Defense Inventory
Defense Logistics Agency Needs to Expand on Efforts to More Effectively Manage Spare Parts Gao ID: GAO-10-469 May 11, 2010The Defense Logistics Agency (DLA) procures and manages large supplies of spare parts to keep military equipment ready and operating. At a time when U.S. military forces and equipment are in high demand and the nation faces long-term fiscal challenges, it is critical that DLA ensure that the warfighter is supplied with the right items at the right time and exercise good stewardship over the billions of dollars invested in its inventories. GAO has identified supply chain management as a high-risk area due in part to high levels of inventory beyond what is needed to support requirements and problems in accurately forecasting demand for spare parts. GAO's objectives were to (1) determine the extent to which DLA's inventory of spare parts reflects the amount needed to support requirements; and (2) identify causes, if applicable, for DLA's having spare parts inventory that does not align with requirements. GAO analyzed DLA inventory data for fiscal years 2006 through 2008.
GAO's review showed that DLA can enhance its efforts to manage spare parts more effectively primarily by focusing on the front end of the process when decisions are being made on what items to buy and how many in response to requirements. GAO's analysis of DLA data showed the agency had significantly more spare parts secondary inventory than was needed to meet current requirements in fiscal years 2006 through 2008. Current requirements include all the requirements used by DLA to determine when to order new parts, which Department of Defense (DOD) guidance refers to as the "requirements objective." The average annual value of the inventory for the 3 years reviewed was about $13.7 billion. Of this total, about $7.1 billion (52 percent) was beyond the amount needed to meet the requirements objective, and about $5.1 billion (37 percent) was not needed to meet the requirements objective plus 2 years of estimated future demand. Of the $5.1 billion, DLA had an average of $4.1 billion in retention stock (materiel for possible contingencies or materiel deemed to be more economical to keep than to dispose of) and had identified $1 billion as potential excess (for reutilization or disposal). Although DOD policy requires that DLA minimize investment in inventory while also meeting requirements, at least seven factors are continuing to cause DLA to order and stock parts that do not align with requirements. Three factors relate to how many parts to buy: inaccurate demand forecasting for parts, unresolved problems with accurately estimating lead times needed to acquire spare parts, and challenges in meeting the military services' special requests to DLA for future spare parts support for weapon systems. Three more factors relate to DLA initiatives that, while showing promise for reducing the acquisition and retention of parts not needed to meet requirements, do not appear to be achieving their full potential: closing gaps in providing accurate, timely data to inventory managers as input into purchase decisions; modifying or canceling planned purchases that may no longer be needed to meet currently estimated requirements; and reducing contingency retention stock that may no longer be needed. Lastly, DLA is not tracking the overall cost efficiency of its inventory management. Although DLA has recognized and begun to address many of these factors, its current efforts may not be fully effective at reducing the significant mismatches GAO identified between spare parts inventory levels and requirements. Acquiring inventory for which demand is much lower than expected reduces the amount of funding available for other military 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: Jack E. Edwards Team: Government Accountability Office: Defense Capabilities and Management Phone: (202) 512-8246GAO-10-469, Defense Inventory: Defense Logistics Agency Needs to Expand on Efforts to More Effectively Manage Spare Parts
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
May 2010:
Defense Inventory:
Defense Logistics Agency Needs to Expand on Efforts to More
Effectively Manage Spare Parts:
GAO-10-469:
GAO Highlights:
Highlights of GAO-10-469, a report to congressional requesters.
Why GAO Did This Study:
The Defense Logistics Agency (DLA) procures and manages large supplies
of spare parts to keep military equipment ready and operating. At a
time when U.S. military forces and equipment are in high demand and
the nation faces long-term fiscal challenges, it is critical that DLA
ensure that the warfighter is supplied with the right items at the
right time and exercise good stewardship over the billions of dollars
invested in its inventories. GAO has identified supply chain
management as a high-risk area due in part to high levels of inventory
beyond what is needed to support requirements and problems in
accurately forecasting demand for spare parts. GAO‘s objectives were
to (1) determine the extent to which DLA‘s inventory of spare parts
reflects the amount needed to support requirements; and (2) identify
causes, if applicable, for DLA‘s having spare parts inventory that
does not align with requirements. GAO analyzed DLA inventory data for
fiscal years 2006 through 2008.
What GAO Found:
GAO‘s review showed that DLA can enhance its efforts to manage spare
parts more effectively primarily by focusing on the front end of the
process when decisions are being made on what items to buy and how
many in response to requirements. GAO‘s analysis of DLA data showed
the agency had significantly more spare parts secondary inventory than
was needed to meet current requirements in fiscal years 2006 through
2008. Current requirements include all the requirements used by DLA to
determine when to order new parts, which Department of Defense (DOD)
guidance refers to as the ’requirements objective.“ The average annual
value of the inventory for the 3 years reviewed was about $13.7
billion. Of this total, about $7.1 billion (52 percent) was beyond the
amount needed to meet the requirements objective, and about $5.1
billion (37 percent) was not needed to meet the requirements objective
plus 2 years of estimated future demand. Of the $5.1 billion, DLA had
an average of $4.1 billion in retention stock (materiel for possible
contingencies or materiel deemed to be more economical to keep than to
dispose of) and had identified $1 billion as potential excess (for
reutilization or disposal).
Although DOD policy requires that DLA minimize investment in inventory
while also meeting requirements, at least seven factors are continuing
to cause DLA to order and stock parts that do not align with
requirements. Three factors relate to how many parts to buy:
inaccurate demand forecasting for parts, unresolved problems with
accurately estimating lead times needed to acquire spare parts, and
challenges in meeting the military services‘ special requests to DLA
for future spare parts support for weapon systems. Three more factors
relate to DLA initiatives that, while showing promise for reducing the
acquisition and retention of parts not needed to meet requirements, do
not appear to be achieving their full potential: closing gaps in
providing accurate, timely data to inventory managers as input into
purchase decisions; modifying or canceling planned purchases that may
no longer be needed to meet currently estimated requirements; and
reducing contingency retention stock that may no longer be needed.
Lastly, DLA is not tracking the overall cost efficiency of its
inventory management. Although DLA has recognized and begun to address
many of these factors, its current efforts may not be fully effective
at reducing the significant mismatches GAO identified between spare
parts inventory levels and requirements. Acquiring inventory for which
demand is much lower than expected reduces the amount of funding
available for other military needs.
What GAO Recommends:
GAO is making recommendations on the seven factors contributing to
mismatches between inventory levels of spare parts and requirements.
Among other things, DLA should develop an action plan for addressing
demand planning issues, and DOD should work with DLA to define goals
and metrics for assessing and tracking the cost-efficiency of
inventory management. DOD concurred with GAO‘s recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-469] or key
components. For more information, contact Jack Edwards at (202) 512-
8246.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
A Significant Portion of DLA's Secondary Inventory Did Not Align with
Current Requirements and Had Limited Demand:
Several Factors Contributed to DLA's Having Inventory Levels of Spare
Parts That Did Not Align with Current Requirements:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Value of DOD's and DLA's Secondary Inventory (Fiscal Years
2006-2008):
Table 2: Stratification of DLA Spare Parts Secondary Inventory (Annual
Average for Fiscal Years 2006-2008):
Table 3: Average Annual Value of Aviation, Land, and Maritime
Inventory Beyond the Requirements Objective (Fiscal Years 2006-2008):
Table 4: Value of DLA Active and Inactive Inventory Compared with
Goals, by Supply Chain, as of June 2009:
Figures:
Figure 1: Categories of DOD Spare Parts Inventory:
Figure 2: DLA's Secondary Inventory Levels for Requirements Objective,
Forecasted Demand, and Inactive Inventory (Fiscal Years 2006-2008):
Figure 3: Value of DLA's Total Inventory on Hand and on Order (Fiscal
Years 2006-2008):
Figure 4: Value of DLA's Inventory Beyond the Requirements Objective
by Projected Years of Supply (Fiscal Years 2006 and 2008):
Figure 5: Estimated Value of On-Hand Inventory Deficits Against
Operating Requirements by Supply Chain (Fiscal Years 2006-2008):
[End of section]
United States Government Accountability Office: Washington, DC 20548:
May 11, 2010:
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 Defense Logistics Agency (DLA) and the military services procure
and manage large supplies of spare parts to keep military equipment
ready and operating. As of September 30, 2008, the Department of
Defense (DOD) reported that the total value of its secondary
inventory, including spare parts and other items, was about $94
billion.[Footnote 1] At a time when U.S. military forces and equipment
are in high demand and the nation and military face long-term fiscal
challenges, it is critical that DLA and the services work toward
ensuring both that the warfighter is supplied with the right items at
the right time and that good stewardship is demonstrated over the
billions of dollars invested in their inventories.
Since 1990, we have identified DOD supply chain management as a high-
risk area due in part to ineffective and inefficient inventory
management practices and procedures, problems with accurately
forecasting demand for spare parts, and high levels of inventory
beyond what is needed to support 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 a contract has been
awarded or funds have been obligated is considered to be on order.
Whereas the military services focus on managing reparable spare parts,
DLA primarily focuses on managing consumable parts, which are normally
expended or intended to be used up beyond recovery. Additionally,
Section 328 of the National Defense Authorization Act for Fiscal Year
2010 requires the Secretary of Defense to submit a comprehensive plan
to improve the inventory management system of the military departments
and DLA, with the objective of reducing the acquisition and storage of
secondary inventory excess to requirements.[Footnote 2]
In response to your request that we review DOD's management of its
secondary inventory, this report addresses DLA's management of the
spare parts that it purchases, stores, and delivers to its military
service customers, including parts for aviation, maritime, and land
systems. Our specific objectives were to (1) determine the extent to
which DLA's inventory of spare parts reflects the amount needed to
support requirements; and (2) identify causes, if applicable, for
DLA's having spare parts inventory that does not align with
requirements. We previously reported on the management of the Army's,
the Navy's, and the Air Force's spare parts inventories (see Related
GAO Reports section at the end of this report).
To determine the extent to which DLA's spare parts inventory reflects
the amount of inventory needed to support requirements, we analyzed
fiscal year 2006 through 2008 stratification data, including summary
reports and item-specific data as of September 30 for each fiscal
year.[Footnote 3] These data were the most recent available for our
analysis. After assessing DLA's data, we determined that the data were
sufficiently reliable for the purposes of our analysis and findings,
as discussed in appendix I in more detail. We determined the total
number of items that had more than or less than enough inventory to
satisfy requirements, as identified by DOD, and for each of these
items also determined the number and value of parts that were more
than or less than what was needed to satisfy requirements. In
presenting the value of inventory in this report, we converted then-
year dollars to constant fiscal year 2008 dollars using DOD operations
and maintenance price deflators.[Footnote 4]
It is important to note that our analysis reflects points in time over
the 3-year period we reviewed and that requirements and inventory
levels are constantly shifting. DOD and DLA officials noted that when
military operations are ongoing, requirements from customers are
particularly volatile and less defined. They further stated that
effective, timely supply support to the warfighter is of paramount
interest and that efforts to measure the cost-efficiency of DLA's
investment in inventory should take the current and recent wartime
environment into consideration, as well as the agency's success at
meeting customer demands. The scope of our review did not include an
analysis of DLA's effectiveness at meeting customer demands.
In this report, we characterize inventory as beyond current
requirements when existing inventory levels are greater than what DOD
calls its "requirements objective," defined as follows: "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 5] We used the requirements
objective as a criterion level because, according to DOD Regulation
4140.1-R, it establishes the target quantity for replenishing an
item's level of stock through procurement. In other words, if DLA had
enough parts to meet the requirements objective, it would not
typically purchase new parts. The requirements objective is reflected
in DLA stratification reports as material needed to meet various
operating requirements (comprised of low demand items, war reserves,
back orders, and safety levels), the time required to acquire parts
(known as acquisition lead time), and an economic order quantity that
may be added to these requirements. The categories DOD and DLA use to
characterize and manage inventory are discussed further in the
Background section of this report.
DOD officials stated that our focus on current requirements (that is,
the requirements objective) does not fully portray the department's
total requirements for spare parts, which includes parts held for
potential demands that have not yet materialized. To address this
concern, in this report, we also identify inventory levels that are
needed to meet what DOD calls its "approved acquisition objective,"
defined as follows: "The quantity of an item authorized for peacetime
and wartime requirements to equip and sustain U.S. and Allied Forces,
according to current DOD policies and plans."[Footnote 6] DLA includes
materiel needed to meet the requirements objective plus 2 years of
estimated future demand in the approved acquisition objective.
According to DOD officials, while spare parts acquisitions are managed
based on the requirements objective, the approved acquisition
objective is their preferred criterion for measuring inventory levels
since it allows DLA and the services to stock items for the future,
thus helping them to ensure sufficient inventory will be available for
customers when needed. According to DLA, both the requirements
objective and the approved acquisition objective exclude "inactive"
inventory, which consists of economic and contingency retention stocks
and parts that DLA has identified for potential disposal or
reutilization.
We use the term "inventory deficit" to describe items that have an
amount of on-hand inventory that falls below the operating
requirements. We used this criterion level because it reflects DLA's
ability to respond to an immediate demand for a spare part. According
to DOD and DLA officials, they would not consider inventory to be in a
true deficit position if new parts are on order. Consequently, in our
report we also present analysis of the extent that on-order inventory
would cover the on-hand deficits we identified.
