Defense Inventory
Management Actions Needed to Improve the Cost Efficiency of the Navy's Spare Parts Inventory Gao ID: GAO-09-103 December 12, 2008Since 1990, GAO has designated the Department of Defense's (DOD) inventory management as a high-risk area. It is critical that the military services and the Defense Logistics Agency effectively and efficiently manage DOD's secondary inventory to ensure that the warfighter is supplied with the right items at the right time. It is also imperative that they maintain good stewardship over the billions of dollars invested in their inventory. GAO reviewed the Navy's management of secondary inventory and determined (1) the extent to which on-hand and on-order secondary inventory reflected the amount needed to support current requirements and (2) causes for the Navy's having secondary inventory in excess of current requirements or, conversely, for having inventory deficits. To address these objectives, GAO analyzed Navy secondary inventory data (spare parts such as aircraft and ship engines and their components and accessories) from fiscal years 2004 through 2007.
For the 4-year period GAOexamined, the Navy had significantly more inventory than was needed to support current requirements. The Navy also experienced some inventory deficits, though to a far lesser extent. GAO's analysis of inventory data identified an annual average of about $18.7 billion of Navy secondary inventory for fiscal years 2004 to 2007, of which about $7.5 billion (40 percent) exceeded current requirements. About half of the $7.5 billion of inventory exceeding current requirements was retained to meet anticipated future demands, and the remainder was retained for other reasons or identified as potential excess. Based on Navy demand forecasts, inventory that exceeded current requirements was sufficient to satisfy several years, or even decades, of anticipated supply needs. Also, a large proportion of items that exceeded current requirements had no projected demand. The Navy also had an annual average of about $570 million of inventory deficits over this 4-year period. Some items experienced persistent deficits for the 4 years covered in GAO's review. Navy inventory did not align with current requirements over this 4-year period because (1) the Navy has not established the cost efficiency of its inventory management, (2) its demand forecasting effectiveness is limited and requirements for items may change frequently after purchase decisions are made, and (3) it has not adjusted certain inventory management practices in response to the unpredictability in demand. As a result, the Navy had billions of dollars in excess inventory against current requirements each year. DOD's supply chain management regulation requires the military services to take several steps to provide for effective and efficient end-to-end materiel support. For example, the regulation directs the components to size secondary item inventories to minimize DOD investment while providing the inventory needed. However, while the Navy has performance measures related to meeting warfighter needs, it lacks metrics and targets for tracking and assessing the cost efficiency of its inventory management. In addition, although Navy managers most frequently attributed the accumulation and retention of inventory exceeding current requirements to changes in demand, the Navy has not systematically evaluated the effectiveness of its demand forecasting. Problems with demand forecasting that contribute to excess inventory include incomplete and inaccurate data and a lack of communication and coordination among key personnel. Finally, the Navy has not adjusted certain management practices--in areas such as initial provisioning, modifying purchase decisions for inventory that is on order and not yet in its possession, and retention--to provide flexibility for responding to changes in demand. First, initial provisioning of spare parts based on engineering estimates can result in the purchase of unneeded stock when these estimates prove to be inaccurate. Second, the Navy's management practices for on-order items limit flexibility in modifying purchase decisions in cases where demand has changed. Third, although prior studies have identified weaknesses in inventory retention practices, the Navy has not implemented recommended corrective actions. Also, the Navy's designation of new chief and deputy chief management officer positions provides an opportunity for enhanced oversight of inventory management improvement efforts. Strengthening the Navy's inventory management--while maintaining high levels of supply availability and meeting warfighter needs--could reduce support costs and free up funds for other needs.
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-09-103, Defense Inventory: Management Actions Needed to Improve the Cost Efficiency of the Navy's Spare Parts Inventory
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
December 2008:
Defense Inventory:
Management Actions Needed to Improve the Cost Efficiency of the Navy's
Spare Parts Inventory:
Defense Inventory:
GAO-09-103:
GAO Highlights:
Highlights of GAO-09-103, a report to congressional requesters
Why GAO Did This Study:
Since 1990, GAO has designated the Department of Defense‘s (DOD)
inventory management as a high-risk area. It is critical that the
military services and the Defense Logistics Agency effectively and
efficiently manage DOD‘s secondary inventory to ensure that the
warfighter is supplied with the right items at the right time. It is
also imperative that they maintain good stewardship over the billions
of dollars invested in their inventory. GAO reviewed the Navy‘s
management of secondary inventory and determined (1) the extent to
which on-hand and on-order secondary inventory reflected the amount
needed to support current requirements and (2) causes for the Navy‘s
having secondary inventory in excess of current requirements or,
conversely, for having inventory deficits. To address these objectives,
GAO analyzed Navy secondary inventory data (spare parts such as
aircraft and ship engines and their components and accessories) from
fiscal years 2004 through 2007.
