support required on-hand and on-order inventory levels from fiscal years 2002 through 2005, although increased demand due to ongoing military operations contributed to slight reductions in the percentage of inventory on hand and the number of years of supply it represents. DOD regulations provide guidance for developing materiel requirements based on customer expectations while minimizing inventories. However, the value of Air Force on-order inventory not needed to support required inventory levels increased by about 7.8 percent, representing an average of 52 percent ($1.3 billion) of its on-order inventory. The Air Force has continued to purchase unneeded on-order inventory because its policies do not provide incentives to reduce the amount of inventory on order that is not needed to support requirements. When the Air Force buys these items it may obligate funds unnecessarily, which could lead to not having sufficient obligation authority to purchase needed items and could negatively impact readiness. In addition, although the percentage of the Air Force on-hand inventory was reduced by 2.7 percent due to increases in demand, about 65 percent ($18.7 billion) of this inventory was not needed to support required inventory levels. GAO calculated that it costs the Air Force from $15 million to $30 million annually to store its unneeded items. Of the Air Force's inventory items not needed to support required inventory levels, 79 percent had no recurring demands (such as engines and airframe components), resulting in a potentially infinite supply of those items. The Air Force has continued to retain this unneeded inventory with no recurring demands, in part, because the Air Force has not performed a comprehensive assessment to revalidate the need to continue to retain these items. For the remaining 21 percent of items that had recurring demands, increasing demands resulted in a reduction in the number of years of supply that this inventory represents, with the largest quantity and value of items having between 2 to 10 years of supply. Inventory not needed to support required inventory levels can be attributed to many long-standing problems, such as decreasing demands, retaining items used to support aging weapon systems that have diminishing sources of supply or are being phased out of service, and not terminating contracts for on-order items. Air Force officials acknowledged that decreases in demand have resulted in having more inventory than is needed; however, the Air Force has not evaluated why it continues to experience decreases in demand or taken actions to mitigate the effect of these changes. Without taking actions to reduce its unneeded inventory, the Air Force will continue its past practices of purchasing and retaining items it does not need and then spending additional resources to handle and store these items. Although more than half of its secondary inventory was not needed to support required levels, the Air Force still had shortages of certain items. From fiscal years 2002 through 2005, the percentage and value of the Air Force's inventory shortages remained the same at about 8 percent and $1.2 billion.
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-07-232, Defense Inventory: Opportunities Exist to Save Billions by Reducing Air Force's Unneeded Spare Parts Inventory
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
April 2007:
Defense Inventory:
Opportunities Exist to Save Billions by Reducing Air Force's Unneeded
Spare Parts Inventory:
GAO-07-232:
GAO Highlights:
Highlights of GAO-07-232, a report to congressional committees
Why GAO Did This Study:
At a time when U.S. military forces and their equipment are in high
demand, effective management of the Department of Defense‘s (DOD)
inventory is critical to ensure that the warfighter has the right items
at the right time. The Air Force is the largest contributor to DOD‘s
total on-hand inventory on the basis of inventory value. Under the
statutory authority of the Comptroller General to conduct evaluations
on his own initiative, GAO determined the extent to which (1) the Air
Force‘s on-order and on-hand inventory reflect the amount of inventory
needed to support required inventory levels from fiscal years 2002
through 2005, and (2) the Air Force had shortages in its inventory
needed to support required levels during this period. To address these
objectives GAO analyzed Air Force secondary inventory data (spare parts
such as engines and guided missiles) from fiscal years 2002 through
2005.
What GAO Found:
More than half of the Air Force‘s secondary inventory (spare parts),
worth an average of $31.4 billion, was not needed to support required
on-hand and on-order inventory levels from fiscal years 2002 through
2005, although increased demand due to ongoing military operations
contributed to slight reductions in the percentage of inventory on hand
and the number of years of supply it represents. DOD regulations
provide guidance for developing materiel requirements based on customer
expectations while minimizing inventories. However, the value of Air
Force on-order inventory not needed to support required inventory
levels increased by about 7.8 percent, representing an average of 52
percent ($1.3 billion) of its on-order inventory. The Air Force has
continued to purchase unneeded on-order inventory because its policies
do not provide incentives to reduce the amount of inventory on order
that is not needed to support requirements. When the Air Force buys
these items it may obligate funds unnecessarily, which could lead to
not having sufficient obligation authority to purchase needed items and
could negatively impact readiness. In addition, although the percentage
of the Air Force on-hand inventory was reduced by 2.7 percent due to
increases in demand, about 65 percent ($18.7 billion) of this inventory
was not needed to support required inventory levels. GAO calculated
that it costs the Air Force from $15 million to $30 million annually to
store its unneeded items. Of the Air Force‘s inventory items not needed
to support required inventory levels, 79 percent had no recurring
demands (such as engines and airframe components), resulting in a
potentially infinite supply of those items. The Air Force has continued
to retain this unneeded inventory with no recurring demands, in part,
because the Air Force has not performed a comprehensive assessment to
revalidate the need to continue to retain these items. For the
remaining 21 percent of items that had recurring demands, increasing
demands resulted in a reduction in the number of years of supply that
this inventory represents, with the largest quantity and value of items
having between 2 to 10 years of supply. Inventory not needed to support
required inventory levels can be attributed to many long-standing
problems, such as decreasing demands, retaining items used to support
aging weapon systems that have diminishing sources of supply or are
being phased out of service, and not terminating contracts for on-order
items. Air Force officials acknowledged that decreases in demand have
resulted in having more inventory than is needed; however, the Air
Force has not evaluated why it continues to experience decreases in
demand or taken actions to mitigate the effect of these changes.
