Defense Inventory
Army Needs to Evaluate Impact of Recent Actions to Improve Demand Forecasts for Spare Parts Gao ID: GAO-09-199 January 12, 2009Since 1990, GAO has designated the Department of Defense's (DOD) inventory management as a high-risk area. It is critical that the military services effectively and efficiently manage DOD's secondary inventory to ensure that the warfighter is supplied with the right items at the right time and to maintain good stewardship over the billions of dollars invested in their inventory. GAO reviewed the Army'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 Army having secondary inventory that exceeded current requirements or, conversely, for having inventory deficits. To address these objectives, GAO analyzed Army data on secondary inventory (spare parts such as aircraft and tank engines) from fiscal years 2004 through 2007.
For the 4-year period GAO examined, the Army had significantly more inventory than was needed to support current requirements. At the same time, the Army had substantial inventory deficits. GAO's analysis of Army data reflected an annual average of about $16.3 billion of secondary inventory for fiscal years 2004 to 2007, of which about $3.6 billion (22 percent) exceeded current requirements. On average, approximately 97 percent of the inventory value exceeding requirements was on hand and the remaining 3 percent was on order. Based on Army demand forecasts, inventory that exceeded current requirements had enough parts on hand for some items 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 Army also had an annual average of about $3.5 billion of inventory deficits over this 4-year period. Army inventory did not align with current requirements over this period because of (1) a lack of cost-efficiency metrics and goals and (2) inaccurate demand forecasting. DOD's supply chain management regulation requires the military services to take a number of steps to provide for effective and efficient end-to-end materiel support. For example, the regulation directs the components to size secondary inventory to minimize DOD's investment while providing the inventory needed. Although the Army has supply support performance measures for meeting warfighter needs, it has not established metrics and goals that can measure the cost efficiency of its inventory management practices. Furthermore, the Army's demand forecasts have frequently been inaccurate. The Army uses a computer model to forecast its spare parts requirements, but when demand data are inaccurate or untimely, the result is a misalignment between inventory and current requirements. As a result, the Army has accumulated billions of dollars in excess inventory against current requirements for some items and substantial inventory deficits in other items. Without accurate and timely demand data, managers cannot ensure that their purchasing decisions will result in inventory levels that are sized to minimize DOD's investment needed to support requirements. The Army has acknowledged that challenges exist in its forecasting procedures and has begun to take steps to address shortcomings. In October 2008, the Army issued guidance directing managers to reduce the forecast period from 24 months to 12 months to better account for changes in the size of the force and the resulting changes in demands. The guidance also directs managers to update forecast models to match actual quantities of weapon systems being used in Southwest Asia; previous models were updated based on estimates that were not always timely or accurate. These two changes constitute steps toward improving the accuracy of demand forecasts, but GAO was unable to assess their effectiveness because this guidance was issued as GAO was completing its audit work. Also, the Army's recent designation of the Under Secretary of the Army as its chief management officer responsible for business transformation provides an opportunity for enhanced oversight of inventory management improvement efforts. Strengthening the Army'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-09-199, Defense Inventory: Army Needs to Evaluate Impact of Recent Actions to Improve Demand Forecasts for Spare Parts
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
January 2009:
Defense Inventory:
Army Needs to Evaluate Impact of Recent Actions to Improve Demand
Forecasts for Spare Parts:
GAO-09-199:
GAO Highlights:
Highlights of GAO-09-199, 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 effectively and efficiently manage DOD‘s secondary
inventory to ensure that the warfighter is supplied with the right
items at the right time and to maintain good stewardship over the
billions of dollars invested in their inventory. GAO reviewed the
Army‘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 Army
having secondary inventory that exceeded current requirements or,
conversely, for having inventory deficits. To address these objectives,
GAO analyzed Army data on secondary inventory (spare parts such as
aircraft and tank engines) from fiscal years 2004 through 2007.
What GAO Found:
For the 4-year period GAO examined, the Army had significantly more
inventory than was needed to support current requirements. At the same
time, the Army had substantial inventory deficits. GAO‘s analysis of
Army data reflected an annual average of about $16.3 billion of
secondary inventory for fiscal years 2004 to 2007, of which about $3.6
billion (22 percent) exceeded current requirements. On average,
approximately 97 percent of the inventory value exceeding requirements
was on hand and the remaining 3 percent was on order. Based on Army
demand forecasts, inventory that exceeded current requirements had
enough parts on hand for some items 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 Army
also had an annual average of about $3.5 billion of inventory deficits
over this 4-year period.
Army inventory did not align with current requirements over this period
because of (1) a lack of cost-efficiency metrics and goals and (2)
inaccurate demand forecasting. DOD‘s supply chain management regulation
requires the military services to take a number of steps to provide for
effective and efficient end-to-end materiel support. For example, the
regulation directs the components to size secondary inventory to
minimize DOD‘s investment while providing the inventory needed.
Although the Army has supply support performance measures for meeting
warfighter needs, it has not established metrics and goals that can
measure the cost efficiency of its inventory management practices.
Furthermore, the Army‘s demand forecasts have frequently been
inaccurate. The Army uses a computer model to forecast its spare parts
requirements, but when demand data are inaccurate or untimely, the
result is a misalignment between inventory and current requirements. As
a result, the Army has accumulated billions of dollars in excess
inventory against current requirements for some items and substantial
inventory deficits in other items. Without accurate and timely demand
data, managers cannot ensure that their purchasing decisions will
result in inventory levels that are sized to minimize DOD‘s investment
needed to support requirements. The Army has acknowledged that
challenges exist in its forecasting procedures and has begun to take
steps to address shortcomings. In October 2008, the Army issued
guidance directing managers to reduce the forecast period from 24
months to 12 months to better account for changes in the size of the
force and the resulting changes in demands. The guidance also directs
managers to update forecast models to match actual quantities of weapon
systems being used in Southwest Asia; previous models were updated
based on estimates that were not always timely or accurate. These two
changes constitute steps toward improving the accuracy of demand
forecasts, but GAO was unable to assess their effectiveness because
this guidance was issued as GAO was completing its audit work. Also,
the Army‘s recent designation of the Under Secretary of the Army as its
chief management officer responsible for business transformation
provides an opportunity for enhanced oversight of inventory management
improvement efforts. Strengthening the Army‘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 Army strengthen inventory management by
incorporating cost efficiency metrics and goals, evaluating and
improving demand forecasting procedures, monitoring the effectiveness
of providing operational information to item managers, and enhancing
oversight of inventory management through the Army‘s chief management
officer. DOD agreed with three of GAO‘s recommendations but disagreed
that the chief management officer should exercise oversight.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-199]. For more
information, contact William M. Solis at (202) 512-8365 or
solisw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Army Secondary Inventory Exceeded Amount Needed to Satisfy Current
Requirements:
Factors Contributing to the Consistent Misalignment Between Army
Inventory Levels and 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 Acknowledgements:
Tables:
Table 1: Value of DOD's Inventory and the Value and Percentage
Represented by the Army, Fiscal Years 2004-2007:
Table 2: Army's On-Hand and On-Order Secondary Inventory, Fiscal Years
2004-2007:
Table 3: Total Army Inventory Exceeding Current Requirements, Fiscal
Years 2004-2007:
Table 4: Army On-Hand Secondary Inventory Exceeding Current
Requirements, Fiscal Years 2004-2007:
Table 5: Army On-Order Secondary Inventory Exceeding Current
Requirements, Fiscal Years 2004-2007:
Table 6: Army On-Order Inventory Identified as Potential Excess, Fiscal
Years 2004-2007:
Table 7: Army Inventory Deficits, Fiscal Years 2004-2007:
Table 8: Estimated Frequency of Reasons for Army Having Inventory That
Exceeded Current Requirements:
Table 9: Estimated Frequency of Reasons for Army Having Inventory
Deficits:
Table 10: Sample Disposition for Fiscal Year 2007 Items:
Figures:
Figure 1: Army Secondary Inventory Meeting and Exceeding Current
Requirements, Fiscal Years 2004-2007:
Figure 2: Value of Army Inventory Exceeding Current Requirements, by
Years of Supply, Fiscal Years 2005-2007:
Abbreviations:
AMCOM: Aviation and Missile Command:
BRAC: Base Realignment and Closure:
CECOM: Communication and Electronics Command:
DLA: Defense Logistics Agency:
DOD: Department of Defense:
TACOM: Tank-automotive and Armaments Command:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
January 12, 2009:
The Honorable Solomon P. Ortiz:
Chairman:
The Honorable J. Randy Forbes:
Ranking Member:
Subcommittee on Readiness:
Committee on Armed Services:
House of Representatives:
The Honorable Bernard 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. With U.S. military forces and their equipment in high
demand, it is critical that the services and DLA effectively and
efficiently manage the Department of Defense's (DOD) secondary
inventory to ensure that the warfighter is supplied with the right
items at the right time.[Footnote 1] Because the military services and
DLA are competing for available resources at a time when the nation
faces an increasingly constrained fiscal environment, it is also
imperative that they exercise 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 its ineffective and inefficient
inventory management practices and procedures, and to its excessively
high levels of inventory beyond what is needed to support current
requirements. These high levels of inventory have included 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 obligated is
considered to be on order.
