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entitled 'Defense Inventory: Opportunities Exist to Save Billions by 
Reducing Air Force's Unneeded Spare Parts Inventory' which was released 
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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

April 2007: 

Defense Inventory: 

Opportunities Exist to Save Billions by Reducing Air Force's Unneeded 
Spare Parts Inventory: 

GAO-07-232: 

GAO Highlights: 

Highlights of GAO-07-232, a report to congressional committees 

Why GAO Did This Study: 

At a time when U.S. military forces and their equipment are in high 
demand, effective management of the Department of Defenseís (DOD) 
inventory is critical to ensure that the warfighter has the right items 
at the right time. The Air Force is the largest contributor to DODís 
total on-hand inventory on the basis of inventory value. Under the 
statutory authority of the Comptroller General to conduct evaluations 
on his own initiative, GAO determined the extent to which (1) the Air 
Forceís on-order and on-hand inventory reflect the amount of inventory 
needed to support required inventory levels from fiscal years 2002 
through 2005, and (2) the Air Force had shortages in its inventory 
needed to support required levels during this period. To address these 
objectives GAO analyzed Air Force secondary inventory data (spare parts 
such as engines and guided missiles) from fiscal years 2002 through 
2005. 

What GAO Found: 

More than half of the Air Forceís secondary inventory (spare parts), 
worth an average of $31.4 billion, was not needed to support required 
on-hand and on-order inventory levels from fiscal years 2002 through 
2005, although increased demand due to ongoing military operations 
contributed to slight reductions in the percentage of inventory on hand 
and the number of years of supply it represents. DOD regulations 
provide guidance for developing materiel requirements based on customer 
expectations while minimizing inventories. However, the value of Air 
Force on-order inventory not needed to support required inventory 
levels increased by about 7.8 percent, representing an average of 52 
percent ($1.3 billion) of its on-order inventory. The Air Force has 
continued to purchase unneeded on-order inventory because its policies 
do not provide incentives to reduce the amount of inventory on order 
that is not needed to support requirements. When the Air Force buys 
these items it may obligate funds unnecessarily, which could lead to 
not having sufficient obligation authority to purchase needed items and 
could negatively impact readiness. In addition, although the percentage 
of the Air Force on-hand inventory was reduced by 2.7 percent due to 
increases in demand, about 65 percent ($18.7 billion) of this inventory 
was not needed to support required inventory levels. GAO calculated 
that it costs the Air Force from $15 million to $30 million annually to 
store its unneeded items. Of the Air Forceís inventory items not needed 
to support required inventory levels, 79 percent had no recurring 
demands (such as engines and airframe components), resulting in a 
potentially infinite supply of those items. The Air Force has continued 
to retain this unneeded inventory with no recurring demands, in part, 
because the Air Force has not performed a comprehensive assessment to 
revalidate the need to continue to retain these items. For the 
remaining 21 percent of items that had recurring demands, increasing 
demands resulted in a reduction in the number of years of supply that 
this inventory represents, with the largest quantity and value of items 
having between 2 to 10 years of supply. Inventory not needed to support 
required inventory levels can be attributed to many long-standing 
problems, such as decreasing demands, retaining items used to support 
aging weapon systems that have diminishing sources of supply or are 
being phased out of service, and not terminating contracts for on-order 
items. Air Force officials acknowledged that decreases in demand have 
resulted in having more inventory than is needed; however, the Air 
Force has not evaluated why it continues to experience decreases in 
demand or taken actions to mitigate the effect of these changes. 
Without taking actions to reduce its unneeded inventory, the Air Force 
will continue its past practices of purchasing and retaining items it 
does not need and then spending additional resources to handle and 
store these items. 

Although more than half of its secondary inventory was not needed to 
support required levels, the Air Force still had shortages of certain 
items. From fiscal years 2002 through 2005, the percentage and value of 
the Air Forceís inventory shortages remained the same at about 8 
percent and $1.2 billion. 

What GAO Recommends: 

GAO recommends that the Air Force take four specific actions to 
strengthen the accountability and improve the management of its 
secondary inventory. DOD generally concurred with our recommendations. 
However, we do not believe DODís planned actions fully respond to two 
of the recommendations in our report. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-232]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact William M. Solis at (202) 
512-8365 or solisw@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

More than Half of the Air Force's Secondary Inventory Was Not Needed to 
Support Requirements, Although Demand for Some Items Increased: 

Air Force Inventory Shortages Remained the Same: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Top 10 Types of Air Force On-Order Inventory That Were Not 
Needed to Support Requirements: 

Appendix III: Top 10 Types of Air Force On-Hand Inventory That Were Not 
Needed to Support Requirements: 

Appendix IV: Comments from the Department of Defense: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Value of DOD's On-Hand Inventory and the Value and Percentage 
Represented by the Air Force: 

Table 2: Air Force On-Order Secondary Inventory Not Needed to Support 
Requirements from End of Fiscal Year 2002 through End of Fiscal Year 
2005: 

Table 3: Air Force On-Hand Secondary Inventory Not Needed to Support 
Requirements from the End of Fiscal Year 2002 through the End of Fiscal 
Year 2005: 

Table 4: Estimated Frequency of Reasons for Having On-Order and On-Hand 
Inventory Not Needed to Meet Requirements: 

Table 5: Air Force Inventory Shortages from Fiscal Year 2002 through 
Fiscal Year 2005: 

Table 6: Estimated Frequency of Reasons for Air Force Inventory 
Shortages: 

Table 7: Comparison of GAO Analysis and Air Force Stratification 
Results for On-Order Inventory in Fiscal Year 2005: 

Table 8: Comparison of GAO Analysis and Air Force Stratification 
Results for On-Hand Inventory in Fiscal Year 2005: 

Table 9: Sample Disposition for Fiscal Year 2005 Items Not Needed to 
Meet Requirements: 

Table 10: Sample Disposition of Fiscal Year 2005 Inventory Shortages: 

Table 11: Top 10 Types of Air Force On-Order Inventory Identified by 
Federal Supply Class That Were Not Needed to Support Requirements as of 
September 30, 2005: 

Table 12: Top 10 Types of Air Force On-Hand Inventory Identified by 
Federal Supply Class That Were Not Needed to Support Requirements as of 
September 30, 2005: 

Figure: 

Figure 1: Comparison of the Number of Items and Value of the Air 
Force's Inventory Not Needed to Support Requirements Stratified by 
Years of Supply for Fiscal Year 2002 and Fiscal Year 2005: 

Abbreviations: 

DLA: Defense Logistics Agency: 

DOD: Department of Defense: 

United States Government Accountability Office: 
Washington, DC 20548: 

April 27, 2007: 

Congressional Committees: 

Each of the military services and the Defense Logistics Agency (DLA) 
maintain a supply of secondary inventory[Footnote 1] of spare parts to 
keep military equipment operating for its missions. At a time when U.S. 
military forces and their equipment are in high demand, the 
effectiveness and efficiency of the Department of Defense's (DOD) 
inventory management is critical to ensure that the warfighter is 
supplied with the right items at the right time. Because the services 
and DLA face challenges in competing for available resources at a time 
when the nation faces an increasingly fiscally constrained environment, 
it is imperative that they have good stewardship over the billions of 
dollars invested in their inventory. 

Since 1990, we have identified the department's management of its 
secondary inventory as a high-risk area due to ineffective and 
inefficient inventory management systems and procedures and high levels 
of inventory not needed to support required inventory levels (hereafter 
referred to as requirements). These high levels of inventory include 
both on-hand and on-order inventory. Inventory that is in DOD's 
possession is considered to be on hand. Inventory that is not in DOD's 
possession but for which contracts have been awarded or funds have been 
committed is considered to be on order. DOD has reduced the overall 
value of its secondary inventory--from more than $100 billion in 1990 
to about $67 billion as of September 30, 2002. However, in recent years 
the trend has been reversed due to increases in the value and quantity 
and changes in the mix of items in DOD inventory, with inventory values 
increasing to about $80 billion as of September 30, 2005, which is a 19 
percent increase from September 30, 2002, to September 30, 
2005.[Footnote 2] Nevertheless, the department continues to attribute 
readiness problems in part to shortages of spare parts. 

We have previously reported on many long-standing and systemic problems 
in DOD's inventory management, which affect all of the military 
services and DLA.[Footnote 3] Given the significant resources invested 
in DOD's inventory and the long-standing problems in the management of 
DOD's spare parts, we reviewed the Air Force's secondary inventory 
because the Air Force is the largest contributor to DOD's total on-hand 
inventory on the basis of inventory value. The Air Force represents an 
average of about 39 percent ($28.9 billion) of the value of DOD's total 
on-hand inventory. In our previous reports, we identified the Air Force 
as having large amounts of inventory on order and on hand that was not 
needed to support its requirements. 

Because of the broad congressional interest in DOD's high-risk areas, 
we prepared this report under the Comptroller General's authority to 
conduct evaluations on his own initiative. We are providing it to you 
because of your oversight responsibilities for defense issues. Our 
objectives for this report were to determine the extent to which (1) 
the Air Force's on-order and on-hand secondary inventory reflects the 
amount of inventory needed to support requirements from fiscal years 
2002 through 2005, and (2) the Air Force had shortages in its inventory 
needed to support requirements from fiscal years 2002 through 2005. We 
plan to report on the management of the Army, Navy, and DLA secondary 
inventory separately. In addition, in March 2007, we reported that 
inaccurate forecasting of DOD's acquisition lead times for spare parts 
has led to early delivery of items, resulting in additional inventory 
on hand that is not needed to support requirements.[Footnote 4] 

To determine the extent to which the Air Force's on-order and on-hand 
secondary inventory reflects the amount of inventory needed to support 
requirements or was not enough to support requirements, we analyzed 
summary and item-specific inventory data from fiscal years 2002 through 
2005 to determine the total value of items that had more than or less 
than enough inventory to satisfy their respective requirements. To 
determine the reasons for having inventory not needed to support 
requirements or inventory shortages, we conducted a survey of some 
inventory items selected from the 18,676 unique Air Force items that 
met our selection criteria--10,810 unique items with inventory not 
needed to support requirements and 7,866 unique items with inventory 
shortages. We selected a probability sample of 335 unique Air Force 
inventory items--230 unique items with inventory not needed to support 
requirements and 105 unique items with inventory shortages. Because 
this was a random probability sample, the results of our analysis can 
be projected to all Air Force items that met our selection criteria. We 
sent surveys to Air Force item management specialists who had 
responsibility for the selected unique inventory items to identify the 
frequency of reasons for items not needed to support requirements or 
not meeting inventory requirements. We received survey responses for 
295 of the 335 unique items in our sample. 

On the basis of information obtained from the Air Force on the 
reliability of their inventory management systems' data, the survey 
results, and our follow-up analyses, we believe that the data used in 
this report are sufficiently reliable for our purposes. We conducted 
our review from January 2006 through February 2007 in accordance with 
generally accepted government auditing standards. Details of our scope 
and methodology are included in appendix I. 

Results in Brief: 

More than half of the Air Force's secondary inventory, worth an average 
of $31.4 billion, was not needed to support on-order and on-hand 
requirements from fiscal years 2002 through 2005, although increases in 
the demand for items due to ongoing military operations has contributed 
to a slight reduction in the percentage of this on-hand inventory and 
the number of years of supply the inventory represents. The Air Force's 
on-order inventory not needed to support its requirements increased by 
7.8 percent ($0.3 billion) over this 4-year period. DOD's regulations 
provide guidance for developing materiel requirements based on customer 
expectations while minimizing inventories. However, an average of 52 
percent ($1.3 billion) of the Air Force's secondary on-order inventory 
was not needed to support on-order requirements from the end of fiscal 
year 2002 through the end of fiscal year 2005. This $1.3 billion in 
unneeded on-order inventory indicates that the Air Force did not cancel 
orders or deobligate funds for items that were not needed to support 
requirements. The Air Force has continued to purchase this unneeded on- 
order inventory because its policies do not provide incentives (such as 
requiring contract termination review for all unneeded on-order 
inventory and reducing the amount of funds available for the Air Force 
Materiel Command to obligate for unneeded inventory items) to reduce 
the amount of inventory on order that is not needed to support 
requirements. In addition, as a result of increased demand associated 
with ongoing military operations, the percentage of the Air Force's on- 
hand inventory not needed to support requirements was reduced by 2.7 
percent from the end of fiscal year 2002 through the end of fiscal year 
2005, but the value of this inventory remained the same. Despite this 
slight reduction, about 65 percent ($18.7 billion) of the Air Force's 
secondary on-hand inventory was not needed. As a result, we calculated 
that it costs the Air Force $15 million annually to store useable items 
not needed to support on-hand requirements and up to an additional $15 
million annually for repairable broken items, depending on the location 
where these items are stored. Moreover, the $18.7 billion in unneeded 
on-hand inventory indicates that the Air Force may not have canceled 
orders for items that were not needed or may have tied up funds that 
could have been obligated for other needs. Of the Air Force's inventory 
items not needed to support requirements, 79 percent had no recurring 
demands at all, resulting in a potentially infinite supply of those 
items. The Air Force has continued to retain this unneeded inventory 
with no recurring demands, in part, because the Air Force has not 
performed a comprehensive assessment of its on-hand inventory items 
that are not needed to support requirements and that have no recurring 
demands to revalidate the need to continue to retain these items. For 
the remaining 21 percent of items that had recurring demands, we found 
that increasing demands resulted in a reduction in the number of years 
of supply that this inventory represents, with the largest quantity and 
value of items having between 2 to 10 years of supply. Based on our 
sample, we found that the Air Force's secondary inventory not needed to 
support on-order and on-hand requirements can be attributed to many of 
the long-standing and systemic inventory management problems that we 
have identified in our prior reports,[Footnote 5] such as decreasing 
demands or demands not materializing at all, retaining items used to 
support aging weapon systems that have diminishing sources of supply or 
are being phased out of service, retaining items that may be used to 
support new weapon systems, and not terminating eligible contracts for 
on-order items. For example, Air Force item management specialists 
indicated that decreasing demands or demands not materializing at all 
were the major factors for having inventory on order and on hand that 
was not needed to support current operations. Air Force officials 
acknowledged that they are aware that decreases in demands have 
resulted in having more inventory than is needed to support 
requirements; however, the Air Force has not evaluated why they 
continue to experience these decreases in demands or taken actions to 
mitigate the effect of these changes. Without taking actions to reduce 
the amount of inventory that is not needed to support requirements, the 
Air Force will continue its past practices of purchasing and retaining 
items that it does not need and then spending additional resources to 
handle and store these items. 

