Defense Inventory:

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

GAO-07-232: Published: Apr 27, 2007. Publicly Released: Apr 27, 2007.

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At a time when U.S. military forces and their equipment are in high demand, effective management of the Department of Defense's (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 DOD's 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 Force's 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.

More than half of the Air Force's 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 Force's 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 Force's inventory shortages remained the same at about 8 percent and $1.2 billion.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In April 2008, the Air Force stated that the distinctions in how GAO computes inventory not needed to support requirements and DOD's policy for computing not needed inventory has yielded to very different results. Based on our methodology, we reported that more than half of the Air Force inventory on hand is not needed to support requirements. However, the Air Force reported that it analyzed the items with no recurring demand cited in our report, and found that these items constitute less than 17% of the total inventory dollar value, and less than 20% of the inventory?s assets. Nevertheless, the Air Force reported that it does experience changes in demand levels attributable to reasons such as a change in AF missions, reliability/technology improvements, and modifications. To address our recommendation, the Air Force stated that it will review the computation forecasting model and make any changes required to help ensure future requirements reflect actual demands. Later, in August 2008, the Air Force stated that it has completed the review of the computation forecasting model. According to the Air Force, the forecasting model has a variety of forecasting methods that can be used by the equipment specialists; and thus it was not deemed necessary to change the forecasting model itself. However, AFMC has developed forecasting analysis comparison tools, which provide feedback to the personnel at the Air Logistics Centers concerning the accuracy of their forecasts. DOD's Comprehensive Inventory Management Improvement Plan, issued in October 2010, contains a sub-plan aimed at improving demand forecasting for the Air Force and other components that manage inventory. DOD is in the process of executing its plan.

    Recommendation: To meet customer expectations while minimizing inventory and to reduce the Air Force's inventory not needed to support requirements, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In April 2008, the Air Force reported evaluating its inventory requirements to ensure the right levels of the right items are available at the right place when required. As part of that evaluation, the Air Force stated that its current stockage retention policies and procedures will be reviewed and modified as required. Later, in August 2008, the Air Force reported that it requirements based leveling system, which is used to ensure the right levels of the right items are available in the right place, has been validated. Additionally, after reviewing its stockage retention policies and procedures, the Air Force changed its sections of its manual, AFMCMAN 23-1, which prescribes guidance and procedural instructions for computing secondary item requirements. Specifically, the signature level for using deferred disposal codes to retain assets in contingency retention was increased, and weapon system wide deferred disposal codes now require approval from Air Force headquarters inventory management officials, AF/A4RM. Additionally, justification for the item deferred disposal codes was changed and now requires more detail, to include cubic footage of the items retained and yearly storage costs. In addition to these policy changes, Air Force headquarters inventory management officials, AF/A4R, now requires HQ AFMC/A4 to provide monthly briefings on disposals. In addition, DOD's Comprehensive Inventory Management Improvement Plan, issued in October 2010, addresses retention actions as one of its sub-issues. The overall goal of the plan is to reduce both on-order and on-hand excess inventory.

    Recommendation: To meet customer expectations while minimizing inventory and to reduce the Air Force's inventory not needed to support requirements, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: In April 2008, the Air Force reported that AFMC constantly reviews and updates its policy to ensure that on-order excess is reviewed and proper actions are taken. The Air Force stated that it believes that its current policies are adequate to support effective reduction of an on-order inventory not needed as long as the management of the Air Logistics Centers enforces the policies. The Air Force also suggested that an effective way for ALC management to enforce policy would be to add review of an order excess to position description and base appraisal of personnel on timely review of an order excess. Later, in August 2008, the Air Force reported that quarterly reviews of the on-order excess measure are and will continue to be utilized to determine if required actions are being taken to prevent the delivery of on-order material in excess to known requirements. This information is now being reviewed quarterly via telecom meetings between AFMC and Air Force headquarters inventory requirements officials as evidence that on-order excess terminations are important and are being monitored by senior Air Force leadership. Additionally, position descriptions have been reviewed and contain adequate language to ensure Item Management performance can be rated. In response to a statutory mandate, DOD in 2010 developed its Comprehensive Inventory Management Improvement Plan with a goal of reducing excess inventory managed by the Air Force and other components.

    Recommendation: To meet customer expectations while minimizing inventory and to reduce the Air Force's inventory not needed to support requirements, the Secretary of Defense should direct the Secretary of the Air Force to 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.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: In April 2008, The Air Force reported that it incorporates requirement changes, resulting in decreased demands, into the computation as soon as those changes are known. According to the Air Force, t it does experience changes in demand levels attributable to reasons such as a change in AF missions, reliability/technology improvements, and modifications; but the key is to define the changes soon enough to prevent or terminate buys which may not be needed. The Air Force stated that the goals, actions, and deliverables will be monitored as a part of its computation forecasting model review. Later, in August 2008, the Air Force stated that it has completed the review and found that it was not deemed necessary to change the forecasting model itself. However, AFMC has developed forecasting analysis comparison tools, which provide feedback to the personnel at the Air Logistics Centers concerning the accuracy of their forecasts. DOD's Comprehensive Inventory Management Improvement Plan, issued in October 2010, contains a sub-plan aimed at improving demand forecasting for the Air Force and other components that manage inventory. DOD is in the process of executing its plan.

    Recommendation: To meet customer expectations while minimizing inventory and to reduce the Air Force's inventory not needed to support requirements, the Secretary of Defense should direct the Secretary of the Air Force to, 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 Affected: Department of Defense

 

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