Without taking actions to reduce its unneeded inventory, the Air Force
will continue its past practices of purchasing and retaining items it
does not need and then spending additional resources to handle and
store these items.
Although more than half of its secondary inventory was not needed to
support required levels, the Air Force still had shortages of certain
items. From fiscal years 2002 through 2005, the percentage and value of
the Air Force‘s inventory shortages remained the same at about 8
percent and $1.2 billion.
What GAO Recommends:
GAO recommends that the Air Force take four specific actions to
strengthen the accountability and improve the management of its
secondary inventory. DOD generally concurred with our recommendations.
However, we do not believe DOD‘s planned actions fully respond to two
of the recommendations in our report.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-232].
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:
Results in Brief:
Background:
More than Half of the Air Force's Secondary Inventory Was Not Needed to
Support Requirements, Although Demand for Some Items Increased:
Air Force Inventory Shortages Remained the Same:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Top 10 Types of Air Force On-Order Inventory That Were Not
Needed to Support Requirements:
Appendix III: Top 10 Types of Air Force On-Hand Inventory That Were Not
Needed to Support Requirements:
Appendix IV: Comments from the Department of Defense:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Value of DOD's On-Hand Inventory and the Value and Percentage
Represented by the Air Force:
Table 2: Air Force On-Order Secondary Inventory Not Needed to Support
Requirements from End of Fiscal Year 2002 through End of Fiscal Year
2005:
Table 3: Air Force On-Hand Secondary Inventory Not Needed to Support
Requirements from the End of Fiscal Year 2002 through the End of Fiscal
Year 2005:
Table 4: Estimated Frequency of Reasons for Having On-Order and On-Hand
Inventory Not Needed to Meet Requirements:
Table 5: Air Force Inventory Shortages from Fiscal Year 2002 through
Fiscal Year 2005:
Table 6: Estimated Frequency of Reasons for Air Force Inventory
Shortages:
Table 7: Comparison of GAO Analysis and Air Force Stratification
Results for On-Order Inventory in Fiscal Year 2005:
Table 8: Comparison of GAO Analysis and Air Force Stratification
Results for On-Hand Inventory in Fiscal Year 2005:
Table 9: Sample Disposition for Fiscal Year 2005 Items Not Needed to
Meet Requirements:
Table 10: Sample Disposition of Fiscal Year 2005 Inventory Shortages:
Table 11: Top 10 Types of Air Force On-Order Inventory Identified by
Federal Supply Class That Were Not Needed to Support Requirements as of
September 30, 2005:
Table 12: Top 10 Types of Air Force On-Hand Inventory Identified by
Federal Supply Class That Were Not Needed to Support Requirements as of
September 30, 2005:
Figure:
Figure 1: Comparison of the Number of Items and Value of the Air
Force's Inventory Not Needed to Support Requirements Stratified by
Years of Supply for Fiscal Year 2002 and Fiscal Year 2005:
Abbreviations:
DLA: Defense Logistics Agency:
DOD: Department of Defense:
United States Government Accountability Office:
Washington, DC 20548:
April 27, 2007:
Congressional Committees:
Each of the military services and the Defense Logistics Agency (DLA)
maintain a supply of secondary inventory[Footnote 1] of spare parts to
keep military equipment operating for its missions. At a time when U.S.
military forces and their equipment are in high demand, the
effectiveness and efficiency of the Department of Defense's (DOD)
inventory management is critical to ensure that the warfighter is
supplied with the right items at the right time. Because the services
and DLA face challenges in competing for available resources at a time
when the nation faces an increasingly fiscally constrained environment,
it is imperative that they have good stewardship over the billions of
dollars invested in their inventory.
Since 1990, we have identified the department's management of its
secondary inventory as a high-risk area due to ineffective and
inefficient inventory management systems and procedures and high levels
of inventory not needed to support required inventory levels (hereafter
referred to as requirements). These high levels of inventory include
both on-hand and on-order inventory. Inventory that is in DOD's
possession is considered to be on hand. Inventory that is not in DOD's
possession but for which contracts have been awarded or funds have been
committed is considered to be on order. DOD has reduced the overall
value of its secondary inventory--from more than $100 billion in 1990
to about $67 billion as of September 30, 2002. However, in recent years
the trend has been reversed due to increases in the value and quantity
and changes in the mix of items in DOD inventory, with inventory values
increasing to about $80 billion as of September 30, 2005, which is a 19
percent increase from September 30, 2002, to September 30,
2005.[Footnote 2] Nevertheless, the department continues to attribute
readiness problems in part to shortages of spare parts.