To identify causes for DLA's having inventory that does not align with
requirements, we selected a nonprobability sample of 90 inventory
items for which DLA inventory data indicated a mismatch between
inventory levels and requirements. We used March 2009 stratification
data to identify these items because these were the most recent data
available when we selected our cases. We met with DLA inventory
managers responsible for managing these items to obtain information on
factors that contributed to the apparent mismatch between inventory
levels and requirements. Because we used a nonprobability sample, our
results cannot be projected to items outside our sample. We also
interviewed DLA headquarters officials and other agency personnel to
obtain information about DLA's inventory management policies and
practices, inventory improvement initiatives, and other activities
related to managing spare parts. Appendix I provides further
information on our scope and methodology, including our methodology
for analyzing DLA stratification data and selecting sample items for
review.
We conducted this performance audit from February 2009 through May
2010 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.
Results in Brief:
DLA had significantly more spare parts secondary inventory than was
needed to meet current requirements in fiscal years 2006 through 2008,
and it also experienced some inventory deficits, though to a far
lesser extent. Our analysis indicated that the average annual value of
DLA's spare parts inventory for the 3 years was about $13.7 billion.
Of this total, about $7.1 billion (52 percent) was beyond the amount
needed to meet its requirements objective, and this inventory
represented 1.4 billion (55 percent) of the 2.5 billion parts that DLA
held on average for each of the 3 years. In addition, the analysis
showed that about $5.1 billion (37 percent) of DLA's total inventory
was not needed to meet its approved acquisition objective--the
requirements objective plus 2 years of estimated future demand. Of the
$5.1 billion, DLA had an average of $4.1 billion in retention stock
(materiel for possible contingencies or materiel deemed to be more
economical to keep than to dispose of) and had identified $1 billion
as potential excess (for reutilization or disposal). In addition,
applying DLA forecasts of future demand for those items where our
analysis indicated quantities were beyond the requirements objective,
we found that the inventory levels of some items were sufficient to
meet over 10 years of demand, or had no projected demand, although the
value of this inventory had decreased from fiscal year 2006 to fiscal
year 2008. Finally, on the basis of our analysis, we also found that
DLA had inventory deficits--where on-hand inventory levels were below
operating requirements--with an estimated value of $1.5 billion on
average each year during the 3 years we reviewed. Of this total, about
$712 million (47 percent) had sufficient inventory on order to meet
the on-hand deficits we identified.
Despite some positive actions by DLA to decrease its inventory of
spare parts that have limited or no future demand, at least seven
factors continue to cause DLA to order and stock parts that do not
align with requirements. These seven factors overlap with one another
but can be grouped into three major categories.
First, DLA faces challenges in determining how many parts to buy for
its customers:
* DLA faces challenges due to inaccurate demand forecasting for the
parts it manages. DOD's supply chain regulation states that customer
demand shall be part of all DOD components' inventory management
decisions; that components shall not stock an item that does not have
any possibility of future demand; and that variance in demand
forecasts outside established parameters should be flagged for
management analysis and action.[Footnote 7] DLA has identified
problems with demand planning and begun to address some of these
issues, but it has not articulated specific goals, objectives,
resources, or time frames for completing this effort. Without an
action plan articulating these specific elements, DLA may have
difficulty sustaining and expanding upon its current efforts.
* DLA has not resolved problems with accurately estimating suppliers'
lead times needed to acquire spare parts, which can lead to a mismatch
between inventory levels and requirements if parts are delivered
before or after they are needed. We identified problems with DLA
overstating lead times in a prior report and found instances within
our sample of cases in this review where fewer parts might have been
procured if lead time estimates had been more accurate. DLA officials
noted that they had already made some changes since 2008 to better
estimate administrative lead time, but the agency had not yet
determined the root causes for inaccurate production lead time
estimates.
* DLA faces challenges in meeting the military services' estimated
additional requirements for spare parts identified in supply support
requests and special program requirements. These two processes provide
a means by which the services submit requirements to DLA when they
first anticipate that they will need DLA to supply future spare parts.
The services have tended to overestimate their additional
requirements, which may result in DLA's holding inventory beyond what
is needed to meet requirements. DLA's internal controls for evaluating
and adjusting purchases in response to these requirements have not
always operated effectively. Also, DLA officials noted that the
services lack a financial incentive for minimizing their supply
support requests because they will not purchase the parts from DLA
using their own funds until the parts are needed. The feasibility of
requiring up-front military service funding for spare parts supply
support requests has not been evaluated.
Second, DLA has some initiatives under way to address known problem
areas, and preliminary results from these initiatives show promise for
reducing the acquisition and retention of spare parts that are not
needed to meet current requirements. However, their implementations
appear to fall short of achieving their full potential:
* DLA has an initiative to improve the exchange of demand data that
inventory managers receive from customers to make purchase decisions,
and sound supply chain management principles emphasize the need for
effective communication internally within the organization and
externally among all stakeholders in the supply chain. However, we
found a number of instances during our review where inventory managers
did not consistently have accurate, timely data to make fully informed
purchase decisions. DLA's current demand data exchange initiative has
been established with a limited number of customers and items. DLA has
not conducted a program evaluation or made clear to what extent it
plans to expand this initiative to more customers and items.
* While DLA has an "over-procurement" process for identifying, and
then modifying or canceling, planned purchases of spare parts that may
no longer be needed to meet currently estimated requirements, several
factors have limited its implementation and associated cost
reductions. These factors include, for example, requirements
thresholds established for identifying potential over-procurements and
the exclusion of special programs from being evaluated under this
process. DLA has not evaluated the overall effectiveness of its over-
procurement process and the feasibility of applying it on a wider
scale.
* DLA has reported progress in an initiative aimed at reducing the
proportion of its secondary inventory that is inactive, but continues
to have large amounts of contingency retention stock. While some of
this contingency retention stock may no longer be needed, the services
have not provided input that DLA needs in order to make these
determinations.
Third, DLA does not assess and track the cost efficiency of its
inventory management. Although DOD's supply chain regulation directs
the military components to size secondary item inventories to minimize
DOD's investment while providing the inventory needed, DLA lacks goals
and associated metrics that would enable it to determine the extent to
which it is meeting this requirement. DLA has metrics aimed at
measuring the extent to which the agency is able to satisfy customer
requisitions and other aspects of its performance, but it lacks cost-
efficiency metrics. The lack of cost-efficiency metrics limits DLA's
ability to track and evaluate outcomes of its inventory management
improvement efforts over the long term.
Although DLA has recognized and begun to address many of the factors
we identified as contributing to mismatches between inventory levels
and requirements, our review shows that DLA's current efforts may not
be fully effective at providing assurance that the agency is
minimizing DOD's investment in unneeded secondary inventory. In the
absence of additional actions to improve inventory management, DLA
will likely continue to purchase and retain items that its customers
do not need and then spend additional resources to handle and store
these items. Acquiring inventory for which demand is much lower than
expected reduces the amount of funding available for other military
needs.
To improve the management of DLA secondary inventory, we are making
recommendations regarding each of the seven factors we identified as
contributing to mismatches between inventory levels of spare parts and
requirements. DLA officials stated that addressing some of the factors
we identified requires a collaborative approach among DLA; the Office
of the Under Secretary of Defense for Acquisition, Technology and
Logistics; and the military services. We took these comments into
account in making our recommendations. DOD, in its comments on a draft
of this report, concurred with our recommendations and identified
corrective actions to be completed. The corrective actions were
generally responsive to our recommendations.
Background:
Under DOD's supply chain materiel management policy, secondary item
inventory is to be sized to minimize DOD's investment while providing
the inventory needed to support both wartime and peacetime
requirements.[Footnote 8] Management and oversight of DLA inventory is
a responsibility shared between the Under Secretary of Defense for
Acquisition, Technology and Logistics and the Director, DLA. The Under
Secretary of Defense for Acquisition, Technology and Logistics is
responsible for developing materiel management policies and ensuring
their implementation in a uniform manner throughout the department,
while the Director, DLA, is responsible for implementing DOD policies
and procedures for the assets DLA manages. DLA provides support in the
areas of subsistence, medical, construction and equipment, clothing
and textile, and fuel, as well as aviation, land, and maritime spare
parts. Aviation items are managed at DLA's office in Richmond,
Virginia; maritime and land items are managed at DLA's office in
Columbus, Ohio. Inventory managers at these locations are assigned to
manage individual items. DLA has developed guidance and procedural
instructions for computing requirements for its secondary inventory.
DLA Has Made Changes to Its Business Practices and Information Systems:
In fiscal year 2006, DLA issued its plan to transform how it does
business in order to improve warfighter support and reduce costs
through business process reengineering, workforce development,
technology modernization, and organizational change.[Footnote 9] The
plan notes that DLA altered its business model, redefined its
supporting processes, and introduced new information systems
architecture. DLA also undertook initiatives in customer relationship
management, supplier management relations, and business systems
modernization, which involved a major information technology
reengineering effort. DLA replaced its legacy materiel management
information systems with a new enterprise resource planning system--
called the Enterprise Business System--using commercial-off-the-shelf
software applications. The transition to the Enterprise Business
System took 6 years and achieved full operating capability in July
2007. DLA continues to enhance the system and resolve identified
problems.
Another major change at DLA involved a reorganization of its inventory
management personnel. Before DLA's reorganization, item managers were
the sole points of contact for handling orders and the distribution of
items assigned to them. As part of the reorganization, DLA made a
major shift, dividing this responsibility and establishing two main
facets of planning: demand planning and supply planning. Demand
planners gather data, determine how the demand plan will be created,
generate the plan, and provide the plan to others in the organization.
In contrast, supply planners use the demand plan to determine how best
to meet the customers' expected demands and generate supply plans.
Within DLA, the demand and supply planning functions also require
input from weapon systems managers, customer account specialists, and
procurement officials.
In addition to these changes DLA has made, decisions made as part of
the Base Realignment and Closure (BRAC) process in 2005 were aimed at
achieving economies and efficiencies related to supply and storage of
secondary inventory. Specifically, the military services were directed
to (1) realign or relocate management and related support functions
for the procurement of depot-level reparables to DLA; (2) relocate
consumable item management to DLA to consolidate missions and reduce
excess capacity; and (3) transfer supply contracting functions for
tires, packaged petroleum products, and compressed gases to DLA, and
privatize all other supply, storage, and distribution functions for
these commodities. DOD is in the process of implementing the BRAC 2005
actions, which are required to be completed by September 15, 2011. We
have recently reported on the progress made and challenges DLA still
faces to consolidate supply-related functions at 13 depot locations.
[Footnote 10]
Value of Secondary Inventory Has Varied in Recent Years:
DOD reported that the total value of its secondary inventory decreased
from fiscal years 2006 to 2007 before increasing to $94.1 billion as
of September 30, 2008. DOD stratification reports show that the value
of DLA's secondary inventory--which includes spare parts and other
commodities managed by the agency--followed a similar pattern,
decreasing by $1.1 billion from fiscal years 2006 to 2007 and then
increasing by $4.8 billion in fiscal year 2008 (see table 1).
According to DLA, most of this increase was caused by higher fuel
costs. The value of DLA secondary inventory as a percentage of the DOD
total remained steady at 19 percent in fiscal years 2006 and 2007
before rising to 22 percent in fiscal year 2008.
Table 1: Value of DOD's and DLA's Secondary Inventory (Fiscal Years
2006-2008) (Dollars in billions):
Fiscal year: 2006;
DOD secondary inventory: $89.3;
DLA secondary inventory: $17.0;
Percentage of DOD secondary inventory held by DLA: 19%.
Fiscal year: 2007;
DOD secondary inventory: $84.2;
DLA secondary inventory: $15.9;
Percentage of DOD secondary inventory held by DLA: 19%.
Fiscal year: 2008;
DOD secondary inventory: $94.1;
DLA secondary inventory: $20.7;
Percentage of DOD secondary inventory held by DLA: 22%.
Source: GAO analysis of DOD data.
Notes: Values are expressed in constant fiscal year 2008 dollars. DOD
values inventory at latest acquisition cost, with reductions for
reparable inventory in need of repair and salvage prices for potential
reutilization/disposal stock.
[End of table]
DLA's Process for Determining Needed Amount of Secondary Inventory:
DLA determines requirements by calculating the amount of wholesale
inventory it needs to either have in storage (on hand) or purchase (on
order). According to DLA officials, the agency identifies in its
stratification reporting the amount of inventory allocated to meet its
requirements objective, which includes various operating requirements
and acquisition lead time, as well as a calculated economic order
quantity that may be added to these requirements. Operating
requirements include low demand items and war reserves, back orders,
and safety levels. Low demand items are requirements for parts for
which demand cannot be forecast but nevertheless need to be stocked.
War reserves include mission-essential secondary items sufficient to
attain and sustain authorized operational objectives. Back orders are
customer-requisitioned materiel that is not immediately available to
issue, but is recorded as a commitment for future issue. Safety levels
are stock that is to be kept on hand in case of minor interruptions in
the resupply process or unpredictable fluctuations in demand.