What GAO Found:
For the 4-year period GAO examined, the Navy had significantly more
inventory than was needed to support current requirements. The Navy
also experienced some inventory deficits, though to a far lesser
extent. GAO‘s analysis of inventory data identified an annual average
of about $18.7 billion of Navy secondary inventory for fiscal years
2004 to 2007, of which about $7.5 billion (40 percent) exceeded current
requirements. About half of the $7.5 billion of inventory exceeding
current requirements was retained to meet anticipated future demands,
and the remainder was retained for other reasons or identified as
potential excess. Based on Navy demand forecasts, inventory that
exceeded current requirements was sufficient to satisfy several years,
or even decades, of anticipated supply needs. Also, a large proportion
of items that exceeded current requirements had no projected demand.
The Navy also had an annual average of about $570 million of inventory
deficits over this 4-year period. Some items experienced persistent
deficits for the 4 years covered in GAO‘s review.
Navy inventory did not align with current requirements over this 4-year
period because (1) the Navy has not established the cost efficiency of
its inventory management, (2) its demand forecasting effectiveness is
limited and requirements for items may change frequently after purchase
decisions are made, and (3) it has not adjusted certain inventory
management practices in response to the unpredictability in demand. As
a result, the Navy had billions of dollars in excess inventory against
current requirements each year. DOD‘s supply chain management
regulation requires the military services to take several steps to
provide for effective and efficient end-to-end materiel support. For
example, the regulation directs the components to size secondary item
inventories to minimize DOD investment while providing the inventory
needed. However, while the Navy has performance measures related to
meeting warfighter needs, it lacks metrics and targets for tracking and
assessing the cost efficiency of its inventory management. In addition,
although Navy managers most frequently attributed the accumulation and
retention of inventory exceeding current requirements to changes in
demand, the Navy has not systematically evaluated the effectiveness of
its demand forecasting. Problems with demand forecasting that
contribute to excess inventory include incomplete and inaccurate data
and a lack of communication and coordination among key personnel.
Finally, the Navy has not adjusted certain management practices”in
areas such as initial provisioning, modifying purchase decisions for
inventory that is on order and not yet in its possession, and
retention”to provide flexibility for responding to changes in demand.
First, initial provisioning of spare parts based on engineering
estimates can result in the purchase of unneeded stock when these
estimates prove to be inaccurate. Second, the Navy‘s management
practices for on-order items limit flexibility in modifying purchase
decisions in cases where demand has changed. Third, although prior
studies have identified weaknesses in inventory retention practices,
the Navy has not implemented recommended corrective actions. Also, the
Navy‘s designation of new chief and deputy chief management officer
positions provides an opportunity for enhanced oversight of inventory
management improvement efforts. Strengthening the Navy‘s inventory
management”while maintaining high levels of supply availability and
meeting warfighter needs”could reduce support costs and free up funds
for other needs.