We have previously reported on many long-standing and systemic problems
in DOD's inventory management, which affect all of the military
services and DLA.[Footnote 3] Given the significant resources invested
in DOD's inventory and the long-standing problems in the management of
DOD's spare parts, we reviewed the Air Force's secondary inventory
because the Air Force is the largest contributor to DOD's total on-hand
inventory on the basis of inventory value. The Air Force represents an
average of about 39 percent ($28.9 billion) of the value of DOD's total
on-hand inventory. In our previous reports, we identified the Air Force
as having large amounts of inventory on order and on hand that was not
needed to support its requirements.
Because of the broad congressional interest in DOD's high-risk areas,
we prepared this report under the Comptroller General's authority to
conduct evaluations on his own initiative. We are providing it to you
because of your oversight responsibilities for defense issues. Our
objectives for this report were to determine the extent to which (1)
the Air Force's on-order and on-hand secondary inventory reflects the
amount of inventory needed to support requirements from fiscal years
2002 through 2005, and (2) the Air Force had shortages in its inventory
needed to support requirements from fiscal years 2002 through 2005. We
plan to report on the management of the Army, Navy, and DLA secondary
inventory separately. In addition, in March 2007, we reported that
inaccurate forecasting of DOD's acquisition lead times for spare parts
has led to early delivery of items, resulting in additional inventory
on hand that is not needed to support requirements.[Footnote 4]
To determine the extent to which the Air Force's on-order and on-hand
secondary inventory reflects the amount of inventory needed to support
requirements or was not enough to support requirements, we analyzed
summary and item-specific inventory data from fiscal years 2002 through
2005 to determine the total value of items that had more than or less
than enough inventory to satisfy their respective requirements. To
determine the reasons for having inventory not needed to support
requirements or inventory shortages, we conducted a survey of some
inventory items selected from the 18,676 unique Air Force items that
met our selection criteria--10,810 unique items with inventory not
needed to support requirements and 7,866 unique items with inventory
shortages. We selected a probability sample of 335 unique Air Force
inventory items--230 unique items with inventory not needed to support
requirements and 105 unique items with inventory shortages. Because
this was a random probability sample, the results of our analysis can
be projected to all Air Force items that met our selection criteria. We
sent surveys to Air Force item management specialists who had
responsibility for the selected unique inventory items to identify the
frequency of reasons for items not needed to support requirements or
not meeting inventory requirements. We received survey responses for
295 of the 335 unique items in our sample.
On the basis of information obtained from the Air Force on the
reliability of their inventory management systems' data, the survey
results, and our follow-up analyses, we believe that the data used in
this report are sufficiently reliable for our purposes. We conducted
our review from January 2006 through February 2007 in accordance with
generally accepted government auditing standards. Details of our scope
and methodology are included in appendix I.
Results in Brief:
More than half of the Air Force's secondary inventory, worth an average
of $31.4 billion, was not needed to support on-order and on-hand
requirements from fiscal years 2002 through 2005, although increases in
the demand for items due to ongoing military operations has contributed
to a slight reduction in the percentage of this on-hand inventory and
the number of years of supply the inventory represents. The Air Force's
on-order inventory not needed to support its requirements increased by
7.8 percent ($0.3 billion) over this 4-year period. DOD's regulations
provide guidance for developing materiel requirements based on customer
expectations while minimizing inventories. However, an average of 52
percent ($1.3 billion) of the Air Force's secondary on-order inventory
was not needed to support on-order requirements from the end of fiscal
year 2002 through the end of fiscal year 2005. This $1.3 billion in
unneeded on-order inventory indicates that the Air Force did not cancel
orders or deobligate funds for items that were not needed to support
requirements. The Air Force has continued to purchase this unneeded on-
order inventory because its policies do not provide incentives (such as
requiring contract termination review for all unneeded on-order
inventory and reducing the amount of funds available for the Air Force
Materiel Command to obligate for unneeded inventory items) to reduce
the amount of inventory on order that is not needed to support
requirements. In addition, as a result of increased demand associated
with ongoing military operations, the percentage of the Air Force's on-
hand inventory not needed to support requirements was reduced by 2.7
percent from the end of fiscal year 2002 through the end of fiscal year
2005, but the value of this inventory remained the same. Despite this
slight reduction, about 65 percent ($18.7 billion) of the Air Force's
secondary on-hand inventory was not needed. As a result, we calculated
that it costs the Air Force $15 million annually to store useable items
not needed to support on-hand requirements and up to an additional $15
million annually for repairable broken items, depending on the location
where these items are stored. Moreover, the $18.7 billion in unneeded
on-hand inventory indicates that the Air Force may not have canceled
orders for items that were not needed or may have tied up funds that
could have been obligated for other needs. Of the Air Force's inventory
items not needed to support requirements, 79 percent had no recurring
demands at all, resulting in a potentially infinite supply of those
items. The Air Force has continued to retain this unneeded inventory
with no recurring demands, in part, because the Air Force has not
performed a comprehensive assessment of its on-hand inventory items
that are not needed to support requirements and that have no recurring
demands to revalidate the need to continue to retain these items. For
the remaining 21 percent of items that had recurring demands, we found
that increasing demands resulted in a reduction in the number of years
of supply that this inventory represents, with the largest quantity and
value of items having between 2 to 10 years of supply. Based on our
sample, we found that the Air Force's secondary inventory not needed to
support on-order and on-hand requirements can be attributed to many of
the long-standing and systemic inventory management problems that we
have identified in our prior reports,[Footnote 5] such as decreasing
demands or demands not materializing at all, retaining items used to
support aging weapon systems that have diminishing sources of supply or
are being phased out of service, retaining items that may be used to
support new weapon systems, and not terminating eligible contracts for
on-order items. For example, Air Force item management specialists
indicated that decreasing demands or demands not materializing at all
were the major factors for having inventory on order and on hand that
was not needed to support current operations. Air Force officials
acknowledged that they are aware that decreases in demands have
resulted in having more inventory than is needed to support
requirements; however, the Air Force has not evaluated why they
continue to experience these decreases in demands or taken actions to
mitigate the effect of these changes. Without taking actions to reduce
the amount of inventory that is not needed to support requirements, the
Air Force will continue its past practices of purchasing and retaining
items that it does not need and then spending additional resources to
handle and store these items.