In response to your request that we review the DOD components'
secondary inventory, this report addresses the management of the Army's
secondary inventory. Our objectives were to (1) determine the extent to
which the Army's on-hand and on-order secondary inventory reflects the
amount needed to support current requirements and (2) identify causes,
if applicable, for the Army having secondary inventory that exceeded
current requirements or, conversely, for having inventory deficits. We
previously reported on the management of the Air Force's secondary
inventory and are reporting separately on the management of the Navy's
secondary inventory.[Footnote 3]
To determine the extent to which the Army's on-hand and on-order
secondary inventory reflects the amount of inventory needed to support
current requirements, we analyzed fiscal year 2004 to 2007
stratification data for the Army's Aviation and Missile Command (AMCOM)
and the Tank-automotive and Armaments Command (TACOM), including
summary reports and item-specific data as of September 30 for each
fiscal year.[Footnote 4] However, we did not include the Army's
Communication and Electronics Command (CECOM) in our analysis because
the information system used to manage secondary inventory was not able
to provide item-specific data for the period of our review.[Footnote 5]
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 we also determined the number and value of parts that were more
or less than needed to satisfy current requirements.[Footnote 6] 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 7] To determine the primary
causes for the Army having inventory that exceeded current requirements
or having inventory deficits, we selected a random probability sample
of inventory items that met these conditions and sent questionnaires to
Army inventory personnel who are responsible for item management.
Because we used a random probability sample, the results of our
analysis can be projected to all Army items that met our selection
criteria. To gain additional understanding about the management of
secondary inventory, we interviewed Army inventory personnel to discuss
some items in more detail. Appendix I provides further information on
our scope and methodology. We conducted this performance audit from
February 2008 through January 2009 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 8]
We used the requirements objective as our baseline because, as the
definition states, it reflects the maximum authorized quantity of stock
for an item. In other words, if the Army 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 and on-order inventory that falls below the baseline established
in the requirements objective. The categories DOD and the Army 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 Army had significantly more
secondary inventory than was needed to support current requirements. At
the same time, the Army had substantial inventory deficits. Our
analysis of stratification data identified an annual average of about
$16.3 billion of Army secondary inventory for fiscal years 2004 to
2007, of which about $3.6 billion (22 percent) exceeded current
requirements. On average, approximately 97 percent of the inventory
value exceeding requirements was on hand, and the remaining 3 percent
was on order. For on-hand inventory, the value of inventory that
exceeded current requirements increased by 59 percent, from $2.7
billion in fiscal year 2004 to $4.3 billion in fiscal year 2007. Based
on Army demand forecasts, inventory that exceeded current requirements
had enough parts on hand for some items 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. For
on-order inventory, the proportion of this inventory that exceeded
current requirements stayed relatively constant, although the value
decreased from approximately $150 million in fiscal year 2004 to $110
million in fiscal year 2007. In fiscal year 2007, the Army identified
approximately $56 million of that $110 million of on-order inventory as
potential excess for disposal or reutilization. The Army also had
substantial inventory deficits--an average value of $3.5 billion over
the 4-year period. However, the value of inventory deficits decreased
17 percent from $4.1 billion in fiscal year 2004 to approximately $3.4
billion in fiscal year 2007.
On the basis of our analysis, we found that Army secondary inventory
did not align with current requirements due in part to two factors--(1)
a lack of cost efficiency metrics and goals and (2) inaccurate demand
forecasting. DOD's supply chain management regulation requires the
military services to take a number of steps to provide effective and
efficient end-to-end materiel support. For example, the regulation
directs the components to size secondary item inventory to minimize
DOD's investment while providing the inventory needed to support both
peacetime and wartime requirements. Although the Army has supply
support performance measures for meeting warfighter needs and other
methods for managing its inventory, it has not established metrics and
goals that can measure the cost efficiency of its inventory management
practices. In the absence of such metrics and goals, Army officials
lack an effective means for assessing whether inventory is being
managed as efficiently as possible and for tracking trends and the
impact of any corrective actions. Furthermore, the Army's demand
forecasts have frequently been inaccurate. The Army uses a computer
model to forecast its spare parts requirements, but when demand data
are inaccurate or untimely, the result is a misalignment between
inventory and current requirements. As discussed above, the Army has
accumulated billions of dollars in excess inventory against current
requirements for some items and substantial inventory deficits for
other items. Army item managers responding to our survey most
frequently cited changes in demand as the reason why inventory did not
align with current requirements.[Footnote 9] Without accurate and
timely demand data, managers cannot ensure that their purchasing
decisions will result in inventory levels that are sized to minimize
DOD's investment needed to support requirements. The Army has
acknowledged that challenges exist in its forecasting procedures and
has begun to take steps to address shortcomings. In October 2008, the
Army issued guidance directing managers to reduce the forecast period
from the previous 24 months to the previous 12 months to better account
for changes in the size of the force and the resulting changes to
demands.[Footnote 10] The guidance also directs managers to update
forecast models to match actual quantities of weapon systems being used
in Southwest Asia; previous models were updated based on estimates that
were not always timely or accurate. These two changes constitute steps
toward improving the accuracy of demand forecasts, but we are unable to
assess their effectiveness because this guidance was issued as we were
completing our audit work. Furthermore, we noted during our review that
the Army has designated the Under Secretary of the Army as its chief
management officer responsible for business transformation. This new
designation provides an opportunity to enhance oversight of inventory
management improvement efforts.
To improve the management of Army secondary inventory, we are
recommending that the Army develop cost efficiency metrics and goals
for inventory management, evaluate the effectiveness of changes to
demand forecasting procedures to identify and correct systemic
weaknesses, improve the flow of information to item managers, and
enhance oversight of inventory management. In reviewing a draft of this
report, DOD agreed with three recommendations and disagreed with one
recommendation. DOD disagreed with our recommendation to direct the
Army's Chief Management Officer to exercise oversight of Army inventory
management improvements to align improvement efforts with overall
business transformation and to reduce support costs. We continue to
believe that our recommendation has merit, and we have modified this
recommendation to make clear our intent regarding the oversight role of
the Chief Management Officer.
Background:
Under DOD's supply chain materiel management policy, the secondary item
inventory is to be sized to minimize DOD's investment while providing
the inventory needed to support both peacetime and wartime
requirements.[Footnote 11] Management and oversight of Army inventory
is a responsibility shared between the Offices of the Secretary of
Defense and the Secretary of the Army. The Under Secretary of Defense
for Acquisition, Technology, and Logistics is responsible for the
uniform implementation of DOD inventory management policies throughout
the department, while the Secretary of the Army is responsible for
implementing DOD inventory policies and procedures. Army inventory
management is primarily the responsibility of the Army Materiel
Command, and inventory management functions are performed at
subordinate commands, namely TACOM, AMCOM, and CECOM. The Army
prescribes guidance and procedural instructions for computing
requirements for its secondary inventory. Army managers are responsible
for developing inventory management plans for their assigned items, to
include coordinating all purchase and repair decisions.
Value of Army's Secondary Inventory Increased Since 2004:
DOD annual stratification reports show that for the 4 years covered in
our review, the value of the Army's secondary inventory increased both
in total dollars and as a percentage of DOD's overall secondary
inventory (see table 1).
Table 1: Value of DOD's Inventory and the Value and Percentage
Represented by the Army, Fiscal Years 2004-2007 (Dollars in billions):
Fiscal year: 2004;
Reported value of DOD's inventory: $84.5;
Value of Army's inventory: $13.9;
Percentage of DOD's inventory held by the Army: 16%.
Fiscal year: 2005;
Reported value of DOD's inventory: $83.7;
Value of Army's inventory: $15.9;
Percentage of DOD's inventory held by the Army: 19%.
Fiscal year: 2006;
Reported value of DOD's inventory: $87.6;
Value of Army's inventory: $18.3;
Percentage of DOD's inventory held by the Army: 21%.
Fiscal year: 2007;
Reported value of DOD's inventory: $82.6;
Value of Army's inventory: $19.1;
Percentage of DOD's inventory held by the Army: 23%.
Source: GAO analysis of DOD data.
Note: 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. Data reported by DOD include all Army
inventory management centers (AMCOM, CECOM, and TACOM).
[End of table]
While the total reported value of DOD's secondary inventory decreased
by almost $2 billion from fiscal year 2004 to fiscal year 2007, the
reported value of the Army's inventory increased by more than $5
billion. Based on our analysis of AMCOM and TACOM inventories from
fiscal year 2004 through fiscal year 2007, the Army's on-hand inventory
increased by about $4 billion, while the Army's on-order inventory
decreased by $1 billion (see table 2).[Footnote 12] The number of
unique items managed by AMCOM and TACOM also increased over that time
period, from 59,443 unique items in fiscal year 2004 to 63,504 items in
fiscal year 2007.
Table 2: Army's On-Hand and On-Order Secondary Inventory, Fiscal Years
2004-2007 (Dollars in billions):
Fiscal year: 2004;
On-hand inventory: Number of parts: 18,029,065;
On-hand inventory: Value: $8.8;
On-order inventory: Number of parts: 19,077,562;
On-order inventory: Value: $5.3;
Total inventory: Number of parts: 37,106,627;
Total inventory: Value: $14.1.
Fiscal year: 2005;
On-hand inventory: Number of parts: 21,379,282;
On-hand inventory: Value: $11.1;
On-order inventory: Number of parts: 18,220,814;
On-order inventory: Value: $5.9;
Total inventory: Number of parts: 39,600,096;
Total inventory: Value: $17.1.
Fiscal year: 2006;
On-hand inventory: Number of parts: 25,981,192;
On-hand inventory: Value: $12.7;
On-order inventory: Number of parts: 13,300,360;
On-order inventory: Value: $4.8;
Total inventory: Number of parts: 39,281,552;
Total inventory: Value: $17.5.
Fiscal year: 2007;
On-hand inventory: Number of parts: 28,361,721;
On-hand inventory: Value: $12.4;
On-order inventory: Number of parts: 12,963,307;
On-order inventory: Value: $4.2;
Total inventory: Number of parts: 41,325,028;
Total inventory: Value: $16.5.
Fiscal year: Average;
On-hand inventory: Number of parts: 23,437,815;
On-hand inventory: Value: $11.3;
On-order inventory: Number of parts: 15,890,511;
On-order inventory: Value: $5.0;
Total inventory: Number of parts: 39,328,326;
Total inventory: Value: $16.3.
Source: GAO analysis of Army data.