What GAO Recommends:
GAO recommends that the Navy strengthen inventory management by
incorporating cost-efficiency metrics and goals, evaluating and
improving demand forecasting procedures, revising inventory management
practices to better accommodate demand fluctuations, and enhancing
oversight though the chief and deputy chief management officers. DOD
concurred with GAO‘s recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-103]. For more
information, contact William M. Solis at (202) 512-8365 or
solisw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
A Significant Portion of the Navy's Secondary Inventory Exceeded
Current Requirements:
Several Factors Contributed to the Navy's Having Large Inventory Levels
In Excess of Current Requirements:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Value of DOD and the Navy Secondary Inventory (Fiscal Years
2004-2007):
Table 2: Stratification of Navy Fiscal Year Secondary Inventory (Annual
Average for Fiscal Years 2004-2007):
Table 3: Aviation and Maritime Inventory Exceeding Current Requirements
(Annual Average for Fiscal Years 2004-2007):
Table 4: Navy On-Order Inventory That Was Identified as Potential
Excess (Fiscal Years 2004-2007):
Table 5: Program Status of Inventory as a Percentage of Inventory Value
(Fiscal Year 2007):
Table 6: Estimated Frequency of Reasons for Navy Having Inventory That
Exceeded Current Requirements:
Table 7: Estimated Frequency of Reasons for Navy Having Inventory
Deficits:
Table 8: Navy Secondary Inventory by Cognizance Code (Annual Average
for Fiscal Years 2004-2007):
Table 9: Sample Disposition for Fiscal Year 2007 Items:
Figures:
Figure 1: Navy Secondary Inventory Meeting and Exceeding Current
Requirements (Fiscal Years 2004-2007):
Figure 2: Stratification of Inventory Exceeding Current Requirements by
Average Value (Fiscal Years 2004-2007):
Figure 3: Years of Supply Available for Inventory Exceeding Current
Requirements (Fiscal Years 2004 and 2007):
Figure 4: Condition of Reparable Inventory That Exceeded Current
Requirements (Fiscal Year 2007):
Figure 5: Value of Inventory Deficits (Fiscal Years 2004-2007):
Figure 6: Value of On-Hand and On-Order Secondary Inventory which
Exceeded Current Requirements (Fiscal Years 2004-2007):
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
December 12, 2008:
The Honorable Solomon P. Ortiz"
Chairman:
The Honorable Randy Forbes:
Ranking Minority Member:
Subcommittee on Readiness:
Committee on Armed Services:
House of Representatives:
The Honorable Bernie Sanders:
United States Senate:
The military services and the Defense Logistics Agency (DLA) procure
and manage large supplies of spare parts to keep military equipment
operating. At a time when U.S. military forces and their equipment are
in high demand, it is critical that the services and DLA effectively
and efficiently manage the Department of Defense's (DOD) secondary
inventory[Footnote 1] to ensure that the warfighter is supplied with
the right items at the right time. Because the military services and
DLA face challenges in competing for resources at a time when the
nation faces an increasingly constrained fiscal environment, it is also
imperative that they have good stewardship over the billions of dollars
invested in their inventory. DOD reported that the total value of its
secondary inventory as of September 30, 2007, was about $82.6
billion.[Footnote 2] Since 1990, we have identified DOD inventory
management as a high-risk area due to ineffective and inefficient
inventory management practices and procedures and to excessively high
levels of inventory beyond what is needed to support current
requirements. These high levels extend to both on-hand and on-order
inventory. Inventory in DOD's possession is considered to be on hand.
Inventory not in DOD's possession but for which contracts have been
awarded or funds have been obligated is considered to be on order.
In response to your request that we review DOD components' secondary
inventory, this report addresses the management of the Navy's secondary
inventory. Our objectives were to (1) determine the extent to which the
Navy's on-hand and on-order secondary inventory reflects the amount
needed to support current requirements and (2) identify causes, if
applicable, for the Navy's having secondary inventory in excess of
current requirements or, conversely, for having inventory deficits. We
previously reported on the management of the Air Force's secondary
inventory,[Footnote 3] and we plan to report separately on the
management of the Army's secondary inventory.
