Budget and Spending:

DOD's 2010 Comprehensive Inventory Management Improvement Plan Addressed Statutory Requirements, But Faces Implementation Challenges

GAO-11-240R: Published: Jan 7, 2011. Publicly Released: Jan 7, 2011.

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The Department of Defense (DOD) spends billions of dollars to purchase, manage, store, track, and deliver spare parts and other supplies needed to keep military equipment ready and operating. Given the need to support ongoing U.S. military operations, DOD reported that it currently manages more than 4 million secondary inventory items valued at more than $91 billion as of September 2009. However, DOD reported that $10.3 billion (11 percent) of its secondary inventory has been designated as excess and categorized for potential reuse or disposal. According to DOD, another $15.2 billion (17 percent) of its secondary inventory exceeds the approved acquisition objective and is being retained because it was determined to be more economical to retain than to dispose of it or it might be needed in the future. Since 1990, we have identified DOD supply chain management as a high-risk area due in part to ineffective and inefficient inventory management practices and procedures, weaknesses in accurately forecasting demand for spare parts, and challenges in achieving widespread implementation of key technologies aimed at improving asset visibility. These factors have contributed to the accumulation of billions of dollars in spare parts that are excess to current requirements. Moreover, we have recently reported on the inventory management practices of the military departments and the Defense Logistics Agency (DLA) and recommended DOD take steps to improve demand forecasting, modify policies to provide incentives to reduce on-order inventory that is not needed to support requirements (i.e., on-order excess), ensure proper, documented reviews are conducted to validate methodologies for making retention decisions, and establish metrics and goals for tracking and assessing the cost efficiency of inventory management. To provide high-level strategic direction, DOD issued its Logistics Strategic Plan in July 2010, which, among other things, established a goal to improve supply chain processes, including inventory management practices. Section 328 of the National Defense Authorization Act (NDAA) for Fiscal Year 2010 requires us to submit to the congressional defense committees an assessment of the extent to which the Plan meets the specified requirements no later than 60 days after the Plan's submission. Our objectives were to (1) determine the extent to which DOD's Plan addresses the reporting elements required by section 328 of the NDAA and (2) assess the extent to which the Plan addresses six key characteristics that help establish a comprehensive, results-oriented management framework to guide implementation. These characteristics were not required to be included by section 328, but our prior work examining national strategies and logistic issues has shown that these characteristics help establish a results-oriented management framework for effective implementation.

Our analysis showed that DOD's Plan addressed each of the eight required elements in section 328 of the NDAA for Fiscal Year 2010. The Plan contains eight sub-plans that each address a required element, as well as a ninth sub-plan that focuses on accomplishing several improvements that extend beyond the elements required by section 328. The sub-plans support the Plan's two overall goals: (1) DOD will reduce total on-order excess inventory from 8.5 percent of total obligated on-order dollars in fiscal year 2009 to 4 percent by the end of fiscal year 2016 and (2) DOD will reduce the on-hand excess inventory from 11.3 percent of the total value of inventory in fiscal year 2009 to 10 percent by the end of fiscal year 2012. The Plan addressed the eight required elements, but DOD faces a number of implementation challenges, including: aggressive timelines and benchmarks, identification of resources, implementation of enterprise resource planning (ERP) systems, standardization of definitions, processes, procedures, and metrics, and coordination and collaboration among multiple stakeholders. Our analysis showed that DOD's Plan addressed three characteristics and partially addressed the three remaining characteristics of a comprehensive, results-oriented management framework to guide implementation. The Plan addressed the characteristics of mission statement; goals, objectives, activities, milestones, and performance measures; and organizational roles, responsibilities, and coordination. For example, the Plan identifies a performance management structure that is intended to provide oversight and ensure actions are progressing as planned while monitoring for adverse effects on operational readiness. The Plan partially addressed the characteristics of problem definition, scope, and methodology; resources and investments; and key external factors that could affect goals. In particular, the Plan did not present the methodology used to develop the Plan; fully identify resources and investments needed to carry out the actions in the Plan; assign responsibility for monitoring external factors; or discuss how external factors, such as challenges in implementing the ERPs, could affect the ability to achieve the desired goals.

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