Although more than half of its secondary inventory was not needed to 
support requirements, the Air Force still had shortages of certain 
items in its inventory. We found that the percentage and value of the 
Air Force's inventory shortages from fiscal years 2002 through 2005 
remained the same, at about 8 percent and $1.2 billion of its inventory 
required. Some of the reasons reported by Air Force item management 
specialists for the inventory shortages were an increase in the demand 
for the items, plans to upgrade the systems the items support, plans to 
replace the items, and lost or delayed repair capability for the items. 

We are recommending that the Secretary of Defense direct the Secretary 
of the Air Force to (1) modify its policies to provide incentives to 
reduce purchases of on-order inventory that are not needed to support 
requirements, such as requiring contract termination review for all 
unneeded on-order inventory or reducing the funding available for the 
Air Force Materiel Command by an amount up to the value of the Air 
Force's on-order inventory that is not needed to support requirements; 
(2) conduct a comprehensive assessment of the inventory items on hand 
that are not needed to support requirements and that have no recurring 
demands and revalidate the need to continue to retain these items; (3) 
evaluate why it continually experiences decreases in demands that 
result in having more than half of its inventory on hand than is needed 
to satisfy its requirements, and (4) determine what actions are needed 
and then take steps to address these changes in demand. 

In written comments on a draft of this report, DOD generally concurred 
with our recommendations. DOD cited specific actions it plans to take 
to implement the four recommendations and specified implementation 
timelines for each recommendation. In response to two recommendations, 
DOD's planned actions did not fully respond to our recommendations. For 
example, DOD partially concurred with our recommendation to modify its 
policies to provide incentives to reduce purchases of on-order 
inventory that are not needed to support requirements. DOD said that 
the Air Force plans to address this issue by enforcing existing policy 
and by placing an increased focus on excess on-order measures. DOD did 
not agree that a change or modification to the Air Force's policy was 
required to accomplish this task, as we recommended. In June 2006, the 
Air Force revised its contraction termination policy to require review 
of fewer on-order inventory items for potential contract termination. 
We believe that this new policy will exacerbate the problem of having 
more inventory than is needed to support current requirements. Thus, we 
continue to believe that the Air Force needs to modify its current 
policy to provide incentives to reduce purchases of on-order inventory. 
Additionally, DOD concurred with our second recommendation to conduct a 
comprehensive assessment of unneeded on-hand inventory. DOD stated that 
the Air Force will review its current stockage retention policy and 
take actions necessary to reduce the inventory as required. DOD also 
stated that the Air Force will conduct annual reviews of all inventory 
items as is directed by DOD's Supply Chain Management policy. While we 
believe that DOD's planned actions are a step in the right direction, 
added scrutiny should be applied to the Air Force's review of its 
stockage retention policy to ensure that it is not retaining assets 
that are not needed to support current and future operational needs. 
Furthermore, unless and until the Air Force makes appropriate 
adjustments to its inventory retention levels, there are no assurances 
that significant improvements will be made to reduce the Air Force's on-
hand inventory not needed to support requirements. Finally, DOD did not 
address the portion of this recommendation directing the Air Force to 
consider establishing requirements for items that support weapon 
systems that have lengthy projected life spans. DOD's comments and our 
evaluation of them are discussed in the "Agency Comments and Our 
Evaluation" section of this report. 

Background: 

Inventory management and oversight for the Air Force is a shared 
responsibility between the Offices of the Secretary of Defense and the 
Secretary of the Air Force. The Under Secretary of Defense for 
Acquisition, Technology, and Logistics is responsible for developing 
and ensuring the uniform implementation of DOD inventory management 
policies throughout the department, monitoring the overall 
effectiveness and efficiency of the DOD logistics system, and 
continually developing improvements. The Secretary of the Air Force is 
responsible for implementing DOD inventory policies and procedures. The 
Air Force Materiel Command has issued a manual to its air logistics 
centers--Ogden Air Logistics Center, Oklahoma City Air Logistics 
Center, and Warner Robins Air Logistics Center--that prescribes 
guidance and procedural instructions for computing requirements for its 
secondary inventory. 

To assist in the management of its inventory, DOD summarizes its 
secondary inventory in its annual Supply System Inventory Report. This 
report is based on financial inventory and other inventory reports 
prepared by the military services and DLA. The report summarizes 
inventories by DOD component and inventory category. Over the past 4 
years, DOD has reported a continuous increase in the value of its 
secondary item inventory in its Supply System Inventory Report. As of 
September 30, 2002, DOD reported that its secondary inventory was 
valued at about $67.0 billion; however, as of September 30, 2005, the 
value of this inventory had increased to about $79.6 billion--a $12.6 
billion increase between 2002 and 2005. Table 1 shows the value of 
DOD's on-hand inventory from fiscal year 2002 through fiscal year 2005 
and the value and percentage of the inventory held by the Air Force. 

Table 1: Value of DOD's On-Hand Inventory and the Value and Percentage 
Represented by the Air Force: 

Dollars in billions. 

Fiscal year: 2005; 
Reported value of DOD's on-hand inventory: $79.6; 
Value of Air Force's on-hand inventory: $29.4; 
Percent of DOD's on-hand inventory held by the Air Force: 36.9%. 

Fiscal year: 2004; 
Reported value of DOD's on-hand inventory: 78.1; 
Value of Air Force's on-hand inventory: 30.2; 
Percent of DOD's on-hand inventory held by the Air Force: 38.7. 

Fiscal year: 2003; 
Reported value of DOD's on-hand inventory: 70.6; 
Value of Air Force's on-hand inventory: 27.9; 
Percent of DOD's on-hand inventory held by the Air Force: 39.5. 

Fiscal year: 2002; 
Reported value of DOD's on-hand inventory: 67.0; 
Value of Air Force's on-hand inventory: 28.2; 
Percent of DOD's on-hand inventory held by the Air Force: 42.1. 

Source: GAO analysis of DOD data. 

[End of table] 

From fiscal year 2002 through fiscal year 2005, the Air Force's total 
on-hand inventory increased by $1.2 billion, representing about 10 
percent of the total $12.6 billion increase in DOD inventory during 
this period. This increase was primarily due to the addition of new 
items to the Air Force's inventory in fiscal year 2005. Specifically, 
from September 30, 2002, through September 30, 2005, the Air Force 
added 2,331 new unique items with a total of about 179,425 individual 
parts that were valued at approximately $1.3 billion.[Footnote 6] Our 
analysis shows that increases in the Air Force's inventory were also 
caused by changes in the value and quantity of the unique items in the 
inventory. We found that changes in the price of items in the Air 
Force's secondary inventory resulted in a $0.8 billion increase in the 
value of its inventory in fiscal year 2005. Similarly, changes in the 
quantity of secondary inventory unique items that were on hand in 
fiscal year 2002 were the reason for a $0.7 billion increase in the 
value of DOD's secondary inventory in fiscal year 2005. These price 
increases were offset by a decrease of $1.6 billion in the value of the 
Air Force's inventory for items that were included in fiscal year 2002 
but were not included in the inventory for fiscal year 2005. 

The Air Force uses a process called requirements determination to 
calculate the amount of inventory that is needed to be held in storage 
(on hand) and that should be purchased (on order). This information is 
used to develop the Air Force's budget stratification report. The 
stratification report shows the amount of inventory needed to meet 
operating requirements. When the total of on-hand and on-order 
inventory falls to or below a certain level--called the reorder point-
-inventory managers place orders for additional inventory to prevent 
out-of-stock situations from occurring. The Air Force refers to its 
inventory managers as item management specialists. Generally, item 
management specialists order the amount of inventory needed to satisfy 
the reorder point requirement. Depending on the item, the reorder point 
may include requirements for one or more of the following: 

* war reserves that are authorized to be purchased, 

* customer-requisitioned materiel that has not been shipped (also known 
as stock due-outs), 

* a safety level to be on hand in case of minor interruptions in the 
resupply process or unpredictable fluctuations in demand, 

* minimum quantities for essential items for which demand is not 
normally predicted (also referred to as numeric stockage objective or 
insurance items), 

* inventory to satisfy demands while broken items are being repaired 
(also referred to as repair cycle stock), 

* inventory to satisfy demands during the period between when the need 
to replenish an item through a purchase is identified and when a 
contract is awarded (also referred to as administrative lead time), 
and: 

* inventory to satisfy demands during the period between when a 
contract for inventory is awarded and when the inventory is received 
(also referred to as production lead time). 

We define the Air Force's current year's operating requirements as 
requirements for war reserves, stock due-outs (backorders), safety 
levels, numeric stockage objective (a form of safety stock), and repair 
cycle. Hereafter, these requirements will be referred to as on-hand 
requirements. On-hand inventory is used to satisfy these on-hand 
requirements. On-order inventory is the amount of inventory for which 
contracts have been awarded or funds have been committed by the Air 
Force to satisfy any shortfall to its on-hand requirements and its 
administrative and production lead time requirements. Hereafter, these 
requirements will be referred to as on-order requirements. When there 
is not enough inventory to meet on-hand and on-order requirements, this 
is defined as an inventory shortage. 

More than Half of the Air Force's Secondary Inventory Was Not Needed to 
Support Requirements, Although Demand for Some Items Increased: 

More than half of the Air Force's on-order and on-hand secondary 
inventory, worth an average of $31.4 billion, was not needed to support 
its requirements from fiscal years 2002 through 2005, although 
increases in demand have contributed to a slight reduction in the 
percentage of this on-hand inventory and a reduction in the number of 
years of supply this inventory represents. Our analysis shows that the 
value and the percentage of the Air Force's inventory not needed to 
support its on-order requirements increased by about $0.3 billion and 
7.8 percent, respectively, representing an average of 52 percent of its 
on-order inventory. Additionally, we found that the percentage of the 
Air Force's inventory not needed to support its on-hand requirements 
was reduced by 2.7 percent, due, in part, to increases in the demand 
for the items. However, this inventory represents an average of about 
65 percent (about $18.7 billion) of the value of unneeded on-hand 
inventory. While increasing demands have resulted in the Air Force 
reducing the number of years of supply this inventory represents, 79 
percent of the Air Force's inventory items not needed to support 
requirements had no recurring demands at all, resulting in a 
potentially infinite supply of those items. We found that the Air 
Force's secondary inventory not needed to support on-order and on-hand 
requirements can be attributed to many of the long-standing and 
systemic inventory management problems that we have identified in our 
prior reports in 1997 and 2000,[Footnote 7] such as decreasing demands 
or demands not materializing at all, retaining items used to support 
aging weapon systems that have diminishing sources of supply or are 
being phased out of service, retaining items that may be used to 
support new weapon systems, and not terminating eligible contracts for 
on-order items. 