To determine the extent to which the Navy's on-order and on-hand
secondary inventory reflects the amount of inventory needed to support
current requirements, we analyzed fiscal years 2004 through 2007
stratification data,[Footnote 4] including summary reports and item-
specific data as of September 30 for each fiscal year. We determined
the total number of items that had more or less than enough inventory
to satisfy current requirements, and for each of these items also
determined the number and value of parts that were either in excess of
or less than needed to satisfy current requirements.[Footnote 5] In
presenting the value of inventory in this report, we converted then-
year dollars to constant fiscal year 2007 dollars using DOD Operations
and Maintenance price deflators.[Footnote 6] To determine the primary
causes for the Navy having inventory in excess of current requirements
or having inventory deficits, we selected a random probability sample
of inventory items that met these conditions and sent surveys to Navy
inventory personnel who are responsible for item management. Because we
used a random probability sample, the results of our survey analysis
statistically weight up to represent the population of all Navy items
that met our selection criteria. To gain additional understanding about
the management of secondary inventory, we interviewed numerous Navy
inventory personnel and discussed 70 items in more detail. Appendix I
provides further information on our scope and methodology. We conducted
this performance audit from November 2007 to December 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
In this report, we characterize inventory as exceeding current
requirements when existing inventory levels are greater than what DOD
calls its "requirements objective," defined as:
"For wholesale stock replenishment, the maximum authorized quantity of
stock for an item. It consists of the sum of stock represented by the
economic order quantity, the safety level, the repair-cycle level, and
the authorized additive levels."[Footnote 7]
We used the requirements objective as our baseline because it includes
the requirements used to determine when to order new parts
(collectively called the "reorder point"). In other words, if the Navy
had enough parts to meet the requirements objective, it would not
purchase new parts. We use the term "inventory deficit" to describe
items that have an amount of on-hand inventory that falls below reorder
point thresholds. We used this baseline because it reflected the Navy's
ability to respond to an immediate demand for a secondary inventory
item. The categories DOD and the Navy use to characterize and manage
inventory are discussed further in the background section of this
report.
Results in Brief:
For the 4-year period we examined, the Navy had significantly more
inventory than was needed to support current requirements. The Navy
also experienced some inventory deficits, though to a far lesser
extent. Our analysis of stratification data identified an annual
average of about $18.7 billion of Navy secondary inventory for fiscal
years 2004 through 2007, of which about $7.5 billion (40 percent)
exceeded current requirements. About half of the $7.5 billion of
inventory exceeding current requirements was retained to meet
anticipated future demands, and the remainder was retained for other
reasons or identified as potential excess. Based on Navy demand
forecasts, inventory that exceeded current requirements had enough
parts on hand to satisfy several years, or even decades, of anticipated
supply needs. Also, a large proportion of items that exceeded current
requirements had no projected demand. Inventory that exceeded current
requirements included both serviceable and unserviceable parts, and was
predominantly associated with steady programs--that is, programs that
were not significantly growing or declining. The Navy also had an
annual average of about $570 million of inventory deficits over this 4-
year period, which represented about 7 percent of its annual reorder
point requirements. Fewer items had inventory deficits than had
excesses, but some items experienced persistent deficits for the 4
years we reviewed.
On the basis of our review, we found that Navy secondary inventory did
not align with current requirements over the 4-year period because (1)
the Navy has not established the cost efficiency of its inventory
management, (2) the Navy's demand forecasting effectiveness is limited
and requirements for items may change frequently after purchase
decisions are made, and (3) the Navy has not adjusted certain inventory
management practices in response to the unpredictability in demand. As
a result, the Navy has accumulated and retained billions of dollars in
excess inventory against current requirements each year. DOD's supply
chain management regulation requires the military services to take
several steps to provide for effective and efficient end-to-end
materiel support. For example, the regulation directs the components to
size secondary item inventories to minimize the DOD investment while
providing the inventory needed. However, while the Navy has performance
measures for meeting warfighter needs, it lacks metrics and targets for
tracking and assessing the cost efficiency of its inventory management.
In addition, Navy managers most frequently attributed the accumulation
of inventory exceeding current requirements to changes in demand.
Although DOD's supply chain regulation states that customer demand
shall be part of all DOD components' inventory management decisions and
that variance in demand forecasts outside established parameters should
be flagged for management analysis and action, the Navy has not
systematically evaluated the effectiveness of its demand forecasting.
Problems with demand forecasting that contribute to excess inventory
include incomplete and inaccurate data and a lack of communication and
coordination among key personnel. Another factor contributing to the
Navy having inventory that does not align with requirements is its
failure to adjust certain management practices--in areas such as
initial provisioning, on-order management, and retention--to allow for
flexible responses to fluctuations in demand. First, initial
provisioning of spare parts based on engineering estimates can result
in the purchase of unneeded stock when these estimates prove to be
inaccurate. Second, the Navy's inventory management practices for on-
order items limit flexibility in modifying purchase decisions in cases
where demand has changed. Third, although prior studies by our office
and the Logistics Management Institute (LMI) have identified weaknesses
in DOD components' inventory retention practices, the Navy has neither
implemented recommended corrective actions nor ensured that required
annual reviews validating its methodologies for making retention
decisions are performed. In addition, the Navy has established a new
chief management officer and deputy chief management officer
responsible for business transformation. These new designations provide
an opportunity to enhance oversight of inventory management improvement
efforts. Strengthening the Navy's inventory management--while
maintaining high levels of supply availability and meeting warfighter
needs--could reduce support costs and free up funds for other needs.
