Defense Inventory: Overall Inventory and Requirements Are	 
Increasing, but Some Reductions in Navy Requirements Are Possible
(08-MAY-03, GAO-03-355).					 
                                                                 
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.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-355 					        
    ACCNO:   A06847						        
  TITLE:     Defense Inventory: Overall Inventory and Requirements Are
Increasing, but Some Reductions in Navy Requirements Are Possible
     DATE:   05/08/2003 
  SUBJECT:   Inventory control					 
	     Equipment inventories				 
	     Military inventories				 
	     Strategic planning 				 

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GAO-03-355

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

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. 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 Military
component Inventory satisfying requirements

Inventory exceeding requirements

Army $2.8 $3.7 Navy 7.3 8.8 Air Force 10.5 19.4

Defense Logistics Agency 4.3 6.1

Total $24.9 $38.0

Source: DOD. DEFENSE INVENTORY

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

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. Highlights of GAO- 03- 355, a report to the

Honorable Tom Harkin, U. S. Senate May 2003

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.

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

Page i GAO- 03- 355 Defense Inventory Letter 1 Results in Brief 2
Background 4 Inventory Growth Reverses Past Reductions 5 Requirements Are
Increasing, but Some of Navy*s Are Overstated 12 Conclusions 18
Recommendation for Executive Action 19 Agency Comments 19 Appendix I Scope
and Methodology 21

Appendix II GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems 22

Appendix III DOD and Military Component Inventory Requirements at the End
of Fiscal Years 1999 and 2001 31

Appendix IV Reasons for Requirements Increasing between September 30,
1999, and September 30, 2001, for 90 Sample Items 36

Appendix V Comments from the Department of Defense 38

Appendix VI Staff Acknowledgments 40 Contents

Page ii GAO- 03- 355 Defense Inventory 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 9 Table
2: Comparison of Inventory Requirements by

Military Component as of September 30, 1999, and September 30, 2001 12
Table 3: Comparison of Requirements for 279,000 Items Managed

by the Navy at the End of Fiscal Years 1999 and 2001 15 Table 4: Reasons
for Navy Requirements Increases for Items Reviewed 17 Table 5: Comparison
of Inventory Requirements for the Department of Defense at the End of
Fiscal Years 1999 and 2001 31 Table 6: Comparison of Inventory
Requirements for the Defense Logistics Agency at the End of Fiscal Years
1999 and 2001 32 Table 7: Comparison of Inventory Requirements for the
Army at the End of Fiscal Years 1999 and 2001 33 Table 8: Comparison of
Inventory Requirements for the Navy at the End of Fiscal Years 1999 and
2001 34 Table 9: Comparison of Inventory Requirements for the Air Force at
the End of Fiscal Years 1999 and 2001 35 Figures

Figure 1: DOD*s Reported Inventory On Hand at the End of Fiscal Years 1996
through 2001 6 Figure 2: DOD*s Reported Inventory On Order at the End of

Fiscal Years 1996 through 2001 7 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 10 Figure 4: Changes in Navy Inventory Requirements
between September 30, 1999, and September 30, 2001 14

Page iii GAO- 03- 355 Defense Inventory Abbreviations

DOD Department of Defense GAO General Accounting Office

This is a work of the U. S. Government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. It may contain
copyrighted graphics, images or other materials. Permission from the
copyright holder may be necessary should you wish to reproduce copyrighted
materials separately from GAO*s product.

Page 1 GAO- 03- 355 Defense Inventory

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. 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 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

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).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 355 Defense Inventory

requirements. We compared September 30, 1999, inventory requirements to
September 30, 2001, inventory requirements for the military services 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.

The Department of Defense reported a $5.6 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. 5 Similarly, in 2000, we
reported

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). Results in Brief

Page 3 GAO- 03- 355 Defense Inventory

that while inventory managers made inventory purchases that were supported
by requirements, subsequent requirement decreases resulted in the
purchases being in excess of requirements. 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 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, 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

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.

Page 4 GAO- 03- 355 Defense Inventory

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. 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, 9  unfilled requisitions, 9 War reserves are authorized
to be purchased to facilitate fast mobilization in the event of war.
Background

Page 5 GAO- 03- 355 Defense Inventory

 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.

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 Growth

Reverses Past Reductions

Page 6 GAO- 03- 355 Defense Inventory

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

Inventory On Hand and On Order Has Begun to Increase

Page 7 GAO- 03- 355 Defense Inventory

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

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.

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 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

10 While requirements increased by $3.4 billion, on- hand inventory
increased by $3.3 billion. On- order inventory also increased. Inventory
Growth Caused

by Reporting Changes and Requirements Increases

Page 8 GAO- 03- 355 Defense Inventory

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.

