Defense Inventory:

Army Needs to Evaluate Impact of Recent Actions to Improve Demand Forecasts for Spare Parts

GAO-09-199: Published: Jan 12, 2009. Publicly Released: Jan 12, 2009.

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Since 1990, GAO has designated the Department of Defense's (DOD) inventory management as a high-risk area. It is critical that the military services effectively and efficiently manage DOD's secondary inventory to ensure that the warfighter is supplied with the right items at the right time and to maintain good stewardship over the billions of dollars invested in their inventory. GAO reviewed the Army's management of secondary inventory and determined (1) the extent to which on-hand and on-order secondary inventory reflected the amount needed to support current requirements and (2) causes for the Army having secondary inventory that exceeded current requirements or, conversely, for having inventory deficits. To address these objectives, GAO analyzed Army data on secondary inventory (spare parts such as aircraft and tank engines) from fiscal years 2004 through 2007.

For the 4-year period GAO examined, the Army had significantly more inventory than was needed to support current requirements. At the same time, the Army had substantial inventory deficits. GAO's analysis of Army data reflected an annual average of about $16.3 billion of secondary inventory for fiscal years 2004 to 2007, of which about $3.6 billion (22 percent) exceeded current requirements. On average, approximately 97 percent of the inventory value exceeding requirements was on hand and the remaining 3 percent was on order. Based on Army demand forecasts, inventory that exceeded current requirements had enough parts on hand for some items to satisfy several years, or even decades, of anticipated supply needs. Also, a large proportion of items that exceeded current requirements had no projected demand. The Army also had an annual average of about $3.5 billion of inventory deficits over this 4-year period. Army inventory did not align with current requirements over this period because of (1) a lack of cost-efficiency metrics and goals and (2) inaccurate demand forecasting. DOD's supply chain management regulation requires the military services to take a number of steps to provide for effective and efficient end-to-end materiel support. For example, the regulation directs the components to size secondary inventory to minimize DOD's investment while providing the inventory needed. Although the Army has supply support performance measures for meeting warfighter needs, it has not established metrics and goals that can measure the cost efficiency of its inventory management practices. Furthermore, the Army's demand forecasts have frequently been inaccurate. The Army uses a computer model to forecast its spare parts requirements, but when demand data are inaccurate or untimely, the result is a misalignment between inventory and current requirements. As a result, the Army has accumulated billions of dollars in excess inventory against current requirements for some items and substantial inventory deficits in other items. Without accurate and timely demand data, managers cannot ensure that their purchasing decisions will result in inventory levels that are sized to minimize DOD's investment needed to support requirements. The Army has acknowledged that challenges exist in its forecasting procedures and has begun to take steps to address shortcomings. In October 2008, the Army issued guidance directing managers to reduce the forecast period from 24 months to 12 months to better account for changes in the size of the force and the resulting changes in demands. The guidance also directs managers to update forecast models to match actual quantities of weapon systems being used in Southwest Asia; previous models were updated based on estimates that were not always timely or accurate. These two changes constitute steps toward improving the accuracy of demand forecasts, but GAO was unable to assess their effectiveness because this guidance was issued as GAO was completing its audit work. Also, the Army's recent designation of the Under Secretary of the Army as its chief management officer responsible for business transformation provides an opportunity for enhanced oversight of inventory management improvement efforts. Strengthening the Army's inventory management--while maintaining high levels of supply availability and meeting warfighter needs--could reduce support costs and free up funds for other needs.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: To satisfy this recommendation, the Army Office of the Deputy Chief of Staff, Logistics issues a formal memorandum annually that provides planning guidance for spare part requirements each fiscal year. This guidance directs adjustments to demand forecasts as applicable (e.g., due to the operational draw downs) and provides links to equipment density and operation tempo information that impacts demand forecasts. For example, the fiscal year 2012 guidance directs item managers to plan for a 40 percent reduction in the Central Command theater of operations compared to fiscal year 2011. This guidance also directs item managers to specific classified sources on global operations that should influence their demand plans. Additionally, Army item managers are integrated with their respective weapon system program management offices, which allows them to factor in system-unique planning factors as needed. Lastly, the Army established a War on Excess against excess inventory, which includes regular reviews of excess inventory by senior management at U.S. Army Materiel Command. The War on Excess includes a review of projected demand against actual demands to determine any necessary changes based on outcomes. Additionally, as part of the War on Excess senior management monitors the reductions of on-order excess inventory to ensure that inventory that is being purchased meets established requirements. For the Army this measure has fallen from approximately $840 million (or 12.6 percent of the total on-order inventory) in September 2009 to approximately $230 million (or 6.2 percent of the total on-order inventory) as of September 2011. As a result of these actions, the Army provides item managers up-to-date operational information so that modeled requirements can be altered as necessary and inventory that is excess to requirements is not procured. Furthermore, the Army monitors the effectiveness of these actions through monitoring its inventory management outcomes.

    Recommendation: To improve the management of the Army's secondary inventory, the Secretary of Defense should direct the Secretary of the Army to monitor the effectiveness of providing item managers with operational information in a timely manner so they can adjust modeled requirements as necessary.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The Army established a "War on Excess" initiative against excess inventory, which includes regular reviews of excess inventory by senior management at U.S. Army Materiel Command (AMC). The War on Excess includes a review of projected demand against actual demands to determine any necessary changes. Each fiscal year the Army issues planning guidance to inform demand forecasting based on past experiences and future operational tempo. Additionally, as part of the War on Excess senior management monitors the reductions of on-order excess inventory to ensure that inventory that is being purchased meets established requirements. For the Army this measure has fallen from approximately $840 million (or 12.6 percent of the total on-order inventory) in September 2009 to approximately $230 million (or 6.2 percent of the total on-order inventory) as of September 2011. Additionally, as part of the AMC effort to continue to improve demand forecasting, a forecast improvement workgroup was chartered in January 2012 to consolidate and implement multiple forecast improvement efforts, such as implementation of the Demand Data Exchange between the Army and the Defense Logistics Agency. As a result of these actions, the Army has addressed the intent of the recommendation by monitoring demand forecasting, reducing on-order excess inventory, and taking steps to improve demand forecasting.

    Recommendation: To improve the management of the Army's secondary inventory, the Secretary of Defense should direct the Secretary of the Army to evaluate the effectiveness of changes to demand forecasting procedures that were set forth in the Army's October 2008 guidance, including measuring the impact on reducing inventory that exceeds requirements, and based on that evaluation, take additional actions as appropriate to identify and correct systemic weaknesses in forecasting procedures.

    Agency Affected: Department of Defense

  3. Status: Open

    Comments: The Army is in the process of developing metrics to evaluate their inventory. We will continue to monitor these metrics.

    Recommendation: To improve the management of the Army's secondary inventory, the Secretary of Defense should direct the Secretary of the Army to establish metrics and goals for tracking and assessing the cost efficiency of inventory management and incorporate these into existing management and oversight processes.

    Agency Affected: Department of Defense

  4. Status: Open

    Comments: The Army and the Department of Defense did not concur with this recommendation.

    Recommendation: The Secretary of the Army should direct the Army's Chief Management Officer to exercise oversight of Army inventory management improvements to align improvement efforts with overall business transformation and to reduce support costs. This oversight role should not replace or eliminate existing operational oversight responsibilities for inventory management that are exercised by other Army offices, but should ensure that the Army maintains a long-term focus for making systemic improvements where needed and for strategically aligning such changes with overall transformation efforts.

    Agency Affected: Department of Defense: Department of the Army

 

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