To improve the management of Navy secondary inventory, we are
recommending that the Navy incorporate cost-efficiency metrics and
goals, evaluate and improve demand forecasting procedures, revise
inventory management practices to better accommodate fluctuations in
demand, and enhance Navy oversight of inventory improvement efforts.
DOD, in its comments on a draft of this report, concurred with our
recommendations.
Background:
Under DOD's supply chain materiel management policy, the secondary item
inventory should be sized to minimize DOD's investment while providing
sufficient inventory to support both peacetime and war
requirements.[Footnote 8] The Offices of the Secretary of Defense and
the Navy share the responsibility for management and oversight of the
secondary item inventory. The Under Secretary of Defense for
Acquisition, Technology, and Logistics is responsible for the uniform
implementation of inventory management policies throughout the
department, while the Secretary of the Navy is responsible for
implementing DOD inventory policies and procedures. Navy inventory
management functions are primarily the responsibility of the Naval
Inventory Control Point, a component of the Navy Supply Systems Command
that has offices in Philadelphia and Mechanicsburg, Pennsylvania.
Aviation and maritime items are managed in Philadelphia and
Mechanicsburg, respectively. The Navy prescribes guidance and
procedural instructions for computing requirements for its secondary
inventory. Navy managers develop inventory management plans for their
assigned items, which include developing budgetary requirements for
procurement and repair, monitoring and discussing inventory performance
with contractors and repair depots, evaluating requests for stocking
from individual DOD activities, and processing requisitions for
materiel that cannot be satisfied by automated processes.
Value of Navy's Secondary Inventory Decreased Since 2004:
DOD requires each service and DLA to semiannually prepare inventory
stratification reports, which are primarily used to determine
procurement and repair budget requirements, and potential excess or
reutilization stock.[Footnote 9] Stratification is a process that
identifies and prioritizes requirements and allocates inventory to
those requirements based on availability. DOD annual stratification
reports show that for the 4 years covered in our review, the value of
the Navy's secondary inventory decreased both in dollar amounts and as
a percentage of DOD's overall secondary inventory (see table 1).
Table 1: Value of DOD and Navy Secondary Inventory (Fiscal Years 2004-
2007):
Dollars (in billions).
Fiscal year: 2004;
DOD secondary inventory: $84.5;
Navy secondary inventory: $25.9;
Percentage of DOD secondary inventory held by the Navy: 31.
Fiscal year: 2005;
DOD secondary inventory: 83.7;
Navy secondary inventory: 22.5;
Percentage of DOD secondary inventory held by the Navy: 27.
Fiscal year: 2006;
DOD secondary inventory: 87.6;
Navy secondary inventory: 21.4;
Percentage of DOD secondary inventory held by the Navy: 24.
Fiscal year: 2007;
DOD secondary inventory: 82.6;
Navy secondary inventory: 18.6;
Percentage of DOD secondary inventory held by the Navy: 23.
Source: GAO analysis of DOD data.
Notes: Values are expressed in constant fiscal year 2007 dollars. DOD
values inventory at latest acquisition cost, with reductions for
reparable inventory in need of repair and salvage prices for potential
reutilization/disposal stock.
[End of table]
While the total reported value of DOD's secondary inventory decreased
by almost $2 billion from fiscal year 2004 through fiscal year 2007,
the reported value of the Navy's inventory decreased by more than $7
billion. According to Navy inventory managers, this decrease was
attributable to the following factors: (1) a greatly accelerated
disposal rate for items in the F-14 program, (2) an accounting cleanup
of records on unserviceable parts in transit, (3) sales of inventory
that had accrued in support of major war operations in 2002 and 2003,
(4) an increase in aviation assets that could not be repaired and
therefore were disposed of, and (5) the transfer of inventory control
for consumable aviation items from the Navy to DLA.