Acquisition lead time includes both administrative and production lead
time requirements. Administrative lead time requirements 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. Production
lead time requirements refer to inventory purchases 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 on-hand and on-order inventory levels drop to a threshold level--
called the reorder point--the supply manager may place an order for
additional inventory of that item. The reorder point factors in demand
for an inventory item during the reordering period so that DLA can
replace it before it goes out of stock, and a safety level to ensure a
supply of stock during interruptions in production or repair.[Footnote
11] 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, if applicable. A purchase request or purchase order may be
terminated or modified if requirements change.[Footnote 12]
On-hand and on-order parts that are not needed to meet DLA's
requirements objective may include some inventory that satisfies 2
years of estimated future demand. As noted earlier, the approved
acquisition objective incorporates both materiel needed to meet the
requirements objective and materiel needed to meet 2 years of
estimated future demand. Materiel that is on hand or on order that
exceeds the approved acquisition objective is referred to as inactive
inventory.[Footnote 13] Inactive inventory includes economic retention
stock, which is materiel that has been deemed more economical to keep
than to discard because it is likely to be needed in the future;
contingency retention stock, which is material retained for specific
contingencies; and potential excess materiel,[Footnote 14] which has
been identified for possible disposal but has potential for
reutilization. Figure 1 summarizes how DOD inventory categories are
aggregated in the context of DLA stratification reporting.
Figure 1: Categories of DOD Spare Parts Inventory:
[Refer to PDF for image: illustration]
* Operating requirements:
Low demand items;
War reserves;
Back orders;
Safety levels;
* Acquisition lead time:
* Economic order quantity.
Lead to:
Requirements objective:
Approved acquisition objective.
* Forecasted demand (2 years):
Leads to:
Approved acquisition objective.
* Economic retention:
* Contingency retention:
Lead to:
Retention stock:
Inactive inventory.
* Potential excess:
Leads to:
Inactive inventory.
Source: GAO analysis of DOD policies and DLA stratification reporting.
[End of figure]
A Significant Portion of DLA's Secondary Inventory Did Not Align with
Current Requirements and Had Limited Demand:
Our analysis of DLA secondary inventory data for the 3-year period we
examined showed that, on average, about half (52 percent) of DLA's
total inventory was not needed to meet current requirements (the
requirements objective) and more than one-third (37 percent) was not
needed to meet the approved acquisition objective--the requirements
objective plus 2 years of estimated future demand. More than one-third
of DLA's total inventory (37 percent) was inactive, comprising
retention stock and material DLA had identified as potential excess
(for reutilization or disposal). In addition, according to DLA's
demand forecasts for items exceeding the requirements objective in
fiscal years 2006 and 2008, the inventory levels of some items were
sufficient to meet over 10 years of demand, or had no projected
demand. We also identified on-hand inventory deficits for some items.
About $7.1 Billion, or 52 Percent, of DLA's On-Hand and On-Order
Inventory Value Exceeded the Requirements Objective Each Year:
Our analysis of DLA secondary inventory data showed that, for the 3
fiscal years 2006 through 2008, an average of about $6.5 billion (48
percent) of the total annual inventory value was needed to meet the
requirements objective, whereas $7.1 billion (52 percent) was not
needed for these requirements. Measured by total number of parts, 45
percent applied to the requirements objective on average each year,
and the remaining 55 percent did not apply to these requirements. Our
analysis revealed that DLA managed an average of about 1.7 million
unique items each year, and many of these had more parts than were
needed to meet the requirements. Table 2 shows DLA's spare parts
secondary inventory grouped by stratification category. DLA identified
$1.0 billion on average each year as potential excess to be reviewed
for possible reutilization or disposal.
Table 2: Stratification of DLA Spare Parts Secondary Inventory (Annual
Average for Fiscal Years 2006-2008):
Requirements objective:
Stratification category: Operating requirements;
Parts (in billions): 0.5;
Value (in billions): $2.8.
Stratification category: Acquisition lead time;
Parts (in billions): 0.3;
Value (in billions): $2.7.
Stratification category: Economic order quantity;
Parts (in billions): 0.3;
Value (in billions): $1.0.
Subtotal: Requirements objective;
Parts (in billions): 1.1;
Value (in billions): $6.5.
Stratification category: Forecasted demand (2 years);
Parts (in billions): 0.4;
Value (in billions): $2.1.
Subtotal: Approved acquisition objective;
Parts (in billions): 1.5;
Value (in billions): $8.6.
Inactive inventory:
Stratification category: Economic retention;
Parts (in billions): 0.3;
Value (in billions): $1.5.
Stratification category: Contingency retention;
Parts (in billions): 0.6;
Value (in billions): $2.6.
Stratification category: Potential excess;
Parts (in billions): 0.1;
Value (in billions): $1.0.
Subtotal: Inactive inventory;
Parts (in billions): 1.0;
Value (in billions): $5.1.
Subtotal: Forecasted demand and inactive inventory;
Parts (in billions): 1.4;
Value (in billions): $7.1.
Total inventory:
Parts (in billions): 2.5;
Value (in billions): $13.7.
Source: GAO analysis of DLA data.
Notes: Values are expressed in constant fiscal year 2008 dollars and
do not include cost recovery rates (overhead charges). Totals may not
add up due to rounding.
[End of table]
In table 2, the approved acquisition objective includes the
requirements objective subtotal ($6.5 billion) plus the 2 years of
forecasted demand ($2.1 billion). Using the approved acquisition
objective as a criterion, about $8.6 billion (63 percent) of the total
inventory was needed to meet these requirements, and $5.1 billion (37
percent) was not needed. In effect, DLA had already purchased a
significant amount of inventory toward its future needs. If some of
these forecasted demands do not materialize, the purchased parts may
become part of DLA's inactive inventory and may eventually be marked
for potential reutilization or disposal.
Our data analysis also showed some variability from year to year in
the balance between inventory meeting current requirements (the
requirements objective) and inventory beyond those requirements
(composed of both the 2-year forecasted demand and the inactive
inventory). For example, both the requirements objective and the
forecasted demand increased each year, whereas the inactive inventory
increased from fiscal years 2006 to fiscal year 2007 and then
decreased in fiscal year 2008. Figure 2 shows the data for each of the
3 years included in this review.
Figure 2: DLA's Secondary Inventory Levels for Requirements Objective,
Forecasted Demand, and Inactive Inventory (Fiscal Years 2006-2008):
[Refer to PDF for image: stacked vertical bar graph]
Fiscal year: 2006;
Requirements objective: $5.3 billion;
Forecasted demand (2 years): $1.9 billion;
Inactive inventory: $5.4 billion;
Total: $12.6 billion.
Fiscal year: 2007;
Requirements objective: $6.5 billion;
Forecasted demand (2 years): $2.0 billion;
Inactive inventory: $5.6 billion;
Total: $14.1 billion.
Fiscal year: 2008;
Requirements objective: $7.7 billion;
Forecasted demand (2 years): $2.4 billion;
Inactive inventory: $4.2 billion;
Total: $15.3 billion.
Source: GAO analysis of DLA data.
Note: Values are expressed in constant fiscal year 2008 dollars and do
not include cost recovery rates (overhead charges).
[End of figure]
On average during the 3-year period, about 68 percent of the value of
DLA's total inventory was on hand and 32 percent of the value was on
order. The relative portion of DLA's on-hand and on-order inventory
varied somewhat over this period, with the value of on-order inventory
rising from 26 percent of the total in 2006 to 34 percent in 2008 (see
figure 3).
Figure 3: Value of DLA's Total Inventory On Hand and On Order (Fiscal
Years 2006-2008):
[Refer to PDF for image: stacked vertical bar graph]
Fiscal year: 2006;
On order: $3.2 billion;
On hand: $9.4 billion;
Total: $12.6 billion.
Fiscal year: 2007;
On order: $4.8 billion;
On hand: $9.4 billion;
Total: $14.2 billion.
Fiscal year: 2008;
On order: $5.0 billion;
On hand: $9.3 billion;
Total: $14.3 billion.
Source: GAO analysis of DLA data.
Note: Values are expressed in constant fiscal year 2008 dollars and do
not include cost recovery rates (overhead charges).
[End of figure]
Inventory Beyond Requirements Objective Varied by Supply Chain, and
Some Items Had Many Years of Projected Demands:
Much of DLA's inventory beyond the requirements objective was
concentrated in the aviation supply chain. Table 3 shows the average
number and value of parts beyond the requirements objective for each
of the three supply chains. Additional analysis of the data on only
the portion of the inventory beyond the requirements objective showed
that the aviation supply chain had about three-fourths (73 percent) of
DLA's total number of spare parts and more than half (61 percent) of
the total value of DLA's spare parts beyond the requirements
objective. In contrast, the land supply chain accounted for a
relatively small percentage (6 percent) of the number of parts beyond
the requirements objective, although the value of these parts was
about $900 million, or 12 percent of the value of DLA's spare parts
that were beyond the requirements objective.
Table 3: Average Annual Value of Aviation, Land, and Maritime
Inventory Beyond the Requirements Objective (Fiscal Years 2006-2008):
Supply chain: Aviation;
Parts: Number (in millions): 0.9;
Parts: Percent: 73;
Value: Dollars (in billions): $4.3;
Value: Percent: 61.
Supply chain: Maritime;
Parts: Number (in millions): 0.3;
Parts: Percent: 21;
Value: Dollars (in billions): $2.0;
Value: Percent: 27.
Supply chain: Land;
Parts: Number (in millions): 0.1;
Parts: Percent: 6;
Value: Dollars (in billions): $0.9;
Value: Percent: 12.
Supply chain: Total;
Parts: Number (in millions): 1.3;
Parts: Percent: 100%;
Value: Dollars (in billions): $7.1;
Value: Percent: 100%.
Source: GAO analysis of DLA data.
Note: Values are expressed in constant fiscal year 2008 dollars and do
not include cost recovery rates (overhead charges). Totals may not add
due to rounding.
[End of table]
Applying DLA forecasts of future demand for those items where our
analysis indicated quantities were beyond the requirements objective,
we found that some of DLA's inventory for fiscal years 2006 and 2008
was sufficient to meet over 10 years of demand. In addition, many
items showed no projected demand. Figure 4 shows the values associated
with the spare parts beyond the identified requirements grouped into
projected years of supply.
Figure 4: Value of DLA's Inventory Beyond the Requirements Objective
by Projected Years of Supply (Fiscal Years 2006 and 2008):
[Refer to PDF for image: multiple vertical bar graph]
Up to 2 years:
Fiscal year 2006: $0.8 billion;
Fiscal year 2008: $1.4 billion.
More than 2 up to 10 years:
Fiscal year 2006: $1.5 billion;
Fiscal year 2008: $1.1 billion.
Over 10 years:
Fiscal year 2006: $1.9 billion;
Fiscal year 2008: $1.4 billion.
Source: GAO analysis of DLA data.
Notes: We identified an annual demand forecast for individual items
with inventory beyond the requirements objective in the stratification
reports for fiscal years 2006 and 2008. We divided inventory beyond
the requirements by the annual demand forecast to obtain the number of
years of supply the inventory levels would satisfy, and then
multiplied the result by the fiscal year 2008 per part cost.
Values are expressed in constant fiscal year 2008 dollars and do not
include cost recovery rates (overhead charges).
[End of figure]
As shown in figure 4, about $1.4 billion of the inventory beyond the
requirements objective in fiscal year 2008 would supply up to 2 years
of forecasted demand, about $1.1 billion of parts would meet more than
2 and up to 10 years of forecasted demand, and about $1.4 billion of
parts would meet forecasted demand for over 10 years. A comparison of
the supply data for the 2 fiscal years suggests some positive changes
occurred. Specifically, the value of inventory forecasted to be used
in the next 2 years was higher in 2008 than in 2006, and the value of
inventory with more than 2 years of supply was lower. Similarly, our
analysis further showed that the value of inventory with no forecasted
demand decreased from $2.3 billion in fiscal year 2006 to $1.6 billion
in fiscal year 2008.
Other information provided by DLA supply distribution centers also
indicated that the agency had large amounts of on-hand inventory as of
September 2008 for which there was little to no demand. Specifically,
this information showed that DLA held parts valued at about $3.2
billion that had no demand in the past 2 or more years. (The value of
these parts was calculated based on the cost that would be charged to
customers and thus differed from the cost data associated with the
stratification reports that we used for our analysis.) Of this total,
parts valued at about $1 billion had no demands for at least the past
8 years. DLA estimated it incurred about $2.5 million in costs for
storing these items with 8 years or more of no demand. At a DLA
warehouse we visited, we saw some of these items on the shelves,
including 3 packaged circuit boards with a total value of $730,140, 15
cable assembly parts valued at $59,086, and 74 contact assembly boards
with a value of $26,270. In each case, DLA has had no demand for the
items in 8 or more years.
On-Hand Inventory Deficits Were Identified for Some Items:
DLA had on-hand inventory deficits for some items--that is, DLA had an
insufficient level of on-hand inventory to meet operating
requirements.[Footnote 15] For fiscal years 2006 through 2008, DLA had
on-hand inventory levels below operating requirements for an average
of about 166,000 items worth an estimated $1.5 billion. DLA
experienced more on-hand inventory deficits for aviation items than
for maritime and land items each year. Figure 5 shows the estimated
value of DLA's on-hand inventory deficits, by supply chain, for each
of the fiscal years included in our review.
Figure 5: Estimated Value of On-Hand Inventory Deficits Against
Operating Requirements by Supply Chain (Fiscal Years 2006-2008):
[Refer to PDF for image: stacked vertical bar graph]
Fiscal year: 2006;
Maritime: $0.3 billion;
Land: $0.2 billion;
Aviation: $0.6 billion;
Total: $1.1 billion.
Fiscal year: 2007;
Maritime: $0.3 billion;
Land: $0.3 billion;
Aviation: $1.0 billion;
Total: $1.6 billion.
Fiscal year: 2008;
Maritime: $0.4 billion;
Land: $0.4 billion;
Aviation: $0.9 billion;
Total: $1.7 billion.
