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Report to the Honorable Tom Harkin, U.S. Senate:

United States General Accounting Office:

GAO:

May 2003:

Defense Inventory:

Overall Inventory and Requirements Are Increasing, but Some Reductions 
in Navy Requirements Are Possible:

GAO-03-355:

GAO Highlights:

Highlights of GAO-03-355, a report to the Honorable Tom Harkin, U.S. 
Senate 

Why GAO Did This Study:

Changes in the Department of Defense’s (DOD) mission can lead to 
changes in inventory requirements, which, in turn, determine the size 
of DOD’s inventory. Since 1990, GAO has identified DOD’s management of 
inventory as a high-risk area because levels of inventory were too 
high and management systems and procedures were ineffective. 
Furthermore, DOD has attributed readiness problems to parts shortages. 
In this report, GAO (1) provides information on changes in and make up 
of the department’s inventory and (2) analyzes changes in inventory 
requirements, focusing on the Navy.

What GAO Found:

DOD reported a $5.6 billion increase in inventory on hand and a $1.7 
billion increase in inventory on order between September 30, 1999, and 
September 30, 2001. The reported inventory increases were primarily 
due to the Navy reporting aviation parts held by ships and air 
squadrons that were previously not reported and to overall DOD 
inventory requirements increases. In addition, GAO identified large 
imbalances in the department’s inventory; as of September 30, 2001, 
over 1.7 million items had $38 billion of inventory that exceeded the 
items’ current inventory operating requirements of $24.9 billion (see 
table below). At the same time, there were 523,000 items that needed 
an additional $10.4 billion of inventory to meet the items’ current 
inventory operating requirements.  

Generally, inventory increases are the result of increases in 
inventory requirements.  DOD’s overall inventory requirements 
increased by $10.6 billion, or 26 percent, between the end of fiscal 
years 1999 and 2001, with some of the Navy’s requirements being 
overstated.  The Navy was responsible for the largest dollar increase, 
$4.7 billion of the $10.6 billion increase. A large part of the Navy 
increase, $3.4 billion, was attributable to a change in the way the 
Navy accounted for aviation parts held by ships and air squadrons. The 
remaining Navy increase was attributable to a variety of reasons, such 
as price increases; increased demand and item wear-out rates; and, in 
some cases, inaccurate data. Also, since 1997 the Navy has reduced the 
amount of administrative lead time it takes to place inventory orders 
(the period between when the need to replenish an item through a 
purchase is identified and when a contract is let), yet it has not 
formally updated the data used to compute those requirements. For 
example, the Navy reduced the administrative lead time for medium-
sized sole-source contracts for repairable items from 200 days to 130 
days, but it did not recognize the reduction in its requirements 
computations.  As a result, those requirements are inaccurate and 
overstated.   

What GAO Recommends:

Because the long-standing logistical problems associated with 
inventory excesses and shortages have been addressed in prior reports 
as well as in GAO’s Performance and Accountability Series reports, GAO 
is not making any additional recommendations in regard to those 
issues.  However, to improve the accuracy of the Navy’s inventory 
requirements, GAO recommends that the Secretary of Defense require the 
Navy to ensure that the most current data available for computing its 
administrative lead time requirements are being used.  DOD generally 
concurred with GAO’s report, and stated that the Navy formally updated 
its system to begin using the most current data available to compute 
administrative lead time requirements in March 2003.

www.gao.gov/cgi-bin/getrpt?GAO-03-355.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact William M. Solis at (202) 512-8365 or 
solisw@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Inventory Growth Reverses Past Reductions:

Requirements Are Increasing, but Some of Navy's Are Overstated:

Conclusions:

Recommendation for Executive Action:

Agency Comments:

Appendix I: Scope and Methodology:

Appendix II: GAO Reports and Open Recommendations Relating to DOD's 
Inventory Management Problems:

Appendix III: DOD and Military Component Inventory Requirements at the 
End of Fiscal Years 1999 and 2001:

Appendix IV: Reasons for Requirements Increasing between 
September 30, 1999, and September 30, 2001, for 90 Sample Items:

Appendix V: Comments from the Department of Defense:

Appendix VI: Staff Acknowledgments:

Tables:

Table 1: Value of DOD's Inventory On Hand and On Order for Items That 
Had Too Much Inventory by Military Component as of September 30, 2001:

Table 2: Comparison of Inventory Requirements by Military Component as 
of September 30, 1999, and September 30, 2001:

Table 3: Comparison of Requirements for 279,000 Items Managed by the 
Navy at the End of Fiscal Years 1999 and 2001:

Table 4: Reasons for Navy Requirements Increases for Items Reviewed:

Table 5: Comparison of Inventory Requirements for the Department of 
Defense at the End of Fiscal Years 1999 and 2001:

Table 6: Comparison of Inventory Requirements for the Defense Logistics 
Agency at the End of Fiscal Years 1999 and 2001:

Table 7: Comparison of Inventory Requirements for the Army at the End 
of Fiscal Years 1999 and 2001:

Table 8: Comparison of Inventory Requirements for the Navy at the End 
of Fiscal Years 1999 and 2001:

Table 9: Comparison of Inventory Requirements for the Air Force at the 
End of Fiscal Years 1999 and 2001:

Figures:

Figure 1: DOD's Reported Inventory On Hand at the End of Fiscal Years 
1996 through 2001:

Figure 2: DOD's Reported Inventory On Order at the End of Fiscal Years 
1996 through 2001:

Figure 3: DOD Inventory On Order and On Hand and Needed Purchases for 
Items That Did Not Have Enough Inventory as of September 30, 2001:

Figure 4: Changes in Navy Inventory Requirements between September 30, 
1999, and September 30, 2001:

Abbreviations:

DOD: Department of Defense:

GAO: General Accounting Office:

United States General Accounting Office:

Washington, DC 20548:

May 8, 2003:

Dear Senator Harkin:

The Department of Defense maintains a supply of spare and repair parts 
in order to keep its equipment operational for war-and peace-time 
missions. The management of this inventory is especially critical as 
the department and the services are called upon for new missions 
relating to combating terrorism worldwide and protecting the homeland. 
Such changes in missions can lead to changes in inventory requirements, 
which, in turn, determine the size of the inventory.

This report, in response to your interest in the Department of 
Defense's inventory management, is one in a series on the department's 
management of secondary inventory--that is, spare and repair parts, 
clothing, medical, and other items that support the military's 
operating forces. Since 1990, we have identified the department's 
management of secondary inventory as a high-risk area because levels of 
inventory were too high and management systems and procedures were 
ineffective. While some improvements have been made, in January 2003 we 
reported that these conditions still existed and that over half of the 
department's inventory is not needed to satisfy current operating 
requirements.[Footnote 1] Nevertheless, the department has attributed 
readiness problems to parts shortages. In response to your request, 
this report (1) provides information on changes in and make up of the 
department's inventory and (2) analyzes changes in inventory 
requirements, with a focus on causes of requirements changes derived 
from a sample of Navy inventory items.

To accomplish this review, we expanded on previously reported 
analyses[Footnote 2] to cover inventory data from fiscal year 1996 
through 2001 for the Army, the Navy, the Air Force, and the Defense 
Logistics Agency. We also analyzed inventory data as of September 30, 
2001, to show the number of items that had more than or less than 
enough inventory to satisfy requirements. We compared September 30, 
1999, inventory requirements to September 30, 2001, inventory 
requirements for the military services[Footnote 3] and the Defense 
Logistics Agency. We used data as of September 30, 2001, because that 
was the most recent end of fiscal year data available when we began our 
examination. We did not revalue the inventory that needs to be repaired 
to recognize the repair cost, and we did not value inventory that is to 
be disposed of at salvage prices. Also, our analyses did not include 
fuel, certain inventories held by units, and Marine Corps inventory. 
Fuel and inventories held by units are not stratified by requirement, 
and the Marine Corps inventory represents a small part of the universe. 
Because the Navy had the largest increase in inventory requirements 
during the period, we analyzed a sample of selected Navy inventory 
items to identify key causes of increased inventory requirements. We 
conducted our review from June 2002 through March 2003 in accordance 
with generally accepted government auditing standards. We provide the 
details of our scope and methodology in appendix I.

Results in Brief:

The Department of Defense reported a $5.6[Footnote 4] billion and a 
$1.7 billion increase in inventory on hand and on order, respectively, 
between September 30, 1999, and September 30, 2001. The on-hand and on-
order inventories had increased to $69.8 billion and $9.9 billion, 
respectively. The reported inventory increases were primarily due to 
the Navy reporting aviation parts held by ships and air squadrons that 
were previously not reported and to overall Department of Defense 
inventory requirements increases. In addition, large imbalances in the 
department's inventory continue to exist. As of September 30, 2001, 
over 1.7 million items had $38 billion of inventory on hand or on order 
that exceeded the items' current inventory operating requirements of 
$24.9 billion. At the same time, 523,000 items needed an additional 
$10.4 billion of inventory to meet the items' current inventory 
operating requirements. In 1997, we reported that requirements 
decreases contributed to items having inventory on hand that exceeded 
current requirements.[Footnote 5] Similarly, in 2000, we reported that 
while inventory managers made inventory purchases that were supported 
by requirements, subsequent requirement decreases resulted in the 
purchases being in excess of requirements.[Footnote 6] The current data 
indicate that many of these long-standing and systemic inventory 
management problems--which have been consistently identified as a high-
risk area in our Performance and Accountability Series reports--
continue to exist. Although the services are implementing management 
changes--initiatives to transfer the management and oversight of some 
of the department's inventory to parts contractors and to implement new 
inventory management systems--that will reduce the size of the 
department's reported inventory, these changes do not address the long-
standing and systemic problems.