Navy's Process for Determining Needed Amount of Secondary Inventory:
The Navy uses a process called requirements determination to calculate
the respective amounts of inventory it either needs to have available
in storage (on hand) or needs to purchase (on order). A central
database called the Master Item File provides data for the requirements
determination process. The Navy also uses the Master Item File to
develop a stratification report showing the amount of inventory
allocated to meet specific requirements, including operating and
acquisition lead time requirements.
* Operating requirements include the war reserves authorized for
purchase; customer-requisitioned materiel that has not yet been shipped
(also known as due-outs); a safety level of reserve to be kept on hand
in case of minor interruptions in the resupply process or unpredictable
fluctuations in demand; minimum quantities for essential items for
which demand cannot normally be predicted (also referred to as numeric
stockage objective or insurance items); and inventory reserve
sufficient to satisfy demand while broken items are being repaired
(also referred to as repair cycle stock).
* Acquisition lead time requirements include administrative lead time
requirements, which refer to inventory reserves sufficient to satisfy
demand[Footnote 10] from the time that the need for replenishment of an
item is identified to the time when a contract is awarded for its
purchase or an order is placed; and production lead time requirements,
which refer to inventory reserves sufficient to satisfy demand from the
time when a contract is let or an order is placed for inventory to the
time when the item is received.
When the combined total of on-hand and on-order inventory for an item
drops to a threshold level--called the reorder point--the item manager
may place an order for additional inventory of that item, to avoid the
risk of the item's going out of stock in the Navy's inventory. The
reorder point includes both operating requirements and acquisition lead
time requirements. An economic order quantity--the amount of inventory
that will result in the lowest total costs for ordering and holding
inventory--is automatically calculated by a computer program and is
added to the order. The reorder point factors in demand for inventory
items during the reordering period so that Navy managers can replace
items before they go out of stock, and a safety level to ensure a
supply of stock during interruptions in production or repair. A
purchase request can be terminated or modified if requirements change.
These requirements collectively constitute the requirements objective,
which we refer to as the Navy's current requirements in this report. An
assessment of the Navy's requirements or requirements determination
process was outside the scope of our review. In accounting for its
inventory, the Navy uses the stratification process to allocate, or
apply, inventory to each requirement category. On-hand inventory in
serviceable condition is applied first, followed by on-hand inventory
in unserviceable condition.[Footnote 11] On-order inventory is applied
when on-hand inventory is unavailable to be applied to requirements. We
refer to situations when on-hand inventory is insufficient to satisfy
reorder point requirements as inventory deficits.
Inventory that exceeds current requirements may include:
* inventory that satisfies 2 years of projected future demand, which
together with current requirements is known as the approved acquisition
objective;[Footnote 12]
* economic retention inventory, which exceeds the approved acquisition
objective but has been deemed more economical to keep than to discard
because it will likely be needed in the future;
* contingency retention inventory, which exceeds the economic retention
inventory but is retained for specific contingencies; and:
* potential excess materiel,[Footnote 13] which exceeds contingency
retention inventory and has been identified for possible disposal but
has potential for reutilization.
A Significant Portion of the Navy's Secondary Inventory Exceeded
Current Requirements:
Our analysis of Navy secondary inventory data for the 4-year period we
examined showed that, on average, about $11.3 billion (60 percent) of
the average annual total inventory value of $18.7 billion was needed to
meet current requirements and $7.5 billion (40 percent) exceeded
current requirements. About half of the inventory that exceeded current
requirements was being retained for demands anticipated within 2 years,
and the remainder was held as economic retention inventory, contingency
retention inventory, or marked as potential excess. According to the
Navy's demand forecasts for items exceeding current requirements in
fiscal years 2004 and 2007, inventory levels of some items were
sufficient to meet many years and sometimes decades of demand. A large
proportion of items that exceeded current requirements had no projected
demand. Reparable inventory that exceeded current requirements included
both serviceable and unserviceable parts, and the proportion of items
associated with steady programs--that is, programs that were not
significantly growing or declining--was similar for inventory meeting
and exceeding current requirements. Relatively few inventory deficits
were identified, but these persisted for some items during the 4 years
we reviewed.