Although more than half of its secondary inventory was not needed to
support requirements, the Air Force still had shortages of certain
items in its inventory. We found that the percentage and value of the
Air Force's inventory shortages from fiscal years 2002 through 2005
remained the same, at about 8 percent and $1.2 billion of its inventory
required. Some of the reasons reported by Air Force item management
specialists for the inventory shortages were an increase in the demand
for the items, plans to upgrade the systems the items support, plans to
replace the items, and lost or delayed repair capability for the items.
We are recommending that the Secretary of Defense direct the Secretary
of the Air Force to (1) modify its policies to provide incentives to
reduce purchases of on-order inventory that are not needed to support
requirements, such as requiring contract termination review for all
unneeded on-order inventory or reducing the funding available for the
Air Force Materiel Command by an amount up to the value of the Air
Force's on-order inventory that is not needed to support requirements;
(2) conduct a comprehensive assessment of the inventory items on hand
that are not needed to support requirements and that have no recurring
demands and revalidate the need to continue to retain these items; (3)
evaluate why it continually experiences decreases in demands that
result in having more than half of its inventory on hand than is needed
to satisfy its requirements, and (4) determine what actions are needed
and then take steps to address these changes in demand.
In written comments on a draft of this report, DOD generally concurred
with our recommendations. DOD cited specific actions it plans to take
to implement the four recommendations and specified implementation
timelines for each recommendation. In response to two recommendations,
DOD's planned actions did not fully respond to our recommendations. For
example, DOD partially concurred with our recommendation to modify its
policies to provide incentives to reduce purchases of on-order
inventory that are not needed to support requirements. DOD said that
the Air Force plans to address this issue by enforcing existing policy
and by placing an increased focus on excess on-order measures. DOD did
not agree that a change or modification to the Air Force's policy was
required to accomplish this task, as we recommended. In June 2006, the
Air Force revised its contraction termination policy to require review
of fewer on-order inventory items for potential contract termination.
We believe that this new policy will exacerbate the problem of having
more inventory than is needed to support current requirements. Thus, we
continue to believe that the Air Force needs to modify its current
policy to provide incentives to reduce purchases of on-order inventory.
Additionally, DOD concurred with our second recommendation to conduct a
comprehensive assessment of unneeded on-hand inventory. DOD stated that
the Air Force will review its current stockage retention policy and
take actions necessary to reduce the inventory as required. DOD also
stated that the Air Force will conduct annual reviews of all inventory
items as is directed by DOD's Supply Chain Management policy. While we
believe that DOD's planned actions are a step in the right direction,
added scrutiny should be applied to the Air Force's review of its
stockage retention policy to ensure that it is not retaining assets
that are not needed to support current and future operational needs.
Furthermore, unless and until the Air Force makes appropriate
adjustments to its inventory retention levels, there are no assurances
that significant improvements will be made to reduce the Air Force's on-
hand inventory not needed to support requirements. Finally, DOD did not
address the portion of this recommendation directing the Air Force to
consider establishing requirements for items that support weapon
systems that have lengthy projected life spans. DOD's comments and our
evaluation of them are discussed in the "Agency Comments and Our
Evaluation" section of this report.
Background:
Inventory management and oversight for the Air Force is a shared
responsibility between the Offices of the Secretary of Defense and the
Secretary of the Air Force. The Under Secretary of Defense for
Acquisition, Technology, and Logistics is responsible for developing
and ensuring the uniform implementation of DOD inventory management
policies throughout the department, monitoring the overall
effectiveness and efficiency of the DOD logistics system, and
continually developing improvements. The Secretary of the Air Force is
responsible for implementing DOD inventory policies and procedures. The
Air Force Materiel Command has issued a manual to its air logistics
centers--Ogden Air Logistics Center, Oklahoma City Air Logistics
Center, and Warner Robins Air Logistics Center--that prescribes
guidance and procedural instructions for computing requirements for its
secondary inventory.
To assist in the management of its inventory, DOD summarizes its
secondary inventory in its annual Supply System Inventory Report. This
report is based on financial inventory and other inventory reports
prepared by the military services and DLA. The report summarizes
inventories by DOD component and inventory category. Over the past 4
years, DOD has reported a continuous increase in the value of its
secondary item inventory in its Supply System Inventory Report. As of
September 30, 2002, DOD reported that its secondary inventory was
valued at about $67.0 billion; however, as of September 30, 2005, the
value of this inventory had increased to about $79.6 billion--a $12.6
billion increase between 2002 and 2005. Table 1 shows the value of
DOD's on-hand inventory from fiscal year 2002 through fiscal year 2005
and the value and percentage of the inventory held by the Air Force.