Since 1995 we have reported on imbalances in DOD*s inventory, and our
current work shows that these imbalances continue to exist. 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 12 on order
that exceeded requirements (see table 1). 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. Large Inventory
Imbalances Still Exist

Page 9 GAO- 03- 355 Defense Inventory

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

Inventory satisfying requirements Inventory exceeding

requirements Military component On hand On order On hand On order

Army $2.6 $0.2 $3.7 $0.0 a Navy 7.0 0.3 8.8 0.0 a Air Force 10.1 0.4 18.8
0.6 Defense Logistics Agency 2.4 1.9 b 4.7 1.4 b Total $22.1 $2.8 $36.0
$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. 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. 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

13 GAO/ NSIAD- 00- 160.

Page 10 GAO- 03- 355 Defense Inventory

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

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. 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.

14 GAO- 03- 98.

Page 11 GAO- 03- 355 Defense 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
contractorowned 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 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.

15 Insurance items are minimum quantities for essential items for which
demand is not normally predicted. Management Changes Will

Reduce the Size of the Department*s Inventory

Page 12 GAO- 03- 355 Defense Inventory

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.

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

Military component 1999 2001

Dollar change Percent

change

Navy $10.5 $15.2 $4.7 44 Defense Logistics Agency 9.1 12.4 3.3 36 Army 6.0
9.1 3.1 52 Air Force 14.9 14.5 -. 5 -3

Total $40.6 $51.2 $10.6 26

Source: DOD. Note: Numbers may not add due to rounding.

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
Requirements Are

Increasing, but Some of Navy*s Are Overstated

Overall DOD Inventory Requirements Are Increasing

Page 13 GAO- 03- 355 Defense Inventory

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 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.

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). Navy Inventory

Requirements Increased for a Variety of Reasons

Navy Requirements Increased $4.7 Billion

Page 14 GAO- 03- 355 Defense Inventory

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

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 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

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.

Page 15 GAO- 03- 355 Defense Inventory

Navy insurance item requirements, 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. 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

Status of requirement quantity Items

Change in requirement

quantity Change in price Total change

Increased 37,000 $4.3 $0.8 $5.1 Stayed the same 205,000 NA 0.2 0.2
Decreased 37,000 -1.2 0.2 -1.0

Total 279,000 $3.1 $1.1 $4.2

Source: DOD. Legend: NA = Not Applicable. Notes: GAO*s analysis of DOD
data. Totals do not add due to rounding.

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

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.

Page 16 GAO- 03- 355 Defense Inventory

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.

Page 17 GAO- 03- 355 Defense Inventory

Table 4: Reasons for Navy Requirements Increases for Items Reviewed
Dollars in millions

Reason for increase Number of items affected Increase in

requirements Increase in insurance item requirements 37 $454 Usage of the
item increased 46 294 Navy changed stock, overhaul, or operational
policies 36 126 Source or repair issues 29 137 Uncertainty of demand, lead
time or wear- out rate increased safety levels 22 72 Increases were not
valid 7 98 Data anomalies 2 2 Source: DOD. Notes: GAO*s analysis of DOD
data. 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.

The Navy has not formally updated the data it uses to project
administrative lead time 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

19 Administrative lead time is the time between when the need to buy an
item is identified and when a contract is let. Navy Administrative Lead
Time

Requirements Are Not Accurately Computed and Are Overstated

Page 18 GAO- 03- 355 Defense Inventory

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.

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. Conclusions

Page 19 GAO- 03- 355 Defense Inventory

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.

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/.
Recommendation for

Executive Action Agency Comments

Page 20 GAO- 03- 355 Defense Inventory

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

Appendix I: Scope and Methodology Page 21 GAO- 03- 355 Defense Inventory

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-
byitem

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. Appendix I: Scope and Methodology

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 22 GAO- 03- 355 Defense Inventory

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.

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
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

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

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 23 GAO- 03- 355 Defense Inventory

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.

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 governmentfurnished
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;

Defense Inventory: Air Force Needs to Improve Control of Shipments to
Repair Contractors,

GAO- 02- 617, July 1, 2002

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 24 GAO- 03- 355 Defense Inventory

 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 costeffective
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. 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.

Military Aircraft: Services Need Strategies to Reduce Cannibalizations,

GAO- 02- 86, November 21, 2001

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 25 GAO- 03- 355 Defense Inventory 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 datacollection 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.

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

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

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 26 GAO- 03- 355 Defense Inventory

recurrences, and obtain credits or reimbursements from suppliers for
deficient products.

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.

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 missioncapable
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.

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

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

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 27 GAO- 03- 355 Defense Inventory

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.

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. 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

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

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

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 28 GAO- 03- 355 Defense Inventory

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.

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.

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

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 29 GAO- 03- 355 Defense Inventory

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

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

Defense Inventory: Process for Canceling Inventory Orders Needs
Improvement,

GAO/ NSIAD- 00- 160, June 30, 2000

Appendix II: GAO Reports and Open Recommendations Relating to DOD*s
Inventory Management Problems Page 30 GAO- 03- 355 Defense Inventory

 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 onorder; 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.