Note: Values are expressed in constant fiscal year 2007 dollars.
Analysis includes AMCOM-and TACOM-managed items.
[End of table]
Army's Process for Determining Needed Amount of Secondary Inventory:
The Army uses a process called requirements determination to calculate
the amount of inventory that is needed to be held in storage (on hand)
and the amount that should be purchased (on order). This information is
used to develop the Army's budget 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 of 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 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 going out of stock in the Army'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 both the demand for
inventory items during the reordering period, so that the Army 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 Army's current requirements in this report. An
assessment of the Army's requirements or requirements determination
process falls outside the scope of our review. In accounting for its
inventory, the Army 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. On-order inventory is applied when on-hand
inventory is unavailable to be applied to requirements. We refer to
situations in which on-hand and on-order inventory are insufficient to
satisfy current requirements as inventory deficits.
Army Secondary Inventory Exceeded Amount Needed to Satisfy Current
Requirements:
Our analysis of Army secondary inventory data for the 4-year period we
examined showed that about $3.6 billion (22 percent) of the average
annual total inventory value of $16.3 billion was not needed to meet
current requirements. During this time period, the value of on-hand
inventory exceeding current requirements increased, whereas the value
of on-order inventory that exceeded requirements decreased. During this
same time period, the value of Army inventory deficits decreased but
remained substantial--an average value of $3.5 billion over the 4-year
period.
About $3.6 Billion, or 22 Percent, of the Army's On-Hand and On-Order
Inventory Value Exceeded Current Requirements Each Year:
Our analysis of Army secondary inventory data showed that, on average,
about $12.7 billion (78 percent) of the total annual inventory value
was needed to meet current requirements, whereas $3.6 billion (22
percent) exceeded current requirements. Measured by number of parts,
these percentages were similar: 81 percent of the parts applied to
current requirements on average each year, and the remaining 19 percent
exceeded current requirements. The value of the inventory that exceeded
current requirements increased over the period of our review, from $2.9
billion in fiscal year 2004 to $4.4 billion in fiscal year 2007, as did
the number of parts that exceeded current requirements, from 5.2
million parts to 10.2 million parts (see table 3).
Table 3: Total Army Inventory Exceeding Current Requirements, Fiscal
Years 2004-2007 (Dollars in billions):
Fiscal year: 2004;
Total value of inventory: $14.1;
Inventory not needed to support current requirements: Number of parts:
5,200,755;
Inventory not needed to support current requirements: Value: $2.9;
Inventory not needed to support current requirements: Percentage of
inventory: 20%.
Fiscal year: 2005;
Total value of inventory: $17.1;
Inventory not needed to support current requirements: Number of parts:
5,705,048;
Inventory not needed to support current requirements: Value: $3.4;
Inventory not needed to support current requirements: Percentage of
inventory: 20%.
Fiscal year: 2006;
Total value of inventory: $17.5;
Inventory not needed to support current requirements: Number of parts:
8,384,379;
Inventory not needed to support current requirements: Value: $3.9;
Inventory not needed to support current requirements: Percentage of
inventory: 22%.
Fiscal year: 2007;
Total value of inventory: $16.5;
Inventory not needed to support current requirements: Number of parts:
10,223,980;
Inventory not needed to support current requirements: Value: $4.4;
Inventory not needed to support current requirements: Percentage of
inventory: 27%.
Fiscal year: Average;
Total value of inventory: $16.3;
Inventory not needed to support current requirements: Number of parts:
7,378,541;
Inventory not needed to support current requirements: Value: $3.6;
Inventory not needed to support current requirements: Percentage of
inventory: 22%.
Source: GAO analysis of Army data.
Note: Values are expressed in constant fiscal year 2007 dollars.
Analysis includes AMCOM-and TACOM-managed items.
[End of table]
The Army's total inventory levels increased from fiscal year 2004 to
fiscal year 2007, with the greatest increase occurring from fiscal year
2004 to fiscal year 2005. Additionally, the overall proportion of
inventory exceeding requirements increased when compared with inventory
meeting current requirements (see figure 1).
Figure 1: Army Secondary Inventory Meeting and Exceeding Current
Requirements, Fiscal Years 2004-2007:
[Refer to PDF for image]
This figure is a stacked vertical bar graph depicting the following
data:
Army Secondary Inventory Meeting and Exceeding Current Requirements,
Fiscal Years 2004-2007:
Fiscal year: 2004;
Beyond current requirements: $11.24 billion;
Current requirements: $2.89 billion;
Total: $14.13 billion.
Fiscal year: 2005;
Beyond current requirements: $13.67 billion;
Current requirements: $3.42 billion;
Total: $17.09 billion.
Fiscal year: 2006;
Beyond current requirements: $13.64 billion;
Current requirements: $3.86 billion;
Total: $17.50 billion.
Fiscal year: 2007;
Beyond current requirements: $12.1 billion;
Current requirements: $4.42 billion;
Total: $16.52 billion.
Note: Values are expressed in constant fiscal year 2007 dollars.
Analysis includes AMCOM-and TACOM-managed items.
[End of figure]
Army On-Hand Inventory Exceeding Current Requirements Increased:
Both the total value of the Army's on-hand inventory and the total
value of on-hand inventory exceeding current requirements increased.
Over the 4-year period, the value of the Army's on-hand inventory
exceeding current requirements averaged $3.5 billion, or 31 percent of
total on-hand inventory (see table 4).
Table 3: Army On-Hand Secondary Inventory Exceeding Current
Requirements, Fiscal Years 2004-2007 (Dollars in billions):
Fiscal year: 2004;
Total value of on-hand inventory: $8.8;
Inventory not needed to support current requirements: Number of parts:
4,332,900;
Inventory not needed to support current requirements: Value: $2.7;
Inventory not needed to support current requirements: Percentage of on-
hand Inventory: 31%.
Fiscal year: 2005;
Total value of on-hand inventory: $11.1;
Inventory not needed to support current requirements: Number of parts:
5,058,714;
Inventory not needed to support current requirements: Value: $3.3;
Inventory not needed to support current requirements: Percentage of on-
hand Inventory: 30%.
Fiscal year: 2006;
Total value of on-hand inventory: $12.7;
Inventory not needed to support current requirements: Number of parts:
6,843,315;
Inventory not needed to support current requirements: Value: $3.7;
Inventory not needed to support current requirements: Percentage of on-
hand Inventory: 29%.
Fiscal year: 2007;
Total value of on-hand inventory: $12.4;
Inventory not needed to support current requirements: Number of parts:
9,207,931;
Inventory not needed to support current requirements: Value: $4.3;
Inventory not needed to support current requirements: Percentage of on-
hand Inventory: 35%.
Fiscal year: Average;
Total value of on-hand inventory: $11.3;
Inventory not needed to support current requirements: Number of parts:
6,360,715;
Inventory not needed to support current requirements: Value: $3.5;
Inventory not needed to support current requirements: Percentage of on-
hand Inventory: 31%.
Source: GAO analysis of Army data.
Note: Values are expressed in constant fiscal year 2007 dollars.
Analysis includes AMCOM-and TACOM-managed items.
[End of table]
The Army's forecasts for items with a recurring demand in fiscal years
2005 through 2007 showed that supplies for some of the on-hand
inventory that exceeded current requirements were sufficient to meet
many years and sometimes decades of demand. In addition, a substantial
amount of the Army's on-hand inventory showed no projected demand. The
results of this analysis are shown in figure 2.
Figure 2: Value of Army Inventory Exceeding Current Requirements, by
Years of Supply, Fiscal Years 2005-2007:
[Refer to PDF for image]
This figure is a multiple vertical bar graph depicting the following
data:
Value of Army Inventory Exceeding Current Requirements, by Years of
Supply, Fiscal Years 2005-2007:
Years of supply: more than 0 and less than 2;
Fiscal year 2005: $706 million;
Fiscal year 2006: $1040 million;
Fiscal year 2007: $936 million.
Years of supply: 2or or and less than 10;
Fiscal year 2005: $545 million;
Fiscal year 2006: $985 million;
Fiscal year 2007: $1109 million.
Years of supply: 10or more and less than 50;
Fiscal year 2005: $852 million;
Fiscal year 2006: $543 million;
Fiscal year 2007: $754 million.
Years of supply: 50 or more;
Fiscal year 2005: $201 million;
Fiscal year 2006: $223 million;
Fiscal year 2007: $608 million.
Years of supply: No demand;
Fiscal year 2005: $985 million;
Fiscal year 2006: $941 million;
Fiscal year 2007: $887 million.
Source: GAO analysis of Army data.
Notes: We identified the annual demand forecast for individual items in
the fiscal year 2005, 2006, and 2007 September stratification reports.
We removed nonrecurring demands from the excess inventory, and then
divided the remainder by the annual demand forecast to obtain the
number of years of supply the inventory levels would satisfy. Data for
fiscal year 2004 was not available. Analysis includes AMCOM-and TACOM-
managed items.
Values are expressed in constant fiscal year 2007 dollars.
[End of figure]
As shown in figure 2, about $900 million (22 percent) of the on-hand
inventory exceeding current requirements in fiscal year 2007 would be
sufficient to satisfy 2 years of demand, $1.1 billion (26 percent)
would be sufficient to meet demands for 2 to 10 years, $750 million (18
percent) would be sufficient to meet demands for 10 to 50 years, and
$600 million (14 percent) would be sufficient to meet demands for 50
years or more. In addition, the Army in fiscal year 2007 had nearly
$900 million (20 percent) of on-hand inventory exceeding current
requirements for which there were no forecasted demands.
Army On-Order Inventory Exceeding Current Requirements Decreased:
For the 4-year period we reviewed, the value of the Army's on-order
inventory that exceeded current requirements decreased from $150
million in fiscal year 2004 to $110 million in fiscal year 2007.