Table 1: Value of DOD's On-Hand Inventory and the Value and Percentage
Represented by the Air Force:
Dollars in billions.
Fiscal year: 2005;
Reported value of DOD's on-hand inventory: $79.6;
Value of Air Force's on-hand inventory: $29.4;
Percent of DOD's on-hand inventory held by the Air Force: 36.9%.
Fiscal year: 2004;
Reported value of DOD's on-hand inventory: 78.1;
Value of Air Force's on-hand inventory: 30.2;
Percent of DOD's on-hand inventory held by the Air Force: 38.7.
Fiscal year: 2003;
Reported value of DOD's on-hand inventory: 70.6;
Value of Air Force's on-hand inventory: 27.9;
Percent of DOD's on-hand inventory held by the Air Force: 39.5.
Fiscal year: 2002;
Reported value of DOD's on-hand inventory: 67.0;
Value of Air Force's on-hand inventory: 28.2;
Percent of DOD's on-hand inventory held by the Air Force: 42.1.
Source: GAO analysis of DOD data.
[End of table]
From fiscal year 2002 through fiscal year 2005, the Air Force's total
on-hand inventory increased by $1.2 billion, representing about 10
percent of the total $12.6 billion increase in DOD inventory during
this period. This increase was primarily due to the addition of new
items to the Air Force's inventory in fiscal year 2005. Specifically,
from September 30, 2002, through September 30, 2005, the Air Force
added 2,331 new unique items with a total of about 179,425 individual
parts that were valued at approximately $1.3 billion.[Footnote 6] Our
analysis shows that increases in the Air Force's inventory were also
caused by changes in the value and quantity of the unique items in the
inventory. We found that changes in the price of items in the Air
Force's secondary inventory resulted in a $0.8 billion increase in the
value of its inventory in fiscal year 2005. Similarly, changes in the
quantity of secondary inventory unique items that were on hand in
fiscal year 2002 were the reason for a $0.7 billion increase in the
value of DOD's secondary inventory in fiscal year 2005. These price
increases were offset by a decrease of $1.6 billion in the value of the
Air Force's inventory for items that were included in fiscal year 2002
but were not included in the inventory for fiscal year 2005.
The Air Force uses a process called requirements determination to
calculate the amount of inventory that is needed to be held in storage
(on hand) and that should be purchased (on order). This information is
used to develop the Air Force's budget stratification report. The
stratification report shows the amount of inventory needed to meet
operating requirements. When the total of on-hand and on-order
inventory falls to or below a certain level--called the reorder point-
-inventory managers place orders for additional inventory to prevent
out-of-stock situations from occurring. The Air Force refers to its
inventory managers as item management specialists. Generally, item
management specialists order the amount of inventory needed to satisfy
the reorder point requirement. Depending on the item, the reorder point
may include requirements for one or more of the following:
* war reserves that are authorized to be purchased,
* customer-requisitioned materiel that has not been shipped (also known
as stock due-outs),
* 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 numeric stockage objective or
insurance items),
* inventory to satisfy demands while broken items are being repaired
(also referred to as repair cycle stock),
* 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 awarded (also referred to as administrative lead time),
and:
* inventory to satisfy demands during the period between when a
contract for inventory is awarded and when the inventory is received
(also referred to as production lead time).
We define the Air Force's current year's operating requirements as
requirements for war reserves, stock due-outs (backorders), safety
levels, numeric stockage objective (a form of safety stock), and repair
cycle. Hereafter, these requirements will be referred to as on-hand
requirements. On-hand inventory is used to satisfy these on-hand
requirements. On-order inventory is the amount of inventory for which
contracts have been awarded or funds have been committed by the Air
Force to satisfy any shortfall to its on-hand requirements and its
administrative and production lead time requirements. Hereafter, these
requirements will be referred to as on-order requirements. When there
is not enough inventory to meet on-hand and on-order requirements, this
is defined as an inventory shortage.
More than Half of the Air Force's Secondary Inventory Was Not Needed to
Support Requirements, Although Demand for Some Items Increased:
More than half of the Air Force's on-order and on-hand secondary
inventory, worth an average of $31.4 billion, was not needed to support
its requirements from fiscal years 2002 through 2005, although
increases in demand have contributed to a slight reduction in the
percentage of this on-hand inventory and a reduction in the number of
years of supply this inventory represents. Our analysis shows that the
value and the percentage of the Air Force's inventory not needed to
support its on-order requirements increased by about $0.3 billion and
7.8 percent, respectively, representing an average of 52 percent of its
on-order inventory. Additionally, we found that the percentage of the
Air Force's inventory not needed to support its on-hand requirements
was reduced by 2.7 percent, due, in part, to increases in the demand
for the items. However, this inventory represents an average of about
65 percent (about $18.7 billion) of the value of unneeded on-hand
inventory. While increasing demands have resulted in the Air Force
reducing the number of years of supply this inventory represents, 79
percent of the Air Force's inventory items not needed to support
requirements had no recurring demands at all, resulting in a
potentially infinite supply of those items. We found that the Air
Force's secondary inventory not needed to support on-order and on-hand
requirements can be attributed to many of the long-standing and
systemic inventory management problems that we have identified in our
prior reports in 1997 and 2000,[Footnote 7] such as decreasing demands
or demands not materializing at all, retaining items used to support
aging weapon systems that have diminishing sources of supply or are
being phased out of service, retaining items that may be used to
support new weapon systems, and not terminating eligible contracts for
on-order items.
