Navy Inventory Management:

Improvements Needed to Prevent Excess Purchases

NSIAD-98-86: Published: Apr 30, 1998. Publicly Released: May 15, 1998.

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Pursuant to a congressional request, GAO reviewed the excess inventory the Navy had on order, focusing on whether the Navy: (1) had valid requirements to support inventory purchases; (2) had purchased items that exceeded needs and the causes of this condition; and (3) was cancelling purchases that exceeded needs.

GAO noted that: (1) it identified several problems that affect the decisionmaking process for billions of dollars of inventory; (2) however, GAO cannot precisely quantify the overall extent of the problems; (3) specifically, its work shows that in some cases purchases: (a) were not based on valid needs; (b) were excess to needs because the requirements changed after orders were placed; and (c) occurred even though contracts could have been cancelled; (4) the Navy did not always have valid requirements to support inventory purchases; (5) GAO previously recommended that the Department of Defense (DOD) revise policies and procedures to eliminate this duplication of requirements; (6) while DOD has acted on many of GAO's past recommendations, it has not taken corrective action on this one; (7) several factors contributed to the excess inventory on contract; (8) recurring demands for certain items had decreased, engineering estimates for requirements had not materialized, nonrecurring demands were delayed or were not needed, and parts had become obsolete; (9) although some of these factors could not have been anticipated, in other cases better management could have eliminated or minimized the accumulation of inventory that exceeded needs; (10) the Navy did not know if planned program requirements accurately reflected needs; (11) also, broken parts to be returned for repair were not adequately considered when making purchase decisions; (12) the Navy cancelled some contracts for excess inventory but could have cancelled more; (13) a major reason for not cancelling more purchases was that the Navy adds protection levels, representing as much as 2 years of usage, to requirements before considering cancellation and cancels only the amount of the purchases that exceeds the protection levels; (14) the 2-year usage represented nearly four times the amount of inventory that the Navy would normally buy; (15) the Navy missed additional opportunities to cancel purchases because item managers did not exercise their responsibility to direct the cancellation of contracts, economic analyses were not made, and inventory and contracting records did not agree; and (16) collectively, these problems contribute to the Navy having inventory in excess of needs.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD agreed with the recommendation on effectiveness measures, partially agreed with the recommendation on updating depot demand forecasts, and disagreed with the recommendation to record broken parts as due-in assets. DOD stated that the Navy will provide detailed guidance on measures of effectiveness for planned program requirements. Detailed guidance was provided NAVICP by NAVSUP in a letter dated 3 September 1999, covering metrics for assessing PPR maintenance, PPRs as predictors of demand, and for support of planned nonrecurring demand. Although DOD agreed that demand forecasts should be updated, it felt that the current procedures were adequate. GAO's review showed that item managers need to take additional steps to verify forecasted demands in a more timely manner to prevent excess purchases. DOD does not plan to take any action on GAO's recommendation to record broken parts as due-in assets.

    Recommendation: The Secretary of the Navy should improve the validity of requirements by, among other things: (1) updating depot demand forecasts in a timely manner; (2) implementing current Navy guidance for measuring the effectiveness of using planned program requirements to satisfy nonrecurring demands by matching customer requisitions with these requirements; and (3) recording broken parts to be returned for repair as due ins when computing requirements.

    Agency Affected: Department of Defense: Department of the Navy

  2. Status: Closed - Implemented

    Comments: DOD did not agree to eliminate protection levels. GAO's work shows that protection levels have a major effect on which contracts are considered for termination. In July 1998, the Navy reiterated contract termination policy and procedure with its item managers and buyers, clearly stating that item managers have the authority and responsibility to terminate a contract when the stock position warrants. DOD did not agree to require economic analyses, stating that the Navy's past experience with an economic termination model did not achieve the intent of promoting the termination of unneeded material. Without these analyses, item managers have no evidence that they made the most economical decision. The Navy noted a change in the contract quantity adjustments process that would eliminate the potential for contract terminations being rejected when the quantity an item manager recommends for cancellation exceeds the quantities available to cancel.

    Recommendation: The Secretary of the Navy should improve the process for cancelling contracts where items are excess to needs by: (1) eliminating 1- and 2-year protection levels when considering purchases for cancellation; (2) reemphasizing to item managers that they have the responsibility and authority to direct cancellation of contracts; (3) requiring economic analyses to determine if it is economical to cancel contracts for excess material; and (4) automatically adjusting item manager cancellation recommendations when the recommended quantities exceed the quantities available to cancel.

    Agency Affected: Department of Defense: Department of the Navy


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