Source: GAO analysis of DLA data.
Note: Values are expressed in constant fiscal year 2008 dollars and do
not include cost recovery rates (overhead charges).
[End of figure]
DOD and DLA officials said they would not consider inventory to be in
a true deficit position if inventory levels have reached the reorder
point and new parts are on order. They noted that inventory managers
typically will place an order for new parts when an item's inventory
falls to the reorder level. We subsequently analyzed the fiscal year
2006 to 2008 data and determined that, on average, about 44,000 (27
percent) of the items with an estimated value of about $712 million
(47 percent) had sufficient inventory on order to meet the on-hand
deficits we identified.[Footnote 16] DLA inventory managers told us
that deficits occur and can persist for various reasons, including
when there is an unexpected surge in requirements for parts or when a
supplier is no longer in business or producing the needed part and a
new, qualified supplier must be found. We could not determine the
criticality of the on-hand inventory deficits we identified because
this information is not available in stratification reporting.
Several Factors Contributed to DLA's Having Inventory Levels of Spare
Parts That Did Not Align with Current Requirements:
On the basis of our audit, we identified several inventory management
factors that contribute to a mismatch between DLA inventory levels and
current requirements for secondary spare parts. These factors involve
deficiencies in (1) accurately forecasting customer demands, (2)
estimating lead times for acquiring parts, (3) meeting the services'
estimated additional requirements for spare parts, (4) improving
communications among stakeholders to ensure purchase decisions are
based on accurate and timely data, (5) modifying or canceling planned
purchases of items that may no longer be needed to meet currently
estimated requirements, (6) determining whether inventory being stored
as contingency retention stock is still needed, and (7) assessing and
tracking the overall cost efficiency of its inventory management.
These factors overlap with one another but can be grouped into three
major categories. The first three factors relate to determining how
many parts to buy. The next three factors relate to DLA initiatives
that, while showing promise for reducing the acquisition and retention
of parts not needed to meet requirements, do not appear to be
achieving their full potential due to limits on their implementation.
The last factor--assessing and tracking the overall cost efficiency of
its inventory management--reflects a deficiency in DLA's current
ability to determine the extent to which it is fulfilling DOD guidance
directing the military components to size secondary item inventories
to minimize DOD's investment while providing the inventory needed.
According to DLA officials, some of these factors--such as determining
the need to retain contingency retention stocks--requires a
collaborative approach among DLA; the Office of the Under Secretary of
Defense for Acquisition, Technology and Logistics; and the military
services.
Inaccurate Demand Forecasts May Result in Acquiring More Spare Parts
Than Needed to Meet Requirements:
DLA faces challenges in aligning inventory levels with requirements
due, in part, to inaccurate demand forecasting for the parts it
manages. When customers' demands for parts are lower than originally
forecasted, DLA can be left holding more inventory than needed to meet
requirements. Conversely, when demands are higher than expected, DLA
may have inventory deficits until new parts can be acquired. Having
accurate demand forecasts is vital to cost-effective inventory
management. DOD's supply chain regulation states that customer demand
shall be part of all DOD components' inventory management decisions;
that components shall not stock an item that does not have any
possibility of future demand; and that variance in demand forecasts
outside established parameters should be flagged for management
analysis and action.[Footnote 17] DLA officials, in discussing demand
planning issues with us, also stated that forecast accuracy is the
most significant factor for simultaneously decreasing inventory levels
while maintaining or increasing customer service.
Our prior reports on the services' management of their spare parts
inventory found that problems with demand forecasting were the leading
cause of mismatches between inventory levels and their requirements
objectives. DOD agreed with this assessment, has included the issue in
the department's strategic business management plan, and is studying
potential improvements. In our current audit, we found instances
within our sample of DLA items where inaccurate demand forecasts
presented problems in managing spare parts and minimizing mismatches
between inventory levels and requirements. For example, the March 2009
stratification report showed that for one of our sampled items (a
drive assembly), DLA had a purchase request for 270 parts valued at
$1.3 million. At our request, the demand planner reviewed the item in
August 2009. She found notes in the record indicating the forecast for
this item had been accepted; however, she determined based on her
review that the forecast was too high. Her research showed that there
had been a prior higher demand for this item that was nonrecurring.
She told us that she subsequently reduced the demand forecast for the
item.
DLA officials acknowledged that the agency can face challenges in
obtaining accurate demand forecasts for items. DLA has been analyzing
demand forecasting issues, emphasizing the need for better demand
planning, and taking steps aimed at mitigating the impact of
inaccurate demand forecasts. DLA steps include reorganizing its work
force to provide additional resources aimed at improving demand
planning, identifying and tracking initiatives and actions that
deserve priority for management attention for enhancing demand
accuracy,[Footnote 18] and adjusting forecasting models to account for
a greater range of demand patterns.
Despite these positive steps, DLA is still in the early stages of
assessing the issues surrounding inaccurate demand forecasting, and it
has not developed an integrated long-term action plan. For example,
although DLA has identified demand planning issues to focus on, it has
not articulated specific goals, objectives, resources, or time frames
for instituting corrective actions. Without a long-term integrated
action plan that incorporates these elements, DLA may have difficulty
sustaining and expanding its current efforts to improve demand
forecasting issues. In commenting on this factor, DLA officials told
us that the agency is providing greater management visibility and
emphasis on cases where overforecasts caused higher than expected
inventory levels. The officials also stated that improved demand
forecasting will require a collaborative effort among DLA; the Office
of the Under Secretary of Defense for Acquisition, Technology and
Logistics; and the military services.
DLA Has Not Resolved Problems with Estimating Lead Times Needed to
Acquire Spare Parts:
DLA has not resolved problems in accurately estimating acquisition
lead times for the parts it acquires. Inaccurate lead time estimates
can result in a mismatch between inventory levels and requirements
because these estimates are included in calculations for purchasing
parts. For fiscal years 2006 through 2008, parts needed for lead time
requirements had an annual average value of $2.7 billion (20 percent)
of the $13.7 billion in total inventory value. About $1.9 billion of
this lead time value was for production lead time, and the remaining
$0.8 billion was for administrative lead time.
In 2007, we reported that DLA tended to overestimate lead time
requirements, which resulted in inventory arriving sooner than
expected.[Footnote 19] For example, in examining about 1 million
shipment deliveries during fiscal year 2005, we found that almost 40
percent had actual lead times that were at least 90 days shorter than
their estimated lead times. Conversely, about 3 percent of the
deliveries had actual lead times that were at least 90 days longer
than their estimated lead times. On the basis of that earlier
analysis, we recommended that DLA review and revise the methodology
and the data it uses to estimate lead time. DOD responded that our
review used data prior to DLA's implementation of the Enterprise
Business System, and that we had not taken into account the benefits
of its new system and related business processes. In our evaluation of
DOD's comments, we noted that calculating the lead times in the same
manner but recording the values in a new computer system would not
improve the accuracy of lead time estimates.
Determining the extent to which DLA continues to experience problems
in estimating lead times for acquiring spare parts was not part of our
current review, but we found instances of this problem within our
sampled cases. In one case, a DLA inventory manager identified
overstated lead time on a purchase of 172 helicopter valves costing
DLA about $2,624 each, or about $451,000 in total. According to DLA
data, the production lead time for this item was 601 days. When we
discussed this case with DLA officials, they estimated that the
production lead time should have been 272 days (about 45 percent of
the production lead time used in the purchase decision) and said it
was not uncommon for production lead times to be overstated. Using the
lower lead time estimate might have reduced the purchase order
requirement and DLA's investment in these valves. In another example
involving a power inverter, a reduction in the lead time from 720 days
to 90 days (about 13 percent of the prior estimated lead time) led DLA
to cancel the purchase of 147 items. With an average price of $1,313,
these canceled items had a total value of about $193,000.
DLA officials acknowledged continuing problems with overstated lead
time requirements, but noted that they had made some changes since
2008 to better estimate administrative lead time. These changes
include evaluating and revising DLA's internal administrative
processing of purchase requests and purchase orders. The DLA officials
stated that analyzing production lead time--which accounted for about
more than two-thirds of the total lead time requirements for the 3-
year period we analyzed--is particularly difficult because DLA does
not have access to contractor data that would be needed to determine
the root causes of inaccurate production lead time estimates. While
the DLA officials acknowledged that such an analysis could be useful,
they said it could be too costly to require contractors to generate
and report the data.
DLA Faces Challenges in Efficiently Meeting the Services' Estimated
Additional Requirements for Spare Parts:
DLA has long faced challenges in efficiently meeting the military
services' requirements for spare parts identified in the form of
supply support requests and special program requirements. These two
processes provide a means by which the services may submit estimated
additional requirements to DLA when they first anticipate that they
will need the agency to supply future spare parts. The services,
however, have tended to overestimate these additional requirements,
which may result in DLA's acquiring and holding inventory beyond what
is needed to meet actual requirements that materialize. While DLA has
internal controls for evaluating and adjusting purchases in response
to the services' estimated additional requirements, these internal
controls have not always operated effectively.
Supply Support Requests Have Included Overstated Requirements
Forecasts:
Supply support requests are the principal means by which the military
services notify DLA of anticipated requirements, such as spare parts
that will be needed to support the maintenance of a new weapon system.
[Footnote 20] The services provide forecasted requirements in their
supply support requests to DLA and are required to retain
documentation showing how the forecasts were computed for at least 3
years after the date the parts are needed to support the weapon
system. DLA is supposed to evaluate the supply support requests and
purchase materiel as it deems appropriate to meet expected
requirements.
DLA officials said the services tend to overestimate requirements in
their supply support requests. Data provided by DLA show that the
services' estimates of forecasted requirements for supply support
requests were significantly higher than their actual demands. For
example, the services submitted supply support requests to DLA valued
at $1.7 billion in fiscal year 2008; but by June 2009, the services
had requisitioned $34 million (2 percent) of the requirements that
they had forecasted.[Footnote 21] The problem of overestimated
forecasted requirements in supply support requests has been known for
many years. As far back as 1988, the DOD Inspector General (DODIG)
reported that forecasted requirements submitted by the services with
their supply support requests were frequently excessive.[Footnote 22]
DODIG reported again in September 1993 that the services' forecasted
requirements were unnecessary, unreasonable, or unsubstantiated; did
not materialize at times; and resulted in unnecessary or premature
investment in inventory.[Footnote 23]
Although DLA has long been aware of this issue, internal controls
aimed at minimizing unnecessary purchases of spare parts have
sometimes operated ineffectively. For example, DOD guidance states
that integrated materiel managers (demand planners in DLA) are to
validate supply support requests,[Footnote 24] and DLA officials
identified supply support requests valued at $2,500 and higher as
those that should be validated. DLA officials, however, said they have
typically lacked data from the services showing how the services'
requirements were calculated and, as a result, were not able to
validate the supply support requests. DLA officials told us in August
2009 that to improve the implementation of this internal control, a
special demand planning team started to track validations of higher
value supply support requests. These officials also said that a
systems change request has been submitted, but not yet implemented, to
enable the Enterprise Business System to automate and track supply
support request validations. Additional guidance on the supply support
request process is being drafted as part of a revision to DOD guidance
(DOD Manual 4140.26-M). Given the long-term nature of the problem, it
is uncertain whether these steps will be effective at improving the
efficiency of the supply support request program without additional
DLA emphasis to reinforce and reinvigorate internal controls.
DLA officials noted that the services lack a financial incentive for
minimizing their supply support requests because they do not purchase
the parts from DLA using their own funds until the parts are actually
needed. If a service does not later purchase all of the requested
parts from DLA, the service does not incur any additional costs for
the unused parts. Instead, the parts remain in DLA's inventory long
term and may result in the agency having inventory levels for these
items beyond requirements. Under the revolving fund approach used by
DOD to finance spare parts, DLA purchases parts using working capital
funds and is reimbursed when the parts are later sold to a customer.
By design, working capital funds, rather than service funds, are tied
up in the inventory until the parts are requisitioned. DLA officials
suggested that the services might have more incentive to submit
accurate supply support requests if they were required to provide some
portion of the up-front funding for DLA's initial purchase of the
parts. However, the military services have resisted the idea of
providing up-front funding in the past, and DLA-proposed pilot
programs to test the concept have not been implemented. DOD budget
officials confirmed that up-front service funding for supply support
requests has never been formally proposed or evaluated. DLA officials
said there could be challenges in implementing up-front service
funding. For example, a service may not have funds available when the
DLA purchase is made. However, up-front service funding is already
required for certain DLA purchases of clothing and other textiles.
Special Program Requirements Have Often Not Materialized:
Special program requirements refer to nonrepetitive requirements for
spare parts that cannot be forecast based on demand data and which
have the greatest probability of materializing and resulting in the
eventual submission of requisitions. As with supply support requests,
the services use special program requirements to plan future supply
support from DLA. As part of the requirement submitted to DLA, the
service identifies a specific anticipated date that the parts will be
needed. On or about the specified support date, the customer is
expected to submit its requisition for the parts. However,
requisitions for the services' special program requirements often have
not materialized.