Air Force On-Order Inventory Not Needed to Support Requirements Has
Increased:
Based on our analyses, we found that the Air Force experienced an
increase in the amount and percentage of on-order inventory not needed
to support its on-order requirements from the end of fiscal year 2002
through the end of fiscal year 2005. The value and percentage of the
Air Force's unneeded on-order inventory increased by about $0.3 billion
and 7.8 percent, respectively. Although DOD's supply chain management
regulation[Footnote 8] provides guidance for developing materiel
requirements based on customer expectations while minimizing
inventories, over the 4-year period an average of 52 percent ($1.3
billion) of the Air Force's on-order inventory was not needed. Examples
of unneeded on-order inventory include jet engines, landing gear
components, electrical and communication equipment, guided missile
components, aircraft hydraulic and de-icing system components, and
other aircraft components. This $1.3 billion in on-order inventory not
needed to support requirements indicates that the Air Force did not
cancel orders or deobligate funds for items that were not needed to
support requirements. Furthermore, based on the Air Force's fiscal year
2005 stratification report, the Air Force marked for disposal
approximately $300 million of its on-order inventory that is not needed
to support requirements. This means that as soon as these on-order
items are delivered, they could be disposed of. Table 2 shows the
amount of unneeded inventory the Air Force had on order at the end of
fiscal year 2002 through the end of fiscal year 2005.
Table 2: Air Force On-Order Secondary Inventory Not Needed to Support
Requirements from End of Fiscal Year 2002 through End of Fiscal Year
2005:
Dollars in billions.
Fiscal year: 2005;
Total value of on-order inventory: $2.3;
Inventory not needed to support requirements: Number of items: 788,515;
Inventory not needed to support requirements: Value: $1.1;
Inventory not needed to support requirements: Percent of on-order
inventory: 47.8%.
Fiscal year: 2004;
Total value of on-order inventory: 3.0;
Inventory not needed to support requirements: Number of items:
1,249,204;
Inventory not needed to support requirements: Value: 1.8;
Inventory not needed to support requirements: Percent of on-order
inventory: 60.0.
Fiscal year: 2003; Total value of on-order inventory: 2.7;
Inventory not needed to support requirements: Number of items: 743,504;
Inventory not needed to support requirements: Value: 1.5;
Inventory not needed to support requirements: Percent of on-order
inventory: 55.6.
Fiscal year: 2002;
Total value of on-order inventory: 2.0;
Inventory not needed to support requirements: Number of items: 792,419;
Inventory not needed to support requirements: Value: 0.8;
Inventory not needed to support requirements: Percent of on-order
inventory: 40.0.
Source: GAO analysis of Air Force data.
[End of table]
At the end of fiscal year 2005, the Air Force had 2,157 unique items
(with a quantity of 788,515 individual parts) valued at $1.1 billion
with inventory on order that was not needed to support requirements. Of
these 2,157 items, there were 1,192 unique items (with a quantity of
723,147 individual parts) that had unneeded inventory both on order and
on hand. These items represented approximately 74 percent, or about
$0.8 billion of the total $1.1 billion of Air Force's on-order items
that were not needed to support requirements. Appendix II contains a
list of the top 10 types of items, identified by the federal supply
class, with the highest value of unneeded items on order as of
September 30, 2005.
The Air Force has not been effective in reducing the amount of its
unneeded inventory on order, with an average of $1.3 billion of its on-
order inventory over the past 4 years not being needed to support
requirements. The Air Force has continued to purchase this unneeded on-
order inventory because its policies do not provide incentives to
reduce the amount of inventory on order that is not needed to support
requirements. Instead, the Air Force has revised its policies to make
it easier to purchase inventory that is not needed to support
requirements. For example, in June 2006 the Air Force Materiel Command
announced a change in its policy for reviewing contract termination
actions valued at $1 million or less to require each air logistics
center to review at least 80 percent of the center's total computed
termination value, with priority given to those terminations with the
highest dollar value.[Footnote 9] Under its prior policy, all such
orders were required to be reviewed for potential contract termination.
We did not evaluate this new policy to determine the overall impact
that it would have on purchasing items not needed to support
requirements because this policy was not in effect during our review
period, but it appears that this new policy will exacerbate the
problem. Until the Air Force policy provides incentives, such as
requiring contract termination review for all unneeded on-order
inventory or reducing the amount of funds available for the Air Force
Materiel Command by an amount up to the value of the Air Force's on-
order inventory that is not needed to support requirements, the Air
Force is likely to continue to experience its long-standing problems
with having on-order inventory that is not needed to support
requirements. In our discussions with Air Force Materiel Command
officials, they disagreed with our assertion that they do not have
incentives to assist them in reducing the amount of on-order inventory
that is not needed to support requirements. According to an Air Force
Materiel Management Command official, the Air Force has a plan to
create a new data system to improve the process for identifying on-
order inventory that should be terminated. However, this official
stated that there is not yet a designated amount of funding in place to
finance the initiative; thus it is unclear when this plan would be
implemented.