About $7.5 Billion, or 40 Percent, of the Navy's On-Hand and On-Order
Inventory Value Exceeded Current Requirements Each Year:
Our analysis of Navy secondary inventory data showed that, on average,
about $11.3 billion (60 percent) of the total annual inventory value
was needed to meet current requirements, whereas $7.5 billion (40
percent) exceeded current requirements. Measured by number of parts,
these percentages were reversed: 40 percent of the parts applied to
current requirements on average each year, and the remaining 60 percent
exceeded current requirements. Our data for the 4-year period revealed
that 121,380 (65 percent) of the Navy's 186,465 unique items with
reported inventory had parts in excess of current requirements. Table 2
shows the stratification of Navy secondary inventory for the 4-year
period, including inventory meeting requirements and inventory
exceeding requirements.
Table 2: Stratification of Navy Fiscal Year Secondary Inventory (Annual
Average for Fiscal Years 2004-2007):
Dollars (in billions).
Annual average: Total inventory;
Items: 186,465;
Parts (in millions): 19.1;
Percentage of total parts: 100%;
Value: $18.7;
Percentage of total value: 100%.
Inventory meeting current requirements: Operating requirements;
Items: 93,153;
Parts (in millions): 2.2;
Percentage of total parts: 11;
Value: 7.6;
Percentage of total value: 41.
Inventory meeting current requirements: Acquisition lead time;
Items: 34,286;
Parts (in millions): 3.5;
Percentage of total parts: 18;
Value: 1.9;
Percentage of total value: 10.
Inventory meeting current requirements: Economic order quantity;
Items: 172,869;
Parts (in millions): 2.0;
Percentage of total parts: 10;
Value: 1.8;
Percentage of total value: 9.
Inventory meeting current requirements: Subtotal;
Items: 184,606;
Parts (in millions): 7.6;
Percentage of total parts: 40;
Value: $11.3;
Percentage of total value: 60%.
Inventory exceeding current requirements: Future demand;
Items: N/A;
Parts (in millions): 1.1;
Percentage of total parts: 6;
Value: 3.7;
Percentage of total value: 20.
Inventory exceeding current requirements: Economic retention;
Items: 81,419;
Parts (in millions): 1.7;
Percentage of total parts: 9;
Value: 1.2;
Percentage of total value: 6.
Inventory exceeding current requirements: Contingency retention;
Items: 26,052;
Parts (in millions): 1.2;
Percentage of total parts: 6;
Value: 0.7;
Percentage of total value: 4.
Inventory exceeding current requirements: Potential excess;
Items: 52,634;
Parts (in millions): 7.4;
Percentage of total parts: 39;
Value: 1.8;
Percentage of total value: 10.
Inventory exceeding current requirements: Subtotal;
Items: 121,380;
Parts (in millions): 11.4;
Percentage of total parts: 60;
Value: $7.5;
Percentage of total value: 40%.
Source: GAO analysis of Navy data.
Notes: Values are expressed in constant fiscal year 2007 dollars and
are less cost recovery rates (overhead charges).
Some of the totals may not add up due to rounding.
[End of table]
The data in table 2 show that the Navy has applied a significant amount
of inventory to future demand as well as to current requirements. On
average, about 1.1 million parts comprising 6 percent of total parts
and 20 percent of total inventory value were designated for future
demand. Furthermore, the average value of these parts ($3.7 billion)
was nearly half the average value of the parts needed to meet annual
operating requirements ($7.6 billion). The balance between inventory
meeting current requirements and inventory exceeding current
requirements stayed relatively constant from year to year (see fig. 1).
Figure 1: Navy Secondary Inventory Meeting and Exceeding Current
Requirements (Fiscal Years 2004-2007):
This figure is a combination bar graph showed Navy secondary inventory
meeting and exceeding current requirements (fiscal years 2004-2007).
The X axis represents the fiscal year, and the Y axis represents the
dollars (in millions).
Fiscal year: 2004;
Current requirements: 11.8936996460;
Beyond current requirements: 7.8607597351.
Fiscal year: 2005;
Current requirements: 11.8028993607;
Beyond current requirements: 7.8672199249.
Fiscal year: 2006;
Current requirements: 11.3425998688;
Beyond current requirements: 7.3581199646.