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

Page 31 GAO- 03- 355 Defense Inventory

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

Dollars in billions

Requirement Fiscal year

1999 requirements Fiscal year

2001 requirements Increase/

decrease since fiscal year

1999 Percent

change since fiscal year

1999

War reserves $2.9 $3.3 $0.4 13 Depot requirements objective a 0.3 0.3 b
Unfilled requisitions 3.2 3.1 -0.1 -3 Safety level 5.9 8.2 2.3 39
Insurance items 4.6 7.4 2.8 62 Repair cycle 3.6 4.2 0.6 18 Production lead
time 6.1 8.1 2.0 32

Administrative lead time 3.5 4.4 0.9 26 Lead time nonrecurring demand c

2.7 1.6 -1.1 -39 Economic order quantity 8.1 10.5 2.4 30

Total $40.6 $51.2 $10.6 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.

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

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

Page 32 GAO- 03- 355 Defense Inventory

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

Dollars in billions

Requirement Fiscal year

1999 requirements Fiscal year

2001 requirements Increase/

decrease since fiscal year

1999 Percent

change since fiscal year

1999

Unfilled requisitions $0.8 $1.0 $0.2 21 Safety level 1.0 1.6 0.6 62
Production lead time 2.9 3.5 0.6 21

Administrative lead time 1.9 2.6 0.7 39 Economic order quantity 2.6 3.8
1.2 46

Total $9.1 $12.4 $3.3 36

Source: DOD. Note: Percentages were calculated prior to rounding.

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

Page 33 GAO- 03- 355 Defense Inventory

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

Dollars in billions

Requirement Fiscal year

1999 requirements Fiscal year

2001 requirements Increase/

decrease since fiscal year

1999 Percent

change since fiscal year

1999

War reserves $0.9 $1.1 $0.2 20 Depot requirements objective a 0.3 0.3 b
Unfilled requisitions 0.8 0.9 0.2c 23 Safety level 0.3 0.9 0.6 203
Insurance items 0.0 d 0.0 d 0.0d 67 d Repair cycle 0.6 0.9 0.3 52

Production lead time 1.0 1.6 0.6 59 Administrative lead time 0.3 0.4 0.2c
64 Economic order quantity 2.1 2.9 0.8 35

Total $6.0 $9.1 $3.1 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.

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

Page 34 GAO- 03- 355 Defense Inventory

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

Dollars in billions

Requirement Fiscal year

1999 requirements Fiscal year

2001 requirements Increase/

decrease since fiscal year

1999 Percent

change since fiscal year

1999

War reserves a $0.0 $0.0 $0.0 -32 Unfilled requisitions 0.7 0.5 -0.3 b -35
Safety level 0.6 0.8 0.2 35 Insurance items 2.4 5.8 3.4 142 Repair cycle
1.2 1.6 0.4 30 Production lead time 1.1 1.6 0.5 50

Administrative lead time 1.1 1.0 -0.1 -6 Economic order quantity 3.4 3.8
0.5 b 14

Total $10.5 $15.2 $4.7 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.

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

Page 35 GAO- 03- 355 Defense Inventory

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

Dollars in billions

Requirement Fiscal year

1999 requirements Fiscal year

2001 requirements Increase/

decrease since fiscal year

1999 Percent

change since fiscal year

1999

War reserves $2.0 $2.2 $0.2 11 Unfilled requisitions 0.9 0.7 -0.2 -22
Safety level 4.1 5.0 0.9 22 Insurance items 2.2 1.5 -0.6 a -28 Repair
cycle 1.8 1.7 0.0 a -2 Production lead time 1.1 1.4 0.2 a 20

Administrative lead time 0.3 0.4 0.1 29 Lead time nonrecurring demand 2.7
1.6 -1.1 -39

Total $14.9 $14.5 $- 0.5 a -3

Source: DOD. Note: Percentages were calculated prior to rounding. a
Differences are due to rounding.

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

Page 36 GAO- 03- 355 Defense Inventory

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.

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 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.
Appendix IV: Reasons for Requirements

Increasing between September 30, 1999, and September 30, 2001, for 90
Sample Items

Navy Usage Increased Navy Changed Stock, Overhaul, or Operational Policies

Source or Repair Issues

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

Page 37 GAO- 03- 355 Defense Inventory

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.

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 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. Uncertainty of Demand,

Lead Time, or Wear- Out Rate

Increases Were Not Valid Data Anomalies

Appendix V: Comments from the Department of Defense Page 38 GAO- 03- 355
Defense Inventory Appendix V: Comments from the Department of Defense

Appendix V: Comments from the Department of Defense Page 39 GAO- 03- 355
Defense Inventory

Appendix VI: Staff Acknowledgments Page 40 GAO- 03- 355 Defense Inventory

Key contributors to this report were Lawson Gist, Jr., Louis Modliszewski,
David Epstein, and R. K. Wild. Appendix VI: Staff Acknowledgments

(350227)

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