DODIG has reviewed special program requirements and found issues
similar to those with supply support requests. In 1990, DODIG reported
that the majority of special program requirements submitted to DLA
from the services included overstated and unsubstantiated forecast
estimates.[Footnote 25] It further found that internal controls had
not been put in place by either the services or DLA to account for
specific procurements and transactions, or to monitor the overall
effectiveness of this program. A 2004 DODIG review found some internal
control improvements aimed at minimizing the investment in inventory
to support special program requirements, although these improvements
were limited to one DLA supply center (Philadelphia).[Footnote 26] Our
current review of 90 sampled items showed that DLA has continued to
experience problems in economically managing special program
requirements. For example, March 2009 inventory data showed DLA had a
purchase order to satisfy a one-time special program requirement for
about 1,650 mechanical drive housing parts with a total value of about
$850,000. However, DLA inventory managers said the customer had
requisitioned only 44 percent of the parts by the support date
specified in the special program requirement submission. Upon further
review of this item, the managers told us the customer may have
incorrectly identified this item as a recurring need, unnecessarily
increasing the quantity of parts ordered.
With regard to internal controls, DODIG's 2004 report focused on two
initiatives that, at the time, had been implemented at DLA's
Philadelphia supply center.[Footnote 27] One was a streamlined
validation process. The streamlined process was designed to
automatically cancel a special program requirement if the organization
submitting the requirement did not validate it within specified time
frames.[Footnote 28] While this process was operating at the time of
our current review, DLA lacked data demonstrating its effectiveness.
For example, DLA lacked data comparing prevalidation requirements to
modified procurement quantities. According to DLA officials, these
data have not been available since the transition to the Enterprise
Business System. Furthermore, a relatively small percentage of special
program requirements were identified as being validated by the
services. For example, according to DLA data, the agency received
special program requirements for a total of about 400,000 items for
fiscal years 2007 through 2009, but requirements for only about 16,000
items (or 4 percent) had been validated.
The second internal control for managing special program requirements
was a program to track the services' requisition, or "buy-back,"
rates. The buy-back program was aimed at tracking the rates at which
the services' requisitioned parts compared with their previously
submitted special program requirements and then adjusting future
procurements based on these buy-back rates. DODIG found the buy-back
program to be effective at reducing procurement quantities, and
thereby minimized investment for some inventory. Prior to the buy-back
program, DLA procured 100 percent of the special program requirements,
according to DODIG. Despite the positive effects from the program
noted in the DODIG report, our current audit found that DLA stopped
updating its buy-back rates in 2006, coinciding with the
implementation of the Enterprise Business System. In May 2009, DLA
began again to update buy-back rates. As a result, during this period
when rates were not updated, DLA may not have been optimizing
investment in inventory purchased for special program requirements.
DLA Inventory Managers Do Not Consistently Have Accurate, Timely Data
to Make Informed Purchase Decisions:
DLA inventory managers do not consistently have accurate, timely data
needed to make informed purchase decisions, which may lead to the
acquisition of parts that are not needed to meet requirements.
Although DLA recognizes that sound supply chain management principles
emphasize the need for effective communication within the agency and
externally with all other stakeholders in the supply chain, we found
that DLA inventory managers have experienced gaps in effective
communication and data exchange. Our review of sampled items
identified cases where inventory managers, as a result of these gaps,
lacked accurate, timely data that could have influenced purchase
decisions. For example:
* DLA received a purchase request in June 2008 for 230 aircraft access
covers at a cost of about $3,900 each for a total cost of about
$897,000. Because March 2009 inventory data indicated that DLA had
significant inventory for this item beyond its requirements objective,
we asked DLA to review this purchase request. Inventory managers
indicated that they had not recently communicated with the customer
for this item. When the inventory managers obtained updated
information following our inquiry, they determined that the purchase
request should have been reduced from 230 to 35 parts costing about
$136,500.
* DLA issued a purchase order in June 2008 for 37 pad assemblies for
Navy aircraft, with a total value of about $402,000. However, DLA
determined later that year that the part was obsolete and the purchase
order should be canceled. The contractor estimated that termination
costs for canceling the order would be about $111,000. The purchase
order was canceled in early 2009.
* DLA purchased parts kits for an Army vehicle but was not aware until
later that the customer's original requirement was no longer valid.
Specifically, DLA inventory data as of September 2008 showed that the
agency had 17,737 kits on hand and had placed a purchase order for
47,146 additional kits. The total value of the purchase order was
about $1.3 million. In May 2009, DLA had 60,717 kits on hand and 3,574
on order, indicating that requirements for the total amount of
inventory (including both on-hand and on-order parts) had remained
about the same. When we inquired about this item, inventory managers
told us there had been several months of no demand and that the
monthly forecast had been reduced from 144 to 1. Furthermore, DLA
checked with its Army customer and learned that the Army did not need
the item as indicated in its purchase request.
DLA in 2005 began an initiative called demand data exchange to improve
collaboration between the agency and customers on the management of
certain items. Under this program, DLA works collaboratively with
customers on selected items to evaluate historical demand data and
tailor procurement plans. Participating customers select items that
they anticipate would benefit from this enhanced collaboration. For
example, an item may be selected because requirements are expected to
fluctuate. As of November 2009, DLA had rolled out the program to
about 80 customers and for about 47,500 items. DLA officials told us
that they were reviewing performance data from their existing demand
data exchange activities and these data indicated the demand data
exchange program effectively improved collaboration in some instances
but not in others. However, DLA had not yet conducted a formal program
evaluation, and it was unclear at the time of our review whether or to
what extent DLA was planning to expand this initiative to incorporate
additional customers and items.
DLA Process for Modifying or Canceling Unneeded Purchases of Spare
Parts Has Been Implemented on a Limited Basis:
While DLA has a process for identifying and limiting the purchase of
spare parts not needed to meet requirements, several factors have
limited its implementation and potential for minimizing investment in
unneeded inventory. Through this "over-procurement" process, DLA
identifies purchase requests and purchase orders that may no longer be
needed to meet currently estimated requirements; evaluates each case
in more detail to determine whether to proceed with, or to cancel part
or all of, the purchase; and then executes cancellation decisions when
applicable. DLA data for fiscal year 2009 showed that a total of $275
million in purchase orders and purchase requests were reviewed, with
$123 million recommended for cancellation and $44 million actually
canceled. The canceled amount represented 16 percent of the $275
million reviewed and about 36 percent of the $123 million recommended
for cancellation. Where the data distinguished between purchase orders
and purchase requests, the analysis indicated that most of the
cancellations were purchase requests.[Footnote 29] Our review of 90
sampled items identified cases where DLA had planned purchases that
appeared to exceed requirements but for some reason did not go through
the over-procurement process. For example:
* DLA inventory data for a combustion chamber liner showed that as of
March 2009, the agency had 527 parts on hand and another 762 parts on
order. The average unit price for the item was $3,748, and the total
value for all 1,289 parts was $4.8 million. Inventory managers told us
that even though this item was identified as being in the top 5
percent in dollar value of aviation inventory, it did not have demand
every month, and a more recent computation indicated the item may be
over-procured by 403 parts priced at $1.5 million. We were told that
this item was not selected for an over-procurement review until we
requested information.
* For another item, an instrument mounting part for B1B aircraft, DLA
had a purchase order for 86 parts. With an average unit price of
$13,410, the total value of parts on the purchase order was $1.2
million. Inventory officials said the production lead time was
recently extended from 322 days to between 800 and 1,000 days, but
they did not know why. The officials added that the item appeared over-
procured by 31 parts valued at about $416,000. They said they would
not have reviewed this item if we had not brought it to their
attention.
DLA officials expressed the view that these cases of missed
opportunities are not representative of the overall success of the
over-procurement process at identifying and reducing purchases of
unneeded parts. However, DLA has not formally evaluated the
effectiveness of the over-procurement process. In addition, while we
agree the over-procurement process has shown promise, our example
cases indicate that it may have greater potential for minimizing
investment in inventory than has been achieved to date. We identified
several factors that may be limiting the impact of the over-
procurement process. These factors include the following:
First, purchases are not identified and reviewed as potential over-
procurements if they do not meet or exceed DLA-established minimum
thresholds. DLA initially established a minimum threshold of 150
percent of the requirements objective for identifying a potential over-
procurement--that is, the value of the purchase request or purchase
order had to exceed the value of the requirements objective by at
least 50 percent in order to be flagged for review. In 2008, DLA
lowered the threshold to 125 percent of the requirements objective,
which flagged a greater number of potential over-procurements for
further review.[Footnote 30]
Second, items are not identified and reviewed for potential over-
procurement if they support programs that have been exempted from the
process.[Footnote 31] A number of items in our sample supported the
Mine Resistant Ambush Protected vehicle--a program exempted from over-
procurement review--and were identified by inventory managers as being
in over-procured positions at the time of our site visit. For example,
March 2009 inventory data for a winch parts kit for the vehicle showed
that DLA had 4 kits on hand and an existing purchase order for 220
kits. A purchase request for 1,200 additional kits was generated in
February 2009, a purchase order was placed in April 2009, and the
items were received in May 2009. In the meantime, forecasted demand
for this item dropped in April 2009 from about 51 per month to 6 per
month. At the demand rate of 6 per month, the 1,424 kits represented
about 20 years of supply and a total value of about $691,000.
Third, items flagged as potential over-procurements may go through a
lengthy review process, which can make it more difficult to execute a
cancellation decision. Although DLA lacked summary data on the overall
timeliness of the process, individual cases may take several months
from the time a potential over-procurement is identified through when
a final decision is reached. For example, inventory data for one of
our sampled items, an antenna accessory kit, showed that DLA had 26
parts on hand and 46 on order as of August 2008. With an average unit
cost of about $3,000, the total value of these 72 parts was about
$216,000. The inventory manager told us that, due to a drop in demand,
the item was in an over-procurement position. Over-procurement reports
for this item were generated in February 2009, May 2009, and September
2009. When the supply planner tried to cancel the on-order parts after
receiving the September report, the contract administrator determined
the planner's request was not timely, and the cancellation was not
executed. This review process may be lengthy because numerous
individuals are involved in evaluating and reviewing the decision,
particularly for higher value purchases where a cancellation has been
recommended. In addition, the supply planner responsible for the item
may not have extensive experience with the item, which could increase
the time needed to evaluate a potential over-procurement. With
responsibility for thousands of items, each planner has limited time
to spend on any particular item and must make trade-offs in how to use
the available time. DLA officials said recent management emphasis has
been placed on making the processing of over-procurement reports more
timely.
Fourth, according to DLA officials and inventory managers we
interviewed for our sample, other factors can limit the impact of the
over-procurement process. For example, data on customers' requirements
for the items may be inaccurate or obsolete; circumstances related to
a potential over-procurement can be complex; canceling or amending
purchase orders may be difficult because of a high termination cost;
and canceling a purchase request within DLA becomes more difficult the
closer it gets to contract award because of the amount of time and
work invested.
DLA officials identified plans to improve the over-procurement process
in fiscal year 2010. First, DLA planned to expand the number and value
of purchases flagged for over-procurement review. Also, DLA officials
said they planned to target more attention on identifying and reducing
purchase orders. Finally, DLA officials said tighter goals have been
set, including at least a 10 percent improvement compared to fiscal
year 2009 performance. These planned improvements in the over-
procurement process recognize that there is greater potential for
minimizing investment in inventory than has been achieved to date.
DLA Has Reported Progress in Reducing the Proportion of Inventory That
Is Inactive, but the Agency Continues to Store Large Amounts of
Contingency Retention Stock:
DLA has reported progress toward its goal of rebalancing its inventory
and reducing the proportion of inactive inventory--those items in the
inventory that are not needed to meet the requirements objective plus
2 years of future supply (collectively referred to as the approved
acquisition objective).[Footnote 32] In July 2008, DLA observed that,
as measured in value, half of its inventory was active and the other
half inactive, a split that the agency determined was too heavily
weighted on the inactive side. To help rebalance its inventory, DLA
established active inventory goals for individual supply chains,
including aviation (75 percent), maritime (74 percent), and land (80
percent). DLA reported that it made progress toward rebalancing its
inventory, although it had not met its specific goals for these supply
chains as of June 2009 (see table 4).
Table 4: Value of DLA Active and Inactive Inventory Compared with
Goals, by Supply Chain, as of June 2009 (Dollars in billions):
Total inventory;
Aviation: $6.0;
Maritime: $2.5;
Land: $1.4.
Inactive inventory:
Economic retention;
Aviation: $0.8;
Maritime: $0.4;
Land: $0.2.
Contingency retention;
Aviation: $1.3;
Maritime: $0.6;
Land: $0.1.
Potential excess;
Aviation: $0.1;
Maritime: [A];
Land: [A].
Subtotal: Inactive inventory;
Aviation: $2.2;
Maritime: $1.0;
Land: $0.3.
Subtotal: Active inventory;
Aviation: $3.8;
Maritime: $1.5;
Land: $1.0.
Percent active;
Aviation: 63%;
Maritime: 60%;
Land: 79%.
Goal for percent active;
Aviation: 75%;
Maritime: 74%;
Land: 80%.
Source: GAO presentation of DLA data.
Note: Totals may not add up due to rounding.
[A] Less than $50 million.
[End of table]
DLA officials attributed the progress in rebalancing inactive and
active inventory to its efforts in fiscal years 2008 and 2009 to
dispose of parts. Despite this progress, DLA continues to have large
amounts of contingency retention stock. Our data analysis for fiscal
years 2006 through 2008 showed that the agency annually held an
average of about $2.6 billion of its secondary inventory as
contingency retention, and the data presented in figure 4 show that
DLA reported having about $2 billion in contingency retention stock as
of June 2009. Some of this inventory may no longer be needed. However,
DLA has not determined the extent that its contingency retention stock
is no longer needed because the services have not provided input
needed to make these determinations.
