From the U.S. Government Accountability Office, www.gao.gov Transcript for: Defense Inventory Management Description: Audio interview by GAO staff with Zina Merritt, Director, Defense Capabilities and Management Related GAO Work: GAO-14-495: Defense Inventory: Actions Needed to Improve Defense Logistics Agency's Inventory Management Released: June 2014 [Background Music] [ Narrator: ] Welcome to GAO's Watchdog Report; your source for news and information from the U.S. Government Accountability Office. It's June 2014. The Defense Logistics Agency manages about one fifth of DOD's $95 billion in secondary item inventory such as spare parts to keep military equipment ready and operating. GAO has identified DOD supply chain management as a high-risk area. A team led by Zina Merritt, a director in GAO's Defense Capabilities and Management team, recently looked at issues related to DLA's inventory management practices. GAO's Sarah Kaczmarek sat down with Zina to talk about what they found. [ Sarah Kaczmarek: ] Has DLA been able to meet its goals to reduce inventory that's in excess of what it needs? [ Zina Merritt: ] Yes. DLA, starting in March of 2012, it decided to set some goals for reducing inventory that it had in stock but was in excess to what it needed. For example, it decided it was going to go from about $14.2 billion in inventory from March, 2012, to about $11.7 billion by September of 2013, and that was actually a reduction of about $4 billion in inventory. What they did in essence was its major supply chains, which consist of its aviation, land, and maritime supply chains, did a risk-based approach which they determined which items they could reduce and as a result of that, they gained about 90 percent of the reductions there. [ Sarah Kaczmarek: ] Now, your team found that DLA might need to end up re-buying some of the same items it's disposing of now. How much money is potentially being wasted here? [ Zina Merritt: ] Well that's interesting. DLA in its own assessments determined that about $855 million of about the $4 billion that it reduced was determined to be more economical to keep than to actually get rid of. Its own guidance states that they should do a economic analysis and that all decisions that are made based upon that analysis should be informed by that, but that is not what DLA did. It set some very aggressive goals and decided to go through and do this at that particular time. [ Sarah Kaczmarek: ] So why is this happening, then? [ Zina Merritt: ] Well, I will give you maybe a good analogy here. Let's say you have a tire company, a wholesaler, who stocks all brands of tires; big, large, medium size, etc. It has a lot of customers throughout the area but because of the economics of the area, decides it wants to go to a smaller space. So they decide, "Well, these big tires, we don't get regular orders on them, we may get a order on them, so we're just going to go ahead and get rid of them." But that same year, one of their major clients comes to them, says that, "I need these large tires now because I have some farm equipment and in order to harvest the crops, I've got to have them." So the tire wholesaler goes to the supplier, the manufacturer, and say, "Hey, I need to once again buy these tires." So what could be problematic about it is that those particular tires may now be a higher price and they may have to pay more. So the analogy is that this wholesaler has now paid twice for the same tire and DLA will potentially have to pay twice for the same items, thereby costing the taxpayers money twice. [ Sarah Kaczmarek: ] That's an excellent analogy. And finally for taxpayers concerned with defense inventory management, what do you see as the bottom line of this report? [ Zina Merritt: ] Well DLA has made some strides in improving its management of its inventory, but we see them having a number of challenges. We made some constructive recommendations where we told them they really need to do a reassessment and determine whether or not they need to revise their very aggressive targets. If they keep going at the pace that they're going, they have additional targets for September of 2014 in which they're trying to get the inventory down to $10 billion. If they do this, then they in essence are going to get rid of all of their economic retention stock and potentially have to re-buy these stocks again. So, we are optimistic that DLA will in fact be receptive to the recommendations and act upon them, and if so, then we hope that it will be very conscious and make very prudent decisions, especially since the budget for the Department of Defense continues to shrink. [Background Music] [ Narrator: ] To learn more, visit GAO.gov and be sure to tune in to the next episode of GAO's Watchdog Report for more from the Congressional Watchdog, the U.S. Government Accountability Office.