Air Force On-Order Inventory Not Needed to Support Requirements Has 
Increased: 

Based on our analyses, we found that the Air Force experienced an 
increase in the amount and percentage of on-order inventory not needed 
to support its on-order requirements from the end of fiscal year 2002 
through the end of fiscal year 2005. The value and percentage of the 
Air Force's unneeded on-order inventory increased by about $0.3 billion 
and 7.8 percent, respectively. Although DOD's supply chain management 
regulation[Footnote 8] provides guidance for developing materiel 
requirements based on customer expectations while minimizing 
inventories, over the 4-year period an average of 52 percent ($1.3 
billion) of the Air Force's on-order inventory was not needed. Examples 
of unneeded on-order inventory include jet engines, landing gear 
components, electrical and communication equipment, guided missile 
components, aircraft hydraulic and de-icing system components, and 
other aircraft components. This $1.3 billion in on-order inventory not 
needed to support requirements indicates that the Air Force did not 
cancel orders or deobligate funds for items that were not needed to 
support requirements. Furthermore, based on the Air Force's fiscal year 
2005 stratification report, the Air Force marked for disposal 
approximately $300 million of its on-order inventory that is not needed 
to support requirements. This means that as soon as these on-order 
items are delivered, they could be disposed of. Table 2 shows the 
amount of unneeded inventory the Air Force had on order at the end of 
fiscal year 2002 through the end of fiscal year 2005. 

Table 2: Air Force On-Order Secondary Inventory Not Needed to Support 
Requirements from End of Fiscal Year 2002 through End of Fiscal Year 
2005: 

Dollars in billions. 

Fiscal year: 2005; 
Total value of on-order inventory: $2.3; 
Inventory not needed to support requirements: Number of items: 788,515; 
Inventory not needed to support requirements: Value: $1.1; 
Inventory not needed to support requirements: Percent of on-order 
inventory: 47.8%. 

Fiscal year: 2004; 
Total value of on-order inventory: 3.0; 
Inventory not needed to support requirements: Number of items: 
1,249,204; 
Inventory not needed to support requirements: Value: 1.8; 
Inventory not needed to support requirements: Percent of on-order 
inventory: 60.0. 

Fiscal year: 2003; Total value of on-order inventory: 2.7; 
Inventory not needed to support requirements: Number of items: 743,504; 
Inventory not needed to support requirements: Value: 1.5; 
Inventory not needed to support requirements: Percent of on-order 
inventory: 55.6. 

Fiscal year: 2002; 
Total value of on-order inventory: 2.0; 
Inventory not needed to support requirements: Number of items: 792,419; 
Inventory not needed to support requirements: Value: 0.8; 
Inventory not needed to support requirements: Percent of on-order 
inventory: 40.0. 

Source: GAO analysis of Air Force data. 

[End of table] 

At the end of fiscal year 2005, the Air Force had 2,157 unique items 
(with a quantity of 788,515 individual parts) valued at $1.1 billion 
with inventory on order that was not needed to support requirements. Of 
these 2,157 items, there were 1,192 unique items (with a quantity of 
723,147 individual parts) that had unneeded inventory both on order and 
on hand. These items represented approximately 74 percent, or about 
$0.8 billion of the total $1.1 billion of Air Force's on-order items 
that were not needed to support requirements. Appendix II contains a 
list of the top 10 types of items, identified by the federal supply 
class, with the highest value of unneeded items on order as of 
September 30, 2005. 

The Air Force has not been effective in reducing the amount of its 
unneeded inventory on order, with an average of $1.3 billion of its on- 
order inventory over the past 4 years not being needed to support 
requirements. The Air Force has continued to purchase this unneeded on- 
order inventory because its policies do not provide incentives to 
reduce the amount of inventory on order that is not needed to support 
requirements. Instead, the Air Force has revised its policies to make 
it easier to purchase inventory that is not needed to support 
requirements. For example, in June 2006 the Air Force Materiel Command 
announced a change in its policy for reviewing contract termination 
actions valued at $1 million or less to require each air logistics 
center to review at least 80 percent of the center's total computed 
termination value, with priority given to those terminations with the 
highest dollar value.[Footnote 9] Under its prior policy, all such 
orders were required to be reviewed for potential contract termination. 
We did not evaluate this new policy to determine the overall impact 
that it would have on purchasing items not needed to support 
requirements because this policy was not in effect during our review 
period, but it appears that this new policy will exacerbate the 
problem. Until the Air Force policy provides incentives, such as 
requiring contract termination review for all unneeded on-order 
inventory or reducing the amount of funds available for the Air Force 
Materiel Command by an amount up to the value of the Air Force's on- 
order inventory that is not needed to support requirements, the Air 
Force is likely to continue to experience its long-standing problems 
with having on-order inventory that is not needed to support 
requirements. In our discussions with Air Force Materiel Command 
officials, they disagreed with our assertion that they do not have 
incentives to assist them in reducing the amount of on-order inventory 
that is not needed to support requirements. According to an Air Force 
Materiel Management Command official, the Air Force has a plan to 
create a new data system to improve the process for identifying on- 
order inventory that should be terminated. However, this official 
stated that there is not yet a designated amount of funding in place to 
finance the initiative; thus it is unclear when this plan would be 
implemented. 

With Higher Demands, Still More than Half of the Air Force's On-Hand 
Inventory Was Not Needed to Support Requirements: 

Although higher demands helped the Air Force slightly reduce the 
percentage of its on-hand inventory not needed to support requirements 
during fiscal year 2002 through fiscal year 2005, more than half of its 
on-hand inventory was unneeded. Our analysis shows that between 
September 30, 2002, and September 30, 2005, the percentage of the Air 
Force's unneeded on-hand inventory was reduced by 2.7 percent, due, in 
part, to increases in the demand for the items, although the value of 
this unneeded inventory remained the same. Despite this reduction, an 
average of about 65 percent ($18.7 billion) of the value of the Air 
Force's on-hand inventory was not needed to support requirements. 
Examples of unneeded on-hand inventory include jet engines, electrical 
and communication equipment, radar equipment, guided missile components 
and subsystems, aircraft gun fire control components, and other 
aircraft components. Table 3 shows the amount of unneeded inventory the 
Air Force had on hand from the end of fiscal year 2002 through the end 
of fiscal year 2005. 

Table 3: Air Force On-Hand Secondary Inventory Not Needed to Support 
Requirements from the End of Fiscal Year 2002 through the End of Fiscal 
Year 2005: 

Dollars in billions. 

Fiscal year: 2005; 
Total value of on-hand inventory: $29.4; 
Inventory not needed to support requirements: Number of items: 
5,776,442; 
Inventory not needed to support requirements: Value: $18.7; 
Inventory not needed to support requirements: Percent of on-hand 
inventory: 63.6%. 

Fiscal year: 2004; 
Total value of on-hand inventory: 30.2; 
Inventory not needed to support requirements: Number of items: 
6,323,311; 
Inventory not needed to support requirements: Value: 19.4; 
Inventory not needed to support requirements: Percent of on-hand 
inventory: 64.2. 

Fiscal year: 2003; 
Total value of on-hand inventory: 27.9; 
Inventory not needed to support requirements: Number of items: 
6,761,671; 
Inventory not needed to support requirements: Value: 17.9; 
Inventory not needed to support requirements: Percent of on-hand 
inventory: 64.2. 

Fiscal year: 2002; 
Total value of on-hand inventory: 28.2; 
Inventory not needed to support requirements: Number of items: 
7,511,932; 
Inventory not needed to support requirements: Value: 18.7; 
Inventory not needed to support requirements: Percent of on-hand 
inventory: 66.3. 

Source: GAO analysis of Air Force data. 

[End of table] 

At the end of fiscal year 2005, the Air Force had 87,480 unique items 
(with a quantity of 5,776,442 individual parts) valued at $18.7 billion 
with inventory on hand that was not needed to support requirements. Of 
these 87,480 items, there were 1,192 unique items (with a quantity of 
775,791 individual parts) that had unneeded inventory both on order and 
on hand. These items represented approximately 4 percent, or about $0.8 
billion of the total $18.7 billion of Air Force's on-hand items that 
were not needed to support requirements. Appendix III contains a list 
of the top 10 types of items, identified by the federal supply class, 
with the highest value of unneeded items as of September 30, 2005. 

Having on-hand inventory that is not needed to support requirements 
increases overall storage costs for the Air Force. According to Air 
Force officials, the cost to store this inventory is small compared to 
the cost to dispose of and then later repurchase these items if they 
are needed. However, we calculated as of September 30, 2005, that it 
cost the Air Force at least $15 million annually to store its useable 
inventory not needed to support on-hand requirements. In addition, 
depending on the location where repairable broken items are stored, it 
could cost up to an additional $15 million to store unneeded inventory 
items that have not been repaired.[Footnote 10] If the Air Force did 
not have this unneeded inventory, it might be in a better position to 
reduce its warehousing infrastructure and associated costs. Moreover, 
the $18.7 billion in on-hand inventory not needed to support 
requirements indicates that the Air Force may not have canceled orders 
for items that were not needed or may have tied up funds that could 
have been obligated for other needed items. 

Much of the Air Force Inventory Not Needed to Support Requirements Had 
No Demands, Although Demands for Some Items Increased: 

Of the Air Force's on-order and on-hand inventory not needed to support 
requirements, 79 percent had no recurring demands at all, resulting in 
a potentially infinite supply of those items. Examples of unneeded 
inventory with no recurring demands include jet engines, electrical 
hardware, guided missiles, fusing and firing devices, and airframe and 
other aircraft components. The Air Force has continued to retain this 
unneeded inventory with no recurring demands, in part, because the Air 
Force has not performed a comprehensive assessment of its on-hand 
inventory items that are not needed to support requirements and that 
have no recurring demands and revalidated the need to continue to 
retain these items. In our discussions with Air Force Materiel Command 
officials, they disagreed with our assertion that they should conduct a 
comprehensive assessment to determine whether to retain this unneeded 
inventory. According to an Air Force Materiel Command official, the Air 
Force's quarterly requirements computation process is a valid 
assessment for determining the amount of inventory needed to satisfy 
its requirements. However, this process does not provide a 
comprehensive assessment on whether to retain inventory items not 
needed to satisfy requirements. Instead, the requirements computation 
process determines the amount of inventory needed to be on hand and on 
order to satisfy current and future requirements and identifies the 
amount of inventory that is above those requirements. An Air Force 
Materiel Command official also stated that the Air Force provides item 
management specialists with the necessary guidance for retaining assets 
that are not needed to support requirements and it conducts an annual 
assessment of the inventory items that are being retained. The official 
commented that although these assets may show no current demands, there 
may be future demands for the items, thus the Air Force retains them 
for possible future use. However, given that we found that 79 percent 
of the Air Force's on-order and on-hand inventory not needed to satisfy 
its current requirements are items that have no recurring demands, 
resulting in a potentially infinite supply of those items, we continue 
to believe that a comprehensive assessment is needed to determine which 
and how many of these items should be retained. 

For the 21 percent of Air Force inventory not needed to support 
requirements that had projected recurring demands, we found that the 
demand for these items slightly increased, thereby improving the 
likelihood that these items will be used. For example, in fiscal year 
2005, 82 percent of the unneeded items with projected recurring demands 
were projected to be used within a period of 10 years or less; whereas 
in fiscal year 2002, only 79 percent of the items were projected to be 
used. Figure 1 shows a comparison of the number of Air Force unneeded 
on-hand and on-order inventory items stratified by years of supply for 
fiscal years 2002 and 2005. 

Figure 1: Comparison of the Number of Items and Value of the Air 
Force's Inventory Not Needed to Support Requirements Stratified by 
Years of Supply for Fiscal Year 2002 and Fiscal Year 2005: 

[See PDF for image] 

Source: GAO analysis of Air Force data. 

[End of figure] 

On the basis of number of items and value, in fiscal year 2002 and 
fiscal year 2005 the largest category of Air Force secondary inventory 
not needed to support requirements was "2 to 10 years of supply." At 
the end of fiscal year 2005, there were 6,361 unique items valued at 
about $4.2 billion within this category. The value of the items was 
largest of all of the years-of-supply categories, representing about 32 
percent of the total value of the supply years stratified. We also 
found that the amount of inventory in the most current years of supply 
improved from 2002 to 2005. In fiscal year 2005, about 31 percent of 
the items with projected recurring demands had an anticipated supply of 
less than 1 year. This is about a 4 percent increase from the 
percentage for fiscal year 2002, which was about 27 percent. 

Reasons Vary for Air Force Maintaining On-Order and On-Hand Inventory 
Not Needed to Support Requirements: 

Responses from Air Force item management specialists and our analysis 
of the Air Force's inventory data identified a variety of reasons for 
maintaining on-order and on-hand inventory not needed to support 
current requirements, such as decreasing demands, retaining items used 
to support aging weapon systems that have diminishing sources of supply 
or are being phased out of service, retaining items to support new 
weapon systems, and not terminating eligible contracts for on-order 
items not needed to support requirements. 