DLA has a retention and disposal program aimed at identifying items in
its contingency retention stock that should be retained and items that
are potential excess and should be considered for disposal or
reutilization. The agency's contingency retention requirements are
aimed at precluding disposal of assets that might be needed for future
nonrecurring demand, such as provisioning or planned maintenance
actions; items used primarily in wartime which have limited use in
peacetime; and future foreign military sales. Since DLA holds
contingency retention stock for the services, DLA depends on the
services to provide input on which contingency inventory items are no
longer needed and should be considered for disposal or reutilization.
DOD regulations require DLA to annually evaluate and attest to the
extent that its contingency retention stock should be retained.
[Footnote 33] Specifically, the DOD regulations require that DLA
ensure that mechanisms are in place to take proper retention,
redistribution, and disposal actions against items in that category of
inventory. To ensure that contingency retention stocks correspond with
the needs for current and future force levels, DLA is to review and
validate its methodologies for making contingency retention decisions.
Contingency retention reviews should focus on verifying that the
reason for contingency retention still exists and the reason is
properly recorded. The inventory management organization commander or
designee is required to attest in writing to the validity of the
annual review decisions. According to DLA officials, they cannot
achieve the goals of the regulation without service input, and
information from the services would enable the agency to reduce
unneeded contingency retention stock in its inventory. However, they
noted that the services have not been providing input to DLA. DLA has
informed the services that all contingency retention levels must be
validated or eliminated in fiscal year 2010. However, if the services
do not provide the necessary information to DLA, then DLA may continue
to carry unneeded inventory.
DLA Does Not Assess and Track the Cost Efficiency of Its Inventory
Management:
Although DOD's supply chain regulation directs the military components
to size secondary item inventories to minimize DOD's investment while
providing the inventory needed, DLA does not assess and track the cost
efficiency of its inventory management to determine whether it is
meeting this requirement. DLA has effectiveness-related metrics aimed
at measuring the extent to which the agency is able to satisfy
customer requisitions and other aspects of its performance, but it
lacks goals and metrics to measure the cost efficiency of its
inventory management. As a result, DLA does not know whether it is
meeting inventory requirements at least cost.
DOD's supply chain management regulation emphasizes a need for both
effective and efficient management of materiel. The regulation sets
out management goals such as considering all costs associated with
materiel management in making best-value logistics decisions, and
directs DOD components and DLA to take a number of steps to implement
these goals. These steps include 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 help 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 34] However, the
regulation does not prescribe specific cost metrics and goals that the
services or DLA should or must use to track and assess the efficiency
of their inventory management practices.
DLA has numerous metrics for assessing and tracking supply chain
performance. None of these, however, enable DLA to monitor the
efficient use of resources for inventory management or to provide a
means for assessing costs versus benefits. Examples of DLA's current
key metrics include orders received, materiel availability, unfilled
orders, and purchase requests awarded. Other DLA performance metrics
track demand plan accuracy; inventory turnover; the timeliness,
quantity, quality, and documentation of filled orders; the receipt and
transportation of materiel; and customer satisfaction. Two additional
metrics that track supply chain financial performance are cash
performance plan (the difference between monthly disbursements and
collections) and net operating result (metrics that track revenue and
expenses monthly, assess performance against the budget, and identify
variances early in the fiscal year). DLA officials told us they are
developing a framework for integrating effectiveness measures with
supply chain costs, but they have not developed milestones for
completing the design or implementation of this framework. They also
told us that they believe the Office of the Secretary of Defense
should be involved in developing any additional metrics to monitor the
efficient use of DOD resources and provide a means to assess costs
versus benefits of supply chain operations.
DLA officials also expressed the view that a lack of cost-efficiency
metrics does not necessarily mean that DLA is being wasteful. They
asserted that DLA strives to be a good steward of government
resources. However, without such metrics, DLA cannot demonstrate that
it is minimizing inventory costs consistent with the DOD regulation.
In addition, without such metrics, DLA is likely to have difficulty in
establishing (1) a baseline for the agency's collective efforts to
improve efficiencies in various areas of inventory management, (2) a
means for DLA to demonstrate progress against the baseline, and (3) a
basis for understanding and responding to any positive or negative
cost-efficiency trends that may occur in the future.
Moreover, the National Defense Authorization Act for Fiscal Year 2010
[Footnote 35] requires the Secretary of Defense to submit a
comprehensive plan to the congressional defense committees for
improving the inventory management systems of the military departments
and DLA with the objective of reducing the acquisition and storage of
secondary inventory that is excess to requirements.[Footnote 36] The
Secretary of Defense's comprehensive plan is to include (among other
things): (1) a plan for a comprehensive review of demand forecasting
procedures to identify and correct any systematic weaknesses in such
procedures, including the development of metrics to identify bias
toward over-forecasting and adjust forecasting methods accordingly;
(2) a plan to reduce the average level of on-order secondary inventory
that is excess to requirements, including a requirement for the
systemic review of such inventory for possible contract termination;
(3) a plan for the review and validation of methods used by the
military departments and DLA to establish economic retention
requirements; (4) a plan for an independent review of methods used by
the military departments and DLA to establish contingency retention
requirements; and (5) a plan for a comprehensive assessment of
inventory items on hand that have no recurring demands, including
metrics to track years of no demand for items in stock and procedures
for ensuring the systemic review of such items for potential
reutilization or disposal.
Conclusions:
Our review showed that DLA can enhance its efforts to manage spare
parts more effectively primarily by focusing on the front end of the
process when decisions are being made on what items to buy and how
many in response to requirements. Our analysis showed that DLA had
substantial mismatches between spare parts inventory levels and its
current requirements for each of the 3 fiscal years we reviewed, and
it has invested in large amounts of inventory that now have little or
no projected demand. The accumulation of inventory beyond either the
requirements objective or the approved acquisition objective is caused
by many overlapping factors, including some that have been identified
in prior audits. The best opportunities for minimizing investment in
unneeded inventory while still meeting required inventory levels are
at the front end of the process when the agency is making decisions on
what and how much to purchase. In addition, DLA needs to have
effective policies and practices in place to modify planned purchases
as appropriate when demands for parts change. DLA has been taking
positive steps to correct problems it has identified in its inventory
management. In addition to enterprisewide changes in business
practices and replacement of legacy information systems, DLA has
efforts aimed at improving specific inventory management practices,
such as the over-procurement process and the demand data exchange
initiative. While some of DLA's steps are relatively recent and may
not be fully implemented, the magnitude of inventory levels beyond
current requirements suggests that the agency has additional
opportunities to minimize its investment in secondary inventory while
still meeting required inventory levels. If DLA does not take
additional actions to better align inventory levels and requirements,
it will continue to invest in spare parts long before they are needed
to meet customer demand or in the future become potential excess
stock. Acquiring inventory for which demand is much lower than
expected reduces the amount of funding available for other military
needs. The recent legislative requirement directing the Secretary of
Defense to submit a comprehensive plan for improving inventory
management practices provides further impetus for addressing the
factors we identified in this review that contribute to mismatches
between inventory levels and requirements.
Recommendations for Executive Action:
To minimize investment in unneeded spare parts inventory, we recommend
that the Secretary of Defense direct the Director, Defense Logistics
Agency, to take the following five actions:
* Establish an action plan for completing the agency's evaluation of
identified demand planning issues, and include goals, objectives,
resources, and time frames in this action plan.
* Develop an approach for working with suppliers to assess the root
causes of inaccurate production lead time estimates and implement
corrective actions linked to these root causes.
* Reinforce and reinvigorate effective internal controls aimed at
evaluating and making adjustments to the military services' estimated
additional requirements, including both supply support requests and
special program requirements.
* Conduct a program evaluation of the demand data exchange initiative
to determine what, if any, additional actions should be taken to (1)
improve communication and data exchange internally and with military
customers and suppliers and (2) expand the initiative across the
enterprise (for example, to other customers, items, and processes).
* Evaluate the effectiveness of the agency's process for identifying
and reducing potential over-procurements and determine the feasibility
of applying the process on a wider scale.
In addition, we recommend that the Secretary of Defense direct the
Under Secretary of Defense for Acquisition, Technology and Logistics,
in conjunction with the Director, Defense Logistics Agency, and the
Secretaries of the Army, the Navy, and the Air Force, to take the
following two actions:
* Formally evaluate and report on the feasibility of requiring up-
front military service funding for a portion of their supply support
requests.
* Establish goals and metrics for tracking and assessing the cost
efficiency of inventory management in accordance with DOD's policy
requiring DLA and the services to minimize investment in secondary
item inventory while providing inventory needed; develop and implement
an approach for integrating these goals and metrics with inventory
management improvement efforts; and incorporate the goals and metrics
into existing management and oversight processes.
Finally, we recommend that the Secretary of Defense direct the
Secretaries of the Army, the Navy, and the Air Force to certify to DLA
which items and what quantities of the contingency reserve stock
should be retained, in response to DLA's requests that they do so, and
direct the Under Secretary of Defense for Acquisition, Logistics and
Technology to provide guidance and oversight of this certification
process.
Agency Comments and Our Evaluation:
In its written comments on a draft of this report, DOD concurred with
our recommendations and identified corrective actions to be completed.
The planned actions were generally responsive to our recommendations.
The department's written comments are reprinted in appendix II.
DOD concurred with our recommendation that DLA establish an action
plan for completing an evaluation of identified demand planning
issues. DOD stated that DLA will establish an action plan that will
include goals, objectives, resources, and time frames and that will be
completed in the fourth quarter of fiscal year 2010. DOD cited a
number of actions that are already underway to evaluate and adjust
demand inputs and also commented that over-forecasting in the
Enterprise Business System does not always equate to over-buying
because of actions to mitigate supply planning impacts of over-
estimated demand. We believe that DOD's planned action is responsive
to our recommendation.
DOD concurred with our recommendation that DLA develop an approach for
assessing the root causes of inaccurate production lead time estimates
and implement corrective actions linked to these root causes. DOD
stated that DLA has already identified several root causes for
inaccurate lead times, including suppliers not accurately predicting
lead time from subcontractors, suppliers including "buffers" in their
projected production time, and suppliers relying on past lead times
for current purchase requests. DOD also identified DLA management
actions to challenge the lead time quotes from vendors to ensure the
quotes are realistic, look at required delivery dates on contracts,
conduct reviews to identify suspected excessive production lead times,
and adjust these lead times as appropriate. It said that DLA will
continue to work with suppliers to improve estimates and noted that
DLA has been able to reduce production lead time over-estimates since
early 2009. We recognize the value of these actions and believe DLA's
efforts could be further enhanced by identifying in measurable terms
the extent to which specific root causes are contributing to
inaccurate production lead time estimates, and then using these data
as benchmarks to assess the effectiveness of corrective actions.
DOD concurred with our recommendation that DLA reinforce and
reinvigorate effective internal controls aimed at evaluating and
making adjustments to the military services' supply support requests
and special program requirements. According to DOD, DLA will reinforce
effective internal controls and has already enhanced internal controls
for special program requirements. DOD cited, for example, a recent
effort to eliminate ongoing discrepancies and issues with Army special
program requirements. DOD said this effort eliminated over $200
million in Army special program requirement submissions. Although we
did not review this effort or the results cited by DOD, it highlights
the potential positive effects that further reinforcing and
reinvigorating internal controls might have if such actions are
implemented.
DOD concurred with our recommendation to conduct a program evaluation
of the demand data exchange initiative to determine what, if any,
additional actions should be taken to improve and expand the
initiative. DOD said that DLA has an evaluation of the initiative
underway, with completion set for February 2011. As part of its
evaluation, DLA will review items as potential candidates for
collaboration partnerships with additional customers and suppliers and
will also look to continue improving forecast accuracy with its
current collaboration customers. DOD also cited actions by DLA to
modify its business rule logic, in response to feedback from current
customers, and to begin holding collaboration forums in August 2010
to, among other things, expand the use of demand data exchange. We
believe these actions are responsive to our recommendation.
DOD concurred with our recommendation that DLA evaluate the
effectiveness of the agency's process for identifying and reducing
potential over-procurements and determine the feasibility of applying
the process on a wider scale. DOD commented that DLA has made
significant progress in reducing its over-procurements. For example,
in 2009, the aviation supply chain initiated a review of its over-
procurement process, and initial findings from that review have been
adopted DLA-wide, resulting in significant cancellations of purchase
requests. DLA will also evaluate ways to increase purchase order
cancellations and, by October 2010, will complete a review and
validation of items currently being excluded from the over-procurement
process. According to DOD, DLA will ensure that any items it continues
to exclude from the systemic over-procurement process will be subject
to a separate review process that allows for cancellation of purchase
requests and purchase orders exceeding requirements. We believe the
actions cited by DOD are positive steps. Because this process provides
opportunities on a continuing basis for DLA to identify and limit the
purchase of spare parts that may no longer be needed to meet currently
estimated requirements, the agency would benefit from a thorough
evaluation of the over-procurement process, including identifying any
factors that may be limiting its potential impact.
DOD concurred with our recommendation to formally evaluate and report
on the feasibility of requiring up-front funding from the military
services for a portion of their supply support requests. It said that
the Office of the Under Secretary of Defense for Acquisition,
Technology and Logistics, in conjunction with the Office of the Under
Secretary of Defense (Comptroller) and the military services, will
evaluate and report on the feasibility of requiring up-front funding
of supply support requests. DOD also said that DLA is pursuing a pilot
effort with the Navy and the Marine Corps to support the H-1
helicopter, wherein DLA and the services share the burden of
investment risk. The concept of this initiative is to have the Navy
and the Marine Corps pay half of the total cost of the supply support
request investment in advance of the anticipated support date. DLA, in
turn, will honor the total supply support request requirement and buy
both retail and wholesale quantities. We believe these planned actions
are positive steps and responsive to our recommendation, although DOD
did not cite time frames for completing either its evaluation or the
pilot project involving the H-1 helicopter.
