defense icon, source: [West Covina, California] Progressive Management, 2008

Defense: DOD's Spare Parts

More efficient management could limit future costs of the Department of Defense’s spare parts inventory.

Action:

The Department of Defense (DOD) could limit future costs by focusing its efforts on better managing on-order inventory, with a view toward reducing on-order inventory levels that are not needed for current needs or projected demand.

Progress:

DOD has reduced the percentage and value of its on-order excess inventory—items already purchased that may be excess due to subsequent changes in requirements—since fiscal year 2009 and has taken steps to improve its management of on-order inventory, as GAO suggested in March 2011.  Specifically, DOD’s data show that its percentage of on-order excess—the amount of on-order excess inventory divided by the total amount of on-order inventory—dropped from 9.5 percent in fiscal year 2009 to 7.0 percent at the end of fiscal year 2015. The 9.5 percent on-order excess inventory for 2009 amounted to $1.3 billion of about $13.6 billion in total on-order inventory, whereas the 7.0 percent excess in September 2015 amounted to $701 million of about $10.0 billion in DOD’s total on-order inventory.
DOD, in response to GAO’s recommendations, has taken numerous actions to improve its management of on-order inventory. Specifically, DOD, the services, and the Defense Logistics Agency (DLA) conducted a review of on-order inventory management policies and processes and updated its departmental guidance in February 2014. In June 2014, GAO found that DLA could take a number of actions to improve its management of on-order excess inventory and in July 2014, DLA took steps to strengthen its oversight of on-order excess inventory, such as establishing and monitoring supply-chain-specific goals for on-order excess inventory. In April 2015, GAO found that the Army and Navy needed to take actions to improve its on-order excess inventory management. As a result, in April 2015 the Army established on-order excess inventory goals and began monitoring its performance against those goals. Also, in September 2015, the Navy implemented management reviews based on dollar value thresholds, as required by DOD guidance, into its current termination practices for on-order excess inventory. The Navy plans to incorporate this review process and the ability to track and review the reasons for not cancelling and modifying on-order excess items into its automated termination module, but the Navy estimates that this will not be accomplished until fiscal year 2019 given higher priority changes needed in its information systems. By taking numerous actions to improve the management of on-order inventory, DOD, the services, and DLA collectively have helped the department to reduce the annual percentage of on-order excess inventory, thereby limiting future costs of unneeded inventory. 

Implementing Entity:

Department of Defense

Action:

The Department of Defense (DOD) should address systematic weaknesses in demand forecasting, revise management practices to incorporate flexibility needed to minimize the impact of demand fluctuations, and track the cost efficiency of its inventory management process.

Progress:

As of March 2017, DOD had taken numerous actions to address weaknesses in demand forecasting, revise the department’s management practices to minimize the effect of demand fluctuations, and track the cost efficiency of its inventory processes, as GAO suggested in March 2011.

  • Demand forecasting weaknesses: DOD has developed department-wide forecast accuracy metrics, implemented modified approaches for setting inventory levels for items with low or highly variable demand, and has begun to improve its collaborative forecasting program. DOD’s key metric for forecast accuracy helped department officials determine that their forecasts have improved from being 46.7 percent accurate in fiscal year 2013 to being 57.4 percent accurate in fiscal year 2015, the latest fiscal year for which data are available. As of March 2016, DOD was working to establish procedures, including statistical techniques, for setting appropriate targets for its metrics on forecast accuracy. Additionally, the Defense Logistics Agency (DLA) has implemented modified approaches for setting inventory levels for consumable items (i.e., items that are normally expended or intended to be used up beyond recovery) with low or highly variable demand and developed a suite of metrics to measure outcomes. Further, the Air Force is in the process of implementing modified approaches for setting inventory levels for its reparable items (i.e., items that can be repaired and reused multiple times) with highly variable demand.

    In June 2014, GAO found that DLA’s collaborative forecasting program had not improved the aggregate forecast accuracy for those items, and DLA had not used a comprehensive approach to manage, evaluate, and improve the performance of its program. As of February 2017, DLA had mapped its collaborative forecasting process and identified nine key points to measure forecast accuracy and bias. Those measurements will be used to quantify the value-added (i.e., improvement to the forecast) of the different steps in the DLA collaborative forecasting process. According to DOD officials, DOD will continue collaboration where those forecasts improve forecast accuracy. On the other hand, where those forecasts do not add value, DLA may choose not to use those forecasts to set inventory requirements. This value-added program is part of a larger DOD-wide program where each DOD component is looking within its forecasting process to determine if collaboration adds value to forecast accuracy and bias. Lastly, in response to GAO’s June 2016 report that found the services and DLA had not adopted metrics on the accuracy of planning factors, such as the accuracy of part lists that are used to determine the type and quantity of parts to buy for depot maintenance activities, DOD has begun developing metrics to measure the accuracy of planning factors and officials project they will be implemented by the end of fiscal year 2018.
  • Management of demand fluctuations: DOD and its components reviewed on-order inventory management policies and processes, which are used to modify or cancel on-order items due to changes in demand, and taken steps to address GAO recommendations to improve the management of on-order excess inventory. As a result of its review of on-order inventory, DOD updated its departmental guidance on the management of this inventory in February 2014. Additionally, DLA in 2014 and the Army and Navy in 2015 took steps to strengthen their respective oversight of on-order excess through establishing and monitoring goals or improving management review processes.  
  • Tracking cost efficiency: In March 2016, DOD issued a Supply Chain Management Metrics Reference Guide, which included standardized definitions and procedures for measuring and reporting its metrics, in response to GAO’s May 2012 recommendation that DOD develop and implement guidance that establishes a comprehensive, standardized set of department-wide metrics for inventory management. Additionally, DOD uses these metrics on a regular basis, approximately bimonthly, to review its approaches and practices for managing the department’s inventory.

By taking numerous actions to improve demand forecasting, the management of demand fluctuations, and tracking cost efficiency, DOD, the services, and DLA collectively have helped the department improve its inventory management which could limit future costs associated with excess inventory.

Implementing Entity:

Department of Defense
  • portrait of
    • Zina Merritt
    • Director, Defense Capabilities and Management
    • merrittz@gao.gov
    • (202) 512-5257