However, because the value of the Army's on-order inventory also
decreased from $5.3 billion in fiscal year 2004 to $4.2 billion in
fiscal year 2007, the proportion of Army on-order inventory that
exceeded current requirements remained relatively constant (see table
5).
Table 5: Army On-Order Secondary Inventory Exceeding Current
Requirements, Fiscal Years 2004-2007 (Dollars in billions):
Fiscal year: 2004;
Total value of on-order inventory: $5.3;
Inventory not needed to support current requirements: Number of parts:
867,855;
Inventory not needed to support current requirements: Value: $0.15;
Inventory not needed to support current requirements: Percentage of on-
order inventory: 3%.
Fiscal year: 2005;
Total value of on-order inventory: $5.9;
Inventory not needed to support current requirements: Number of parts:
646,334;
Inventory not needed to support current requirements: Value: $0.12;
Inventory not needed to support current requirements: Percentage of on-
order inventory: 2%.
Fiscal year: 2006;
Total value of on-order inventory: $4.8;
Inventory not needed to support current requirements: Number of parts:
1,541,064;
Inventory not needed to support current requirements: Value: $0.11;
Inventory not needed to support current requirements: Percentage of on-
order inventory: 2%.
Fiscal year: 2007;
Total value of on-order inventory: $4.2;
Inventory not needed to support current requirements: Number of parts:
1,016,049;
Inventory not needed to support current requirements: Value: $0.11;
Inventory not needed to support current requirements: Percentage of on-
order inventory: 3%.
Fiscal year: Average;
Total value of on-order inventory: $5.0;
Inventory not needed to support current requirements: Number of parts:
1,017,826;
Inventory not needed to support current requirements: Value: $0.12;
Inventory not needed to support current requirements: Percentage of on-
order inventory: 2%.
Source: GAO analysis of Army data.
Note: Values are expressed in constant fiscal year 2007 dollars.
Analysis includes AMCOM-and TACOM-managed items.
[End of table]
For all 4 years, the Army also had some on-order inventory that was
designated as potential excess for disposal or reutilization. For
example, according to the Army's fiscal year 2007 stratification
report, about $56 million of on-order inventory items were designated
as potential excess, meaning that they could be disposed of or
reutilized as soon as they were delivered (see table 6).
Table 6: Army On-Order Inventory Identified as Potential Excess, Fiscal
Years 2004-2007 (Dollars in millions):
Total:
Fiscal year: 2004: $64.8;
Fiscal year: 2005: $18.6;
Fiscal year: 2006: $42.7;
Fiscal year: 2007: $55.7.
Source: GAO analysis of Army data.
Note: Values are expressed in constant fiscal year 2007 dollars.
[End of table]
Army Inventory Deficits Decreased, but Remained Substantial:
The Army had substantial inventory deficits for some items--that is, an
insufficient level of inventory on hand or on order to meet the current
requirements. For the 4-year period we reviewed, the Army's inventory
deficits had an average value of $3.5 billion. However, the value of
the deficits decreased by 17 percent from $4.1 billion in fiscal year
2004 to approximately $3.4 billion in fiscal year 2007 (see table 7).
Table 7: Army Inventory Deficits, Fiscal Years 2004-2007 (Dollars in
billions):
Fiscal year: 2004;
Total value of Army's stated requirements: $15.4;
Total inventory deficits: Number of parts: 10,366,808;
Total inventory deficits: Value: $4.1;
Total inventory deficits: Percentage of value: 27%.
Fiscal year: 2005;
Total value of Army's stated requirements: $17.3;
Total inventory deficits: Number of parts: 7,054,927;
Total inventory deficits: Value: $3.7;
Total inventory deficits: Percentage of value: 21%.
Fiscal year: 2006;
Total value of Army's stated requirements: $16.5;
Total inventory deficits: Number of parts: 6,286,566;
Total inventory deficits: Value: $2.9;
Total inventory deficits: Percentage of value: 17%.
Fiscal year: 2007;
Total value of Army's stated requirements: $15.5;
Total inventory deficits: Number of parts: 6,520,067;
Total inventory deficits: Value: $3.4;
Total inventory deficits: Percentage of value: 22%.
Fiscal year: Average;
Total value of Army's stated requirements: $16.2;
Total inventory deficits: Number of parts: 7,557,092;
Total inventory deficits: Value: $3.5;
Total inventory deficits: Percentage of value: 22%.
Source: GAO analysis of Army data.
Note: Values are expressed in constant fiscal year 2007 dollars.
Analysis includes AMCOM-and TACOM-managed items.
[End of table]
Although inventory deficits exist, they do not always translate
directly into an operational impact. Army officials told us that, in
the past, inventories have fallen below current requirements because of
unforeseen demands. In those cases, managers were able to use parts
that were designated for safety-level requirements in order to minimize
the operational impact of the inventory deficit. However, we could not
determine the criticality of the Army's inventory deficits because this
information is not available in stratification reporting.
Factors Contributing to the Consistent Misalignment Between Army
Inventory Levels and Current Requirements:
Our review of the Army's secondary inventory identified two factors
contributing to the consistent misalignment between inventory levels
and current requirements. First, while the Army strives to provide
effective supply support to the warfighter and uses metrics such as
supply availability to measure performance, it lacks corresponding
metrics and goals for assessing and tracking the cost efficiency of its
inventory management practices. Inaccurate demand forecasting for spare
parts also contributed to the Army having inventory that was in excess
of current requirements as well as having inventory deficits. After
evaluating its demand forecasting procedures, the Army has issued
guidance that the Army expects will improve the accuracy of its
forecasts. Because the guidance was issued as we were completing our
audit work, we were unable to assess whether the changes to forecasting
procedures would be sufficient to address deficiencies. However, these
actions are consistent with some of our past recommendations related to
inventory management.
In addition, we noted during our review that the Army has an
opportunity to enhance oversight of inventory management as it develops
the roles and responsibilities for the newly designated chief
management officer.
Army Lacks Metrics and Goals to Assess and Track the Cost Efficiency of
Inventory Management:
Although the Army uses a number of methods to manage its secondary
inventory, it lacks metrics and goals for assessing and tracking the
cost efficiency of its inventory management practices. DOD's supply
chain management regulation requires the military services to take a
number of steps to provide for effective and efficient end-to-end
materiel support. The regulation also sets out a number of management
goals, including sizing secondary item inventories to minimize the DOD
investment while providing the inventory needed; considering all costs
associated with materiel management in making best-value logistics
decisions; balancing the use of all available logistics resources to
accomplish timely and quality delivery at the lowest cost; and
measuring total supply chain performance based on timely and cost-
effective delivery. To ensure efficient and effective supply chain
management, the regulation also calls for the use of metrics to
evaluate the performance and cost of supply chain operations. These
metrics should, among other things, monitor the efficient use of DOD
resources and provide a means to assess costs versus benefits of supply
chain operations.[Footnote 13] However, the regulation does not
prescribe specific cost metrics and goals that the services should or
must use to track and assess the efficiency of their inventory
management practices.
According to Army officials, the Army has processes and controls for
efficiently managing secondary inventory and fulfilling the DOD
regulation. First, Army officials stated that they use a number of
metrics to determine whether the Army provides the inventory needed,
including customer wait time, back orders, stock availability, and the
not-mission-capable supply rate, which counts the number of vehicles or
aircraft that cannot perform the Army's mission due to a lack of parts.
Second, the Army uses a cost differential model to determine the
appropriate level of inventory to maintain in order to achieve a
desired performance goal. The model is based on a number of variables,
including procurement costs, holding costs, frequency of demand,
implied stockage cost, and the probability of future demand. Army
officials also stated that cost minimization is integral in the
formulas used to compute requirements. Third, the Army assesses the
effectiveness of inventory by evaluating the Army Working Capital Fund.
Specifically, if sales from the fund to customers match the values of
inventory purchased, then inventory purchases have been cost effective.
While these methods may be effective management tools, we found that
the Army has not established metrics and goals for measuring the cost
efficiency of its inventory management. In the absence of such metrics
and goals, Army officials lack an effective means for assessing whether
inventory is being managed as efficiently as possible and for tracking
trends and the impact of any corrective actions. As discussed in this
report, we determined that the Army had substantial amounts of
inventory that exceeded requirements for all 4 years of our review.
However, the consistent misalignment between inventory levels and
current requirements are not readily revealed by the Army's current
methods for measuring inventory management. The overall secondary
inventory data we analyzed show that the Army carried about $1.29 in
inventory for every $1 in requirements to meet its goals during the 4-
year period of fiscal years 2004 through 2007. Such a metric, in
combination with other cost metrics and established goals, could
provide the Army with a capability to track trends and assess progress
toward achieving greater cost efficiency.
Demand Forecasting Has Been Inaccurate:
Our review showed that demand forecasting for spare parts has been
inaccurate. According to the Army regulation on centralized management
of the Army supply system, the Army uses a computer model to forecast
its spare parts requirements.[Footnote 14] The model uses the average
monthly demand over the previous 24 months as a baseline, and it allows
the demand forecast to be modified to account for expected future
usage. Army officials stated that when demand data does not accurately
reflect usage or forecasts for future usage are incorrect, the result
is a misalignment between inventory and current requirements. For
example, Army officials stated that at the beginning of the global war
on terrorism, the average monthly demand was based on a peacetime
operations tempo, which did not accurately reflect a wartime usage of
items. They also stated that they did not always have complete or
accurate information on the amounts or types of weapon systems to be
used in the global war on terrorism, so they modified the demand
forecast to account for expected future usage based on speculation. As
a result, inventory did not always align with requirements.
Army managers who responded to our survey most frequently cited changes
in demand as the reason inventory did not align with current
requirements. Demand may decrease, fluctuate, or not materialize at
all, resulting in inventory exceeding current requirements; conversely,
it may increase, resulting in inventory deficits. Table 8 shows the
results of our representative survey of items with inventory excesses
(160 items), and table 9 shows the results of our survey for items with
inventory deficits (56 items).