With Higher Demands, Still More than Half of the Air Force's On-Hand
Inventory Was Not Needed to Support Requirements:
Although higher demands helped the Air Force slightly reduce the
percentage of its on-hand inventory not needed to support requirements
during fiscal year 2002 through fiscal year 2005, more than half of its
on-hand inventory was unneeded. Our analysis shows that between
September 30, 2002, and September 30, 2005, the percentage of the Air
Force's unneeded on-hand inventory was reduced by 2.7 percent, due, in
part, to increases in the demand for the items, although the value of
this unneeded inventory remained the same. Despite this reduction, an
average of about 65 percent ($18.7 billion) of the value of the Air
Force's on-hand inventory was not needed to support requirements.
Examples of unneeded on-hand inventory include jet engines, electrical
and communication equipment, radar equipment, guided missile components
and subsystems, aircraft gun fire control components, and other
aircraft components. Table 3 shows the amount of unneeded inventory the
Air Force had on hand from the end of fiscal year 2002 through the end
of fiscal year 2005.
Table 3: Air Force On-Hand Secondary Inventory Not Needed to Support
Requirements from the End of Fiscal Year 2002 through the End of Fiscal
Year 2005:
Dollars in billions.
Fiscal year: 2005;
Total value of on-hand inventory: $29.4;
Inventory not needed to support requirements: Number of items:
5,776,442;
Inventory not needed to support requirements: Value: $18.7;
Inventory not needed to support requirements: Percent of on-hand
inventory: 63.6%.
Fiscal year: 2004;
Total value of on-hand inventory: 30.2;
Inventory not needed to support requirements: Number of items:
6,323,311;
Inventory not needed to support requirements: Value: 19.4;
Inventory not needed to support requirements: Percent of on-hand
inventory: 64.2.
Fiscal year: 2003;
Total value of on-hand inventory: 27.9;
Inventory not needed to support requirements: Number of items:
6,761,671;
Inventory not needed to support requirements: Value: 17.9;
Inventory not needed to support requirements: Percent of on-hand
inventory: 64.2.
Fiscal year: 2002;
Total value of on-hand inventory: 28.2;
Inventory not needed to support requirements: Number of items:
7,511,932;
Inventory not needed to support requirements: Value: 18.7;
Inventory not needed to support requirements: Percent of on-hand
inventory: 66.3.
Source: GAO analysis of Air Force data.
[End of table]
At the end of fiscal year 2005, the Air Force had 87,480 unique items
(with a quantity of 5,776,442 individual parts) valued at $18.7 billion
with inventory on hand that was not needed to support requirements. Of
these 87,480 items, there were 1,192 unique items (with a quantity of
775,791 individual parts) that had unneeded inventory both on order and
on hand. These items represented approximately 4 percent, or about $0.8
billion of the total $18.7 billion of Air Force's on-hand items that
were not needed to support requirements. Appendix III contains a list
of the top 10 types of items, identified by the federal supply class,
with the highest value of unneeded items as of September 30, 2005.
Having on-hand inventory that is not needed to support requirements
increases overall storage costs for the Air Force. According to Air
Force officials, the cost to store this inventory is small compared to
the cost to dispose of and then later repurchase these items if they
are needed. However, we calculated as of September 30, 2005, that it
cost the Air Force at least $15 million annually to store its useable
inventory not needed to support on-hand requirements. In addition,
depending on the location where repairable broken items are stored, it
could cost up to an additional $15 million to store unneeded inventory
items that have not been repaired.[Footnote 10] If the Air Force did
not have this unneeded inventory, it might be in a better position to
reduce its warehousing infrastructure and associated costs. Moreover,
the $18.7 billion in on-hand inventory not needed to support
requirements indicates that the Air Force may not have canceled orders
for items that were not needed or may have tied up funds that could
have been obligated for other needed items.
Much of the Air Force Inventory Not Needed to Support Requirements Had
No Demands, Although Demands for Some Items Increased:
Of the Air Force's on-order and on-hand inventory not needed to support
requirements, 79 percent had no recurring demands at all, resulting in
a potentially infinite supply of those items. Examples of unneeded
inventory with no recurring demands include jet engines, electrical
hardware, guided missiles, fusing and firing devices, and airframe and
other aircraft components. The Air Force has continued to retain this
unneeded inventory with no recurring demands, in part, because the Air
Force has not performed a comprehensive assessment of its on-hand
inventory items that are not needed to support requirements and that
have no recurring demands and revalidated the need to continue to
retain these items. In our discussions with Air Force Materiel Command
officials, they disagreed with our assertion that they should conduct a
comprehensive assessment to determine whether to retain this unneeded
inventory. According to an Air Force Materiel Command official, the Air
Force's quarterly requirements computation process is a valid
assessment for determining the amount of inventory needed to satisfy
its requirements. However, this process does not provide a
comprehensive assessment on whether to retain inventory items not
needed to satisfy requirements. Instead, the requirements computation
process determines the amount of inventory needed to be on hand and on
order to satisfy current and future requirements and identifies the
amount of inventory that is above those requirements. An Air Force
Materiel Command official also stated that the Air Force provides item
management specialists with the necessary guidance for retaining assets
that are not needed to support requirements and it conducts an annual
assessment of the inventory items that are being retained. The official
commented that although these assets may show no current demands, there
may be future demands for the items, thus the Air Force retains them
for possible future use. However, given that we found that 79 percent
of the Air Force's on-order and on-hand inventory not needed to satisfy
its current requirements are items that have no recurring demands,
resulting in a potentially infinite supply of those items, we continue
to believe that a comprehensive assessment is needed to determine which
and how many of these items should be retained.