We conducted a survey of selected Air Force inventory items, which 
identified a variety of reasons for having items not needed to support 
their inventory requirements. Table 4 summarizes the estimated 
frequency of reasons for having unneeded on-order and on-hand inventory 
as reported in our survey results. Based on our sample, decreases in 
demands and changes in implementation schedules for inventory 
replacement were the most frequent reasons specifically cited for on- 
order inventory not needed to support requirements. Decreases in demand 
and weapon systems being phased out were the most frequent reasons 
identified for unneeded on-hand inventory. Specific examples and more 
detailed discussion of some of these reasons appear in the subsections 
that follow. For more details on our item selection and survey 
methodology, refer to appendix I. 

Table 4: Estimated Frequency of Reasons for Having On-Order and On-Hand 
Inventory Not Needed to Meet Requirements: 

Reason: Demand decreased, fluctuated, or did not materialize; 
On order: Sample item count: 32; 
On order: Percentage estimate of items in population[A]: 29%; 
On hand: Sample item count: 47; 
On hand: Percentage estimate of items in population[A]: 37%. 

Reason: Nonrecurring (additive) demand did not materialize; 
On order: Sample item count: 8; 
On order: Percentage estimate of items in population[A]: 8; 
On hand: Sample item count: 4; 
On hand: Percentage estimate of items in population[A]: 2. 

Reason: Higher assembly (component parts)/weapons system was phased out 
or reduced; 
On order: Sample item count: 2; 
On order: Percentage estimate of items in population[A]: 1; 
On hand: Sample item count: 17; 
On hand: Percentage estimate of items in population[A]: 18. 

Reason: Change in the implementation schedules for some Air Force 
inventory reduction/ replacement programs; 
On order: Sample item count: 16; 
On order: Percentage estimate of items in population[A]: 14; 
On hand: Sample item count: 14; 
On hand: Percentage estimate of items in population[A]: 2. 

Reason: Item was replaced; 
On order: Sample item count: 5; 
On order: Percentage estimate of items in population[A]: 4; 
On hand: Sample item count: 10; 
On hand: Percentage estimate of items in population[A]: 7. 

Reason: Item became obsolete; 
On order: Sample item count: 1; 
On order: Percentage estimate of items in population[A]: 1; 
On hand: Sample item count: 10; 
On hand: Percentage estimate of items in population[A]: 10. 

Reason: Items scheduled for transfer to DLA or a contractor facility; 
On order: Sample item count: 7; 
On order: Percentage estimate of items in population[A]: 7; 
On hand: Sample item count: 1; 
On hand: Percentage estimate of items in population[A]: <1. 

Reason: Minimum purchase quantity or minimum purchase value; 
On order: Sample item count: 4; 
On order: Percentage estimate of items in population[A]: 3; 
On hand: Sample item count: 2; 
On hand: Percentage estimate of items in population[A]: 2. 

Reason: Data errors; 
On order: Sample item count: 6; 
On order: Percentage estimate of items in population[A]: 5; 
On hand: Sample item count: 6; 
On hand: Percentage estimate of items in population[A]: 2. 

Reason: No reported excess; 
On order: Sample item count: 12; 
On order: Percentage estimate of items in population[A]: 10; 
On hand: Sample item count: 14; 
On hand: Percentage estimate of items in population[A]: 10. 

Reason: Other (reclamation gains, previously unreported assets, change 
in condemnation rates, insurance items, initial provisioning, etc.); 
On order: Sample item count: 25; 
On order: Percentage estimate of items in population[A]: 22; 
On hand: Sample item count: 26; 
On hand: Percentage estimate of items in population[A]: 18. 

Reason: No response given; 
On order: Sample item count: 10; 
On order: Percentage estimate of items in population[A]: 8; 
On hand: Sample item count: 12; 
On hand: Percentage estimate of items in population[A]: 9. 

Source: Results of GAO survey for Air Force on-order and on-hand 
inventory in our sample. 

Notes: Percentage estimates are based on a limited sample size and have 
a margin of error of at most plus or minus 10 percent at the 95 percent 
confidence level. Reasons are not mutually exclusive; therefore, 
percentages do not total to 100. 

[A] These estimates are based on a stratified sample and while item 
counts may be the same, percentage estimates may vary due to weighting. 

[End of table] 

Many of these reasons are long-standing and systemic inventory 
management problems that we have identified in our prior reports. Since 
early 1990, when we began reporting on this issue, decreases in demand, 
obsolescence, and data input errors were some of the reasons given for 
DOD's excess inventory. Additionally, on the basis of our March 2007 
report reviewing DOD's administrative and production lead time 
requirements, we found that inaccurate forecasting of these 
requirements led to early delivery of items valued at approximately $2 
billion--of which the Air Force represented $0.3 billion--resulting in 
having additional inventory on hand that was not needed to support 
requirements.[Footnote 11] 

Demand Decreasing or Not Materializing: 

Based on our survey, we estimate that demand decreasing or not 
materializing at all account for 29 percent of items with on-order 
inventory not needed to support requirements and 37 percent of items 
that had on-hand inventory not needed to support requirements. We 
estimate that decreases in demand were a factor in at least $0.97 
billion of the unneeded on-hand Air Force inventory. Moreover, since 
1997, DOD's data have shown that demand decreasing or not materializing 
at all were the primary reasons for having on-order and on-hand 
inventory not needed to support requirements. Demand includes both 
recurring and nonrecurring demands. A one-time event, such as the 
initial upgrading of selected parts of a weapon system, is considered 
to be a nonrecurring demand. In our 1997 report, a decrease in demand 
or demand not materializing was also the primary reason for DOD having 
unneeded on-order and on-hand inventory, representing 24 percent and 11 
percent, respectively, for the items sampled. Similarly, in 2000, we 
reported that while DOD inventory managers made inventory purchases 
that were supported by requirements at the time they were contracted, 
subsequent requirement decreases resulted in the purchases being in 
excess of requirements.[Footnote 12] During our analysis, Air Force 
officials acknowledged that they are aware that decreases in demand 
have resulted in having more inventory than is needed to support 
requirements; however, the Air Force has not evaluated why it continues 
to experience these decreases in demand or taken actions to mitigate 
the effect of these changes. Until the Air Force evaluates why it 
continues to have long-standing changes in demand, it will continue to 
have on-order and on-hand inventory that is not needed to support 
requirements, which may result in unnecessary increased storage costs 
and obligation of funds earlier than necessary. In addition, until the 
Air Force evaluates these decreases in demand, it will be unable to 
effectively take necessary management actions to reduce unneeded on- 
hand and on-order inventory. 

Items Used to Support Aging Weapon System That Have Diminishing Sources 
of Supply or Are Being Phased Out of Service: 

Many of the Air Force's inventory items not needed to satisfy 
requirements are items used to support aging weapon systems that have 
diminishing sources of supply or are being phased out of service. Based 
on our sample, we estimate that 18 percent of unneeded on-hand 
inventory items are in this category. According to Air Force policy, 
items not needed to satisfy requirements may be retained by inventory 
management specialists if the items supporting older weapon systems can 
no longer be procured.[Footnote 13] Additionally, DOD's Supply Chain 
Materiel Management Regulation states that the Air Force is required to 
review and validate, at least once annually, the methodology used in 
deciding to retain these items. In responding to our surveys, many item 
management specialists cited various Air Force memoranda that contain 
the justification for retaining items that support aging weapon 
systems, such as the B-52[Footnote 14] and the A/OA-10.[Footnote 15] 
For example, according to the retention memo for B-52 assets, the 
rationale for taking a conservative approach when disposing of excess 
inventory items is to counter routine difficulties in obtaining assets 
needed to meet requirements due to diminishing manufacturing sources 
and the increasing cost of reprocuring these items should demand arise 
after disposal of on-hand assets occurs. The projected life of the B-52 
is expected to last until the year 2040. According to an Air Force 
memorandum, unless an item or system supporting the B-52 is replaced, 
most of these inventory items will be required at some point during the 
weapon system's projected life. Similar reasons were given for 
retaining the A-10 assets. However, item management officials for the A-
10 have requested that all assets supporting this weapon system--many 
of which currently have little or no usage--be retained for the 
projected life of the weapon system, which is the year 2028. Based on 
our sample, we estimate that there is at least $24 million worth of 
inventory on hand that supports the A-10 and the B-52 weapons systems. 
Although the actual usage rates may be small, given the length of time 
these systems will continue to be in service, without establishing some 
baseline requirements for the items supporting these systems, the Air 
Force will continue to have large quantities of inventory on hand that 
appear not to be needed to support requirements, even though the Air 
Force projects that these items may be needed in the future to support 
these weapon systems. 

Potential Support of New Weapon Systems by Current Items: 

The Air Force is retaining some inventory items because they 
potentially may be used to support new weapon systems. In June 2005, 
the Air Force Materiel Management Division directed that all parts for 
the F-16[Footnote 16] aircraft weapon system be retained for a period 
of at least 1 year until the Air Combat Command completes an analysis 
of alternatives on the next generation replacement for the QF-4 
aircraft weapon system.[Footnote 17] In July 2006, this retention 
policy was extended until the analysis of alternatives is completed in 
2007 and a decision is made. Currently, the F-16 is a leading candidate 
for replacing the QF-4 aircraft that will be phased out of service; 
thus, the future requirements for assets supporting the F-16 are 
unknown at this time. As a result, the Air Force is retaining all F-16 
assets because they may be used to support the new weapon system. 
According to Air Force officials, they are using the lessons learned 
from the QF-4 program, where they had documented cases of repurchasing 
previously owned Air Force inventory from salvage contractors, usually 
at very high prices. Based on our sample, we estimate that 10 percent 
of items on hand that are not needed to meet current requirements are 
used to support the F-16 aircraft weapon system. 

Contracts for On-Order Items Not Terminated: 

Some of the Air Force's on-order items not needed to support 
requirements remain on order because the contracts for these items have 
not been terminated. The Air Force defines items on order that are in 
excess of their requirements objective as termination quantities, which 
should be considered for contract cancellation under Air Force 
policy.[Footnote 18] As of September 30, 2005, the Air Force had 789 
unique items (about 115,000 individual parts), valued at about $261 
million, that should have been considered for contract termination. 
However, based on our sample, we estimate that only 5 percent of the 
contracts for items that should have been considered for termination 
actually were terminated or reduced. Item management specialists 
reported that contracts were not cancelled or the quantity on contract 
was not reduced due to a variety of reasons that include: items were 
delivered before the termination quantities were identified, items were 
delivered before termination actions were taken, contract termination 
model results showed that it was not economically feasible to terminate 
contracts, items were purchased as government furnished equipment to 
support contractor repair, data errors resulted in inaccurately 
identifying contracts for termination, and manpower constraints 
resulted in the issuance of an interim policy directing that no 
contracts valued at $1 million or less be terminated. For these items, 
we did not determine whether the Air Force ran the termination model in 
a timely manner to determine the feasibility of canceling the orders or 
bringing the items into inventory, nor did we determine whether the Air 
Force responded to the model's recommendations in a timely manner. 

One frequent reason noted for lack of action to terminate or reduce a 
contract was an interim policy instituted from March 2005 through June 
2006 at the Oklahoma City Air Logistics Center, directing that no 
termination actions be taken for items valued at $1 million or 
less.[Footnote 19] For these items, item management specialists also 
were not required to perform the contract cancellation computation to 
determine if it was economically feasible to terminate these contracts. 
According to Oklahoma City Air Logistics Center officials, this revised 
termination policy was instituted because of a decrease in the manpower 
needed to accurately and completely process these items with potential 
excess inventory due to mandatory training requirements. For the total 
number of items that we computed to be on-order inventory not needed to 
meet requirements as of September 30, 2005, this policy resulted in the 
acquisition of about 77 percent of the Oklahoma Air Logistics Center's 
inventory, valued at $123 million, which was not supported by 
requirements. 

Air Force Inventory Shortages Remained the Same: 

Although more than half of its secondary inventory was not needed to 
support requirements, the Air Force still had shortages of certain 
items in inventory. Between September 30, 2002, and September 30, 2005, 
the percentage and value of the Air Force's inventory shortages 
remained the same--at about 8 percent and $1.2 billion of its inventory 
required--while it maintained about $20.0 billion for items on order 
and on hand that were not needed to support requirements. In fiscal 
year 2005, the Air Force experienced shortages of about $1.2 billion 
for some 7,866 unique items (with a quantity of 371,961 individual 
parts), which may negatively affect readiness. Table 5 summarizes the 
value of the Air Force's inventory shortages during this 4-year period. 

Table 5: Air Force Inventory Shortages from Fiscal Year 2002 through 
Fiscal Year 2005: 

Dollars in billions. 

Fiscal year: 2005; 
Value of total requirements: $15.8; 
Shortages: Number of items: 371,961; 
Shortages: Value: $1.2; Shortages: Percent: 7.6%. 

