Defense Inventory:

Services Generally Have Reduced Excess Inventory, but Additional Actions Are Needed

GAO-15-350: Published: Apr 20, 2015. Publicly Released: Apr 20, 2015.

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Zina Merritt
(202) 512-5257
merrittz@gao.gov

 

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What GAO Found

The Navy and Air Force reported meeting the Department of Defense's (DOD) goal of reducing on-hand excess inventory (i.e., items categorized for potential reuse or disposal) to 10 percent of the total value of inventory, but the Army had not met the goal, as of March 2014. Reporting issues hinder full visibility of on-hand excess inventory and progress against DOD's goal. For example,

  • the Army's calculation of its inventory to meet requirements was not in accordance with Army guidance and resulted in potentially underreporting its amount of on-hand excess inventory to the Office of the Secretary of Defense (OSD);
  • the Navy's and Air Force's calculations of on-hand excess inventory included contractor-managed inventory at the direction of OSD, which resulted in the appearance that these services had made greater progress in reducing their on-hand excess inventory than they actually had;
  • an internal Army goal for reducing its total inventory was not based on an analysis of inventory data consistent with standards for internal control, potentially misguiding Army efforts to dispose of inventory; and
  • the Air Force identified about $2.6 billion in inventory that was retained without proper economic justification and plans to continue to retain it until late 2016, resulting in the Air Force paying to store inventory that may not be needed.

The Air Force has reported generally meeting DOD's goal of reducing on-order excess inventory (i.e., already purchased items that may be excess due to subsequent changes in requirements) to 6 percent of the total value of on-order inventory, but the Army and Navy had not met the goal, as of March 2014. Army and Navy management weaknesses pose challenges in reducing on-order excess inventory and meeting DOD's goal. For example,

  • the Army has not established goals for reducing on-order excess inventory in accordance with standards for internal control; and
  • the Navy does not use management reviews of potential on-order excess inventory based on dollar thresholds, as required by DOD guidance, resulting in a lack of oversight of on-order excess inventory.

In accordance with DOD guidance, the services use metrics that generally balance availability of spare parts with supply chain costs to assess their overall performance. The services' metrics balance several areas, including customer service, cost, and internal efficiency. Their customer-service metrics center on the availability of spare parts and backorders (i.e., part shortages). Their cost metrics measure financial aspects of inventory management, such as monthly sales of spare parts. The services also monitor internal efficiency metrics, such as the accuracy of demand forecasts (i.e., predicting future customer demand so managers can develop requirements to satisfy demands when they occur) for spare parts.

The services have efforts to improve and monitor demand forecasting and acquisition lead times (i.e., the time interval between identifying a need to purchase an item and delivering that item to the customer). The services have taken different approaches in these areas, and their efforts are in various stages of implementation.

Why GAO Did This Study

The Army, Navy, and Air Force are responsible for about $78 billion of DOD's $98 billion in secondary item inventory, such as spare parts needed to maintain military equipment. GAO identified DOD supply chain management as a high-risk area due in part to ineffective and inefficient inventory management practices that have contributed to high levels of excess inventory relative to total inventory. DOD established goals to reduce the percentages of both on-hand and on-order excess inventory.

GAO was asked to review DOD's inventory management practices. This report assesses the extent to which the services have (1) reduced on-hand excess inventory consistent with DOD goals, (2) reduced on-order excess inventory consistent with DOD goals, (3) balanced the timely availability of spare parts with supply chain costs in their inventory management metrics, and (4) implemented and monitored key improvement efforts. GAO analyzed inventory data from September 2009 through March 2014; evaluated the services' inventory processes; and interviewed service and OSD officials.

What GAO Recommends

GAO is making seven recommendations to OSD and the services to improve the effectiveness and efficiency of inventory management practices, including addressing reporting issues that limit visibility of inventory and identified management weaknesses. DOD concurred with GAO's recommendations.

For more information, contact Zina Merritt at (202) 512-5257 or merrittz@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Based on our recommendation, as of September 2016, the Army has updated its calculation of the approved acquisition objective so that it only includes 2 years of demand data. These actions will allow the Army to accurately report as well as provide better oversight of its inventory.

    Recommendation: To help ensure that the Army calculates its requirements for spare parts in accordance with Army guidance, and that OSD has accurate information to manage and oversee the department's progress in reducing on-hand excess inventory, the Secretary of the Army should direct the Commander, Army Materiel Command, to correct its calculation of the approved acquisition objective to include 2 years of demand data, as officials state the Army is taking steps to do.