Table 8: Estimated Frequency of Reasons for Army Having Inventory That
Exceeded Current Requirements:
Reasons: Demands decreased, fluctuated, or did not materialize;
Sample item count: 57;
Percentage of estimated frequency: 63;
95 percent, 2-sided confidence interval: (52% to 73%).
Reasons: Changes in wearout or survival rate/washout;
Sample item count: 7;
Percentage of estimated frequency: 9;
95 percent, 2-sided confidence interval: (3% to 18%).
Reasons: Nonrecurring demands did not materialize;
Sample item count: 17;
Percentage of estimated frequency: 24;
95 percent, 2-sided confidence interval: (14% to 36%).
Reasons: Higher assembly or weapon system being phased out or reduced;
Sample item count: 13;
Percentage of estimated frequency: 17;
95 percent, 2-sided confidence interval: (9% to 28%).
Reasons: Item was/is being replaced or became obsolete;
Sample item count: 23;
Percentage of estimated frequency: 30;
95 percent, 2-sided confidence interval: (20% to 42%).
Reasons: Changes in fielding schedule of the weapon system or higher
assembly;
Sample item count: 4;
Percentage of estimated frequency: 6;
95 percent, 2-sided confidence interval: (2% to 15%).
Reasons: Potential support of new weapon system by current item;
Sample item count: 2;
Percentage of estimated frequency: 2;
95 percent, 2-sided confidence interval: (0.1% to 7%).
Reasons: Minimum purchase quantity or value;
Sample item count: 14;
Percentage of estimated frequency: 11;
95 percent, 2-sided confidence interval: (5% to 20%).
Reasons: Projected repair changed or was canceled;
Sample item count: 4;
Percentage of estimated frequency: 4;
95 percent, 2-sided confidence interval: (0.9% to 10%).
Reasons: Procurement contracts for on-order items were not changed or
terminated;
Sample item count: 12;
Percentage of estimated frequency: 10;
95 percent, 2-sided confidence interval: (5% to 18%).
Reasons: Inaccurate data used;
Sample item count: 5;
Percentage of estimated frequency: 6;
95 percent, 2-sided confidence interval: (2% to 13%).
Reasons: Other;
Sample item count: 34;
Percentage of estimated frequency: 46;
95 percent, 2-sided confidence interval: (34% to 57%).
Source: GAO survey of Army inventory managers.
Notes: Percentage estimates are based on a limited sample size and have
a margin of error of at most plus or minus 10 percent at the 95 percent
confidence level. Reasons are not mutually exclusive; therefore,
percentages do not total to 100.
[End of table]
These estimates are based on a stratified sample, and while item counts
may be the same, percentage estimates may vary due to weighting.
Table 9: Estimated Frequency of Reasons for Army Having Inventory
Deficits:
Reasons: Demands increased;
Sample item count: 22;
Percentage of estimated frequency: 46;
95 percent, 2-sided confidence interval: (30% to 64%).
Reasons: Changes in wearout or survival rate/washout;
Sample item count: 4;
Percentage of estimated frequency: 8;
95 percent, 2-sided confidence interval: (2% to 20%).
Reasons: Nonrecurring demands increased;
Sample item count: 17;
Percentage of estimated frequency: 32;
95 percent, 2-sided confidence interval: (19% to 48%).
Reasons: Next higher assembly/weapon systems are upgraded or new ones
are added;
Sample item count: 7;
Percentage of estimated frequency: 14;
95 percent, 2-sided confidence interval: (4% to 30%).
Reasons: Item was/is being replaced and can no longer be procured;
Sample item count: 6;
Percentage of estimated frequency: 16;
95 percent, 2-sided confidence interval: (6% to 33%).
Reasons: Items are purchased on an annual basis;
Sample item count: 6;
Percentage of estimated frequency: 14;
95 percent, 2-sided confidence interval: (5% to 30%).
Reasons: Lost or delayed repair capability;
Sample item count: 3;
Percentage of estimated frequency: 7;
95 percent, 2-sided confidence interval: (1% to 19%).
Reasons: Qualified supplier not available;
Sample item count: 3;
Percentage of estimated frequency: 9;
95 percent, 2-sided confidence interval: (2% to 25%).
Reasons: Inaccurate data used;
Sample item count: 4;
Percentage of estimated frequency: 6;
95 percent, 2-sided confidence interval: (0.8% to 20%).
Reasons: Other;
Sample item count: 20;
Percentage of estimated frequency: 51;
95 percent, 2-sided confidence interval: (33% to 69%).
Source: GAO survey of Army inventory managers.
Notes: Percentage estimates are based on a limited sample size and have
a margin of error of at most plus or minus 10 percent at the 95 percent
confidence level. Reasons are not mutually exclusive, therefore,
percentages do not total to 100.
These estimates are based on a stratified sample and while item counts
may be the same, percentage estimates may vary due to weighting.
[End of table]
Responses categorized as "other" varied but included issues related to
lack of data, obsolescence, or other explanations of demand changes.
For example, Army managers stated that the 2005 Base Realignment and
Closure (BRAC) Commission recommended a supply transfer of consumable
items from the Army to DLA that was under way during the time of our
review. Army managers who participated in the survey could not provide
information on some of these items because prior data was not retained.
Our discussions with Army managers provided examples that illustrate
the challenges they face in predicting demands for items due to changes
in plans, policy, or repair schedules:
* In anticipation of higher usage, the Army purchased an additional 95
parts of a calibration tool that supports the UH-60 Black Hawk
Helicopter. However, because the increased usage did not occur, in
fiscal year 2007, the Army had 130 parts that exceeded current
requirements, valued at $7.4 million.
* Conversely, an unanticipated increase in operational demand led to an
inventory deficit of an item that supports the OH-58D Kiowa Warrior
helicopter. This helicopter had higher-than-expected usage, which
increased the need for repairs and replacements through procurement. In
fiscal year 2007, the Army had an inventory deficit of 128 parts,
valued at $1.2 million.
* A change in an overhaul repair program for a shipping and storage
container used to store and transport the drive shaft for the M1 Abrams
Tank resulted in excess inventory. As stated by an Army manager with
whom we spoke and according to Army records, in fiscal year 2007, the
Army had 272 on-hand units, valued at over $0.4 million, that exceeded
current requirements because the Army's delay of the overhaul repair
program for the Abrams Tank caused demands not to materialize.
* Having identified a defect in some of the batteries used on the
Patriot Missile System, the Army procured 350 new batteries. While
awaiting production, however, the Army developed a repair for the
defective batteries. The Army could not cancel the procurement order,
resulting in an on-hand excess of 619 items, valued at about $0.6
million.
* Another example of multiple supply sources resulting in excess
inventory concerns the corner actuator used to support the hydraulic
suspension and steering for the M9 Armored Combat Earthmover vehicle.
The Army made an emergency purchase from a sole source contractor to
ensure that sufficient parts would be available while it concurrently
developed a repair program. The purchases and repaired assets increased
on-hand inventory beyond current requirements, resulting in an excess
quantity of 836 parts, valued at $7.7 million.
Army officials stated that forecasts rely heavily on accurate demand
rates and relatively stable demand data. They stated in June that,
since demand rates had achieved some stability, forecasts had improved.
In the future, however--particularly as operations in Southwest Asia
decrease---they indicated that they expect to see more difficulties in
accurately forecasting future demands for parts.
Army Is Taking Steps to Improve Forecasting:
The Army has taken steps designed to improve its inventory management.
In January 2008, the Army began an evaluation of its secondary
inventory management processes. Army officials stated that the impetus
for the review was the need to manage the effects of the Army's
increased operations tempo, which had resulted in higher usage of
secondary inventory. However, because the duration of the heightened
operations tempo was unknown, the Army wanted to improve its
forecasting processes to better account for a changing operational
environment.
As part of its supply planning assumptions for fiscal year 2009, the
Army shortened the forecast period used by managers to determine
procurement decisions. The Army issued guidance in October 2008
directing inventory managers to set a forecast period using the
previous 6 months for missiles and the previous 12 months for all other
secondary items.[Footnote 15] Army officials stated that, based on
their evaluation, shortening the forecast period from the previous 24
months would provide managers the ability to better capture changing
demand patterns, allowing them to adjust their purchase decisions to
accommodate new force patterns. Army officials believe that shortening
the forecast period should help capture changes to demand in a more
real-time fashion.
The Army's guidance also directs managers to update forecast models
based on the readiness portion of the Army Operations Update to match
actual quantities of weapon systems being used in Southwest Asia.
[Footnote 16] According to Army officials, previous models were updated
based on estimates that were not always timely or accurate. Army
officials stated that the readiness portion of the Army Operations
Update reflects the actual quantities of weapons systems as reported by
commanders in Southwest Asia. Army officials believe that these changes
should provide more accurate and timely information to item managers,
allowing for better purchase decisions.
The Army guidance was issued as we were completing our audit work.
Therefore, we were unable to assess whether these changes to the
forecasting model will be sufficient to address this long-standing
problem. Since early 1990, when we began reporting on this issue,
inaccurate demand forecasts have consistently been identified as a key
cause for DOD's inventory not aligning with requirements. The actions
directed by the Army could address some of these challenges, and they
have been consistent with recommendations we made in our prior work. In
our report on the Air Force's management of spare parts, we recommended
that the Air Force evaluate reasons for decreases in demand and
determine actions needed to address these decreases.[Footnote 17] The
Army's evaluation of decreases in demand has identified the 24-month
forecast period as a contributing factor, and its new guidance
constitutes a step toward addressing the issue. We also recommended in
a previous report on critical parts shortages that the Army should
provide item managers with operational information in a timely manner
so managers can adjust their requirements forecasting.[Footnote 18] The
Army's guidance directing managers to use actual quantities of weapon
systems as reported in the readiness portion of the Army Operations
Update constitutes another step toward addressing this issue. Army
officials stated that the primary purpose of the guidance was to
improve the performance of inventory rather than to reduce the amount
of inventory that exceeds requirements. While Army officials expect
that improved forecasting could result in reductions in excess
inventory, the Army has yet to develop processes to measure the
effectiveness of these actions on reducing excess inventory.