DOD concurred with our recommendation to establish goals and metrics
for tracking and assessing the cost efficiency of inventory
management. DOD stated the department is undertaking a comprehensive
review of its inventory management practices, to include establishing
goals and metrics for tracking inventory management improvement
initiatives and cost efficiency. DOD is developing an improvement plan
that will include goals, objectives, metrics, targets, and a
governance process for overseeing execution and refreshing the plan on
a regular basis. The target for publishing the plan is the last
quarter of fiscal year 2010. We believe the inclusion of cost-
efficiency goals and metrics as part of overall efforts to improve
inventory management is responsive to our recommendation.
DOD concurred with our recommendation aimed at identifying which items
and what quantities of these items to retain as contingency reserve
stock. It said the military services and DLA are collaboratively
reviewing contingency retention inventory and the Office of the Under
Secretary of Defense for Acquisition, Technology and Logistics will
review the results of that review once complete. In addition, the
department stated that, in conjunction with its previously discussed
plan for improving inventory management practices, it will conduct an
independent review of contingency retention methodologies. That
review, according to DOD, will highlight any changes in guidance
necessary to improve the contingency retention process. We believe
DLA's planned actions are responsive to the recommendation.
As arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report until
30 days after its date. At that time, we will send copies to
interested congressional committees; the Secretary of Defense; the
Secretaries of the Army, the Navy, and the Air Force; the Under
Secretary of Defense for Acquisition, Technology and Logistics; the
Director, DLA; 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) 512-8246 or edwardsj@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:
Jack E. Edwards:
Director, Defense Capabilities and Management:
[End of section]
Appendix I: Scope and Methodology:
We conducted work at the Defense Logistics Agency's (DLA) headquarters
and at DLA Supply Centers in Richmond, Virginia, and Columbus, Ohio.
We used DLA stratification data to determine the extent to which the
DLA's inventory of spare parts reflected the amount needed to support
requirements. The Department of Defense (DOD) requires DLA and each
military service to semiannually prepare inventory stratification
reports, which are used to determine procurement and repair budget
requirements and identify potential excess or reutilization stock.
[Footnote 37] Stratification is a process that applies assets, by
type, for an individual item against requirements for the same item in
a prescribed priority sequence. The stratification reports serve as a
mechanism for matching on-hand and on-order inventory to requirements.
We conducted the following steps in our analysis of inventory data:
* Obtained DLA's stratification summary data for three DLA supply
chains--aviation, land, and maritime. We also obtained item-specific
electronic files as of October 30 of each fiscal year from 2006
through 2008. These data were the most recent available for our
analysis. Our analysis was based on analyzing DLA's item
stratifications within the opening position table as defined for DOD's
Central Secondary Item Stratification Reports. Opening position data
represent current requirements as of a certain cutoff date and do not
include any forecasted requirements or simulations. DLA's secondary
inventory data are identified by unique stock numbers for each unique
item, such as an engine for a particular aircraft. DLA may have in its
inventory multiple quantities of the same item, which we refer to as
parts.
* Assessed the reliability of the data to be used in our audit. While
our assessments occurred throughout our analyses, most of our efforts
to evaluate the data were concentrated in the initial stages of data
analysis. Those assessments included reviewing DOD requirements for
secondary spare parts inventory reporting, comparing the data we
generated from DLA-provided electronic files to its summary tables,
searching for and reconciling inconsistent information (e.g., out-of-
range and missing data), and discussing DLA's data and our findings
with database managers. After assessing DLA's data, we determined that
the data were sufficiently reliable for the purposes of our analysis
and findings.
* Calculated the value of each unique item by multiplying the quantity
of parts for an item by the item's moving average unit price, which is
the latest acquisition cost for the item. We computed total values for
all items in DLA's inventory and recreated the stratification tables.
This computation approach is consistent with DOD's process for valuing
assets in its annual Supply System Inventory Report. Values do not
include DLA cost recovery rates (overhead charges).
* Converted then-year dollars to constant fiscal year 2008 dollars
using DOD operations and maintenance price deflators.[Footnote 38]
We analyzed the data to determine the extent to which DLA had more
inventory than was needed to satisfy its requirements objective based
on the opening position table of DLA's budget stratification report.
DOD defines the requirements objective as the maximum authorized
quantity of stock for wholesale items.[Footnote 39] However, if DLA
has more inventory on hand or on order than is needed to satisfy its
requirements objective, it can allot inventory that is beyond its
requirements objective to satisfy forecasted demands over a 2-year
period. When the forecast is added to its requirements objective, it
constitutes the approved acquisition objective. Inventory beyond an
item's approved acquisition objective is identified as inactive
inventory and is applied to economic retention requirements[Footnote
40] and then to contingency retention requirements.[Footnote 41] Only
after applying inventory to satisfy these additional requirements
would DLA consider that it has more inventory than is needed and would
consider this inventory for potential reutilization or disposal.
[Footnote 42] We used the requirements objective as a criterion for
our analysis because, according to DOD Regulation 4140.1-R, it
establishes the target quantity for replenishing an item's level of
stock through procurement. DOD's requirements objective process does
not consider the 2-year forecast or inactive inventory as additional
requirements when determining inventory needs. The requirements
objective is reflected in DLA stratification reports as material
needed to meet various operating requirements (comprised of low demand
items, war reserves, back orders, and safety levels) and also factors
in the time required to acquire parts--or acquisition lead time--as
well as an economic order quantity that may be added to these
requirements.
We also analyzed the data to determine the extent to which DLA had
less inventory than was needed to satisfy its requirements. We
considered DLA to have inventory deficits if levels of on-hand
inventory were insufficient to meet the operating requirements. We
used this criterion level because it reflects DLA's ability to respond
to an immediate demand for a secondary inventory item. DOD and DLA
officials said they would not consider inventory to be in true deficit
position if new parts are on order. Therefore, we also analyzed the
extent to which on-order inventory for those items would cover the on-
hand inventory deficits identified.
Additionally, we calculated, based on DLA's forecasted demand, the
number of years of supply for each item with on-hand and on-order
quantities greater than the requirements objective. Our calculations
were based on quantity of parts and demand for those parts at the time
of stratification in October 2006 and October 2008. We identified an
annual demand forecast for individual items with inventory beyond the
requirements objective in the stratification reports for fiscal years
2006 and 2008. We divided inventory beyond the requirements objective
by the annual demand forecast to obtain the number of years of supply
the inventory levels would satisfy. We grouped these data into
categories as follows: up to 2 years, more than 2 to less than 10
years, over 10 years, and no forecasted demand.
To identify causes for DLA's having inventory that does not align with
requirements, we used a case study approach using a nonprobability
sample of 90 inventory items for which DLA inventory data indicated a
mismatch between inventory levels and requirements. We used March 2009
stratification data because these were the most recent available when
we selected our case studies. From the data set, we identified those
items with inventory levels that were beyond the requirements
objective and further identified those items with open purchase
requests and open purchase orders. We focused on such items because
DLA did not yet have physical possession of the items and there could
be an opportunity for DLA to modify or cancel the request or order to
reflect changes in demand. Of the items meeting these criteria, we
identified those with the highest purchase request and purchase order
values, as determined by DLA's moving average price, and further
identified items where at least one-third of the value was stratified
to retention or potential disposal categories. We then selected an
equal number of items as case studies from each of DLA's three supply
chains--aviation, land, and maritime--and selected 10 items with open
purchase orders and 10 with open purchase requests--for a total of 60
items. We selected 30 additional items for our sample where the March
2009 data showed that there were insufficient quantities of parts on
hand to meet the requirements objective. We identified these items
with purchase requests that also had the greatest back order deficits
by value, as determined by DLA's moving price average. Selections
based on purchase request value and back order data helped identify
items experiencing more current and critical deficits. We met with DLA
inventory managers responsible for managing the items in our sample to
obtain information on factors that contributed to the apparent
mismatch between inventory levels and requirements. For example, we
discussed and documented the initial requirements, any adjustments,
current status, and future plans. This provided insight into how
inventory management processes were applied to these items. Because we
used a nonprobability sample, our results cannot be projected to items
outside our sample.
We also interviewed DLA headquarters officials and other agency
personnel to obtain information about DLA's inventory management
policies and practices, inventory improvement initiatives, and other
activities related to managing spare parts.
We conducted this performance audit from February 2009 to May 2010 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.
[End of section]
Appendix II: Comments from the Department of Defense:
Office Of The Assistant Secretary Of Defense:
Logistics And Materiel Readiness:
3500 Defense Pentagon:
Washington, DC 20301-3010:
April 28, 2010:
Mr. Jack Edwards:
Defense Capabilities and Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Edwards:
This is the Department of Defense response to the GAO Draft Report,
GAO-10-469, "Defense Inventory: Defense Logistics Agency Needs to
Expand on Efforts to More Effectively Manage Spare Parts," dated March
23, 2010 (GAO Code: 351316). The Department's detailed comments on the
report recommendations are enclosed.
The Department concurs with the eight recommendations in the draft
report. The Defense Logistics Agency has taken immediate steps to
improve its inventory management practices and is fully engaged in the
development of the Department's comprehensive plan on improving its
inventory management practices.
The Department appreciates the opportunity to comment on the draft
report.
Sincerely,
Signed by:
Alan F. Estevez:
Principal Deputy:
Enclosure: As stated:
[End of letter]
GAO Draft Report Dated March 23, 2010:
GA0-10-469 (GAO Code 351316):
"Defense Inventory: Defense Logistics Agency Needs To Expand On
Efforts To More Effectively Manage Spare Parts"
Department Of Defense Comments To The GAO Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the Director, Defense Logistics Agency, to establish an action
plan for completing the agency's evaluation of identified demand
planning issues, and include goals. objectives, resources, and time
frames in this action plan.
DOD Response: Concur. The Defense Logistics Agency will establish an
action plan for completing the agency's evaluation of its demand
planning process currently underway. The plan will include goals,
objectives, resources and time frames for actions and be completed
Fourth Quarter FY2010. Significant actions are already underway to
continuously evaluate and adjust demand input prior to incorporation
into the DLA demand plan. DLA has established management objectives
for Demand Plan Accuracy at the enterprise and demand chain level. The
objectives are based on a three-month timeframe, resulting in holding
DLA's demand planners to a very high standard of performance. Monthly
performance reviews are presented to DLA senior leaders.
It is important to note that over-forecasting in EBS does not always
equate to overbuying, as actions are taken monthly to mitigate Supply
Planning impacts of overestimated demand in order to optimize
obligation authority utilization. Because improving Demand Planning
remains a top priority for DLA, requiring a continuous focus on both
people and system settings, HQ DLA hosts a bi-monthly Demand Planning
Executive forum (attended by its field activity Deputy Commanders) to
ensure improvement actions on all aspects of Demand Planning (system-
generated statistical forecasts, Customer input, and Demand Planner
input) are aggressively identified. pursued, and tracked.
Recommendation 2: The GAO recommends that the Secretary of Defense
direct the Director, Defense Logistics Agency, to develop an approach
for working with suppliers to assess the root causes of inaccurate
production lead time estimate and implement corrective actions linked
to these root causes.
DOD Response: Concur. DLA has already identified several root causes
for inaccurate lead times, including suppliers not accurately
predicting lead time from subcontractors, suppliers including
"buffers" in their projected production time, and suppliers relying on
past lead times for current purchase requests. DLA challenges the lead
time quotes from vendors to ensure realistic Production Lead Time
(PLT), and looks at required delivery dates on all contracts. As part
of DLA's Supplier Relationship Management, PLT is one of the metrics
measured, captured, and reported on a monthly basis. DLA conducts
monthly reviews to identify suspected excessive PLTs and performs
monthly updates to adjust the PLTs, as appropriate. DLA will continue
its efforts to work with suppliers on improving estimates by utilizing
the Supplier Requirements Visibility Application (SRVA) tool to give
vendors access to forecast data that will allow sub-contractors to
predict accurate lead times.
DLA also identifies items that have not been bought for a significant
period of time that may have outdated lead times in the system, using
SRVA and other collaboration methods to identify these out-of-
production type items. On the supply planner side, DLA uses outlier
reports to identify one-time occurrences and ensure they do not impact •
system lead times.
DLA has been able to achieve a 20% reduction in PLT overestimates
since early 2009. These improvements are due to systemic changes in
updating lead times of record.
Recommendation 3: The GAO recommends that the Secretary of Defense
direct the Director, Defense Logistics Agency, to reinforce and
reinvigorate effective internal controls aimed at evaluating and
making adjustments to the Military Services' estimated additional
requirements, including both supply support requests and special
program requirements.
DOD Response: Concur. DLA will reinforce effective internal controls
on additional requirements. In fact, the DLA has already enhanced
internal controls for Special Program Requirements (SPRs). One example
of these enhancements is the recently-initiated SPR validation effort
with the Army to eliminate ongoing discrepancies/issues that were
partly associated with Army using multiple systems to submit SPRs to
DLA. A manual effort is underway to validate all Army SPRs as a
result. These controls have identified and eliminated over $200M in
Army SPR submissions. Additionally, DLA compares submitted SPRs with
historical accuracy rates (by item) prior to making investment
decisions.