    Agency Affected: Department of Defense: Department of the Army

  2. Status: Closed - Implemented

    Comments: Based on our recommendation, in April 2015, the department began excluding contractor-managed spare parts from calculations of the percentage of on-hand excess inventory. This action will allow the department and Congress to provide better oversight of on-order excess inventory managed by the government and contractors, thereby preventing unneeded inventory from being retained and stored.

    Recommendation: To balance DOD's continuing efforts to gather and report data on its contractor-managed inventory with ensuring the accuracy of its metric used to measure progress reducing on-hand excess inventory, the Secretary of Defense should direct the Assistant Secretary of Defense for Logistics and Materiel Readiness, in conjunction with the services, to exclude contractor-managed spare parts from calculations of the percentage of on-hand excess inventory.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: Based on our recommendation, as of July 2017, the Army had established an on-hand inventory excess goal that aligned with the Office of the Secretary of Defense's prescribed goal for on-hand excess inventory. Specifically, the Army eliminated its reduction goal and replaced it with goal of having no more than eight percent on-hand excess inventory. These actions will prevent the Army from pursuing a goal that results in it disposing of inventory it should retain.

    Recommendation: To help ensure that the Army has established appropriate goals to guide improved performance, in accordance with federal standards for internal control, the Secretary of the Army should direct the Commander, Army Materiel Command, to reassess its on-hand inventory reduction goal based on analysis of corrected Army inventory stratification data and other relevant inventory factors such as inventory returning from overseas operations, and revise the goal, as necessary, based on the results of the analysis.

    Agency Affected: Department of Defense: Department of the Army

  4. Status: Open

    Comments: As of August 2017, the Air Force has not completed the review of all of the necessary items to address the recommendation. We will continue to monitor the Air Force's actions to fully address this implementation.

    Recommendation: To help ensure that the Air Force is properly retaining items and accurately reporting its amount of retention stock and excess inventory in accordance with DOD guidance, and not spending resources to store unneeded inventory, the Secretary of the Air Force should direct the Commander, Air Force Materiel Command, to begin performing contingency retention reviews for those items, valued at about $2.6 billion, that it already knows should not be retained as economic retention stock so that it can identify and promptly dispose of inventory that is not needed.

    Agency Affected: Department of Defense: Department of the Air Force

  5. Status: Closed - Implemented

    Comments: Based on our recommendation, in April 2015, the Army established on-order excess inventory goals for its life-cycle management commands and began monitoring its performance against those goals. These actions will provide the Army the ability to provide better oversight of on-order excess inventory and maximize its reduction of on-order excess inventory.

    Recommendation: To improve management and minimize the amount of on-order excess inventory in accordance with DOD's on-order excess inventory reduction goal, and to be consistent with federal standards for internal control and leading practices for results-oriented management, the Secretary of the Army should direct the Commander, Army Materiel Command, to develop life-cycle management command-specific goals for the reduction of on-order excess inventory and monitor these goals.

    Agency Affected: Department of Defense: Department of the Army

  6. Status: Closed - Implemented

    Comments: Based on our recommendation, as of September 2015, the Navy began management reviews based on dollar value thresholds. This action will provide the Navy ability to provide better oversight of on-order excess inventory, thereby preventing unneeded inventory from being procured.

    Recommendation: To help ensure that the Navy has adequate oversight of on-order excess inventory termination decisions and necessary performance measures consistent with DOD guidance, the Secretary of the Navy should direct the Commander, Naval Supply Systems Command, to incorporate graduated management reviews based on dollar value thresholds into its current on-order excess inventory termination practices.

    Agency Affected: Department of Defense: Department of the Navy

  7. Status: Open

    Comments: As of September 2017, Naval Supply Systems Command plans to incorporate graduated management reviews and the ability to track and review the reason for not canceling and modifying on-order excess items into its automated termination module that is under development and being implemented. However, fiscal year 2019 is the best estimate for full implementation of such capabilities into the automated termination module, according to Naval Supply Systems Command officials.

    Recommendation: To help ensure that the Navy has adequate oversight of on-order excess inventory termination decisions and necessary performance measures consistent with DOD guidance, the Secretary of the Navy should direct the Commander, Naval Supply Systems Command, to incorporate the graduated management reviews and the ability to track and review the reasons for not canceling and modifying on-order excess items into its automated termination module that is under development.

    Agency Affected: Department of Defense: Department of the Navy

 

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