Fiscal year: 2007;
Current requirements: 10.0296993256;
Beyond current requirements: 6.7833499908.
[See PDF for image]
GAO analysis of Navy data.
Note: Values are expressed in constant fiscal year 2007 dollars.
[End of figure]
The secondary inventory data further showed that while the aviation
community had fewer spare parts than the maritime community, these
parts constituted a higher average value; conversely, the maritime
community had more parts but at lower average value. Table 3 shows the
average number and value of parts exceeding current requirements for
each of these communities at the end of each fiscal year.
Table 3: Aviation and Maritime Inventory Exceeding Current Requirements
(Annual Average for Fiscal Years 2004-2007):
Aviation;
Number of parts (millions): 1.7;
Percent: 15;
Value of parts (billions): $5.6;
Percent: 75.
Maritime;
Number of parts (millions): 9.7;
Percent: 85;
Value of parts (billions): 1.8;
Percent: 25.
Total;
Number of parts (millions): 11.4;
Percent: 100;
Value of parts (billions): $7.5;
Percent: 100.
Source: GAO analysis of Navy data.
Notes: Totals may not add up due to rounding.
Values are expressed in constant fiscal year 2007 dollars and are less
cost recovery rates (overhead charges).
[End of table]
Inventory Excess to Current Requirements Was Retained for Anticipated
Future Needs:
Of the nearly $7.5 billion in Navy secondary inventory that exceeded
current requirements in the time frame we examined, about half was
being retained for demands anticipated within 2 years, while the
remainder was being retained either as economic retention inventory,
contingency retention inventory, or potential excess (see fig. 2).
Figure 2: Stratification of Inventory Exceeding Current Requirements by
Average Value (Fiscal Years 2004-2007):
This figure is a pie graph showing stratification of inventory
exceeding current requirements by average value (fiscal years 2004-
2007).
Projected future demand: 47%;
Potential excess: 26%;
Economic retention: 17%;
Contingency retention: 10%.
[See PDF for image]
Source: GAO analysis of Navy data.
[End of figure]
With regard to on-order inventory, the Navy marked approximately $10
million (1 percent) of this inventory each year as potential excess to
be reviewed for possible disposal. This means that demands had
decreased significantly since the time the order was placed, yet the
Navy had not terminated the order. Navy managers told us that on-order
inventory marked as potential excess is routinely cancelled to prevent
the immediate disposal of new inventory. We did not independently
verify whether this practice was consistently followed. Table 4 shows
the amount of potential excess inventory the Navy had on order at the
end of fiscal years 2004 to 2007.
Table 4: Navy On-Order Inventory That Was Identified as Potential
Excess (Fiscal Years 2004-2007):
Dollars (in millions).
Aviation;
Fiscal year: 2004: $7.2;
Fiscal year: 2005: $10.1;
Fiscal year: 2006: $5.6;
Fiscal year: 2007: $7.6.
Maritime;
Fiscal year: 2004: 4.0;
Fiscal year: 2005: 1.3;
Fiscal year: 2006: 2.1;
Fiscal year: 2007: 3.7.
Total;
Fiscal year: 2004: $11.1;
Fiscal year: 2005: $11.4;
Fiscal year: 2006: $7.6;
Fiscal year: 2007: $11.3.
Source: GAO analysis of Navy data.
Notes: Values are expressed in constant fiscal year 2007 dollars and
are less cost recovery rates (overhead charges).
Some of the totals may not add up due to rounding.
[End of table]
Excess Inventory Was Sufficient to Meet Many Years of Projected
Demands:
The Navy's forecasts for items with a recurring demand in fiscal years
2004 and 2007 showed that inventory for some items exceeded the current
requirements necessary to meet many years and sometimes decades of
demand. In addition, a substantial amount of this inventory showed no
projected demand. The results of this analysis are shown in figure 3.
Figure 3: Years of Supply Available for Inventory Exceeding Current
Requirements (Fiscal Years 2004 and 2007):
This figure is a combination bar graph showing the years of supply
available for inventory exceeding current requirements (fiscal years
2004 and 2007). The X axis represents the years of supply, and the Y
axis represents the dollars (in billions). One bar represents the
fiscal year 2004, and the other bar represents fiscal year 2007.
Years of supply: >0 and =2 and =10 and =50 and