Army Has Opportunity to Increase Its Oversight of Inventory Management:
The Army has an opportunity to increase its ability to provide
oversight of inventory management. Recently, the Army established a
chief management officer for business transformation. However, it has
not defined whether and how the chief management officer will have a
role overseeing inventory management improvement. The costs of DOD's
business operations have been of continuing concern. In April 2008, for
example, the Defense Business Board noted that DOD had not aggressively
reduced the overhead costs related to supporting the warfighter, which
accounted for about 42 percent of DOD's total spending each year. The
Defense Business Board recommended that DOD align strategies to focus
on reducing overhead while supporting the warfighter.[Footnote 19]
In May 2007, DOD established a chief management officer position with
responsibility for ensuring that business transformation policies and
programs are designed and managed to improve performance standards,
economy and efficiency. In 2008, the Army designated the Under
Secretary of the Army as its chief management officer responsible for
business transformation. Although the role of the Army's chief
management officer is still being developed, according to existing Army
guidance, one of the Under Secretary of the Army's roles was to provide
oversight of policy, planning, coordination, and execution of matters
related to logistics.[Footnote 20] However, it is unclear whether
inventory management was included as part of this existing oversight.
The substantial value of the Army's inventory and the systemic
challenges that we have identified since the early 1990s suggest that
inventory management can be improved. Accordingly, the new designation
of the chief management officer provides the Army an opportunity to
enhance oversight of inventory management, as well as gauge the
effectiveness of inventory management improvement efforts.
Conclusions:
The Army accumulates high levels of secondary inventory each year that
exceed current requirements without justifying that these inventory
levels are sized to minimize DOD's investment. When the Army invests in
the purchase of inventory items that become excess to its requirements,
these funds are not available to meet other military needs. Taking
steps to reduce the high levels of inventory exceeding requirements
could help to ensure that DOD is meeting supply performance goals at
least cost. Among other things, cost-efficiency metrics and goals that
reveal the existence of inventory excesses and deficits could provide a
basis for effective management and oversight of inventory reduction
efforts. Much of the inventory that exceeded current requirements or
had inventory deficits resulted from inaccurate demand forecasts. To
its credit, the Army has evaluated the unpredictability of demand and
has taken steps that it believes will enhance flexibility in adapting
to fluctuations in demand. Implementation of the plan, evaluation of
the results, and continued monitoring could also assist in addressing
this long-standing problem. Finally, since inventory management is part
of the Army's broader business operations and transformation, it is
reasonable to expect the newly established chief management officer to
exercise some level of oversight of inventory management improvement
efforts taken by the Army. Strengthening the Army'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.
Recommendations for Executive Action:
To improve the management of the Army's secondary inventory, we
recommend that the Secretary of Defense direct the Secretary of the
Army to take the following three actions:
* Establish metrics and goals for tracking and assessing the cost
efficiency of inventory management and incorporate these into existing
management and oversight processes.
* Evaluate the effectiveness of changes to demand forecasting
procedures that were set forth in the Army's October 2008 guidance,
including measuring the impact on reducing inventory that exceeds
requirements, and based on that evaluation, take additional actions as
appropriate to identify and correct systemic weaknesses in forecasting
procedures.
* Monitor the effectiveness of providing item managers with operational
information in a timely manner so they can adjust modeled requirements
as necessary.
We also recommend that the Secretary of the Army direct the Army's
Chief Management Officer to exercise oversight of Army inventory
management improvements to align improvement efforts with overall
business transformation and to reduce support costs. This oversight
role should not replace or eliminate existing operational oversight
responsibilities for inventory management that are exercised by other
Army offices, but should ensure that the Army maintains a long-term
focus for making systemic improvements where needed and for
strategically aligning such changes with overall transformation
efforts.
Agency Comments and Our Evaluation:
In its written comments on a draft of this report, DOD agreed with
three of our recommendations and disagreed with one recommendation. On
the basis of DOD's comments, we have modified one of our
recommendations. The department's written comments are reprinted in
appendix II.
DOD agreed with our recommendation that the Army establish metrics and
goals for tracking and assessing the cost efficiency of inventory
management. However, DOD did not provide information on planned
corrective actions. According to DOD, the Army has already established
inventory metrics and readiness goals which it evaluates during
periodic reviews. DOD also stated that the Army's primary inventory
goals are to achieve high stock availability and low non-mission-
capable supply rates for its warfighting systems and capabilities, and
that the Army has current inventory metrics that mirror those in
commercial inventory management. While the metrics cited by DOD in its
response may be useful tools for assessing cost efficiency, we could
not determine on the basis of our review that the Army was using these
or other metrics to track and assess cost efficiency and to make
management decisions aimed at improving cost efficiency. DOD, in its
written comments, also did not provide information on how the Army may
be using existing metrics to improve cost efficiency. Therefore, we
continue to believe that the Army should place a greater emphasis on
setting cost efficiency goals, measuring progress, and establishing
accountability for cost efficiency through its existing management and
oversight processes.
DOD concurred with our recommendations that the Army evaluate the
effectiveness of changes to demand forecasting procedures that were set
forth in the Army's October 2008 guidance and that the Army monitor the
effectiveness of providing item managers with operational information
in a timely manner. According to DOD, the Army will evaluate the
effectiveness of its corrective actions beginning in August 2009, again
in February 2010, and periodically thereafter during quarterly reviews.
We believe this action is responsive to these recommendations.
DOD disagreed with our recommendation that the Secretary of the Army
direct the Army's Chief Management Officer to exercise oversight of
Army inventory management improvements to align improvement efforts
with overall business transformation and to reduce support costs. DOD
stated that inventory oversight is the operational responsibility of
the Army's Life Cycle Management Commands and appropriately assigned
under the combined oversight of the Army G-4, the Assistant Secretary
of the Army, Financial Management and Comptroller, and the Army
Materiel Command. DOD also stated that the Under Secretary of the Army,
as the Chief Management Officer, at the department-level, synchronizes
strategic systems and processes across the enterprise. We do not
dispute the need to maintain existing oversight responsibilities for
Army inventory management, and we have modified our recommendation to
make this clear. However, we disagree with DOD's position that the
Army's Chief Management Officer should not have an oversight role.
First, the existing combined oversight shared by Army staff and the
Army Materiel Command may not be sufficient to ensure long-term change.
As we stated previously, for the 4-year period of our review, the
Army's inventory exceeded current requirements by $3.6 billion. While
we are encouraged that the Army has taken steps designed to improve
inventory management, these steps have occurred only recently compared
to the systemic challenges related to inventory management that we have
reported on since the 1990s. Given the substantial value of the Army's
inventory, exercising oversight of inventory management is essential,
and assigning additional oversight responsibility to a department-level
official, such as the Chief Management Officer, could ensure that a
continuous focus is maintained. Additionally, since the Army's Chief
Management Officer operates at the department-level and is responsible
for synchronizing strategic systems and processes across the
enterprise, this individual would be uniquely suited to exercise
oversight as part of the Army's broader business transformation
efforts.
Finally, directing the Army's Chief Management Officer to exercise
oversight of Army inventory management improvement efforts could make
oversight operations more uniform across the Department of Defense. In
its written response to our review of the Navy's inventory management,
DOD stated that the Navy is developing a business transformation
implementation strategy to align with Office of the Secretary of
Defense actions in this area, and that the Navy will determine the
appropriate role its Chief Management Officer should exercise in
inventory management oversight.[Footnote 21] Accordingly, we continue
to believe that our recommendation has merit.
We are sending copies of this report to interested congressional
committees; the Secretary of Defense; the Secretary of the Army; the
Under Secretary of Defense for Acquisition, Technology, and Logistics;
and the Director, Office of Management and Budget. In addition, the
report will be available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov/].
If you or your staff have any questions concerning this report, please
contact me on (202) 512-8365 or solisw@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix III.
Signed by:
William M. Solis:
Director, Defense Capabilities and Management:
[End of section]
Appendix I: Scope and Methodology:
To determine the extent to which the Army's on-hand and on-order
secondary inventory reflects the amount of inventory needed to support
current requirements, we obtained the Central Secondary Item
Stratification Budget Summary and item-specific reports for the Army's
Aviation and Missile Command (AMCOM) and the Tank-automotive and
Armaments Command (TACOM), including summary reports and item-specific
data as of September 30 for fiscal years 2004 through 2007. Our
analysis did not include the Army's Communication and Electronics
Command (CECOM) because the information system used to manage secondary
inventory was not able to provide item-specific data for the period of
our review. Stratification reports serve as a budget request
preparation tool and a mechanism for matching assets to requirements.
Our analysis was based on analyzing the Army's item stratifications
within the opening position table of the Central Secondary Item
Stratification Reports.[Footnote 22] To validate the data in the budget
stratification reports, we generated summary reports using electronic
data and verified our totals against the summary stratification reports
obtained from the Army. The Army secondary inventory data are
identified by unique stock numbers for each spare part, such as an
engine for a particular vehicle, which we refer to as unique items. The
Army may have in its inventory multiple quantities of each unique item,
which we refer to as individual parts. We calculated the value of each
unique item by multiplying the quantity of the item's individual parts
by the item's unit price, which is the latest acquisition cost for the
item.