Fiscal year: 2004; 
Value of total requirements: 15.8; 
Shortages: Number of items: 691,509; 
Shortages: Value: 1.1; Shortages: Percent: 7.0. 

Fiscal year: 2003; 
Value of total requirements: 14.6; 
Shortages: Number of items: 356,977; 
Shortages: Value: 0.9; Shortages: Percent: 6.2. 

Fiscal year: 2002; 
Value of total requirements: 14.4; 
Shortages: Number of items: 428,195; 
Shortages: Value: 1.2; Shortages: Percent: 8.3. 

Source: GAO analysis of Air Force data. 

[End of table] 

The reasons cited by the Air Force item management specialists for 
their inventory shortages varied. Table 6 summarizes the estimated 
frequency of reasons for why these items did not meet overall inventory 
requirements. For more details on our item selection and survey 
methodology, see to appendix I. 

Table 6: Estimated Frequency of Reasons for Air Force Inventory 
Shortages: 

Reasons: Demand increased; 
Sample item count: 1; 
Percentage estimate of items in population[A]: 1%. 

Reasons: Nonrecurring (additive) demand increased; 
Sample item count: 3; 
Percentage estimate of items in population[A]: 4. 

Reasons: Minimum purchase quantity didn't meet requirements; 
Sample item count: 1; 
Percentage estimate of items in population[A]: 1. 

Reasons: Next higher assembly (component parts)/weapons systems are 
upgraded or new ones are added; 
Sample item count: 3; 
Percentage estimate of items in population[A]: 2. 

Reasons: Items are replaced with substitute items; 
Sample item count: 3; 
Percentage estimate of items in population[A]: 2. 

Reasons: Items are purchased on an annual basis; 
Sample item count: 2; 
Percentage estimate of items in population[A]: 3. 

Reasons: Lost or delayed repair capability; 
Sample item count: 5; 
Percentage estimate of items in population[A]: 5. 

Reasons: Data errors; 
Sample item count: 4; 
Percentage estimate of items in population[A]: 6. 

Reasons: No shortages reported; 
Sample item count: 17; 
Percentage estimate of items in population[A]: 22. 

Reasons: Other (initial provisioning, insurance items, change in 
condemnation rates, etc.); 
Sample item count: 25; 
Percentage estimate of items in population[A]: 24. 

Reasons: No responses given; 
Sample item count: 29; 
Percentage estimate of items in population[A]: 30. 

Source: Results of GAO survey for Air Force inventory shortages in our 
sample. 

Notes: Percentage estimates are based on a limited sample size and have 
a margin of error of at most plus or minus 10 percent at the 95 percent 
confidence level. Reasons are not mutually exclusive; therefore, 
percentages do not total to 100. 

[A] These estimates are based on a stratified sample and while item 
counts are the same, percentage estimates may vary due to weighting. 

[End of table] 

The most frequent reasons identified by item management specialists in 
the sample were "other" and "no shortages reported." The specific 
reasons most frequently cited for shortages were lost or delayed repair 
capability, increases in demand, and data errors. For example, lost or 
delayed repair capability was a reason cited for a shortage with the 
fuel pump for a jet engine and with the electronic circuit card. 
Additionally, shortages for a transistor and a dual-level valve in 
fiscal year 2005 were attributed to increases in demand. In our 
previous work, we have similarly reported that increases in demand, the 
use of substitute items, and weapon systems upgrades or modifications 
have been reasons for inventory shortages. 

Conclusions: 

The nation faces an increasingly fiscally constrained environment where 
it is imperative that the Air Force exercise good stewardship over the 
billions of dollars invested in its inventory. At a time when the Air 
Force is making personnel reductions due to fiscal challenges, its 
ineffective and inefficient inventory management practices hinder its 
ability to efficiently and effectively allocate its resources. On 
average, from fiscal year 2002 through fiscal year 2005, the Air Force 
experienced shortages for some required items, valued at about $1.2 
billion, which may have negatively affected readiness. However, during 
this same period, the Air Force maintained about $20 billion worth of 
items both on order and on hand that were not needed to support 
requirements. When the Air Force buys unneeded items, it is obligating 
funds unnecessarily, which could lead to not having sufficient funds to 
purchase needed items, which also may negatively affect readiness. 
Correcting these problems would make more funds available that could 
then be used to purchase items needed to reduce the Air Force's 
inventory shortages or meet other Air Force requirements. Without 
modifying its policies to provide incentives to reduce the amount of 
inventory on order that is not needed to support requirements or 
conducting a comprehensive assessment to validate the need to retain 
unneeded on-hand inventory that does not have recurring demands, the 
Air Force will continue its past practices of purchasing and retaining 
items that it does not need and then spending additional resources to 
handle and store these items. Absent establishing ongoing requirements 
for items to support weapon systems that have lengthy projected life 
spans, the spare parts used in these systems will appear to be unneeded 
even though the Air Force plans to retain these items and expects that 
these items will be needed over the life span of the system. Moreover, 
although inventory requirements change as a result of changes in the 
national threat levels and missions, continuing decreases in demand 
have caused more inventory to be on hand than is needed to support 
requirements. Until the Air Force evaluates why it continues to have 
long-standing decreases in demand, it will continue to maintain 
inventory that is not needed to support requirements, which may result 
in unnecessary increased storage costs. 

Recommendations for Executive Action: 

To meet customer expectations while minimizing inventory and to reduce 
the Air Force's inventory not needed to support requirements, we are 
recommending that the Secretary of Defense direct the Secretary of the 
Air Force to take the following four actions: 

* modify its policies to provide incentives to reduce purchases of on- 
order inventory that are not needed to support requirements, such as 
requiring contract termination review for all unneeded on-order 
inventory or reducing the funding available for the Air Force Materiel 
Command by an amount up to the value of the Air Force's on-order 
inventory that is not needed to support requirements; 

* conduct a comprehensive assessment of the inventory items on hand 
that are not needed to support requirements and that have no recurring 
demands and revalidate the need to continue to retain these items, and, 
as part of this assessment, consider establishing ongoing requirements 
for items supporting weapon systems that have lengthy projected life 
spans; 

* evaluate the reasons why the Air Force continually experiences 
decreases in demands which have contributed to having more than half of 
its inventory on hand not needed to support requirements; and: 

* after evaluating the reasons for the decreases in demand, determine 
what actions are needed to address these decreases and then take steps 
to implement these actions. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report (reprinted in app. IV), 
DOD concurred with three of our recommendations and partially concurred 
with one. DOD cited specific actions it plans to take to implement the 
four recommendations and specified implementation timelines for each 
recommendation. We do not believe that DOD's planned actions are fully 
responsive to two of our recommendations. Our evaluation of DOD's 
planned actions is discussed in detail below. 

DOD partially concurred with our recommendation for the Air Force to 
modify its policies to provide incentives to reduce purchases of on- 
order inventory that are not needed to support requirements. While DOD 
agreed that opportunities exist to reduce Air Force on-order inventory 
by ensuring that on-order material above the reorder point is properly 
reviewed and that measures are put in place to ensure Air Force 
inventory management specialists are following excess on-order 
termination procedures, it did not agree that a change or modification 
to the Air Force's policy was required to accomplish this task, as we 
recommended. DOD said that the Air Force plans to address this issue by 
enforcing existing policy and by placing an increased focus on excess 
on-order measures. However, DOD did not explain these measures or what 
steps it will take to ensure that they are effectively implemented. DOD 
plans to provide a status update on the implementation of this 
recommendation by the end of September 2007. While we believe the 
actions cited by DOD are a step in the right direction, we do not 
believe that these planned actions are fully responsive to our 
recommendation. In this report we found that the Air Force has 
continued to not terminate contracts for unneeded on-order inventory 
because its policies do not provide incentives to reduce the amount of 
inventory on order that is not needed to support requirements. For 
example, as we stated in our report, in June 2006 the Air Force revised 
its policy for reviewing contract termination actions valued at $1 
million or less, which makes it easier to purchase inventory that is 
not needed to support requirements. This new policy requires each air 
logistics center to review at least 80 percent of the center's total 
computed termination value, with priority given to those terminations 
with the highest dollar value. Under its prior policy, all such orders 
were required to be reviewed for potential contract termination. As a 
result, this revised policy will require fewer on-order inventory items 
to be reviewed for potential contract termination. Given that we found 
more than half of the Air Force's on-order inventory was not needed to 
support on-order requirements at a time when the old policy requiring 
review of all orders was in effect, we believe that this new policy 
will exacerbate the problem. Thus, we continue to believe that the Air 
Force needs to modify its current policy to provide incentives to 
reduce purchases of on-order inventory as we recommended. 

DOD concurred with our second recommendation to conduct a comprehensive 
assessment of unneeded on-hand inventory, stating that it agreed that 
opportunities exist to reduce Air Force on-hand inventory for items 
that are not needed to support requirements and have no recurring 
demands and that the need to continue to retain these items should be 
validated. DOD stated that the Air Force will review its current 
stockage retention policy and take actions necessary to reduce the 
inventory as required. DOD also stated that the Air Force will conduct 
annual reviews of all inventory items as directed by DOD's Supply Chain 
Management policy. DOD plans to provide a status update on the 
implementation of this recommendation by the end of September 2007. DOD 
also commented that no further guidance was needed. While we recognize 
that some of this inventory should be retained for economic or 
contingency reasons, we believe that added scrutiny should be applied 
to the Air Force's review of its stockage retention policy to ensure 
that it is not retaining assets that are not needed to support current 
and future operational needs. Based on our work, we believe that the 
Air Force has a tremendous potential for reducing its inventory because 
much of the inventory has no projected recurring demands, meaning that 
it is unlikely that this inventory will ever be used. In other cases, 
inventories may not be needed because many years of supply are on hand. 
DOD's planned actions are a step in the right direction; however, 
unless and until the Air Force makes appropriate adjustments to its 
inventory retention levels, there are no assurances that significant 
improvements will be made to reduce the Air Force's on-hand inventory 
not needed to support requirements. 

In responding to our second recommendation, DOD did not address the 
portion of the recommendation directing the Air Force to consider 
establishing requirements for items that support weapon systems that 
have lengthy projected life spans. Without establishing requirements 
for items that the Air Force wants to retain for future use, it will be 
difficult to determine what portion of its inventory that is in excess 
of its requirements is valid to retain. For example, as stated in our 
report, many of the items supporting the A-10 and B-52 weapon systems 
have minimal usage rates, but they are being procured today to prevent 
difficulties in obtaining these assets in the future due to diminishing 
manufacturing sources. These weapon systems have projected life spans 
that could last until the year 2028 and 2040, respectively. Given the 
length of time these systems will continue to be in service, the Air 
Force needs to establish some baseline requirements for the items 
supporting these systems; otherwise, the Air Force will continue to 
have large quantities of inventory on hand that appear not to be needed 
to support requirements, even though these items may be needed in the 
future to support these weapon systems. Thus, we continue to believe 
that our recommendation is valid and DOD should consider establishing 
requirements for these items. 

DOD concurred with our third recommendation to evaluate the reasons why 
the Air Force continually experiences decreases in demands, which have 
contributed to having more than half of its inventory on hand not 
needed to support requirements. DOD agreed that the Air Force 
experiences changes in demand levels and stated that these changes can 
be attributed to changes in Air Force missions, reliability and 
technology improvements, and modifications of inventory items. DOD 
stated that the Air Force plans to review the computation forecasting 
model and make any changes required to help ensure future requirements 
reflect actual demands. DOD plans to provide a status update on the 
implementation of this recommendation by the end of September 2007. We 
believe that these actions are generally responsive to our 
recommendation. 

In responding to this recommendation, DOD also stated that our finding 
that more than half of the Air Force inventory on hand is not needed to 
support requirements is inaccurate. DOD has consistently disagreed with 
our definition of inventory not needed to support requirements because 
it differs from the definition that DOD uses for budgeting purposes. 
DOD policy identifies inventory not needed to support requirements 
based on current requirements and requirements that are projected 
through the end of a 2-year budget period.[Footnote 20] For our work, 
we only analyzed the Air Force's inventory that is needed to support 
current requirements.[Footnote 21] We do not believe that the projected 
requirements for the 2-year budget period should be considered in 
determining the amount of inventory needed to support current 
requirements. As stated in our report, if the Air Force did not have 
enough inventory on hand or on order to satisfy the projected 
requirements for the 2-year budget period, the requirements 
determination process would not result in additional inventory being 
purchased to satisfy these requirements. As a result, based on our 
analysis, we found that more than half of the Air Force's on-hand and 
on-order inventory is not needed to support requirements. We continue 
to believe that our characterization of the Air Force inventory is 
reasonable, because it reflects the amount of inventory needed to be on 
hand and on order to support current requirements. 

