Navy Supply:

Economic Order Quantity and Item Essentiality Need More Consideration

NSIAD-88-64: Published: Jan 6, 1988. Publicly Released: Jan 6, 1988.

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GAO evaluated the economic order quantity (EOQ) and safety-level aspects of the Navy's requirements determination process for replenishment materiel for peacetime operating stocks to determine whether the process could lead to inflated procurements and unnecessary costs.

GAO found that the Navy: (1) ordered $133.7 million in materiel in fiscal year 1986 that exceeded EOQ; (2) incurred additional costs of $10.5 million on this materiel because the increased holding costs more than offset the decreases in ordering costs and implied shortage costs; (3) increased overbuying rates by ordering a year's supply of materiel instead of EOQ; (4) lowered the acceptable risk of running out of stock, which increased safety-level requirements by $80.6 million; and (5) provided safety-level requirements of $11.1 million for items that aircraft did not need to perform their missions.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The Department of Defense (DOD) did not agree that EOQ normally should be used in ordering material in lieu of ordering a 1-year supply. DOD stated that GAO did not consider all of the relevant costs and benefits of the 1-year policy. After reevaluating the matter, GAO still believes that the Navy should rescind its policy of routinely buying more than EOQ.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Supply Systems Command, not to routinely buy more than EOQ under the overall Defense order parameters of the 3-month minimum and the 3-year maximum, unless it can be shown that larger procurements will result in quantity discounts that more than offset the additional holding costs.

    Agency Affected: Department of Defense: Department of the Navy

  2. Status: Closed - Implemented

    Comments: NAVAIR has completed its evaluation of essentiality codes and will issue new instructions by June 1991. Implementation of these instructions will be covered by GAO in future supply management reviews.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Supply Systems Command, to base safety-level requirements on the relative importance of the items, rather than constrain acceptable stockout risks for certain items. The Secretary should also direct the Commander to use mission essentiality in safety-level requirement determinations when this information is available.

    Agency Affected: Department of Defense: Department of the Navy

 

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