After discussing the results with Army officials, we determined that
the data were sufficiently reliable for the purposes of our analysis
and findings. Upon completion of the data validation process, we
revalued the Army's secondary inventory items identified in its budget
stratification summary reports because these reports value useable
items and items in need of repair at the same rate, and do not take
into account the repair cost of repairing broken items. We computed the
new value for items in need of repair by subtracting repair costs from
the unit price for each item. We also removed overhead charges from the
value of each item. In presenting the value of inventory in this
report, we converted then-year dollars to constant fiscal year 2007
dollars using Department of Defense (DOD) Operations and Maintenance
price deflators.[Footnote 23]
We consider the Army to have inventory exceeding current requirements
if it has more inventory than is needed to satisfy its requirements
based on the opening position table of the Army's budget stratification
report. Collectively, these requirements are referred to by DOD as the
"requirements objective," defined as the maximum authorized quantity of
stock for an item.[Footnote 24] However, if the Army has more inventory
on hand or on order than is needed to satisfy its requirements, it does
not consider the inventory beyond the requirements to be unneeded.
Instead, the Army uses the inventory that is beyond its requirements to
satisfy future demands over a 2-year period, economic retention
requirements,[Footnote 25] and contingency retention requirements.
[Footnote 26] Only after applying inventory to satisfy these additional
requirements would the Army consider that it has more inventory than is
needed and would consider this inventory for potential reutilization or
disposal.[Footnote 27] In commenting on our past reports, DOD and the
other services have disagreed with our definition of inventory that was
not needed to satisfy current operating requirements because it
differed from the definition that is used for the inventory budget
process. We do not agree with the Army's practice of not identifying
inventory used to satisfy these additional requirements as excess
because it overstates the amount of inventory needed to be on hand or
on order by billions of dollars. The Army's requirements determination
process does not consider these additional requirements when it
calculates the amount of inventory needed to be on hand or on order,
which means that if the Army did not have enough inventory on hand or
on order to satisfy these additional requirements, the requirements
determination process would not result in additional inventory being
purchased to satisfy these requirements. We consider the Army to have
inventory deficits if levels of on-hand and on-order inventory are
insufficient to meet the requirements objective.
To determine the extent to which the Army's on-order and on-hand
secondary inventory reflects the amount of inventory needed to support
requirements, we reviewed DOD and Army inventory management guidance,
past GAO products on DOD and Army inventory management practices for
secondary inventory items, and other related documentation. We also
created a database which compared the Army's current inventory to its
current requirements and computed the amount and value of secondary
inventory exceeding or not meeting current requirements. Additionally,
to understand whether the inventory not needed to support requirements
had improved in relation to its years of supply, we calculated the
number of supply years a given item would have based on its quantity
and demand at the time of stratification in September 2005, September
2006, and September 2007.
We developed a survey to estimate the frequency of reasons why the Army
maintained items in inventory that were not needed to support
requirements or that did not meet requirements. The survey asked
general questions about the higher assembly (component parts) and/or
weapon systems that the items support, and the date of the last
purchase. In addition, we asked survey respondents to identify the
reason(s) for having inventory that exceeded current requirements or
had an inventory deficit. We provided potential reasons as responses
from which they could select based on reasons identified in some of our
prior work. Since the list was not exhaustive, we provided an open-
ended response option to allow other reasons to be provided. In
addition to expert technical review of the questionnaire by an
independent methodologist, we conducted pretests with Army managers
from TACOM and AMCOM prior to sending out the final survey instrument.
We revised the survey instrument accordingly based on findings from the
pretests.
We sent this questionnaire electronically to specific Army managers in
charge of sampled unique items at two of the Army's inventory control
point locations in Huntsville, Alabama and Warren, Michigan. To
estimate the frequency of reasons for inventory not needed to meet
requirements and inventory deficits, we drew a stratified random
probability sample of 220 unique items--153 unique secondary inventory
items not needed to support requirements and 67 with inventory
deficits--from a study population of 45,007 items--30,222 with
inventory not needed to meet requirements and 14,785 with inventory
deficits. Based on our analysis of the Army stratification data, for
fiscal year 2007, there were 26,535 unique items with on-hand inventory
not needed to meet requirements, and 3,687 unique items with on-order
inventory not needed to meet requirements. These categories identified
a combined value of $4.4 billion of inventory not needed to meet
requirements. All of these items met our criteria to be included in our
study population of items not needed to meet requirements.
Additionally, based on our analysis of stratification data, all of the
14,785 unique items with inventory deficits, valued at $3.4 billion,
met our criteria to be included in our deficit study population.
We sent 216 electronic questionnaires--one questionnaire for each item
in the sample--to the 131 Army managers identified as being responsible
for these items. Four of the items in our sample were determined to be
out of scope, because three items did not have item managers and had
low quantities and values associated, and one item was randomly
selected at two commands, so the item was removed from one command and
left for the other command with a higher quantity to answer.
Table 10 divides TACOM and AMCOM's on-hand excess, on-order excess and
deficit inventory into three substratum, each by the amount of supply
for Fiscal Year 2007. The divisions of the population, sample, and
respondents across the strata are also shown in table 10. We received
187 responses for the questionnaire. Each sampled item was subsequently
weighted in the final analysis to represent all the members of the
target in-scope population.
Table 10: Sample Disposition for Fiscal Year 2007 Items:
Stratum: AMCOM--On-Hand Excess--0 to 2 Years of Supply;
Total population: 4,255;
Total sample size: 29;
Out-of-scope cases: 2;
Number of responses: 21.
Stratum: AMCOM--On-Hand Excess--More than 2 Years of Supply;
Total population: 1,926;
Total sample size: 14;
Out-of-scope cases: 0;
Number of responses: 13.
Stratum: AMCOM--On-Hand Excess--No Demand or Nonrecurring Only;
Total population: 3,355;
Total sample size: 23;
Out-of-scope cases: 0;
Number of responses: 19.
Stratum: AMCOM--On-Order Excess--0 to 2 Years of Supply;
Total population: 351;
Total sample size: 5;
Out-of-scope cases: 0;
Number of responses: 3.
Stratum: AMCOM--On-Order Excess--More than 2 Years of Supply;
Total population: 17;
Total sample size: 5;
Out-of-scope cases: 0;
Number of responses: 4.
Stratum: AMCOM--On-Order Excess--No Demand or Nonrecurring Only;
Total population: 53;
Total sample size: 5;
Out-of-scope cases: 0;
Number of responses: 5.
Stratum: AMCOM--Deficits;
Total population: 4,738;
Total sample size: 33;
Out-of-scope cases: 2;
Number of responses: 28.
Stratum: TACOM--On-Hand Excess--0 to 2 Years of Supply;
Total population: 1,957;
Total sample size: 7;
Out-of-scope cases: 0;
Number of responses: 6.
Stratum: TACOM--On-Hand Excess--More than 2 Years of Supply;
Total population: 2,997;
Total sample size: 10;
Out-of-scope cases: 0;
Number of responses: 10.
Stratum: TACOM--On-Hand Excess--No Demand or Nonrecurring Only;
Total population: 12,045;
Total sample size: 40;
Out-of-scope cases: 0;
Number of responses: 30.
Stratum: TACOM--On-Order Excess--0 to 2 Years of Supply;
Total population: 1,367;
Total sample size: 5;
Out-of-scope cases: 0;
Number of responses: 5.
Stratum: TACOM--On-Order Excess--More than 2 Years of Supply;
Total population: 490;
Total sample size: 5;
Out-of-scope cases: 0;
Number of responses: 5.
Stratum: TACOM--On-Order Excess--No Demand or Nonrecurring Only;
Total population: 1,409;
Total sample size: 5;
Out-of-scope cases: 0;
Number of responses: 5.
Stratum: TACOM--Deficits;
Total population: 10,047;
Total sample size: 34;
Out-of-scope cases: 0;
Number of responses: 33.
Stratum: Total;
Total population: 45,007;
Total sample size: 220;
Out-of-scope cases: 4;
Number of responses: 187.
Source: GAO analysis of Army budget stratification data and survey
responses.
[End of table]
At the time of this review, the Army was undergoing secondary inventory
supply transfer actions as a part of a larger 2005 Base Realignment and
Closure (BRAC) recommendation.[Footnote 28] In our survey of 216 items,
we identified 38 items that were a part of this supply transfer to the
Defense Logistics Agency (DLA). Most item managers overseeing these
previously Army-managed items stated that they no longer retained the
data to complete our survey; therefore, these DLA-transferred items are
reflected in the "other" category of our sample results in tables 8 and
9.
Because we followed a probability procedure based on random selections,
our sample of unique items is only one of a large number of samples
that we might have drawn. Because each sample could have provided
different estimates, we express our confidence in the precision of our
particular sample's results in 95 percent confidence intervals. These
are intervals that would contain the actual population values for 95
percent of the samples we could have drawn. As a result, we are 95
percent confident that each of the confidence intervals in this report
will include the true values in the study population.
In addition to sampling errors, the practical difficulties of
conducting any questionnaire may introduce errors, commonly referred to
as nonsampling errors. For example, difficulties in how a particular
question is interpreted, in the sources of information that are
available to respondents, or in how the data are entered into a
database or were analyzed can introduce unwanted variability into the
questionnaire results. We took steps in the development of the
questionnaire, the data collection, and the data analysis to minimize
these nonsampling errors. We reviewed each questionnaire to identify
unusual, incomplete, or inconsistent responses and followed up with
Army item managers by telephone and e-mail to clarify those responses.
In addition, we performed computer analyses to identify inconsistencies
and other indicators of errors and had a second independent reviewer
for the data analysis to further minimize such error.
To determine reasons for the types of answers given in the
questionnaires, we held 30 face-to-face discussions with Army inventory
managers, of which 14 were in our sample. We judgmentally selected some
TACOM and AMCOM items that had unusual or high on-hand, on-order, and
deficit inventory. During these discussions we obtained additional
detailed comments and documentation related to demand, demand
forecasting, acquisitions, retention, and disposal actions.