DLA also makes forecast adjustments, based on intelligence received
from the Service program offices, during the monthly Sales &
Operations Planning (S&OP) process. S&OP provides an additional avenue
to query Services on forecasts that do not materialize in actual
demand, and DLA can use the responses to make trade-off decisions for
funding future procurement actions.
Recommendation 4: The GAO recommends that the Secretary of Defense
direct the Director. Defense Logistics Agency, to conduct a program
evaluation of the demand data exchange initiative to determine what,
if any, additional actions should be taken to (1) improve
communications and data exchange internally and with military
customers and suppliers and (2) expand the initiative across the
enterprise (for example, to other customers, items, and processes).
DOD Response: Concur. DLA has a program evaluation of its Demand Data
Exchange (DDE) initiative currently underway, with completion set for
February 2011. As part of its evaluation, DLA will review candidate
items for collaboration partnerships with additional customers and
suppliers. The evaluation will also look to continue improving
forecast accuracy with its current collaboration customers. Based on
feedback received from current DDE Service customers, DLA will roll
out modified DDE business rule logic for all collaboration customers.
The new business rules will be effective in May 2010.
Beginning in August 2010, DLA will host two Collaboration forums
annually, one for Service customers participating in Demand Data
Exchange (DDE) and one for suppliers. The intent of these forums is to
obtain feedback, improve communication, and expand the use of both DDE
and the Supplier Visibility Requirements Application (SRVA).
Recommendation 5: The GAO recommends that the Secretary of Defense
direct the Director, Defense Logistics Agency, to evaluate the
effectiveness of the agency's process for identifying and reducing
potential over-procurements and determine the feasibility of applying
the process on a wider scale.
DOD Response: Concur. DLA continues to make significant progress in
reducing its over-procurements. In 2009, its Aviation supply chain
initiated a Lean Six Sigma review of the entire over-procurement
process. The initial findings from that review have already been
adopted DLA-wide and have resulted in significant Purchase Request
(PR) cancellations. Additional outcomes of this review will include
evaluations of ways to improve/increase Purchase Order (PO)
cancellations. By October 2010, DLA will complete a review and
validation of items currently being excluded from the over-procurement
process. DLA will ensure that any items it continues to exclude from
the systemic over-procurement process will be subject to an off-line
over-procurement review processes that allows for cancellation of PRs
and POs exceeding requirements.
DLA has begun working to streamline the over-procurement process by
eliminating the currently-required manual review of open purchase
actions in a 100% over-procured position.
Recommendation 6: The GAO recommends that the Secretary of Defense
direct the Under Secretary of Defense for Acquisition, Technology and
Logistics, in conjunction with Director, Defense Logistics Agency, and
the Secretaries of the Army, the Navy, and the Air Force to formally
evaluate and report the feasibility of requiring up-front Military
Service funding for a portion of their supply support requests.
DOD Response: Concur. The office of USD(AT&L) will evaluate and report
the feasibility of requiring up-front funding of Supply Support
Requests (SSRs) in conjunction with the office of the USD(Comptroller)
and the Military Services.
Currently, DLA is pursuing a pilot effort with Navy/Marine Corps with
the H-1 Helicopter, wherein DLA and the Services share the burden of
investment risk. The concept of this initiative is to have Navy/Marine
Corps pay half of the total SSR investment cost a lead time away from
the recorded support date. DLA, in turn, will honor the total SSR
requirement and buy both retail and wholesale quantities.
Recommendation 7: The GAO recommends that the Secretary of Defense
direct the Under Secretary of Defense for Acquisition, Technology and
Logistics. in conjunction with Director, Defense Logistics Agency, and
the Secretaries of the Army, the Navy, and the Air Force to establish
goals and metrics for tracking and assessing the cost efficiency of
inventory management in accordance with DOD's policy requiring DLA and
the Services to minimize investment in secondary item inventory while
providing inventory needed; develop and implement an approach for
integrating these goals and metrics with inventory management
improvement efforts; and incorporate the goals and metrics into
existing management and oversight processes.
DOD Response: Concur. The Department is undertaking a complete review
of its inventory management practices, to include establishing goals
and metrics for tracking inventory management improvement initiatives
and cost efficiency. The office of USD(AT&L) is working closely with
the Military Services and DLA to develop and publish a data-driven and
actionable comprehensive inventory management improvement plan which
will include goals, objectives, metrics, targets and a governance
process for overseeing execution and refreshing the plan on a regular
basis. The target for publication of the plan is Fourth Quarter FY2010.
Recommendation 8: The GAO recommends that the Secretary of Defense
direct the Secretaries of the Army, the Navy, and the Air Force to
certify to DLA which items and what quantities of the contingency
reserve stock should be retained, in response to DLA's requests that
they do so, and direct the Under Secretary of Defense for Acquisition,
Technology and Logistics to provide guidance and oversight of this
certification process.
DOD Response: Concur. The Military Services and DLA are
collaboratively reviewing contingency retention inventory currently
and the USD(AT&L) will review the results of that review once
complete. The Department is also undertaking a complete review of its
inventory management practices, to include an independent review of
contingency retention methodologies. This review is part of the
comprehensive plan for improving inventory management practices due in
Fourth Quarter FY2010. This independent review will highlight any
changes in guidance necessary to improve the contingency retention
process.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Jack Edwards, (202) 512-8246 or edwardsj@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Thomas Gosling, Assistant
Director; Lionel Cooper; Qahira El'Amin; Foster Kerrison; Elke
Kolodinski; Steve Pruitt; and Minette Richardson made key
contributions to this report.
[End of section]
Related GAO Products:
Military Base Realignments and Closures: DOD Needs to Update Savings
Estimates and Continue to Address Challenges in Consolidating Supply-
Related Functions at Depot Maintenance Locations. [hyperlink,
http://www.gao.gov/products/GAO-09-703]. Washington, D.C.: July 9,
2009.
Defense Inventory: Army Needs to Evaluate Impact of Recent Actions to
Improve Demand Forecasts for Spare Parts. [hyperlink,
http://www.gao.gov/products/GAO-09-199]. Washington, D.C.: January 12,
2009.
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.: December
12, 2008.
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.: April 27,
2007.
Defense Inventory: Opportunities Exist to Improve the Management of
DOD's Acquisition Lead Times for Spare Parts. [hyperlink,
http://www.gao.gov/products/GAO-07-281]. Washington, D.C.: March 2,
2007.
[End of section]
Footnotes:
[1] DOD defines secondary inventory items to include reparable
components, subsystems, and assemblies other than major end items
(e.g., ships, aircraft, and helicopters), consumable repair parts,
bulk items and materiel, subsistence, and expendable end items (e.g.,
clothing and other personal gear).
[2] Pub. L. No. 111-84, § 328 (2009). Section 328(d) states that for
the purposes of section 328, the term "inventory that is excess to
requirements" means inventory that is excess to the approved
acquisition objective and is not needed for the purposes of economic
retention or contingency retention.
[3] Section C9.2.2.3.2. of DOD Regulation 4140.1-R, Supply Chain
Materiel Management Regulation (May 23, 2003) requires each service
and DLA to report secondary inventory data annually as of September
30, no later than February 1, and requires that report to have a
narrative that describes significant trends, changes from previous
reporting periods, and modifications to systems, procedures, or
operations impacting on the reported value of materiel. Secondary
inventory data are stratified by item, each of which is assigned a
unique stock number. DLA may have in its inventory multiple quantities
(parts) of each unique item.
[4] DOD Comptroller, National Defense Budget Estimates for FY 2009
(March 2008), p. 47.
[5] According to DOD Regulation 4140.1-R, § C2.6.3.2.3 (May 23, 2003),
authorized additive levels include nondemand-based requirements, such
as stock for wartime reserve and planned program requirements.
[6] DOD Regulation 4140.1-R, § AP1.1.4 (May 23, 2003).
[7] DOD Regulation 4140.1-R, § C2.5.1.1 and C2.5.1.6 (May 23, 2003).
[8] DOD Directive 4140.1, Supply Chain Materiel Management Policy
(April 2004), establishes policy and responsibilities for materiel
management. DOD Regulation 4140.1-R implements this directive.
[9] DLA, Transformation Roadmap, Fiscal Year 2006.
[10] GAO, Military Base Realignments and Closures: DOD Needs to Update
Savings Estimates and Continue to Address Challenges in Consolidating
Supply-Related Functions at Depot Maintenance Locations, [hyperlink,
http://www.gao.gov/products/GAO-09-703] (Washington, D.C.: July 9,
2009).
[11] The reorder point also typically includes a repair-cycle level
(for repairable items) and authorized additive levels (e.g., war
reserves), but DLA does not include those levels in its reorder point
calculus.
[12] A purchase request is a requisition for an item that has not yet
been placed on order. A purchase order refers to inventory that has
been purchased but not yet delivered to DLA's possession.
[13] Defense Logistics Agency Memorandum, Improving DLA Inventory
Management and Performance (July 25, 2008).
[14] DLA uses the term "potential excess" to describe materiel that
DOD Regulation 4140.1-R categorizes as "potential reutilization and/or
disposal materiel." Potential reutilization and/or disposal materiel
is defined as materiel identified by an item manager for possible
disposal, but with potential for reutilization.
[15] This analysis excluded acquisition lead time and economic order
quantity requirements.
[16] This analysis of on-order inventory included purchase orders but
not purchase requests.
[17] DOD Regulation 4140.1-R, § C2.5.1.1 and C2.5.1.6 (May 23, 2003).
[18] DLA determined that approximately 400,000 items of its 1.7
million items (24 percent) meet specific criteria and have sufficient
demand data to qualify for forecasting. According to DLA, about 20
percent (or 80,000) of the 400,000 items should receive greater
priority for management attention due to such factors as their dollar
value and the programs they support.
[19] GAO, Defense Inventory: Opportunities Exist to Improve the
Management of DOD's Acquisition Lead Times for Spare Parts,
[hyperlink, http://www.gao.gov/products/GAO-07-281] (Washington, D.C.:
Mar. 2, 2007).
[20] DOD Manual 4140.26, Defense Integrated Materiel Management Manual
for Consumable Items (May 23, 1997) prescribes the policy and
procedures for supply support requests.
[21] DLA did not have data readily available on amounts requisitioned
prior to fiscal year 2008.
[22] DODIG, Requirements Forecasts on Supply Support Requests, Report
No. 88-140 (Arlington, Va.: Apr. 27, 1988).
[23] DODIG, Follow-Up Audit of Requirements Forecasts on Supply
Support Requests, Report No. 93-175 (Arlington, Va.: Sept. 30, 1993).
[24] DOD Manual 4140.26-M, Chapter 4 (May 23, 1997).
[25] DODIG, Special Program Requirements for Logistic Support, No. 90-
087 (Arlington, Va.: June 27, 1990).
[26] DODIG, Logistics: Defense Logistics Agency Processing of Special
Program Requirements, D-2005-020 (Arlington, Va.: Nov. 14, 2004).
[27] DLA's Philadelphia supply center now administers this program
agencywide.
[28] The validation process is to begin 90 days before an item's
reorder point. The information system generates an e-mail validation
request to all submitting organizations for all special program
requests exceeding $10,000 in value. If no reply is received within 30
days, a follow-up e-mail is sent, and the submitting organization has
an additional 30 days to respond. If no response is received, a final
validation request is sent. If no response is received within 15 days
of the final request, DLA automatically cancels the special program
requirement.
[29] The data included one maritime item with both a purchase request
and a purchase order outstanding.
[30] DLA is concerned that reducing the threshold too much may result
in costs associated with placing and terminating contracts and the
activities associated with initiating a purchase, terminating the
purchase before completion, and then having to initiate a new purchase.
[31] Programs may be exempted for various reasons. DLA has exempted
items that are categorized as safety related or that support a special
program such as the Navy's nuclear reactor program. DLA has also
exempted items at depots where DLA is taking over the retail
management.
[32] In contrast, DLA defines active inventory as materiel in the
approved acquisition objective. DLA Memorandum, Improving DLA
Inventory Management and Performance (July 25, 2008).
[33] DOD Regulation 4140.1-R, § C2.8.1.1 (May 2003).
[34] DOD Regulation 4140.1-R, §§ C2.8.1.1, C2.8.1.1.2, and C2.8.1.2.6
(May 23, 2003).
[35] Pub. L. No. 111-84,§ 328 (2009). Additionally, the law directs
the Comptroller General to submit a report setting forth an assessment
of the extent to which the plan meets the requirements of section 328
to the congressional defense committees, not later than 60 days after
the plan's submission, and an assessment of the extent to which the
plan has been effectively implemented, not later than 18 months after
the plan's submission.
[36] Section 328(d) of Pub. L. No. 111-84 (2009) states that for the
purposes of that section, the term "inventory that is excess to
requirements" means inventory that is excess to the approved
acquisition objective and is not needed for the purposes of economic
retention or contingency retention.
[37] DOD Regulation 4140.1-R, §§ C9.1.2.1 and C9.1.2.3 (May 23, 2003).
[38] DOD Comptroller, National Defense Budget Estimates for FY 2009
(March 2008), p. 47.
[39] DOD Regulation 4140.1-R (May 23, 2003), AP1.1.126. DOD refers to
this inventory level as its "total requirements objective."
[40] 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.
[41] Contingency retention inventory exceeds economic retention
inventory and would normally be processed for disposal, but it is
retained for specific contingencies.
[42] Potential reutilization and/or disposal materiel exceeds
contingency retention requirements and has been identified for
possible disposal but with potential for reutilization.
[End of section]
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