Finally, DOD fully concurred with our fourth recommendation to 
determine what actions are needed to address the decreases in demand 
and then take steps to implement these actions. DOD stated that the Air 
Force incorporates requirement changes, resulting in decreased demands, 
into the computation forecasting model as soon as those changes are 
known. However, DOD acknowledged that the key is to define the changes 
soon enough to prevent or terminate buys which may not be needed. DOD 
stated that the Air Force will monitor the goals, actions, and 
deliverables as a part of the Air Force computation forecasting model 
review. DOD plans to provide a status update on the implementation of 
this recommendation by the end of September 2007. We believe these 
actions will adequately address our recommendation. 

We are sending copies of this report to interested congressional 
committees; the Secretary of Defense; the Secretary of the Air Force; 
the Director, Defense Logistics Agency; the Under Secretary of Defense 
for Acquisition, Technology, and Logistics; and the Director, Office of 
Management and Budget. We will also make copies available to others 
upon request. In addition, the report will be available at no charge on 
the GAO Web site at http://www.gao.gov/. 

If you or your staff have any questions concerning this report, please 
contact me on (202) 512-8365 or solisw@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix V. 

Sincerely yours, 

Signed by: 

William M. Solis: 
Director, Defense Capabilities and Management: 

List of Congressional Committees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable John McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Daniel Inouye: 
Chairman: 
The Honorable Ted Stevens: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Ike Skelton: 
Chairman: 
The Honorable Duncan Hunter: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable John P. Murtha: 
Chairman: 
The Honorable C.W. Bill Young: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

To assess data used in this report, we obtained the Air Force's Central 
Secondary Item Stratification Budget Summary and item-specific reports 
for fiscal years 2002 through 2005. The stratification reports serve as 
a budget request preparation tool and a mechanism for military 
officials to review funding. Specifically, the Air Force uses this 
inventory stratification process to develop inventory budgets, show why 
inventory is held, and identify assets that are either on hand or on 
order as of the stratification date. Our analysis was based on 
evaluating the Air Force's item stratifications within the opening 
position table of the Central Secondary Item Stratification 
Reports.[Footnote 22] 

To validate the data in the budget stratification reports, we generated 
summary reports using electronic data and verified our totals against 
the summary stratification reports obtained from the Air Force. The Air 
Force secondary inventory data are identified by unique stock numbers 
for each spare part, such as an engine for a particular aircraft, which 
we refer to as unique items. The Air Force may have in its inventory 
multiple quantities of each unique item, which we refer to as 
individual parts. We calculated the value of each unique item by 
multiplying the quantity of the item's individual parts by the item's 
unit price, which is the latest acquisition cost for the item. We 
computed total values for all items collectively in the inventory and 
the stratification tables were recreated. This computation approach is 
consistent with the Department of Defense's (DOD) process for valuing 
assets in its annual Supply System Inventory Report. In cases where we 
found discrepancies in our dataset because of one or more items being 
reported in the stratification, we identified the excess item and 
removed it from the dataset. After assessing the Air Force data, we 
determined that the data were sufficiently reliable for the purposes of 
our analysis and findings. 

Upon completion of the data validation process, we revalued the Air 
Force's secondary inventory items identified in its budget 
stratification summary reports because these reports value useable 
items and items in need of repair at the same rate, and do not take 
into account the repair cost for repairable broken items. We computed 
the new value for items in need of repair by subtracting repair costs 
from the unit price for each item. In cases where the repair cost was 
greater than the unit price, we obtained new calculations from the Air 
Force for revaluing these assets. To determine the causes for the $1.2 
billion increase in the Air Force's secondary item inventory levels 
between fiscal years 2002 and 2005, we analyzed the inventory to 
determine if the increase was due to changes in the inventory's value, 
changes in the quantity of items in inventory, new items added to the 
inventory, or obsolete items removed from the inventory. 

We excluded requirements for administrative and production lead time 
from the Air Force's on-hand requirements.[Footnote 23] However, DOD's 
practice has always been to use administrative and production lead time 
requirements[Footnote 24] to justify the amount of inventory it had on 
hand. We do not agree with this practice to use lead time requirements 
to justify on-hand inventory because based on DOD's material management 
regulations,[Footnote 25] acquisition lead time quantities are not 
required to be on hand. Acquisition lead time is the sum of 
administrative and production lead times. However, we do agree with DOD 
that excess on-hand inventory should be used to offset or satisfy 
requirements for lead time because it would reduce the amount of 
inventory that needs to be on order. 

In commenting on our past reports,[Footnote 26] DOD and the Air Force 
have disagreed with our definition of inventory that was not needed to 
satisfy current operating requirements because it differs from the 
definition that is used for the inventory budget process.[Footnote 27] 
We consider the Air Force to have unneeded on-order or on-hand 
inventory if it has more inventory than is needed to satisfy its 
requirements based on the Opening Position table of the Air Force's 
budget stratification report. However, if the Air Force has more 
inventory on order or on hand than is needed to satisfy its 
requirements, it does not consider the inventory beyond the 
requirements to be unneeded. Instead, the Air Force uses the on-order 
inventory that is beyond its on-order requirements to satisfy future 
demands over a 2-year period and contingency retention 
requirements.[Footnote 28] Similarly, when the Air Force has on-hand 
inventory that is beyond its on-hand requirements, it uses the 
inventory to satisfy future demands over a 2-year period, lead time 
requirements, economic retention requirements,[Footnote 29] and 
contingency retention requirements. Only after applying inventory to 
satisfy these additional requirements would the Air Force consider that 
it has more inventory than is needed and would consider this inventory 
for potential reutilization or disposal.[Footnote 30] We do not agree 
with the Air Force's practice of not identifying inventory used to 
satisfy these additional requirements as excess because it overstates 
the amount of inventory needed to be on hand or on order by billions of 
dollars. The Air Force's requirements determination process does not 
consider these additional requirements (except for on-hand inventory 
needed to meet lead time requirements) when it calculates the amount of 
inventory needed to be on hand or on order. If the Air Force did not 
have enough inventory on hand or on order to satisfy these additional 
requirements, the requirements determination process would not result 
in additional inventory being purchased to satisfy these requirements. 
Tables 7 and 8 show a comparison of our analysis and the Air Force's 
stratification results of how on-order and on-hand inventory for fiscal 
year 2005 is applied to satisfy requirements. 

Table 7: Comparison of GAO Analysis and Air Force Stratification 
Results for On-Order Inventory in Fiscal Year 2005: 

Dollars in billions. 

Inventory on order; 
GAO: $2.3; 
Air Force: $2.3. 

On-order inventory applied to: 

Demands for a 2-year period; 
GAO: --; 
Air Force: 1.0. 

On-order requirements; 
GAO: 1.2[A]; 
Air Force: 1.0[B]. 

Contingency retention requirements; 
GAO: --; 
Air Force: 0.0. 

On-order inventory not needed to satisfy requirements; 
GAO: 1.1; 
Air Force: 0.3. 

Source: GAO analysis of Air Force budget stratification data. 

[A] We define on-order requirements as requirements for war reserves, 
stock due-outs, safety levels, numeric stockage objective, repair 
cycle, production lead time, and administrative lead time. We used the 
opening position table of the Air Force's budget stratification report 
to compute the value of the inventory used to satisfy these 
requirements. 

[B] The value of the inventory applied to the Air Force's on-order 
requirements is less than the value identified in our analysis due, in 
part, to the priority the Air Force places on the various requirements 
that comprise the on-order requirements identified in the Air Force 
budget stratification report. Specifically, because inventory items are 
applied to satisfy demands over a 2-year period before items are 
applied to meet the safety levels, numeric stockage objective, repair 
cycle, production lead time, and administrative lead time requirements, 
the value of the inventory applied to meet the Air Force's on-order 
requirements appears to be less than the value computed in our 
analysis. The Air Force uses its Approved Force Acquisition Objective 
and Retention Position table of its budget stratification report to 
determine the amount of inventory needed to satisfy its requirements; 
whereas in our analysis we used the Opening Position table of the 
stratification report. 

[End of table] 

Table 8: Comparison of GAO Analysis and Air Force Stratification 
Results for On-Hand Inventory in Fiscal Year 2005: 

Dollars in billions. 

Inventory on hand; 
GAO: $29.4[A]; 
Air Force: $34.6. 

On-hand inventory applied to: 

Demands for a 2-year period; 
GAO: --; 
Air Force: 15.3. 

Lead time requirements; 
GAO: --; 
Air Force: 0.2. 

On-hand requirements; 
GAO: 10.7[B]; 
Air Force: 6.7[C]. 

Economic retention requirements; 
GAO: --; 
Air Force: 3.6. 

Contingency retention requirements; 
GAO: --; 
Air Force: 6.1. 

On-hand inventory not needed to satisfy requirements; 
GAO: 18.7; 
Air Force: 2.7. 

Source: GAO analysis of Air Force budget stratification data. 

[A] In our analysis, the value of the Air Force's on-hand inventory is 
less than the value shown in the Air Force's budget stratification 
report because we revalued the Air Force's secondary inventory items to 
take into account the repair cost for broken repairable items. We 
computed the new value for items in need of repair by subtracting 
repair costs from the unit price for each item. 

[B] We define on-hand requirements as requirements for war reserves, 
stock due-outs, safety levels, numeric stockage objective, and repair 
cycle. We used the Opening Position table of the Air Force's budget 
stratification report to compute the value of the inventory used to 
satisfy these requirements. 

[C] The value of the inventory applied to the Air Force's on-hand 
requirements is significantly less than the value identified in our 
analysis due, in part, to the priority the Air Force places on the 
various requirements that comprise the on-hand requirements identified 
in the Air Force budget stratification report. Specifically, because 
inventory items are applied to satisfy demands over a 2-year period 
before items are applied to meet the safety levels, numeric stockage 
objective, and repair cycle requirements, the value of the inventory 
applied to meet the Air Force's on-hand requirements appears to be less 
than the value computed in our analysis. Unlike GAO, the Air Force uses 
its Approved Force Acquisition Objective and Retention Position table 
to determine the amount of inventory needed to satisfy its 
requirements. 

[End of table] 

To determine the extent to which the Air Force's on-order and on-hand 
secondary inventory reflects the amount of inventory needed to support 
requirements, we reviewed DOD and Air Force inventory management 
policies, past GAO products on DOD and Air Force inventory management 
practices for secondary inventory items, and other related 
documentation. We also compared the Air Force's current inventory to 
its current on-order and on-hand operating requirements and computed 
the amount and value of secondary inventory exceeding or not meeting 
current operating requirements. To determine the amount and value of 
the Air Force inventory not needed to support requirements and 
inventory shortages, we reviewed the Air Force's summary and item- 
specific budget stratification reports for fiscal years 2002 through 
2005. We subdivided all items into one of four categories: (1) items 
that only had on-order inventory not needed to support requirements, 
(2) items that only had on-hand items not needed to support 
requirements, (3) items that had both on-order and on-hand items not 
needed to support requirements, or (4) items with inventory shortages. 
In computing the number and value of on-order items not needed to 
support requirements, we added the results from category one and the 
results from the on-order portion of category three to compute the 
total number of items and value of on-order items not needed to support 
requirements. Similarly, we added the results from category two and the 
results from the on-hand portion of category three to compute the total 
number of items and value of on-hand items not needed to support 
requirements. 

Additionally, we calculated the storage costs of the inventory on hand 
that was not needed to meet requirements. We obtained the storage rates 
for the three different categories--covered, open, and special--of 
storage from the Defense Logistic Agency (DLA), which was where the 
inventory items were held.[Footnote 31] Then we sent DLA officials a 
list of the Air Force inventory, and they identified the category of 
each item. To determine the storage rate, we created a database that 
calculated the number of items multiplied by the annual storage cost 
rate and multiplied by the volume per item. To distinguish between the 
categories of items, the storage rates for useable items and items in 
need of repair were calculated separately. 

Additionally, to understand whether the inventory not needed to support 
requirements had improved in relation to its years of supply, we 
calculated the number of supply years a given item would have based on 
its present quantity and demand. To determine the years of supply, we 
computed the projected years of supply using the projected recurring 
demand data for items with on-hand and on-order inventory not needed to 
support requirements. In fiscal years 2002 and 2005, items with 
projected recurring demands represented about 21 percent of the items 
with on-order and on-hand inventory not needed to support requirements. 
The remaining 79 percent of these items had no projected recurring 
demands, which means that the potential years of supply is infinite. 