The department's overall inventory requirements increased by $10.6 
billion, or 26[Footnote 7] percent, between the end of fiscal years 
1999 and 2001, with some of the Navy's requirements being overstated. 
The Navy was responsible for the largest dollar increase, $4.7 billion 
of the $10.6 billion increase. A large part of the Navy increase, $3.4 
billion, corresponded to its reporting of requirements associated with 
aviation parts held by ships and air squadrons that were not previously 
reported. The remaining Navy increase was due to a variety of reasons, 
such as price increases; increased demand, inventory lead 
time,[Footnote 8] and item wear-out rates that increased safety levels; 
and, in some cases, inaccurate data. Also, since 1997 the Navy has 
reduced the amount of administrative lead time it takes to place 
inventory orders, yet it has not formally updated the data used to 
compute those requirements. For example, the Navy reduced the 
administrative lead time for medium-sized sole-source contracts for 
repairable items from 200 days to 130 days, but it did not recognize 
the reduction in its requirements computations. As a result, those Navy 
requirements are inaccurate and overstated.

Many of the long-standing and systemic logistical problems associated 
with having both too much inventory for some items and not enough 
inventory for others have been addressed in our prior reports as well 
as in our Performance and Accountability Series, and we therefore are 
not making any new recommendations in regard to those issues. We 
provide a list of those reports and past recommendations in appendix 
II. However, to improve the accuracy of the Navy's inventory 
requirements, we are recommending that the Secretary of Defense require 
the Navy to use the most current data available for computing its 
administrative lead time requirements. In commenting on a draft of the 
report, the department generally concurred with the report. With regard 
to our recommendation, the department noted that item managers use the 
most current data available to manually compute administrative lead 
time requirements when making management decisions for individual items 
and that in March 2003, the Navy formally updated its automated 
inventory system to begin using the most current data available to 
compute administrative lead time requirements for all items. This 
action to update the Navy's automated inventory system responds to our 
recommendation.

Background:

The Department of Defense (DOD) refers to the amount of secondary 
inventory that it needs to have on hand or on order to support current 
operations as the requirements objective. The requirements objective 
includes inventory requirements for a reorder point and an economic 
order quantity. The reorder point is the point at which inventory 
replenishment will normally prevent out-of-stock situations from 
occurring. The economic order quantity is the amount of inventory that, 
when ordered and received, results in the lowest total cost for 
ordering and holding inventory.

When the combined total of on-hand and on-order inventories falls to or 
below the reorder point, an item manager generally places an order for 
additional inventory so that the total of on-hand and on-order 
inventories is equal to the requirements objective. Subsequently, on-
hand inventory is used to satisfy customer requisitions that are 
received after the item manager orders new inventory, and thus the 
total of on-hand and on-order inventories is generally less than the 
requirements objective. Furthermore, an item's reorder point can move 
up or down over time and--depending on the item--may include one or 
more of the following:

* war reserves,[Footnote 9]

* unfilled requisitions,

* a safety level to be on hand in case of minor interruptions in the 
resupply process or unpredictable fluctuations in demand,

* minimum quantities for essential items for which demand is not 
normally predicted (also referred to as insurance items),

* inventory to satisfy demands while broken items are being repaired,

* inventory to satisfy demands during the period between when the need 
to replenish an item through a purchase is identified and when a 
contract is let (also referred to as administrative lead time), and:

* inventory to satisfy demands during the period between when a 
contract for inventory is let and when the inventory is received (also 
referred to as production lead time).

Because the reorder point provides for inventory to be used during 
the time needed to order and receive inventory and for a safety level, 
item managers are able to place orders so that the orders arrive before 
out-of-stock situations occur. Generally, an item manager orders an 
amount of inventory needed to satisfy both the reorder point 
requirement and the economic order quantity.

Inventory Growth Reverses Past Reductions:

Between September 30, 1999, and September 30, 2001, DOD's inventory 
on hand increased by $5.6 billion and inventory on order increased by 
$1.7 billion, reversing past inventory reductions. These inventory 
increases were primarily due to the Navy reporting aviation parts held 
by ships and air squadrons that were previously not reported and to 
overall DOD inventory requirements increases. In addition, large 
imbalances in the inventory continue to exist. As of September 30, 
2001, over 1.7 million items had $38 billion of inventory on hand or on 
order that exceeded the items' current inventory operating requirements 
of $24.9 billion. We also identified 523,000 items that did not have 
enough inventory on hand or on order to meet the items' current 
inventory operating requirements. While the services are implementing 
management changes that will reduce the size of DOD's inventory, long-
standing and systemic inventory management problems continue to exist.

Inventory On Hand and On Order Has Begun to Increase:

As of September 30, 2001, DOD's on-hand inventory was $69.8 billion, up 
$5.6 billion, or 9 percent, since September 30, 1999, and on-order 
inventory was $9.9 billion, up $1.7 billion, or 21 percent (see figs. 1 
and 2).

Figure 1: DOD's Reported Inventory On Hand at the End of Fiscal Years 
1996 through 2001:

[See PDF for image]

[End of figure]

Figure 2: DOD's Reported Inventory On Order at the End of Fiscal Years 
1996 through 2001:

[See PDF for image]

[End of figure]

As indicated in figures 1 and 2, the period September 30, 1996, to 
September 30, 1999, shows a decline in on-hand and on-order 
inventories. During this period, inventory on hand dropped $5.5 billion 
and inventory on order dropped $0.7 billion.

Inventory Growth Caused by Reporting Changes and Requirements 
Increases:

A Navy inventory reporting change and increased DOD inventory 
requirements contributed significantly to the growth in DOD's 
inventory. In 1996, the Navy began including aviation inventories held 
by ships and air squadrons in its inventory reports. Most of the change 
occurred in 1999 when the Navy began reporting parts held by aircraft 
carriers. Previously, the Navy considered these inventories as having 
been sold to ships and installations and not as reported inventory. 
Based on Navy records, we estimate that parts valued at about $3.3 
billion[Footnote 10] were added to the reported inventory as a result 
of the accounting change. A similar change by the Army resulted in an 
inventory increase of $0.3 billion between September 30, 1999, and 
September 30, 2001. These Navy and Army inventory reporting changes 
correspond to the reporting methods already in use by the Air Force.

In addition, overall DOD inventory requirements increased from 
$40.6 billion as of September 30, 1999, to $51.2 billion as of 
September 30, 2001. Increased requirements can affect an item's reorder 
point and economic order quantity. Consequently, an increase in 
requirements can affect when item managers place orders and the amount 
of inventory they purchase and can affect how much inventory is on 
hand. For example, if the requirements increase and enough inventory is 
not on hand or on order to satisfy the requirements, an item manager 
will place an order for additional inventory. When the additional 
inventory is received, inventory levels will also be increased.

Large Inventory Imbalances Still Exist:

Since 1995 we have reported on imbalances in DOD's inventory, and 
our current work shows that these imbalances continue to 
exist.[Footnote 11] Our comparison of September 30, 2001, on-hand and 
on-order inventories to the requirements objectives for 2.4 million 
items showed that 1.7 million items, or 70 percent, had inventory on 
hand or on order that exceeded the requirements, and 523,000 items, or 
21 percent, did not have enough inventory on hand or on order to 
satisfy all of the requirements. The remaining 209,000 items, or 9 
percent, had the right amount of inventory on hand and/or on order to 
satisfy all requirements.

The 1.7 million items had $22.1 billion of inventory on hand and $2.8 
billion of inventory on order that satisfied requirements and an 
additional $36 billion of inventory on hand and $2.0 billion[Footnote 
12] on order that exceeded requirements (see table 1).

Table 1: Value of DOD's Inventory On Hand and On Order for Items That 
Had Too Much Inventory by Military Component as of September 30, 2001:

Dollars in billions.

Army: Inventory satisfying requirements: On hand: $2.6: 
Inventory satisfying requirements: On order: $0.2: 
Inventory exceeding requirements: On hand: $3.7: 
Inventory exceeding requirements: On order: $0.0[A].

Navy: Inventory satisfying requirements: On hand: 7.0: 
Inventory satisfying requirements: On order: 0.3: 
Inventory exceeding requirements: On hand: 8.8: 
Inventory exceeding requirements: On order: 0.0[A].

Air Force: Inventory satisfying requirements: On 
hand: 10.1: Inventory satisfying requirements: On 
order: 0.4: Inventory exceeding requirements: On 
hand: 18.8: Inventory exceeding requirements: On 
order: 0.6.

Defense Logistics Agency: Inventory satisfying 
requirements: On hand: 2.4: Inventory satisfying 
requirements: On order: 1.9[B]: Inventory 
exceeding requirements: On hand: 4.7: Inventory 
exceeding requirements: On order: 1.4[B].

Total: Inventory satisfying requirements: On hand: 
$22.1: Inventory satisfying requirements: On 
order: $2.8: Inventory exceeding requirements: On 
hand: $36.0: Inventory exceeding requirements: On 
order: $2.0.

Source: DOD.

[A] The amount is less than $50 million.

[B] The data provided by the Defense Logistics Agency did not 
distinguish between inventory on order and inventory that was in 
transit. We estimate that $400 million was in-transit inventory.

[End of table]

Overall, the amount of DOD's inventory that exceeds current operating 
requirements has decreased since 1996. On-hand inventory that 
exceeds current operating requirements decreased from $41.3 billion, or 
59 percent, of on-hand inventory on September 30, 1996, to $36.1 
billion, or 52 percent, of the $69.8 billion inventory on hand on 
September 30, 2001. During the same period, DOD's inventory on order 
that exceeds requirements decreased from $1.7 billion, or 19 percent, 
of on-order inventory to $1.6 billion, or 16 percent, of the $9.9 
billion inventory on order. In 1997, we reported that requirement 
decreases contributed to items having inventory on hand that exceeded 
current requirements. Similarly, in 2000, we reported that while 
inventory managers made inventory purchases that were supported by 
requirements, subsequent requirement decreases resulted in the 
purchases being in excess of requirements.[Footnote 13]

We identified 523,000 items that did not have enough inventory on hand 
or on order to satisfy all of the requirements that make up the 
requirements objective. The items had requirements valued at $23.4 
billion that were partially satisfied by $7.7 billion of inventory on 
hand and $5.3 billion of inventory that was on order (see fig. 3). The 
remaining $10.4 billion of requirements could be satisfied by 
purchases.

Figure 3: DOD Inventory On Order and On Hand and Needed Purchases for 
Items That Did Not Have Enough Inventory as of September 30, 2001:

[See PDF for image]

[End of figure]

The amount of inventory exceeding or failing to meet inventory 
requirements indicates that many of the long-standing and systemic 
inventory management problems previously identified in our Performance 
and Accountability Series still exist.[Footnote 14] We recommended in 
these reports that DOD address the long-standing weaknesses that limit 
the economy and efficiency of its logistics operations, including 
having too much inventory on hand and on order and shortages of key 
spare parts. Appendix II lists past reports and recommendations 
relating to DOD's long-standing inventory management problems.

Management Changes Will Reduce the Size of the Department's Inventory:

The services are implementing management changes that will reduce 
the size of DOD's reported inventory and the amount of inventory that 
satisfies requirements. These changes include an initiative to transfer 
the traditional DOD inventory and technical support function to parts 
contractors and initiatives to implement new inventory management 
systems.

The services have initiatives that will transfer the traditional DOD 
inventory and technical support function to parts contractors. For 
example, as of September 30, 2001, the Navy had about 22,000 items 
that were managed by contractors. In some cases, Navy-owned inventory 
is being replaced by contractor-owned inventory. The Navy was paying 
$330 million for contractors to manage the 22,000 items, and the Navy 
planned to increase that amount to over $700 million for the next 
fiscal year. According to an official from the Office of the Secretary 
of Defense, contractor-owned inventories used to support military 
operations are not included in its inventory report. Consequently, the 
use of contractor-owned inventories will decrease the growth of DOD's 
inventory.

In addition, new inventory management systems that the military 
components are implementing may also affect the amount of DOD's 
reported inventory. For example, the Air Force's requirements for 
insurance items[Footnote 15] decreased by $600 million between 1999 and 
2001. According to the Air Force, the requirements decreased as a 
result of implementing a new requirements determination system that 
changed the way in which it computed those requirements. The Army, the 
Navy, and the Defense Logistics Agency are also in the process of 
developing new inventory management systems. However, the impact of the 
implementation of these new inventory management systems on the size of 
DOD's inventory is not yet known.

Although the initiatives described above will reduce the size of 
DOD's inventory, they do not address the long-standing and systemic 
problems that are limiting the economy and efficiency of the 
department's logistics operations.

Requirements Are Increasing, but Some of Navy's Are Overstated:

DOD's overall inventory requirements increased by $10.6 billion, or 
26 percent, between the end of fiscal years 1999 and 2001, with some of 
the Navy's requirements being overstated. The Navy was responsible for 
$4.7 billion of the overall $10.6 billion increase. A large part of the 
Navy increase, $3.4 billion, was due to the Navy reporting change we 
discussed in the previous section--that is, reporting aviation parts 
held by ships and air squadrons as inventory that were previously not 
reported. Consequently, the Navy also began reporting the associated 
requirements. The remaining $1.3 billion Navy increase was due to a 
variety of reasons related to inventory cost and usage. However, some 
Navy increases were caused by inaccurate data used to compute 
administrative lead time requirements, and as a result, those 
requirements are overstated.

Overall DOD Inventory Requirements Are Increasing:

DOD's overall inventory requirements increased from $40.6 billion as of 
September 30, 1999, to $51.2 billion as of September 30, 2001, an 
increase of $10.6 billion, or 26 percent. Army, Navy, and Defense 
Logistics Agency inventory requirements increased significantly while 
the Air Force's requirements decreased (see table 2). The Navy was 
responsible for the largest share of DOD's overall inventory 
requirements increase, with $4.7 billion of the $10.6 billion inventory 
change.

Table 2: Comparison of Inventory Requirements by Military Component as 
of September 30, 1999, and September 30, 2001:

Dollars in billions.

Navy: 1999: $10.5: 2001: $15.2: Dollar: change: $4.7: Percent change: 
44.

Defense Logistics Agency: 1999: 9.1; 2001: 12.4: Dollar: change: 3.3; 
Percent change: 36.

Army: 1999: 6.0: 2001: 9.1; Dollar: change: 3.1: Percent 
change: 52.

Air Force: 1999: 14.9: 2001: 
14.5: Dollar: change: -.5: 
Percent change: -3.

Total: 1999: $40.6: 2001: 
$51.2: Dollar: change: $10.6: 
Percent change: 26.

Source: DOD.

Note: Numbers may not add due to rounding.

[End of table]

All requirements that comprise DOD's requirements objective increased 
except for unfilled requisitions and nonrecurring lead time 
requirements used by the Air Force. Requirements for safety levels, 
items held as insurance against outages; economic order quantities; and 
production lead time increased most significantly. Appendix III 
provides a detailed comparison of the military components' inventory 
requirements as of September 30, 1999, and September 30, 2001.

Table 2 shows a decrease in the Air Force's requirements. According to 
an Air Force Materiel Command official:

* Higher congressional funding levels allowed the Air Force to buy and 
repair more of the items that were needed and reduce requirements for 
unfilled requisitions.

* Requirements for items held as insurance against outages decreased as 
a result of implementing a new requirements determination system that 
changed the way in which the Air Force computed those requirements.

* Requirements for war reserves decreased as a result of decreased need 
for F-16 fuel tanks.

Navy Inventory Requirements Increased for a Variety of Reasons:

Navy requirements increased $4.7 billion between September 30, 1999, 
and September 30, 2001, primarily due to a change in how the Navy 
accounts for aviation inventory requirements. The remaining Navy 
increase was due to such reasons as price increases and increased usage 
of items. Also, because the Navy has not updated the data used to 
compute administrative lead time requirements for some aviation items, 
those requirements are overstated.

Navy Requirements Increased $4.7 Billion:

The Navy's $4.7 billion increase was not uniform across all 
requirements. Safety level, repair cycle, production lead time, 
economic order quantity, and insurance items requirements all increased 
by approximately $5.0 billion. However, requirements for Navy war 
reserves, unfilled requisitions, and administrative lead time actually 
decreased during this period, by $331 million (see fig. 4).

Figure 4: Changes in Navy Inventory Requirements between September 30, 
1999, and September 30, 2001:

[See PDF for image]

[End of figure]

A large part of the Navy's increase was due to a change in the way the 
Navy accounts for aviation inventory requirements for parts held by 
ships and air squadrons. According to the Navy, prior to 1996, aviation 
items that inventory control points[Footnote 16] sold to customers 
onboard ships and at installations were not accounted for in its 
inventory. In 1996, the Navy began accounting for aviation items held 
by ships and installations by recognizing these requirements and assets 
in its inventory system and recording them as insurance item 
requirements. The Navy made the change in order to provide item 
managers visibility of the inventory and associated requirements and 
assets. Most of the increase in requirements and inventory occurred 
after 1999 when the Navy began to include aviation parts held on 
aircraft carriers. Generally, the change in accounting for these 
requirements resulted in a $3.4 billion increase in Navy insurance item 
requirements,[Footnote 17] from $2.4 billion on September 30, 1999, to 
$5.8 billion on September 30, 2001.

To gain insight into why increases in the Navy's inventory requirements 
occurred, we compared the 307,000 items the Navy managed as of 
September 30, 1999, to the 309,000 items managed as of September 30, 
2001, and identified 279,000 items that were managed in both 
years.[Footnote 18] Overall, the value of the 279,000 items increased 
$4.2 billion between September 30, 1999, and September 30, 2001 (see 
table 3). Of this amount, $3.1 billion was the result of increased 
inventory requirement quantities and $1.1 billion was due to price 
changes. About 37,000 items accounted for $4.3 billion in inventory 
requirements increases, and another 37,000 items accounted for a $1.2 
billion decrease in inventory requirements decreases. There was no 
change in inventory requirement quantities for the remaining 205,000 
items during the same period of review.

Table 3: Comparison of Requirements for 279,000 Items Managed by the 
Navy at the End of Fiscal Years 1999 and 2001:

Dollars in billions.

Increased: Items: 37,000: Change in requirement quantity: $4.3: Change 
in price: $0.8: Total change: $5.1.

Stayed the same: Items: 205,000; Change in requirement quantity: NA: 
Change in price: 0.2: Total change: 0.2.

Decreased: Items: 37,000: 
Change in requirement quantity: -1.2: Change in 
price: 0.2: Total change: -1.0.

Total: Items: 279,000: Change 
in requirement quantity: $3.1: Change in price: 
$1.1: Total change: $4.2.

Source: DOD.

Legend: NA = Not Applicable.

Notes: GAO's analysis of DOD data.

Totals do not add due to rounding.

[End of table]

We also reviewed in more detail 90 of the 279,000 items. We selected 
the 90 items because they had large increases in requirements and 
accounted for $1.1 billion of the $4.2 billion of the requirements 
increase associated with the 279,000 items. For 37 of the 90 items, 
insurance requirements increases accounted for $454 million of the 90 
items' $1.1 billion total requirements increase between 1999 and 2001. 
Of the $454 million, $428 million of the increase was attributable to 
including existing aviation requirements and $26 million was 
attributable to new aviation requirements. For example, the insurance 
requirement for an aviation radar transmitter, valued at $446,000 each 
and used on the F-18 and the AV-8B aircraft, increased from 44 
transmitters on September 30, 1999, to 196 on September 30, 2001. The 
requirement caused an increase of 128 transmitters by recognizing 
existing aviation requirements in the Navy's inventory and an increase 
of another 24 transmitters as a result of new requirements for these 
transmitters in newer versions of the F-18 aircraft.

In addition to the $454 million increase in insurance item 
requirements, our analysis of the 90-item sample identified a wide 
variety of additional reasons for the increases in requirements. For 
example, increased usage of items resulted in requirements increasing 
by $294 million for 46 items. Increased usage was often the result of 
changes in demand for an item, defective parts needing to be replaced, 
and items wearing out at a faster rate than expected. Changes in the 
Navy's stock, overhaul, or operational policies; the inability to find 
a commercial source for an item; and the unavailability of material 
needed to manufacture items were among the other reasons for 
requirements increases. Table 4 summarizes the reasons identified for 
the requirements increases. Additional information and examples are 
discussed in more detail in appendix IV.

Table 4: Reasons for Navy Requirements Increases for Items Reviewed:

Dollars in millions.

Increase in insurance item requirements: Number of 
items affected: 37: Increase in requirements: 
$454.

Usage of the item increased: Number of items 
affected: 46: Increase in requirements: 294.

Navy changed stock, overhaul, or operational policies; Number of items 
affected: 36: Increase in requirements: 126.

Source or repair issues: Number of items affected: 
29: Increase in requirements: 137.

Uncertainty of demand, lead time or wear-out rate increased safety 
levels: Number of items affected: 22; Increase in requirements: 72.

Increases were not valid: Number of items 
affected: 7: Increase in requirements: 98.

Data anomalies: Number of items affected: 2; Increase in 
requirements: 2.

Source: DOD.

Notes: GAO's analysis of DOD data.

[End of table]

Because some items had more than one reason for requirements increases, 
the number of items and value of the increased requirements exceeds 90 
and $1.1 billion, respectively.

Navy Administrative Lead Time Requirements Are Not Accurately Computed 
and Are Overstated:

The Navy has not formally updated the data it uses to project 
administrative lead time[Footnote 19] requirements for aviation parts 
since 1999, and thus these requirements are overstated. Before 1999, 
the Navy used the actual administrative lead time from an item's 
previous procurement as a basis for projecting its future 
administrative lead time requirements for aviation parts. In 1999, the 
Navy began using an administrative lead time matrix for computing the 
requirements. Under this approach, the Navy places aviation items into 
matrix cells based on the type of item being purchased, the size of the 
potential purchase, and the type of contract to be used to purchase the 
item. The Navy believes that items that are similar and are purchased 
in a similar manner will have similar lead times. As of September 30, 
2001, the Navy had computed $895 million of administrative lead time 
requirements for its 101,000 aviation parts.

When the Navy implemented the matrix approach for computing 
administrative lead time requirements in 1999, it based the 
requirements on actual fiscal year 1997 lead time data. Since 1997 the 
Navy has generally reduced its actual administrative lead time. While 
the Navy has recomputed its administrative lead times using statistical 
techniques aimed at reducing fluctuations from year to year, it has not 
formally updated the administrative lead time matrix used to compute 
requirements to reflect the most current, lower data. However, in 
response to our inquiries, the Navy, in December 2002, reviewed the 
administrative lead time data used to compute requirements and found 
that the data had been revised. Item manager reviews and the purchase 
of items that had not recently been purchased led to changes to the 
lead time data in the files.

Our analysis of the changes showed that the revised data had lowered 
the administrative lead times for most of the matrix cells and that the 
Navy-computed lead times would be further reduced for most matrix 
cells. For example, revised data reduced the lead time from 200 days to 
183 days for medium-sized sole-source contracts for repairable items. 
The Navy-computed lead time further reduced the lead time to 130 days. 
In contrast, for large-sized sole-source contracts for repairable 
items, the revised data reduced the lead time from 280 days to 183 days 
while the Navy-computed lead time set it at 195 days.

Navy officials responsible for aviation parts have been reluctant to 
use the lower Navy-computed lead time data. Even though the Navy uses a 
technique to reduce fluctuations in its computed lead time from year to 
year, the officials believe that annual changes in the lead time will 
result in terminating contracts for parts in 1 year and possibly having 
to repurchase the same items the next year.

Conclusions:

The Navy is overstating its administrative lead time requirements for 
aviation items by not using the most current data available for 
computing those requirements. Because the most current data reflects 
the Navy's reduced administrative lead time, using old data 
unnecessarily results in inaccurate and overstated requirements that 
can lead to unnecessary purchases. The Navy is concerned that using the 
most current data will result in cycles of ordering inventory, 
canceling the orders, and subsequently reordering the items. We believe 
that using the most current data that is based on statistical 
techniques aimed at reducing potential fluctuations in the requirements 
will result in stable and more accurate administrative lead time 
requirements and help the Navy avoid unnecessary purchases.

Recommendation for Executive Action:

To improve the accuracy of the Navy's secondary inventory requirements, 
we recommend that the Secretary of Defense direct the Secretary of the 
Navy to require the Commander, Naval Supply Systems Command, 
require its inventory managers to use the most current data available 
for computing administrative lead time requirements.

Agency Comments:

In commenting on a draft of the report, DOD generally concurred with 
the report. With regard to our recommendation, DOD noted that item 
managers use the most current data available to manually compute 
administrative lead time requirements when making management decisions 
for individual items and that in March 2003, the Navy formally updated 
its automated inventory system to begin using the most current data 
available to compute administrative lead time requirements for all 
items. This action to update the Navy's automated inventory system 
responds to our recommendation.

DOD's comments can be found in appendix V.

As arranged with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from the issue date. At that time, we will send copies of this report 
to the Secretary of Defense; the Secretaries of the Army, the Navy, and 
the Air Force; the Director, Defense Logistics Agency; the Director, 
Office of Management and Budget; and other interested congressional 
committees. We will also make copies available to others upon request. 
In addition, the report will be available at no charge on the GAO Web 
site at http://www.gao.gov/.

Please contact me on (202) 512-8365, if you or your staff have any 
questions concerning this report. Staff acknowledgments are listed in 
appendix VI.

Sincerely yours,

William M. Solis, 
Director 
Defense Capabilities and Management:

Signed by William M. Solis:

[End of section]

Appendix I: Scope and Methodology:

To identify changes in the Department of Defense's (DOD) on-hand and 
on-order inventories for fiscal years 1996 through 2001, we used data 
developed in prior reviews and inventory stratification reports. We 
analyzed on-hand and on-order inventories as they related to the 
military components' requirements objectives. We held meetings to 
discuss these observations with officials from the Army Materiel 
Command, Alexandria, Virginia; the Naval Supply Systems Command, 
Mechanicsburg, Pennsylvania; the Air Force Materiel Command, Dayton, 
Ohio; and the headquarters of Defense Logistics Agency, Alexandria, 
Virginia. To determine the number of items that had more than or less 
than enough inventory to satisfy requirements, we obtained computerized 
inventory records from the military components as of September 30, 
2001, the most recent end of fiscal year data at the time we began our 
examination. We did not test the reliability of the data. We used the 
computerized records to compare on-hand and on-order inventories to 
requirements on an item-by-item basis to determine if items had 
sufficient inventory available to satisfy requirements. DOD reported 
that its secondary inventory was valued at $63.3 billion in its 
September 30, 2001, Supply System Inventory Report. For our analyses, 
we used inventory stratification files and reports. We did not revalue 
the inventory that needs to be repaired to recognize the repair cost, 
and we did not value inventory that is to be disposed of at salvage 
prices. Also, our analyses did not include fuel, certain inventories 
held by units, and Marine Corps inventory. Fuel and inventories held by 
units are not stratified by requirement, and the Marine Corps inventory 
represents a small part of the universe.

To ascertain the causes for increases in inventory requirements, we 
compared September 30, 1999, inventory requirements to September 30, 
2001, inventory requirements for the military components. Because the 
Navy had the largest dollar increase in requirements, we analyzed the 
Navy requirements in more detail. For items that the Navy managed in 
both 1999 and 2001, we compared the requirements to determine if the 
requirements increased, stayed the same, or decreased. We selected 90 
items for detailed review based on how much their requirements 
increased between 1999 and 2001. The 90 items accounted for about $1.1 
billion of the Navy's $4.7 billion increase in requirements. We met 
with appropriate personnel from the Philadelphia and Mechanicsburg, 
Pennsylvania, offices of the Naval Inventory Control Point to identify 
the specific reasons for the items' increase in requirements.

[End of section]

Appendix II: GAO Reports and Open Recommendations Relating to DOD's 
Inventory Management Problems:

Defense Inventory: Better Reporting on Spare Parts Spending Will 
Enhance Congressional Oversight, GAO-03-18, Oct. 24, 2002:

DOD's reports on spare parts spending--called Exhibit OP-31, Spares and 
Repair Parts, and submitted as part of the President's annual budget 
submission--do not provide an accurate and complete picture of spare 
parts funding as required by financial management regulation. As a 
result, the reports do not provide Congress with reasonable assurance 
about the amount of funds being spent on spare parts. Furthermore, the 
reports did not always contain actual expenditure data: all of the 
Army's annual operations and maintenance appropriations data and most 
of the services' commodity amounts were shown as estimates. Without 
actual data, the reports are of limited use to Congress as it makes 
decisions on how best to spend resources to reduce spare parts 
shortages and improve military readiness.

Open Recommendations:

We recommended that the Secretary of Defense:

* issue additional guidance on how the services are to identify, 
compile, and report on actual and complete spare parts spending 
information, including supplemental funding, in total and by commodity, 
as specified by Exhibit OP-31; and:

* direct the Secretaries of the military departments to comply with 
Exhibit OP-31 reporting guidance to ensure that complete information is 
provided to Congress on the quantities of spare parts purchased and 
explanations of deviations between programmed and actual spending.

Defense Inventory: Improved Industrial Base Assessments for Army War 
Reserve Spares Could Save Money, GAO-02-650, July 12, 2002:

The Army, in its approach for assessing wartime spare parts industrial 
base capability, still does not use current data from industry. 
Instead, the Army uses historical parts procurement data because its 
prior efforts to collect current data from industry were not successful 
due to poor response rates. The Army's assessments depend on historical 
data and resulting lead-time factors to project industry's contribution 
to satisfying wartime spare parts requirements. Without current data on 
industry's capability, assessments could be unreliable, resulting in 
reduced readiness due to critical spare parts shortfalls in wartime or 
inflated and costly war reserve spare parts inventories in peacetime. 
Moreover, the Army's budget requests to Congress for war reserve spare 
parts risk being inaccurate.

We identified a program in the Defense Logistics Agency that has 
several attributes reflecting sound management practices that are 
required for reliable industrial base capability assessments. Our 
analysis of the approach used by the Army compared to the Defense 
Logistics Agency's spare parts industrial base assessment program 
revealed that the Army's approach can be improved in three areas--data 
collection, data analysis, and management strategies.

Open Recommendations:

We recommended that the Secretary of Defense direct the Army to:

* establish an overarching industrial base capability assessment 
process that considers the attributes in this report;

* develop a method to efficiently collect current industrial base 
capability data directly from industry itself;

* create analytical tools that identify potential production capability 
problems such as those due to surge in wartime spare parts demand; and:

* create management strategies for resolving spare parts availability 
problems, for example, by changing acquisition procedures or by 
targeting investments in material and technology resources to reduce 
production lead times.

Defense Inventory: Air Force Needs to Improve Control of Shipments to 
Repair Contractors, GAO-02-617, July 1, 2002:

We reported that Air Force and contractor personnel had largely not 
complied with DOD and Air Force inventory control procedures designed 
to safeguard material shipped to contractors, placing items worth 
billions of dollars at risk of fraud, waste, and abuse.

Open Recommendations:

We recommended that the Secretary of Defense direct the Air Force to:

* Improve processes for providing contractor access to government-
furnished material by:

* listing specific stock numbers and quantities of material in repair 
contracts (as they are modified or newly written) that the inventory 
control points have agreed to furnish contractors;

* demonstrating that automated internal control systems for loading and 
screening stock numbers and quantities against contractor requisitions 
perform as designed;

* loading stock numbers and quantities that the inventory control 
points have agreed to furnish to contractors into the control systems 
manually until the automated systems have been shown to perform as 
designed; and:

* requiring that waivers to loading stock numbers and quantities 
manually are adequately justified and documented based on cost-
effective and/or mission-critical needs.

* Revise Air Force supply procedures to include explicit responsibility 
and accountability for:

* generating quarterly reports of all shipments of Air Force material 
to contractors, and:

* distributing the reports to Defense Contractor Management Agency 
property administrators.

* Determine, for the contractors in our review, what actions are needed 
to correct problems in posting material receipts.

* Determine, for the contractors in our review, what actions are needed 
to correct problems in reporting shipment discrepancies.

* Establish interim procedures to reconcile records of material shipped 
to contractors with records of material received by them, until the Air 
Force completed the transition to its Commercial Asset Visibility 
system in fiscal year 2004.

* Comply with exiting procedures to request, collect, and analyze 
contractor shipment discrepancy data to reduce the vulnerability of 
shipped inventory to undetected loss, misplacement, or theft.

Military Aircraft: Services Need Strategies to Reduce 
Cannibalizations, GAO-02-86, November 21, 2001:

All the military services extensively use cannibalization--that is, 
removing serviceable parts from one piece of equipment and installing 
them in another--as a routine aircraft maintenance practice. In fiscal 
years 1996 through 2000, the Navy and the Air Force reported about 
850,000 cannibalizations, requiring about 5.3 million additional 
maintenance hours. Cannibalizations have several adverse impacts. They 
increase maintenance costs by increasing mechanics' workloads, affect 
morale and personnel retention, and sometimes take expensive aircraft 
out of service for long periods of time. Cannibalizations can also 
create additional mechanical problems. The services have many reasons 
for cannibalizing aircraft and strong incentives for continuing to do 
so. However, with the exception of the Navy, they do not consistently 
track the specific reasons for cannibalizations. As a result, much of 
the information on causes is anecdotal. In the broadest sense, 
cannibalizations are done because of pressures to meet readiness and 
operational needs and because of shortcomings in the supply system.

Open Recommendations:

We recommended that the Secretary of Defense direct the Army, the Navy 
and the Air Force to take the following actions:

* Establish standardized, comprehensive, and reliable cannibalization 
data-collection procedures and systems for cannibalizations.

* Measure and report the number of maintenance hours associated with 
cannibalizations.

* Develop strategies to reduce the number of maintenance hours spent on 
cannibalization, ensure that cannibalized aircraft do not remain 
grounded for long periods of time, and reduce the adverse effects of 
cannibalizations on maintenance costs and personnel. At a minimum, the 
strategies should include criteria to determine (1) which 
cannibalizations are appropriate, (2) cannibalization-reduction goals, 
and (3) the actions to be taken to meet those goals. The services must 
assign responsibility for ensuring that goals are being met and 
allocate resources for this purpose.

Defense Inventory: Navy Spare Parts Quality Deficiency Reporting 
Program Needs Improvement, GAO-01-923, August 16, 2001:

The Navy's Product Quality Deficiency Reporting Program has been 
largely ineffective in gathering the data needed for analyses so that 
Navy managers can determine the full extent of spare parts quality 
deficiencies affecting maintenance activities. Without these data, 
managers lose opportunities to initiate important corrective and 
preventive action with parts and suppliers.

Open Recommendations:

We recommended that the Secretary of Defense direct the Secretary of 
the Navy to:

* increase the program's levels of (1) training, describing what 
quality deficiencies to report, how to report them, and why it is 
important to the Navy; (2) incentives, including financial credits back 
to the reporting unit where appropriate to encourage participation; (3) 
automation support, to simplify and streamline reporting and analysis; 
and (4) management emphasis provided to the program, as necessary, to 
determine the causes, trends, and responsibilities for parts failures 
and achieve greater compliance with joint-service requirements, 
including reporting on parts that fail before the end of their design 
life; and:

* require program officials to measure and periodically report to the 
appropriate Defense and Navy managers the results of the program in 
such areas as actions taken to correct parts quality deficiencies, 
prevent recurrences, and obtain credits or reimbursements from 
suppliers for deficient products.

Navy Inventory: Parts Shortages Are Impacting Operations and 
Maintenance Effectiveness, GAO-01-771, July 31, 2001:

Spare parts shortages for the EA-6B and the F-14 aircraft adversely 
impacted the Navy's readiness to perform assigned missions and the 
economy and efficiency of its maintenance activities. The shortages 
also contributed to problems retaining personnel. The primary reasons 
for spare parts shortages were that more parts were required than the 
Navy originally anticipated and problems in identifying, qualifying, or 
contracting with a private company to produce or repair the parts.

We did not make any recommendations in this report because of our prior 
recommendations on improving the Navy's management framework for 
implementing commercial practices and DOD's efforts to develop an 
overarching integration plan.

Army Inventory: Parts Shortages Are Impacting Operations and 
Maintenance Effectiveness, GAO-01-772, July 31, 2001:

Aviation spare parts shortages for the Apache, Blackhawk, and Chinook 
helicopters adversely affected operations and led to inefficient 
maintenance practices that have lowered morale of maintenance 
personnel. Specifically, while the helicopters generally met their 
mission-capable goals, indicating that parts shortages have not 
affected their mission capability, supply availability rates and 
cannibalization of parts from one aircraft to another indicate that 
spare parts shortages have indeed been a problem. The reasons for the 
unavailability of the 90 parts we reviewed included actual demands for 
parts that were greater than anticipated, delays in obtaining parts 
from a contractor, and problems concerning overhaul and maintenance. 
For example, because a cracked gear in a Chinook transmission was 
discovered during an overhaul, the entire fleet was grounded in August 
1999. As a result, the demand for the part has been much greater than 
anticipated. The Army and the Defense Logistics Agency have initiatives 
under way or planned that are designed to improve the availability of 
aviation parts. The initiatives generally address the reasons we 
identified for spare parts shortages. Additionally, the Army has 
developed a Strategic Logistics Plan that is designed to change its 
current approach to one that is more effective, efficient, and 
responsive. The plan's initiatives for resolving spare parts shortages 
are linked to the asset management process under the Army's planned 
change in approach. Some of these initiatives are new or in the 
planning stages. Once the initiatives are more fully developed, we plan 
to review them to determine whether there are opportunities to enhance 
them.

Because we previously reported problems with the way the Army has 
implemented its logistics initiatives and recommended that it develop a 
management framework for its initiatives, to include a comprehensive 
strategy and performance plan, we did not make recommendations in 
this report.

Air Force Inventory: Parts Shortages Are Impacting Operations and 
Maintenance Effectiveness, GAO-01-587, June 27, 2001:

Spare parts shortages on the E-3 and C-5 aircraft and F-100-220 engines 
have adversely affected the performance of assigned missions and the 
economy and efficiency of maintenance activities. Specifically, the Air 
Force did not meet its mission-capable goals for the E-3 or C-5 during 
fiscal years 1996-2000, nor did it meet its goal to have enough F-100-
220 engines to meet peacetime and wartime goals during that period. The 
majority of reasons cited by item managers at the maintenance 
facilities for spare parts shortages were most often related to more 
spares being required than were anticipated by the inventory management 
system and delays in the Air Force's repair process as a result of the 
consolidation of repair facilities. Other reasons included (1) 
difficulties with producing or repairing parts, (2) reliability of 
spare parts, and (3) contracting issues. The Air Force and the Defense 
Logistics Agency have numerous overall initiatives under way or planned 
that may alleviate shortages of the spare parts for the three aircraft 
systems we reviewed. The initiatives generally address the reasons we 
identified for the shortages. To ensure that the initiatives are 
achieving the goals of increasing efficiencies in the supply system, 
the Air Force has developed a Supply Strategic Plan that contains 
specific goals and outcome-oriented measures for the initiatives.

Because the Air Force's plan is in keeping with our previous 
recommendations to improve overall logistics planning, we did not make 
recommendations in this report. We will separately review the overall 
approach and initiatives, once they are more fully developed, to 
determine whether there are opportunities to enhance these efforts.

Defense Inventory: Approach for Deciding Whether to Retain or Dispose 
of Items Needs Improvement, GAO-01-475, May 25, 2001:

DOD's components do not have sound analytical support for determining 
when it is economical to retain or dispose of the $9.4 billion in 
inventory the department is holding for economic reasons. The 
components' decision-making approaches for retaining economic 
retention inventory have evolved from the use of economic models to the 
use of judgmentally determined levels. In addition, the department did 
not have sound analytical support for the maximum levels they selected. 
Also, although the department requires annual reviews of the analyses 
supporting economic retention decisions, the components have generally 
not done such reviews. As a result of these weaknesses, the department 
is vulnerable to retaining some items when it is uneconomical to do so 
and disposing of others when it is economical to retain them.

Open Recommendations:

We recommended that the Secretary of Defense direct the Secretaries of 
the Army, the Navy, and Air Force and the Director of the Defense 
Logistics Agency to:

* establish milestones for reviewing current and recently used 
approaches for making decisions on whether to hold or dispose of 
economic retention inventory to identify actions needed to develop and 
implement appropriate approaches to economic retention decisions; and:

* annually review their approaches to meet department regulations to 
ensure that they have sound support for determining economic retention 
inventory levels.

Defense Inventory: Army War Reserve Spare Parts Requirements Are 
Uncertain, GAO-01-425, May 10, 2001:

In the October-December 2000 time frame, the Army reported that it had 
about 35 percent of its prepositioned spare parts on hand and a $1-
billion shortfall in required spare parts for its war reserves. 
Notwithstanding the reported shortages, we identified uncertainties 
about the accuracy of the Army's requirements. For example, we 
identified a potential mismatch between the Army's methodology for 
determining parts requirements and the Army's planned battlefield 
maintenance practices.

Open Recommendations:

We recommended that the Secretary of Defense:

* Assess the priority and level of risk associated with the Army's 
plans for addressing the reported shortfall in Army war reserve spare 
parts.

* Direct the Army to provide accurate calculations of the Army's war 
reserve spare parts requirements by:

* developing and using the best available consumption factors in 
calculating all spare parts requirements for the Army's war reserves;

* eliminating potential mismatches in how the Army calculates its war 
reserve spare parts requirements and the Army's planned battlefield 
maintenance practices; and:

* developing fact-based estimates of industrial base capacity to 
provide the needed spare parts in the two major theater war scenarios 
time frames.

* Include in future industrial capabilities reports more comprehensive 
assessments on industry's ability to supply critical spare parts for 
two major theater wars.

Defense Inventory: Process for Canceling Inventory Orders Needs 
Improvement, GAO/NSIAD-00-160, June 30, 2000:

Requirements for the 490 items we reviewed often changed after the 
orders were placed, which caused the items to exceed requirements. 
Further, because of inaccurate inventory records, 182 of the 490 items 
(valued at $170 million) were reported as excess, but were not actually 
excess to requirements. Because of the large number of inaccurate 
records, neither DOD nor the military components know whether managers 
are efficiently focusing their efforts to cancel excess inventory on 
order, and the department does not have an accurate view of the total 
value of its excess inventory on order. Each component's process for 
canceling orders that exceeded requirements differs and cannot be 
relied on to consistently identify orders to be considered for 
cancellation or to terminate orders when economical.

Specifically:

* The components use different criteria for the amount of excess 
inventory on order they consider for cancellation.

* Only the Defense Logistics Agency consistently uses its computer 
model to determine whether it is more economical to cancel orders or 
not. However, of the $696 million its model referred for consideration 
during a 3-month period in 1999, less than $11 million in orders were 
canceled.

* The military components' frequency in reviewing orders of excess 
inventory for cancellation ranges from monthly to quarterly. The longer 
components wait to consider an item for cancellation, the less likely 
cancellation will be cost-effective because they have to pay the 
contractor for costs incurred until the order is canceled.

* The components' goals for reducing excess inventory on order vary and 
are not comparable. Thus, the department cannot evaluate the 
components' progress in reducing excess inventory on order in a 
consistent way.

Open Recommendations:

We recommended that the Secretary of Defense, in conjunction with the 
Secretaries of the Army, the Navy, and the Air Force, and the Director 
of the Defense Logistics Agency review and improve the processes for 
identifying and canceling orders, focusing on areas such as:

* the accuracy of inventory management records;

* the level at which the services and the Defense Logistics Agency 
identify excess inventory on order that is subject to cancellation 
review, including low-dollar excess inventory on order that is excluded 
from cancellation review;

* the timeliness and frequency of reviews for identifying excess items 
on-order; and:

* the validity and use of the military components' termination models 
in making economic analyses.

We also recommended that the Secretary of Defense require the 
Secretaries of the Army, the Navy, and the Air Force, and the Director 
of the Defense Logistics Agency to report on the amount of all excess 
inventory on order, identifying inventory on order that exceeds both 
the requirements objective and the approved acquisition objective.

[End of section]

Appendix III: DOD and Military Component Inventory Requirements at the 
End of Fiscal Years 1999 and 2001:

Table 5: Comparison of Inventory Requirements for the Department of 
Defense at the End of Fiscal Years 1999 and 2001:

Dollars in billions.

War reserves: Fiscal year 1999 requirements: $2.9; 
Fiscal year 2001 requirements: $3.3; 
Increase/ decrease since fiscal year 1999: $0.4; 
Percent change since fiscal year 1999: 13.

Depot requirements objective: Fiscal year 1999 
requirements: a: Fiscal year 2001 requirements: 
0.3: Increase/ decrease since fiscal year 1999: 
0.3: Percent change since fiscal year 1999: b.

Unfilled requisitions: Fiscal year 1999 
requirements: 3.2: Fiscal year 2001 requirements: 
3.1: Increase/ decrease since fiscal year 1999: -
0.1: Percent change since fiscal year 1999: -3.

Safety level: Fiscal year 1999 requirements: 5.9; 
Fiscal year 2001 requirements: 8.2; 
Increase/ decrease since fiscal year 1999: 2.3; 
Percent change since fiscal year 1999: 39.

Insurance items: Fiscal year 1999 requirements: 
4.6: Fiscal year 2001 requirements: 7.4; 
Increase/ decrease since fiscal year 1999: 2.8; 
Percent change since fiscal year 1999: 62.

Repair cycle: Fiscal year 1999 requirements: 3.6; 
Fiscal year 2001 requirements: 4.2; 
Increase/ decrease since fiscal year 1999: 0.6; 
Percent change since fiscal year 1999: 18.

Production lead time: Fiscal year 1999 
requirements: 6.1: Fiscal year 2001 requirements: 
8.1: Increase/ decrease since fiscal year 1999: 
2.0: Percent change since fiscal year 1999: 32.

Administrative lead time: Fiscal year 1999 
requirements: 3.5: Fiscal year 2001 requirements: 
4.4: Increase/ decrease since fiscal year 1999: 
0.9: Percent change since fiscal year 1999: 26.

Lead time nonrecurring demand[C]: Fiscal year 1999 
requirements: 2.7: Fiscal year 2001 requirements: 
1.6: Increase/ decrease since fiscal year 1999: -
1.1: Percent change since fiscal year 1999: -39.

Economic order quantity: Fiscal year 1999 
requirements: 8.1: Fiscal year 2001 requirements: 
10.5: Increase/ decrease since fiscal year 1999: 
2.4: Percent change since fiscal year 1999: 30.

Total: Fiscal year 1999 requirements: $40.6; 
Fiscal year 2001 requirements: $51.2; 
Increase/ decrease since fiscal year 1999: $10.6; 
Percent change since fiscal year 1999: 26.

Source: DOD.

[A] The Army is the only component that uses this requirement for 
reporting retail level requirements and inventory. It began its use in 
fiscal year 2000.

[B] This percentage calculation is not meaningful since comparable data 
were not available for fiscal year 1999.

[C] The Air Force is the only component that reports lead time 
nonrecurring demand as a separate requirement.

[End of table]

Table 6: Comparison of Inventory Requirements for the Defense Logistics 
Agency at the End of Fiscal Years 1999 and 2001:

Dollars in billions.

Unfilled requisitions: Fiscal year 1999 
requirements: $0.8: Fiscal year 2001 requirements: 
$1.0: Increase/ decrease since fiscal year 1999: 
$0.2: Percent change since fiscal year 1999: 21.

Safety level: Fiscal year 1999 requirements: 1.0; 
Fiscal year 2001 requirements: 1.6; 
Increase/ decrease since fiscal year 1999: 0.6; 
Percent change since fiscal year 1999: 62.

Production lead time: Fiscal year 1999 
requirements: 2.9: Fiscal year 2001 requirements: 
3.5: Increase/ decrease since fiscal year 1999: 
0.6: Percent change since fiscal year 1999: 21.

Administrative lead time: Fiscal year 1999 
requirements: 1.9: Fiscal year 2001 requirements: 
2.6: Increase/ decrease since fiscal year 1999: 
0.7: Percent change since fiscal year 1999: 39.

Economic order quantity: Fiscal year 1999 
requirements: 2.6: Fiscal year 2001 requirements: 
3.8: Increase/ decrease since fiscal year 1999: 
1.2: Percent change since fiscal year 1999: 46.

Total: Fiscal year 1999 requirements: $9.1; 
Fiscal year 2001 requirements: $12.4; 
Increase/ decrease since fiscal year 1999: $3.3; 
Percent change since fiscal year 1999: 36.

Source: DOD.

Note: Percentages were calculated prior to rounding.

[End of table]

Table 7: Comparison of Inventory Requirements for the Army at the End 
of Fiscal Years 1999 and 2001:

Dollars in billions.

War reserves: Fiscal year 1999 requirements: $0.9; 
Fiscal year 2001 requirements: $1.1; 
Increase/: decrease since fiscal year 1999: $0.2; 
Percent change since fiscal year 1999: 20.

Depot requirements objective: Fiscal year 1999 
requirements: [A]: Fiscal year 2001 requirements: 
0.3: Increase/: decrease since fiscal year 1999: 
0.3: Percent change since fiscal year 1999: [B].

Unfilled requisitions: Fiscal year 1999 
requirements: 0.8: Fiscal year 2001 requirements: 
0.9: Increase/: decrease since fiscal year 1999: 
0.2c: Percent change since fiscal year 1999: 23.

Safety level: Fiscal year 1999 requirements: 0.3; 
Fiscal year 2001 requirements: 0.9; 
Increase/: decrease since fiscal year 1999: 0.6; 
Percent change since fiscal year 1999: 203.

Insurance items: Fiscal year 1999 requirements: 
0.0[D]: Fiscal year 2001 requirements: 0.0[D]; 
Increase/: decrease since fiscal year 1999: 0.0d; 
Percent change since fiscal year 1999: 67[D].

Repair cycle: Fiscal year 1999 requirements: 0.6; 
Fiscal year 2001 requirements: 0.9; 
Increase/: decrease since fiscal year 1999: 0.3; 
Percent change since fiscal year 1999: 52.

Production lead time: Fiscal year 1999 
requirements: 1.0: Fiscal year 2001 requirements: 
1.6: Increase/: decrease since fiscal year 1999: 
0.6: Percent change since fiscal year 1999: 59.

Administrative lead time: Fiscal year 1999 
requirements: 0.3: Fiscal year 2001 requirements: 
0.4: Increase/: decrease since fiscal year 1999: 
0.2c: Percent change since fiscal year 1999: 64.

Economic order quantity: Fiscal year 1999 
requirements: 2.1: Fiscal year 2001 requirements: 
2.9: Increase/: decrease since fiscal year 1999: 
0.8: Percent change since fiscal year 1999: 35.

Total: Fiscal year 1999 requirements: $6.0; 
Fiscal year 2001 requirements: $9.1; 
Increase/: decrease since fiscal year 1999: $3.1; 
Percent change since fiscal year 1999: 52.

Source: DOD.

Note: Percentages were calculated prior to rounding.

[A] The Army did not use this requirement for fiscal year 1999.

[B] Because there was no data for fiscal year 1999, this percentage 
could not be computed.

[C] Differences are due to rounding.

[D] The Army reported insurance items valued at less than $50 million.

[End of table]

Table 8: Comparison of Inventory Requirements for the Navy at the End 
of Fiscal Years 1999 and 2001:

Dollars in billions.

War reserves[A]: Fiscal year 1999 requirements: 
$0.0: Fiscal year 2001 requirements: $0.0; 
Increase/: decrease since fiscal year 1999: $0.0;
Percent change since fiscal year 1999: -32.

Unfilled requisitions: Fiscal year 1999 
requirements: 0.7: Fiscal year 2001 requirements: 
0.5: Increase/: decrease since fiscal year 1999: -
0.3[B]: Percent change since fiscal year 1999: -
35.

Safety level: Fiscal year 1999 requirements: 0.6; 
Fiscal year 2001 requirements: 0.8; 
Increase/: decrease since fiscal year 1999: 0.2; 
Percent change since fiscal year 1999: 35.

Insurance items: Fiscal year 1999 requirements: 
2.4: Fiscal year 2001 requirements: 5.8; 
Increase/: decrease since fiscal year 1999: 3.4; 
Percent change since fiscal year 1999: 142.

Repair cycle: Fiscal year 1999 requirements: 1.2; 
Fiscal year 2001 requirements: 1.6; 
Increase/: decrease since fiscal year 1999: 0.4; 
Percent change since fiscal year 1999: 30.

Production lead time: Fiscal year 1999 
requirements: 1.1: Fiscal year 2001 requirements: 
1.6: Increase/: decrease since fiscal year 1999: 
0.5: Percent change since fiscal year 1999: 50.

Administrative lead time: Fiscal year 1999 
requirements: 1.1: Fiscal year 2001 requirements: 
1.0: Increase/: decrease since fiscal year 1999: -
0.1: Percent change since fiscal year 1999: -6.

Economic order quantity: Fiscal year 1999 
requirements: 3.4: Fiscal year 2001 requirements: 
3.8: Increase/: decrease since fiscal year 1999: 
0.5[B]: Percent change since fiscal year 1999: 14.

Total: Fiscal year 1999 requirements: $10.5; 
Fiscal year 2001 requirements: $15.2; 
Increase/: decrease since fiscal year 1999: $4.7; 
Percent change since fiscal year 1999: 44.

Source: DOD.

Note: Percentages were calculated prior to rounding.

[A] The Navy reported war reserve items valued at less than $50 
million.

[B] Differences are due to rounding.

[End of table]

Table 9: Comparison of Inventory Requirements for the Air Force at the 
End of Fiscal Years 1999 and 2001:

Dollars in billions.

War reserves: Fiscal year 1999 requirements: $2.0; 
Fiscal year 2001 requirements: $2.2; 
Increase/: decrease since fiscal year 1999: $0.2; 
Percent change since fiscal year 1999: 11.

Unfilled requisitions: Fiscal year 1999 
requirements: 0.9: Fiscal year 2001 requirements: 
0.7: Increase/: decrease since fiscal year 1999: -
0.2: Percent change since fiscal year 1999: -22.

Safety level: Fiscal year 1999 requirements: 4.1; 
Fiscal year 2001 requirements: 5.0; 
Increase/: decrease since fiscal year 1999: 0.9; 
Percent change since fiscal year 1999: 22.

Insurance items: Fiscal year 1999 requirements: 
2.2: Fiscal year 2001 requirements: 1.5; 
Increase/: decrease since fiscal year 1999: -0.6[A]; 
Percent change since fiscal year 1999: -28.

Repair cycle: Fiscal year 1999 requirements: 1.8; 
Fiscal year 2001 requirements: 1.7; 
Increase/: decrease since fiscal year 1999: 0.0[A]; 
Percent change since fiscal year 1999: -2.

Production lead time: Fiscal year 1999 
requirements: 1.1: Fiscal year 2001 requirements: 
1.4: Increase/: decrease since fiscal year 1999: 
0.2[A]: Percent change since fiscal year 1999: 20.

Administrative lead time: Fiscal year 1999 
requirements: 0.3: Fiscal year 2001 requirements: 
0.4: Increase/: decrease since fiscal year 1999: 
0.1: Percent change since fiscal year 1999: 29.

Lead time nonrecurring demand: Fiscal year 1999 
requirements: 2.7: Fiscal year 2001 requirements: 
1.6: Increase/: decrease since fiscal year 1999: -
1.1: Percent change since fiscal year 1999: -39.

Total: Fiscal year 1999 requirements: $14.9; 
Fiscal year 2001 requirements: $14.5; 
Increase/: decrease since fiscal year 1999: $-0.5[A]; 
Percent change since fiscal year 1999: -3.

Source: DOD.

Note: Percentages were calculated prior to rounding.

[A] Differences are due to rounding.

[End of table]

[End of section]

Appendix IV: Reasons for Requirements Increasing between 
September 30, 1999, and September 30, 2001, for 90 Sample Items:

Navy Usage Increased:

Increased usage resulted in requirements increasing by $294 million for 
46 items. Usage of the items increased for a variety of reasons, 
including:

* recurring demand for items increased,

* defective parts needing to be replaced,

* demands being received for items that are not normally stocked,

* increases in the number of ships or aircraft using items,

* items reaching the end of their useful life,

* unplanned foreign military sales,

* usage shifting from other items,

* items wearing out at a faster rate than expected, and:

* items being new to the inventory system.

For example, unfilled requisitions, safety level, repair cycle, and 
production and administrative lead time requirements for the hub used 
on the AH-1W (Cobra) helicopter increased from 24 on September 30, 
1999, to 48 on September 30, 2001. During that time, many of the hubs 
reached the end of their 1,100-hour life and had to be replaced. As a 
result, demand for the $275,000 hub increased from 31 a year in 1999 to 
74 a year in 2001.

Navy Changed Stock, Overhaul, or Operational Policies:

Changes in stock, overhaul, or operational policies resulted in 
requirements increases of $126 million for 36 items. For example, 
repair cycle requirements for a radio transmitter modulator increased 
from 10 in September 1999 to 22 in September 2001. The increase was a 
result of the Navy requiring that the transmitter modulator, valued at 
$136,000 each, be operational 100 percent of the time. Previously, 
ships were permitted to operate in a degraded status with the modulator 
not operational.

Source or Repair Issues:

Source and repair issues for 29 items resulted in requirements 
increases of $137 million. A wide variety of reasons fell into this 
category, including entering requirements for an item that would no 
longer be available to provide support for a weapon system for its 
remaining life, difficulties in identifying a commercial source for an 
item, unavailability of material needed to manufacture items, and 
increased time needed to repair or buy an item. For example, economic 
order quantity requirements for a data module used in a submarine 
control panel increased from 75 in September 1999 to 410 in September 
2001. The item manager explained that the manufacturing source of 
supply for the data module was being lost, and the requirement was 
increased to protect the 419 on-hand modules from being subject to 
disposal. In August 2002, the Navy had 229 of the $10,000 modules on 
hand.

Uncertainty of Demand, Lead Time, or Wear-Out Rate:

Uncertainty of demand, lead time, and the rate at which items wear out 
for 22 items resulted in safety level requirements increasing by $72 
million. Safety level requirements are intended to compensate for 
unplanned increases in demand, lead times, and the rate at which items 
wear out. For example, the safety level requirement for an inertial 
navigational unit used on several aircraft such as the AV-8B, the F-
14D, and several versions of the F-18 increased from 2 in September 
1999 to 15 in September 2001. The increased requirement was the result 
of demands for the $170,000 unit increasing from 155 to 205 a year.

Increases Were Not Valid:

Requirements increases, valued at $98 million, were not valid for seven 
items. The reasons for the invalid requirements included overstating 
the 2001 requirement, understating the 1999 requirement, and 
inappropriately recording nonrecurring requirements. For example, the 
September 2001 requirements requiring replacement for an electron tube 
for a transmitter used on the EA-6B aircraft were overstated because 
the requirements were inappropriately based on demand for the tube 
instead of the rate at which the tube was failing and needed to be 
replaced. As a result, safety level, repair cycle, administrative and 
production lead times and economic order quantity requirements were 
overstated by 2,124 tubes for the $57,500 item.

Data Anomalies:

Data anomalies for two items resulted in a requirement increase of $2 
million. For both of the items, requirements increased for unfilled 
requisitions. The item manager for the items explained that the items' 
requirements, as of September 30, 2001, reflected back orders as of 
that date and that the back orders were not the result of any 
particular reason--just the status as of that date. The item manager 
explained that the back orders went away when material was shipped a 
few days after September 30th.

[End of section]

Appendix V: Comments from the Department of Defense:

DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS 
3500 DEFENSE PENTAGON WASHINGTON, DC 20301-3500:

APR 15 2003:

Mr. William M. Solis:

Director, Defense Capabilities and Management U.S. General Accounting 
Office:

Washington, D.C. 20548:

Dear Mr. Solis:

This is the Department of Defense (DoD) response to the General 
Accounting Office (GAO) draft report, GAO-03-355: "DEFENSE INVENTORY: 
Overall Inventory and Requirements Are Increasing, but Some Reductions 
in Navy Requirements Are Possible," dated March 14, 2003 (GAO Code 
350227). The DoD generally concurs with the report.

Detailed comments on the draft report recommendation are included in 
the enclosure. The DoD appreciates the opportunity to comment on the 
draft report.

Sincerely,

Diane K. Morales:

Signed for Diane K. Morales

Enclosure:

GAO DRAFT REPORT GAO-03-355 DATED MARCH 14, 2003 (GAO CODE 350227):

"DEFENSE INVENTORY: OVERALL INVENTORY AND REQUIREMENTS ARE INCREASING, 
BUT SOME REDUCTIONS IN NAVY REQUIREMENTS ARE POSSIBLE":

DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATION:

RECOMMENDATION: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Navy to require the Commander, Naval Supply 
Systems Command require its inventory managers to use the most current 
data available for computing administrative lead time requirements.	
(Page 19/Draft Report).

DOD RESPONSE: Partially Concur. The Navy inventory managers use the 
most current data available to manually compute administrative lead 
time when making management decisions such as procurement. However, we 
concur that the Navy should formally update the administrative lead 
time matrix. In March 2003, the Navy implemented an updated 
administrative lead time matrix utilizing the most current data 
available. This action is complete.

[End of section]

Appendix VI: Staff Acknowledgments:

Key contributors to this report were Lawson Gist, Jr., Louis 
Modliszewski, David Epstein, and R.K. Wild.

FOOTNOTES

[1] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: Jan. 
30, 2003).

[2] U.S. General Accounting Office, Defense Inventory: Status of 
Inventory and Purchases and Their Relationship to Current Needs, GAO/
NSIAD-99-60 (Washington, D.C.: Apr. 16, 1999).

[3] In this report, we refer to the Army, the Navy, and the Air Force 
as military services; when referring to the Army, the Navy, and the Air 
Force, and the Defense Logistics Agency, we use military components.

[4] In this report, all numbers over 1,000 are rounded. Inventory and 
requirement values are in current dollars.

[5] U.S. General Accounting Office, Defense Logistics: Much of the 
Inventory Exceeds Current Needs, GAO/NSIAD-97-71 (Washington, D.C.: 
Feb. 28, 1997).

[6] U.S. General Accounting Office, Defense Inventory: Process for 
Canceling Inventory Orders Needs Improvement, GAO/NSIAD-00-160 
(Washington, D.C.: June 30, 2000).

[7] In this report, percentages are rounded to the nearest whole 
number.

[8] The inventory lead time refers to the time elapsed between when the 
need to replenish inventory through a purchase is identified and when 
the order is received.

[9] War reserves are authorized to be purchased to facilitate fast 
mobilization in the event of war.

[10] While requirements increased by $3.4 billion, on-hand inventory 
increased by $3.3 billion. On-order inventory also increased.

[11] U.S. General Accounting Office, Defense Inventory: Shortages Are 
Recurring, but Not a Problem, GAO/NSIAD-95-137 (Washington, D.C.: Aug. 
7, 1995); GAO/NSIAD-97-71; and GAO/NSIAD-00-160.

[12] Based on Defense Logistics Agency data, we estimate that this 
amount includes about $400 million of Defense Logistics Agency 
inventory that was in transit. Files provided by the Defense Logistics 
Agency did not distinguish between on-order and in-transit inventories.

[13] GAO/NSIAD-00-160.

[14] GAO-03-98.

[15] Insurance items are minimum quantities for essential items for 
which demand is not normally predicted.

[16] An inventory control point is responsible for the management of a 
group of items, including the computation of requirements and the 
purchase of inventory.

[17] While the aviation items held by ships and installations are not 
insurance items, the Navy began reporting them as such in order to 
retain their visibility to item managers.

[18] About 28,000 items that the Navy managed as of September 30, 1999, 
were discontinued by September 30, 2001; however, the Navy added about 
30,000 new items after September 30, 1999. 

[19] Administrative lead time is the time between when the need to buy 
an item is identified and when a contract is let.

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