We conducted this performance audit from February 2008 to January 2009
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. On the basis of information
obtained from the Army on the reliability of its inventory management
systems' data, and the survey results and our follow-up analysis, we
believe that the data used in this report were sufficient reliable for
reporting purposes.
[End of section]
Appendix II: Comments from the Department of Defense:
Department of Defense:
Deputy Under Secretary Of Defense For Logistics And Materiel Readiness:
3500 Defense Pentagon:
Washington, DC 20301-3500:
December 19, 2008:
Mr. William M. Solis:
Director, Defense Capabilities and Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Solis:
This is the Department of Defense (DoD) response to the Government
Accountability Office (GAO) draft report, GAO-09-199, "Defense
Inventory: Army Needs to Evaluate Impact of Recent Actions to Improve
Demand Forecasts for Spare Parts," dated November 21, 2008 (GAO Code
351088). The GAO recommends that the Army strengthen inventory
management by incorporating cost efficiency metrics and goals,
evaluating and improving demand forecasting procedures, and monitoring
effectiveness of providing operational information to item managers.
The DoD concurs with these three recommendations. However, the DoD does
not concur on the fourth recommendation which states that the Army
should provide oversight of inventory management through the Army's
chief management officer. Inventory oversight is the operational
responsibility of the Army's Life Cycle Management Commands and is
appropriately assigned under the combined oversight of the Army G-4,
the Assistant Secretary of the Army, Financial Management and
Comptroller, and the Army Materiel Command.
Detailed comments on the draft report recommendations are included in
the enclosure. The DoD appreciates the opportunity to comment on the
report.
Signed by:
Jack Bell:
Enclosure: As stated:
GAO Draft Report - Dated November 21, 2008:
GAO Code 351088/GAO-09-199:
"Defense Inventory: Army Needs to Evaluate Impact of Recent Actions to
Improve Demand Forecasts for Spare Parts"
Department Of Defense Comments To The Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the Secretary of the Army to establish metrics and goals for
tracking and assessing the cost efficiency of inventory management and
incorporate these into existing management and oversight processes.
DoD Response: Concur. The Army has already established inventory
metrics and readiness goals, which the Army evaluates during its
quarterly Due Diligence and monthly Army Working Capital Fund Supply
Management (AMCF SMA) Review. The Army's primary inventory goals are to
achieve high stock availability and low non-mission capable supply
rates for its war fighting systems and capabilities. The Army's current
metrics mirror those in commercial inventory management and include:
inventory turns, inventory levels at points of service, order quantity
costs, critical inventory levels (also known as reorder point
levels/costs), stock to sale ratios, gross margin of return on
investment and inventory carrying rates.
Recommendation 2: The GAO recommends that the Secretary of Defense
direct the Secretary of the Army to evaluate the effectiveness of
changes to demand forecasting procedures that were set forth in the
Army's October 2008 guidance, including measuring the impact on
reducing inventory that exceeds requirements, and based on that
evaluation, take additional actions as appropriate to identify and
correct systemic weaknesses in forecasting procedures.
DoD Response: Concur. The Army will evaluate the effectiveness of its
demand forecasting guidance beginning in August 2009 (following the
July 2009 Stratification), in February 2010 (following the December
2009 Stratification), and periodically thereafter during the quarterly
Due Diligence reviews. The Army expects that as demands and materiel
returns remain relatively stable (or as planned), the total global
asset posture (on hand and due in) will reduce, while also maintaining
sufficient stocks to meet operational readiness requirements.
Recommendation 3: The GAO recommends that the Secretary of Defense
direct the Secretary of the Army to monitor the effectiveness of
providing item managers with operational information in a timely manner
so they can adjust modeled requirements as necessary.
DoD Response: Concur. The Army will monitor the effectiveness of
providing item managers with timely operational information beginning
in August 2009 (following the July 2009 Stratification), in February
2010 (following the December 2009 Stratification), and periodically
thereafter during the quarterly Due Diligence reviews. Item managers
will continue to base their procurement and repair decisions against
the stratification recommendations and the latest materiel return and
demand rate assumptions, which help to identify conditions different
than planned.
Recommendation 4: The GAO recommends that the Secretary of the Army
direct the Army's Chief Management Officer to exercise oversight of
Army inventory management improvements to align improvement efforts
with overall business transformation and to reduce support costs.
DoD RESPONSE: Non-Concur. Inventory oversight is the operational
responsibility of the Army's Life Cycle Management Commands and
appropriately assigned under the combined oversight of the Army G-4,
the Assistant Secretary of the Army, Financial Management and
Comptroller, and the Army Materiel Command. The Under Secretary of the
Army, as the Chief Management Officer, at the department-level,
synchronizes strategic systems and processes across the enterprise.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgements:
GAO Contact:
William M. Solis, (202) 512-8365 or solisw@gao.gov:
Staff Acknowledgements:
In addition to the contact named above, Thomas Gosling, Assistant
Director; Carl Barden; Aisha Cabrer; Jim Melton; Steve Pruitt; Carl
Ramirez; Minette Richardson; and Cheryl Weissman made key contributions
to this report.
[End of section]
Footnotes:
[1] Secondary inventory items include reparable components, subsystems,
and assemblies other than major end items (e.g., tanks and
helicopters), consumable repair parts, bulk items and materiel,
subsistence, and expendable end items, including clothing and other
personal gear.
[2] This was the most recent data available at the time we began our
review.
[3] GAO, Defense Inventory: Opportunities Exist to Save Billions by
Reducing Air Force's Unneeded Spare Parts Inventory, [hyperlink,
http://www.gao.gov/products/GAO-07-232] (Washington, D.C.: Apr. 27,
2007); and Defense Inventory: Management Actions Needed to Improve the
Cost Efficiency of the Navy's Spare Parts Inventory, [hyperlink,
http://www.gao.gov/products/GAO-09-103] (Washington, D.C.: Dec. 12,
2008).
[4] DOD requires each service and the DLA to prepare inventory
stratification reports semi-annually to match assets to requirements.
[5] For the period of our review, CECOM used the Logistics
Modernization Program to manage its secondary inventory, while the
other Army commands used the Commodity Command Standard System. CECOM
officials stated that item-specific data will be available beginning
with the fiscal year 2008 stratification report.
[6] The Army secondary inventory data are identified by unique stock
numbers for each spare part, such as a component for an engine, which
we refer to as unique items. The Army may have in its inventory
multiple quantities of each unique item, which we refer to as
individual parts.
[7] DOD Comptroller, National Defense Budget Estimates for FY 2009,
March 2008, p. 47.
[8] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, p. 207 (May 2003).
[9] For more detailed results, see table 8.
[10] The Army G-4 issued a memorandum to assist the Army Materiel
Command in forecasting spare parts requirements. This memorandum
adjusts planning assumptions for the fiscal year 2009 Army Working
Capital Fund budget preparation "in light of a potentially changing
operational and resource environment."
[11] Department of Defense Directive 4140.1, Supply Chain Materiel
Management Policy (April 2004), establishes policy and responsibilities
for materiel management. The Department of Defense Supply Chain
Materiel Management Regulation 4140.1-R (May 23, 2003) implements this
directive.
[12] As noted earlier, CECOM was excluded from the scope of our review
because that command lacked item-specific inventory stratification
data.
[13] Department of Defense Supply Chain Materiel Regulation 4140.1-R,
C1.5.1 (May 23, 2003).
[14] Army Regulation 710-1, Centralized Management of the Army Supply
System (Sept. 20, 2007).
[15] Department of the Army, Office of the Deputy Chief of Staff, G-4
Memorandum, Army Working Capital Fund Planning Assumptions for FY 2009
(Oct. 6, 2008).
[16] The Army Operations Update is a daily briefing delivered by the
Army staff to the Army's leadership that includes information on
personnel, operations, and equipment readiness.
[17] [hyperlink, http://www.gao.gov/products/GAO-07-232], p. 25.
[18] GAO, Defense Logistics: Actions Needed to Improve the Availability
of Critical Items during Current and Future Operations, [hyperlink,
http://www.gao.gov/products/GAO-05-275], (Washington, D.C.: Apr. 8,
2005).
[19] Defense Business Board, Task Group Report on Tooth-to-Tail
Analysis, FY08-2 (April 2008). The Deputy Secretary of Defense tasked
the Board to assess and make recommendations regarding the relationship
between the force structure executing the Department's major combat and
irregular warfare missions ("tooth") and the infrastructure used to
manage and support those forces ("tail").
[20] Army General Orders No. 03, Assignment of Functions and
Responsibilities within Headquarters, Department of the Army,
(Washington, D.C., July 9, 2002). The Army is currently developing an
update to this order. See Army General Orders No. 00, Managing the
Headquarters, Department of the Army, (Washington, D.C., March 9,
2007).
[21] [hyperlink, http://www.gao.gov/products/GAO-09-103].
[22] The Opening Position table of the Army's Central Secondary Item
Stratification Report shows current requirements as of a certain cutoff
date and does not include any forecasted requirements or simulations.
[23] DOD Comptroller, National Defense Budget Estimates for FY2009,
March 2008, p. 47
[24] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, p.207 (May 2003).
[25] Economic retention inventory includes items that have been
determined to be more economical to keep than to dispose of because
they are likely to be needed in the future. Economic retention
inventory is not applied to on-order inventory not needed to satisfy
requirements.
[26] Contingency retention inventory exceeds economic retention
inventory (items that are more economical to keep than to dispose of)
and would normally be processed for disposal but is retained for
specific contingencies.
[27] Potential reutilization and/or disposal materiel exceeds
contingency retention and has been identified for possible disposal but
with potential for reutilization.
[28] GAO, Military Base Realignments and Closures: Transfer of Supply,
Storage, and Distribution Functions from Military Services to Defense
Logistics Agency, [hyperlink, http://www.gao.gov/products/GAO-08-121R]
(Washington, D.C.: Oct. 26, 2007).
[End of section]
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