We developed a survey to estimate the frequency of reasons why the Air 
Force maintained items in inventory that were not needed to support 
requirements or that did not meet requirements. In the survey, we 
referred to those items that were not needed to support requirements as 
"excess" and the items that did not meet requirements as "shortages." 
The survey asked general questions about the higher assembly (component 
parts) and/or weapon systems that the items support, and whether the 
item is on the Air Force's mission-critical items list (i.e., Air Force 
Readiness Driver Program). In addition, we asked survey respondents to 
identify the reason(s) for the excess or shortage. We provided 
potential reasons as responses from which they could select based on 
reasons identified in some of our prior work. Since the list was not 
exhaustive, we provided a response option of "other, please explain." 
Finally, we asked that survey respondents provide copies of any 
implementation plans, schedules, and initiatives planned or in place to 
reduce excesses or improve shortages. In addition to an expert 
technical review of the questionnaire by an independent survey 
methodologist, we conducted in-depth pretests by item management 
specialists at the Cryptologic Systems Group located in San Antonio, 
Texas prior to deployment of the final survey instrument. We revised 
the questionnaire accordingly based on findings from the pretests. 

We sent this survey electronically to specific item management 
specialists in charge of sampled unique items at the Air Force's Air 
Logistic Centers. To estimate the frequency of reasons for inventory 
not needed to meet requirements and inventory shortages, we drew a 
stratified random probability sample of 335 unique items--230 of these 
with excess inventory and 105 with inventory shortages--from a study 
population of 18,676 items--10,810 with inventory not needed to meet 
requirements and 7,866 with inventory shortages. Based on our analysis 
of the Air Force stratification data, for fiscal year 2005, there were 
88,445 unique items with inventory not needed to meet requirements 
valued at $19.8 billion. Of these 88,445 items, 10,810 met our criteria 
to be included in our study population of items not needed to meet 
requirements. These items were valued at $12.4 billion and represented 
12 percent of total unique items and 63 percent of the total dollar 
value of items not needed to meet requirements. Additionally, based on 
our analysis of the stratification data, all of the 7,866 unique items 
with inventory shortages, valued at $1.2 billion, met our criteria to 
be included in our shortage study population. We selected our sample of 
items not needed to meet requirements from six strata defined by the 
criteria described in table 9. Our shortage sample was selected from 
two strata defined by the criteria described in table 10. The divisions 
of the population, sample, and respondents across the strata, as well 
as response rate by stratum, are also shown in tables 9 and 10. 

Table 9: Sample Disposition for Fiscal Year 2005 Items Not Needed to 
Meet Requirements: 

Dollars in millions. 

Stratum: 1; 
Description: On-hand excess with unknown or 2 or more years of long 
supply and a dollar value of at least $100,000, excluding those 
included in stratum 2; 
Total population: 2,630; 
Value of on-hand population: $1,043.10; 
Value of on-order population: 0; 
Total sample size: 20; 
Number of responses: 17; 
Response rate by stratum: 85%. 

Stratum: 2; 
Description: On-hand excess with 10 or more years of long supply or 
quantity of 10 or more items; 
Total population: 7,399; 
Value of on-hand population: 10,701.90; 
Value of on-order population: 0; 
Total sample size: 88; 
Number of responses: 70; 
Response rate by stratum: 80. 

Stratum: 3; 
Description: On-order excess with unknown or 2 or more years of long 
supply, excluding those included in stratum 4; 
Total population: 136; 
Value of on-hand population: 0; 
Value of on- order population: $0.4; 
Total sample size: 15; 
Number of responses: 15; 
Response rate by stratum: 100. 

Stratum: 4; 
Description: On-order excess with 10 or more years of long supply or 
dollar value of at least $10,000; 
Total population: 320; 
Value of on-hand population: 0; 
Value of on-order population: 268.2; 
Total sample size: 50; 
Number of responses: 45; 
Response rate by stratum: 90. 

Stratum: 5; 
Description: Both on-hand and on-order excess with unknown or 2 or more 
years of long supply, excluding those included in stratum 6; 
Total population: 47; 
Value of on-hand population: 0.1; 
Value of on-order population: 0.06; 
Total sample size: 6; 
Number of responses: 6; 
Response rate by stratum: 100. 

Stratum: 6; 
Description: Both on-hand and on-order excess with 10 or more years of 
long supply and total dollar value at least $10,000; 
Total population: 278; 
Value of on-hand population: 279.9; 
Value of on-order population: 151.4; 
Total sample size: 51; 
Number of responses: 49; 
Response rate by stratum: 96. 

Total; 
Description: [Empty]; 
Total population: 10,810; 
Value of on-hand population: $12,024.8; 
Value of on-order population: $420.1; 
Total sample size: 230; 
Number of responses: 202; 
Response rate by stratum: 82%. 

Source: GAO analysis of Air Force budget stratification data and survey 
responses. 

[End of table] 

Table 10: Sample Disposition of Fiscal Year 2005 Inventory Shortages: 

Dollars in millions. 

Stratum number: 1; 
Stratum description: Shortage items, excluding those included in 
stratum 2; 
Total population size: 3,891; 
Value of population items: $10.0; 
Total sample size: 31; 
Number of responses: 27; 
Response rate by stratum: 87%. 

Stratum number: 2; 
Stratum description: Shortage items with either 10 or more items or 
total dollar value of $10,000; 
Total population size: 3,975; 
Value of population items: 1,238.8; 
Total sample size: 74; 
Number of responses: 66; 
Response rate by stratum: 89. 

Total; 
Stratum description: [Empty]; 
Total population size: 7,866; 
Value of population items: $1,248.8; 
Total sample size: 105; 
Number of responses: 93; 
Response rate by stratum: 88%. 

Source: GAO analysis of Air Force budget stratification data and survey 
responses. 

[End of table] 

We sent 335 electronic surveys--one survey for each item in the sample-
-to the 230 Air Force item management specialists identified as being 
responsible for these items. Ultimately, we received 295 responses for 
the survey, for adjusted response rates of 82 percent for excess items 
and 88 percent for shortage items. Each sampled item was subsequently 
weighted in the final analysis to represent all the members of the 
target population. 

Because we followed a probability procedure based on random selections, 
our sample of unique items is only one of a large number of samples 
that we might have drawn. Because each sample could have provided 
different estimates, we express our confidence in the precision of our 
particular sample's results in 95 percent confidence intervals. These 
are intervals that would contain the actual population values for 95 
percent of the samples we could have drawn. As a result, we are 95 
percent confident that each of the confidence intervals in this report 
will include the true values in the study population. All percentage 
estimates from our sample have margins of error (that is, widths of 
confidence intervals) of plus or minus 10 percentage points or less, at 
the 95 percent confidence level unless otherwise noted. 

In addition to sampling errors, the practical difficulties of 
conducting any survey may introduce errors, commonly referred to as 
nonsampling errors. For example, difficulties in how a particular 
question is interpreted, in the sources of information that are 
available to respondents, or in how the data are entered into a 
database or were analyzed can introduce unwanted variability into the 
survey results. We took steps in the development of the questionnaire, 
the data collection, and the data analysis to minimize these 
nonsampling errors. For example, data were collected electronically and 
exported for analyses, negating data entry error. We also reviewed each 
survey to identify unusual, incomplete, or inconsistent responses and 
followed up with item management specialists by telephone to clarify 
those responses. In addition, we performed computer analyses to 
identify inconsistencies and other indicators of errors and had a 
second independent reviewer for the data analysis to further minimize 
such error. 

On the basis of information obtained from the Air Force on the 
reliability of its inventory management systems' data, and the survey 
results and our follow-up analysis, we believe that the data used in 
this report were sufficiently reliable for reporting purposes. 

In addition to meeting with Air Force officials at the Air Force 
Materiel Command in Dayton, Ohio, we conducted telephone interviews and 
e-mailed correspondence to inventory management officials from the 
three Air Force Air Logistics Centers located in Macon, Georgia; Ogden, 
Utah; and Oklahoma City, Oklahoma; and the Cryptologic Systems Group 
located in San Antonio, Texas to obtain answers to these questions. We 
conducted our work between January 2006 and February 2007 in accordance 
with generally accepted government auditing standards. 

[End of section] 

Appendix II: Top 10 Types of Air Force On-Order Inventory That Were Not 
Needed to Support Requirements: 

Table 11: Top 10 Types of Air Force On-Order Inventory Identified by 
Federal Supply Class That Were Not Needed to Support Requirements as of 
September 30, 2005: 

Dollars in billions. 

Federal supply class: 2840; 
Federal supply class description: Gas Turbines and Jet Engines, 
Aircraft & Comps; 
Number of items by federal supply class: 3,087; 
Number of items in on-order excess: 341; 
Total value of on-order excess inventory: $0.5. 

Federal supply class: 1560; 
Federal supply class description: Airframe Structural Components; 
Number of items by federal supply class: 6,875; 
Number of items in on-order excess: 288; 
Total value of on-order excess inventory: 0.2. 

Federal supply class: 1630; 
Federal supply class description: Aircraft Wheel and Brake Systems; 
Number of items by federal supply class: 570; 
Number of items in on-order excess: 42; 
Total value of on-order excess inventory: 0.03. 

Federal supply class: 1620; 
Federal supply class description: Aircraft Landing Gear Components; 
Number of items by federal supply class: 1,244; 
Number of items in on-order excess: 161; 
Total value of on-order excess inventory: 0.03. 

Federal supply class: 1680; 
Federal supply class description: Miscellaneous Aircraft Accessories 
and Components; 
Number of items by federal supply class: 1,918; 
Number of items in on-order excess: 102; 
Total value of on-order excess inventory: 0.02. 

Federal supply class: 1650; 
Federal supply class description: Aircraft Hydraulic, Vacuum & De-icing 
Sys Comp; 
Number of items by federal supply class: 1,650; 
Number of items in on-order excess: 91; 
Total value of on-order excess inventory: 0.02. 

Federal supply class: 5985; 
Federal supply class description: Antennas, Waveguides & Related 
Equipment; 
Number of items by federal supply class: 2,626; 
Number of items in on-order excess: 27; 
Total value of on-order excess inventory: 0.02. 

Federal supply class: 5998; 
Federal supply class description: Electrical & Electric Boards, Cards & 
Associated Hardware; 
Number of items by federal supply class: 41,526; 
Number of items in on-order excess: 94; 
Total value of on-order excess inventory: 0.02. 

Federal supply class: 1420; 
Federal supply class description: Guided Missile Components; 
Number of items by federal supply class: 786; 
Number of items in on-order excess: 3; 
Total value of on-order excess inventory: 0.02. 

Federal supply class: 5895; 
Federal supply class description: Miscellaneous Communication 
Equipment; 
Number of items by federal supply class: 4,731; 
Number of items in on-order excess: 23; 
Total value of on-order excess inventory: 0.02. 

Source: GAO analysis of Air Force data. 

[End of table] 

[End of section] 

Appendix III: Top 10 Types of Air Force On-Hand Inventory That Were Not 
Needed to Support Requirements: 

Table 12: Top 10 Types of Air Force On-Hand Inventory Identified by 
Federal Supply Class That Were Not Needed to Support Requirements as of 
September 30, 2005: 

Dollars in billions. 

Federal supply class: 2840; 
Federal supply class description: Gas Turbines and Jet Engines, 
Aircraft & Components; 
Number of items by federal supply class: 3,087; 
Number of items in on-Hand excess: 1,880; 
Total value of on-hand excess inventory: $2.4. 

Federal supply class: 1560; 
Federal supply class description: Airframe Structural Components; 
Number of items by federal supply class: 6,875; 
Number of items in on-Hand excess: 4,163; 
Total value of on-hand excess inventory: $1.6. 

Federal supply class: 5998; 
Federal supply class description: Electrical & Electric Boards, Cards & 
Associated Hardware; 
Number of items by federal supply class: 41,526; 
Number of items in on-Hand excess: 28,777; 
Total value of on-hand excess inventory: $1.2. 

Federal supply class: 5865; 
Federal supply class description: Electric Countermeasures & Quick 
Reaction Capability Equipment; 
Number of items by federal supply class: 669; 
Number of items in on-Hand excess: 394; 
Total value of on-hand excess inventory: $1.0. 

Federal supply class: 5841; 
Federal supply class description: Radar Equipment, Airborne; 
Number of items by federal supply class: 977; 
Number of items in on-Hand excess: 695; 
Total value of on-hand excess inventory: $0.8. 

Federal supply class: 5895; 
Federal supply class description: Miscellaneous Communication 
Equipment; 
Number of items by federal supply class: 4,731; 
Number of items in on-Hand excess: 2,750; 
Total value of on-hand excess inventory: $0.8. 

Federal supply class: 1420; 
Federal supply class description: Guided Missile Components; 
Number of items by federal supply class: 786; 
Number of items in on-Hand excess: 456; 
Total value of on-hand excess inventory: $0.7. 

Federal supply class: 1135; 
Federal supply class description: Fusing and Firing Devices, Nuclear 
Ordnance; 
Number of items by federal supply class: 583; 
Number of items in on-Hand excess: 460; 
Total value of on- hand excess inventory: $0.7. 