For the 21 percent of Air Force inventory not needed to support
requirements that had projected recurring demands, we found that the
demand for these items slightly increased, thereby improving the
likelihood that these items will be used. For example, in fiscal year
2005, 82 percent of the unneeded items with projected recurring demands
were projected to be used within a period of 10 years or less; whereas
in fiscal year 2002, only 79 percent of the items were projected to be
used. Figure 1 shows a comparison of the number of Air Force unneeded
on-hand and on-order inventory items stratified by years of supply for
fiscal years 2002 and 2005.
Figure 1: Comparison of the Number of Items and Value of the Air
Force's Inventory Not Needed to Support Requirements Stratified by
Years of Supply for Fiscal Year 2002 and Fiscal Year 2005:
[See PDF for image]
Source: GAO analysis of Air Force data.
[End of figure]
On the basis of number of items and value, in fiscal year 2002 and
fiscal year 2005 the largest category of Air Force secondary inventory
not needed to support requirements was "2 to 10 years of supply." At
the end of fiscal year 2005, there were 6,361 unique items valued at
about $4.2 billion within this category. The value of the items was
largest of all of the years-of-supply categories, representing about 32
percent of the total value of the supply years stratified. We also
found that the amount of inventory in the most current years of supply
improved from 2002 to 2005. In fiscal year 2005, about 31 percent of
the items with projected recurring demands had an anticipated supply of
less than 1 year. This is about a 4 percent increase from the
percentage for fiscal year 2002, which was about 27 percent.
Reasons Vary for Air Force Maintaining On-Order and On-Hand Inventory
Not Needed to Support Requirements:
Responses from Air Force item management specialists and our analysis
of the Air Force's inventory data identified a variety of reasons for
maintaining on-order and on-hand inventory not needed to support
current requirements, such as decreasing demands, retaining items used
to support aging weapon systems that have diminishing sources of supply
or are being phased out of service, retaining items to support new
weapon systems, and not terminating eligible contracts for on-order
items not needed to support requirements.
We conducted a survey of selected Air Force inventory items, which
identified a variety of reasons for having items not needed to support
their inventory requirements. Table 4 summarizes the estimated
frequency of reasons for having unneeded on-order and on-hand inventory
as reported in our survey results. Based on our sample, decreases in
demands and changes in implementation schedules for inventory
replacement were the most frequent reasons specifically cited for on-
order inventory not needed to support requirements. Decreases in demand
and weapon systems being phased out were the most frequent reasons
identified for unneeded on-hand inventory. Specific examples and more
detailed discussion of some of these reasons appear in the subsections
that follow. For more details on our item selection and survey
methodology, refer to appendix I.
Table 4: Estimated Frequency of Reasons for Having On-Order and On-Hand
Inventory Not Needed to Meet Requirements:
Reason: Demand decreased, fluctuated, or did not materialize;
On order: Sample item count: 32;
On order: Percentage estimate of items in population[A]: 29%;
On hand: Sample item count: 47;
On hand: Percentage estimate of items in population[A]: 37%.
Reason: Nonrecurring (additive) demand did not materialize;
On order: Sample item count: 8;
On order: Percentage estimate of items in population[A]: 8;
On hand: Sample item count: 4;
On hand: Percentage estimate of items in population[A]: 2.
Reason: Higher assembly (component parts)/weapons system was phased out
or reduced;
On order: Sample item count: 2;
On order: Percentage estimate of items in population[A]: 1;
On hand: Sample item count: 17;
On hand: Percentage estimate of items in population[A]: 18.
Reason: Change in the implementation schedules for some Air Force
inventory reduction/ replacement programs;
On order: Sample item count: 16;
On order: Percentage estimate of items in population[A]: 14;
On hand: Sample item count: 14;
On hand: Percentage estimate of items in population[A]: 2.
Reason: Item was replaced;
On order: Sample item count: 5;
On order: Percentage estimate of items in population[A]: 4;
On hand: Sample item count: 10;
On hand: Percentage estimate of items in population[A]: 7.
Reason: Item became obsolete;
On order: Sample item count: 1;
On order: Percentage estimate of items in population[A]: 1;
On hand: Sample item count: 10;
On hand: Percentage estimate of items in population[A]: 10.
Reason: Items scheduled for transfer to DLA or a contractor facility;
On order: Sample item count: 7;
On order: Percentage estimate of items in population[A]: 7;
On hand: Sample item count: 1;
On hand: Percentage estimate of items in population[A]:
