Defense Inventory:

Cost Factors Used to Manage Secondary Items

NSIAD-92-112: Published: May 14, 1992. Publicly Released: May 14, 1992.

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Pursuant to a congressional request, GAO reviewed how the Department of Defense (DOD) develops and uses cost data in making purchasing and stocking decisions for secondary items.

GAO found that: (1) through the DOD economic quantity formula, ordering and holding costs influence order quantities; (2) ordering cost includes the costs of determining supply needs, processing purchases, and receiving orders; (3) holding costs include the costs of having funds tied up in inventory, storage, material obsolescence, and inventory losses; (4) an increase in ordering cost or demand causes a larger computed order quantity, while an increase in the holding cost or the replacement price causes a smaller quantity for any given order; (5) in June 1990, DOD revised its policy to retain secondary item inventory, regardless of quantity, that pertained to an active weapons system, to encourage disposal of items that exceeded reasonable quantities; and (6) in fiscal year 1991, DOD sold excess property valued at $9.1 billion for $138.5 million.