Federal supply class: 1270; 
Federal supply class description: Aircraft Gunnery Fire Control 
Components; 
Number of items by federal supply class: 573; 
Number of items in on-Hand excess: 353; 
Total value of on- hand excess inventory: $0.6. 

Federal supply class: 1427; 
Federal supply class description: Guided Missile Subsystems; 
Number of items by federal supply class: 32; 
Number of items in on-Hand excess: 24; 
Total value of on-hand excess inventory: $0.6. 

Source: GAO analysis of Air Force data. 

[End of table] 

[End of section] 

Appendix IV: Comments from the Department of Defense: 

Deputy Under Secretary Of Defense For Logistics And Materiel Readiness: 
3500 Defense Pentagon: 
Washington, DC 20301-3500: 

April 10, 2007: 

Mr. William Solis: 
Director, Defense Capabilities and Management: 
U.S. Government Accountability Office: 
441 G. Street, N.W. 
Washington, DC 20548: 

Dear Mr. Solis: 

This is the Department of Defense (DoD) response to the GAO draft 
report GAO-07-232 "Defense Inventory: Opportunities Exist to Save 
Billions by Reducing Air Force's Unneeded Spare Parts Inventory," dated 
February 22, 2007 (GAO Code 350798). The GAO draft report recommends 
that the Air Force conduct a review of its current inventory levels in 
excess of requirements and determine what causes variability in 
forecasted requirements between order and receipt of material. The DoD 
partially concurs with recommendation 1 and concurs with comment with 
recommendations 2, 3, and 4 in the report. 

Detailed comments on the draft report recommendations are included in 
the enclosure. The DoD appreciates the opportunity to comment on the 
draft report. 

Sincerely, 

Signed by: 

Jack Bell: 

Enclosure: 
As stated: 

GAO Draft Report - Dated February 22, 2007 GAO Code 350798/GAO-07-232: 

"Defense Inventory: Opportunities Exist to Save Billions by Reducing 
Air Force's Unneeded Spare Parts Inventory," 

Department Of Defense Comments To The Recommendations: 

Recommendation 1: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Air Force to modify its polices to provide 
incentives to reduce purchases of on-order inventory that are not 
needed to support requirements, such as requiring contract termination 
review for all unneeded on-order inventory or reducing the funding 
available for the Air Force Materiel Command by an amount up to the 
value of the Air Force's on-order inventory that is not needed to 
support requirements. (page 32/Draft Report): 

DOD Response: Partially concur. The DoD agrees that opportunities exist 
to reduce Air Force (AF) on-order inventory by ensuring that on-order 
material above the reorder point is properly reviewed and that measures 
are put in place to ensure AF Inventory Managers (IM) are following 
excess on-order termination procedures. The DoD does not agree that an 
AF policy change is required. The AF will address this issue by 
enforcing existing policy and by placing an increased focus on excess 
on-order measures. A status update will be provided at the end of 
September 2007. No further direction is required. 

Recommendation 2: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Air Force to conduct a comprehensive 
assessment of the inventory items on hand that are not needed to 
support requirements and that have no recurring demands and revalidate 
the need to continue to retain these items, and as part of this 
assessment consider establishing ongoing requirements for items 
supporting weapon systems that have lengthy projected life spans. (page 
32/Draft Report): 

DOD Response: Concur with comment. The DoD agrees that opportunities 
exist to reduce AF on-hand inventory for items that are not needed to 
support requirements and have no recurring demands and that the need to 
continue to retain these items should be validated. The AF will review 
the current stockage retention policy and take actions necessary to 
reduce the inventory as required. Current' policy requires a thorough 
review of all inventory items at least once per year. The AF will 
conduct reviews annually as directed by current policy. A status update 
will be provided at the end of September 2007. No further direction is 
required. 

Recommendation 3: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Air Force to evaluate the reasons why the 
Air Force continually experiences decreases in demands which have 
contributed to having more than half of its inventory on hand not 
needed to support requirements; and (page 32/Draft Report): 

DOD Response: Concur with comment. The AF analyzed the items with no 
recurring demand cited by GAO and found that they constitute less than 
17% of the total inventory dollar value, and less than 20% of the 
inventory's assets. The recommendation is inaccurate in stating that 
more than half of AF inventory on hand is not needed to support 
requirements. As GAO acknowledged in this report, the GAO definition of 
inventory not needed does not agree with the DoD definition of 
inventory not needed. GAO bases their findings on the Opening Position 
inventory or current requirements, while DOD policy identifies 
inventory not needed based on the Approved Acquisition Objective 
Position, which includes requirements through the budget period. The 
Opening Position does not include the full war reserve requirements and 
only includes today's requirements without considering inventory needed 
for requirements through the budget period. 

The AF does experience changes in demand levels attributable to reasons 
such as a change in AF missions, reliability/technology improvements, 
and modifications. The AF will review the computation forecasting model 
and make any changes required to help ensure future requirements 
reflect actual demands. A status update will be provided at the end of 
September 2007. No further direction is required. 

Recommendation 4: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Air Force to determine what actions are 
needed and then take steps to address these changes in demand, after 
evaluating the reasons for the decrease in demand. (pages 32-33/Draft 
Report): 

DOD Response: Concur with comment. The AF incorporates requirement 
changes, resulting in decreased demands, into the computation as soon 
as those changes are known. The key is to define the changes soon 
enough to prevent or terminate buys which may not be needed. The goals, 
actions, and deliverables will be monitored as a part of the AF 
computation forecasting model review. A status update will be provided 
at the end of September 2007. No further direction is required. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

William M. Solis, (202) 512-8365 or solisw@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Lawson Gist, Jr., Assistant 
Director; Renee Brown; Natasha Ewing; Nancy Hess; Catherine Hurley; 
Jacqueline McColl; Matt Michaels; Steven Pruitt; Minnette Richardson; 
Terry Richardson; and George Quinn made key contributions to this 
report. 

FOOTNOTES 

[1] Secondary inventory items include reparable components, subsystems, 
and assemblies other than major end items (e.g., ships, tanks, 
aircraft, and helicopters), consumable repair parts, bulk items and 
materiel, subsistence, and expendable end items, including clothing and 
other personal gear. 

[2] At the start of our review, the most recent inventory data 
available from DOD were through the end of fiscal year 2005. 

[3] GAO, Defense Inventory: Much of the Inventory Exceed Current Needs, 
GAO/NSIAD-97-71 (Washington, D.C.: Feb. 28, 1997); High-Risk Series: 
Defense Inventory Management, GAO/HR-97-5 (Washington, D.C.: February 
1997); Overall Inventory and Requirements Are Increasing, but Some 
Reductions in Navy Requirements Are Possible, GAO-03-355 (Washington, 
D.C.: May 8, 2003); High-Risk Series: An Update, GAO-05-207 
(Washington, D.C.: January 2005); and High-Risk Series: An Update, GAO-
07-310 (Washington, D.C.: Jan. 31, 2007). 

[4] GAO, Defense Inventory: Opportunities Exist to Improve the 
Management of DOD's Acquisition Lead Times for Spare Parts, GAO-07-281 
(Washington, D.C.: Mar. 2, 2007). 

[5] GAO, Defense Inventory: Much of the Inventory Exceed Current Needs, 
GAO/NSIAD-97-71 (Washington, D.C.: Feb. 28, 1997); Defense Inventory: 
Process for Canceling Inventory Orders Needs Improvement, GAO/ NSIAD-00-
160 (Washington, D.C.: June 30, 2000). 

[6] The Air Force secondary inventory data are identified by unique 
stock numbers for each spare part, such as an engine for a particular 
aircraft, which we refer to as unique items. The Air Force may have in 
its inventory multiple quantities of each unique item, which we refer 
to as individual parts. 

[7] GAO, Defense Logistics: Much of the Inventory Exceed Current Needs, 
GAO/NSIAD-97-71 (Washington, D.C.: Feb. 28, 1997); Defense Inventory: 
Process for Canceling Inventory Orders Needs Improvement, GAO/ NSIAD-00-
160 (Washington, D.C.: June 30, 2000). 

[8] Office of the Deputy Under Secretary of Defense for Logistics and 
Materiel Readiness, Department of Defense Supply Chain Materiel 
Management Regulation, DOD 4140.1-R (May 23, 2003). 

[9] Air Force Materiel Command, Secondary Item Requirements System 
(SIRS) Policy Memo #2006-05 (June 7, 2006). 

[10] We calculated this cost based on DLA storage rates. Useable assets 
are stored in warehouses managed by DLA, and items in need of repair 
may be stored at either DLA warehouses or Air Force repair facilities. 

[11] GAO, Defense Supply: Opportunities Exist to Improve the Management 
of DOD's Acquisition Lead Time for Spare Parts, GAO-07-282 (Washington, 
D.C.: Mar. 2, 2007). 

[12] GAO, Defense Inventory: Process for Canceling Inventory Orders 
Needs Improvement, GAO/NSIAD-00-160 (Washington, D.C.: June 30, 2000). 

[13] The Air Force Materiel Command Manual 23-1, Requirements for 
Secondary Items (D200A, D200N) (Jan. 5, 2007), prescribes guidance and 
procedural instructions for computing secondary item requirements. 

[14] The B-52 is a long-range heavy combat bomber that can perform a 
variety of missions. 

[15] The A/OA-10 is an aircraft designed for close air support of 
ground forces. 

[16] The F-16 is a compact, multirole fighter aircraft that is highly 
maneuverable and utilized in air-to-air combat and air-to-surface 
attack. 

[17] The QF-4 is an F-4 fighter that has been converted into a drone to 
resemble enemy aircraft. 

[18] The Air Force Materiel Command Manual 23-1, Requirements for 
Secondary Items (D200A, D200N) (Jan. 5, 2007), prescribes guidance and 
procedural instructions for computing secondary item requirements. 
Chapter 33 of this manual requires item management specialists to 
determine whether termination or reduction of the contract is 
economical for all items on order that are in excess of their 
requirements and are valued at $5,000 or more, excluding complete 
aircraft or missile engines. According to Federal Acquisition 
Regulation (FAR), Subpart 49.101(C), when the price of the undelivered 
balance of the contract is less than $5,000, the contract should not 
normally be terminated for convenience but should be permitted to run 
to completion. 

[19] Air Force Materiel Command, Oklahoma City Air Logistics Center, 
448th Combat Sustainment Wing, D200A Recoverable and Consumable 
Termination Policy Beginning Mar 05 (May 3, 2005), and D200A 
Recoverable and Consumable On-order Excess, 30 Sep 05 Computation 
Cycles (Jan. 23, 2006). 

[20] These requirements are identified in the Approved Acquisition 
Objective table of DOD's budget stratification report. 

[21] These requirements are identified in the Opening Position table of 
DOD's budget stratification report. 

[22] The Opening Position table of the Air Force's Central Secondary 
Item Stratification Report shows current requirements as of a certain 
cutoff date and does not include any forecasted requirements or 
simulations.  

[23] Administrative lead time is defined as the time interval between 
identification of a need to buy and the awarding of a contract or the 
placing of an order. Production lead time is defined as the time 
interval between the awarding of a contract or the placing of an order, 
and receipt into the supply system of materiel purchased. 

[24] Office of the Deputy Under Secretary of Defense for Logistics and 
Materiel Readiness, Department of Defense Supply Chain Materiel 
Management Regulation, DOD 4140.1-R (May 2003). 

[25] GAO, Defense Inventory: More Accurate Reporting Categories Are 
Needed, GAO/NSIAD-93-31 (Washington, D.C.: Aug. 12, 1993); Defense 
Inventory: Shortages Are Recurring, but Not a Problem, GAO/NSIAD-95-137 
(Washington, D.C.: Aug. 7, 1995); and Defense Logistics: Much of the 
Inventory Exceed Current Needs, GAO/NSIAD-97-71 (Washington, D.C.: Feb. 
28, 1997). 

[26] Instead of using the Opening Position table of its stratification 
reports to determine current requirements in its budget process, the 
Air Force uses the Approved Force Acquisition Objective and Retention 
Position table of its stratification report to determine the amount of 
inventory it needs to satisfy current requirements plus 2 years of 
future demands and the amount of inventory it needs to retain for long 
supply (inventory beyond current requirements), including items 
identified for potential excess. 

[27] Contingency retention inventory exceeds economic retention 
inventory (items that are more economical to keep than to dispose of) 
and would normally be processed for disposal but is retained for 
specific contingencies. 

[28] Economic retention inventory includes items that have been 
determined to be more economical to keep than to dispose of because 
they are likely to be needed in the future. Economic retention 
inventory is not applied to on-order inventory not needed to satisfy 
requirements. 

[29] Potential reutilization and/or disposal materiel exceeds 
contingency retention and has been identified for possible disposal but 
with potential for reutilization. 

[30] Useable assets are stored at DLA and items in need of repair may 
be stored at DLA and/or Air Force maintenance facilities. 

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