Defense Inventory: The Department Needs a Focused Effort to	 
Overcome Critical Spare Parts Shortages (27-JUN-03, GAO-03-707). 
                                                                 
The Department of Defense's (DOD) annual appropriation totals	 
billions of dollars for spare parts. In addition, it has received
supplemental funding totaling $1.5 billion since fiscal year 1999
to increase the availability of spare parts. However, DOD	 
continues to experience critical spare parts shortages that	 
impact military readiness. GAO examined whether (1) DOD's	 
logistics strategic plan addresses the mitigation of critical	 
spare parts shortages that adversely affect readiness, (2) DOD's 
logistics initiatives are likely to mitigate spare parts	 
shortages that affect readiness, and (3) DOD has the ability to  
identify the effect of increased investments for spare parts on  
readiness.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-707 					        
    ACCNO:   A07377						        
  TITLE:     Defense Inventory: The Department Needs a Focused Effort 
to Overcome Critical Spare Parts Shortages			 
     DATE:   06/27/2003 
  SUBJECT:   Logistics						 
	     Spare parts					 
	     Strategic planning 				 
	     Combat readiness					 
	     Equipment inventories				 
	     Military inventories				 
	     H-53 Helicopter					 
	     H-60 Helicopter					 
	     Pavehawk Helicopter				 

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GAO-03-707

Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, House of Representatives

United States General Accounting Office

GAO

June 2003 DEFENSE INVENTORY

The Department Needs a Focused Effort to Overcome Critical Spare Parts
Shortages

GAO- 03- 707

The Office of the Secretary of Defense*s (OSD) logistics strategic plan
focuses on transforming the department*s logistics operations by
emphasizing weapon system support, customer service, and enterprise
integration, but does not specifically address mitigating spare parts
shortages. In addition, while it contains some key attributes of a
strategic plan, such as broad goals and implementation strategies, it
lacks other key attributes. In June 2002, the department published the
Future Logistics Enterprise, which serves as the

strategic plan behind efforts to transform logistics operations within the
department to ensure consistent, reliable support that meets the
warfighters* requirements. This plan presents its vision for accelerating
logistics improvement, enhancing support to the warfighter and aligning
logistics processes with the operational demands of the 21 st Century.
While the Future Logistics Enterprise plan identifies six departmentwide

initiatives under three broad topical areas to improve weapon system
availability, none of the initiatives specifically address mitigating
critical spare parts shortages. However, DOD has directed a separate
Defense Logistics Agency effort to improve the availability of critical
aviation spare parts. Under

the three topics of weapon system support, customer service, and
enterprise integration, OSD*s six agencywide initiatives aim to improve
supply operations and readiness. In fact, two* Condition Based Maintenance
Plus and Total Life Cycle System Management* specifically identify
improving readiness as an objective. For example, the Condition Based
Maintenance Plus initiative is

designed to improve maintenance capabilities and business processes that
could increase operational availability and readiness throughout the life
cycle of the department*s weapon systems. If successfully implemented,
this initiative would improve maintenance operations and might affect
spare parts shortages, but it does not have goals and performance measures
related to mitigating spare parts shortages. As a result, DOD may not know
whether it is investing its resources in the most efficient and effective
manner.

Recent OSD efforts to link funding to readiness could enhance its ability
to identify the affect of funding for critical spare parts on readiness.
In an August 2002 study report, the DOD Comptroller identified the value
of investing in critical parts that adversely affect readiness and
recommended the Defense

Logistics Agency and the services link budget requests to weapon system
readiness rates. The Comptroller*s recommendations stemmed from concern
that the Defense Logistics Agency and the services* inventory systems tend
to purchase low- cost/ high- demand items and not those that would most
improve readiness rates. While citing some improvement, the Comptroller
made eight recommendations, four of which were specifically aimed at
improving efforts to increase investment in critical spare parts and link
funding requests to readiness rates. In addition, the Comptroller changed
the budget justification document (budget exhibit) to provide such
information to Congress. The Department of Defense*s

(DOD) annual appropriation totals billions of dollars for spare parts. In
addition, it has received

supplemental funding totaling $1.5 billion since fiscal year 1999 to
increase the availability of spare parts. However, DOD continues to
experience critical spare parts shortages that impact military readiness.
GAO examined whether (1) DOD*s logistics strategic plan

addresses the mitigation of critical spare parts shortages that adversely
affect readiness, (2) DOD*s logistics initiatives are likely to mitigate
spare parts shortages that affect readiness, and (3) DOD has the ability
to identify the effect

of increased investments for spare parts on readiness. GAO recommends that
the Secretary of Defense:

Incorporate clear goals, objectives, and performance measures pertaining
to mitigating spare parts shortages in the Future Logistics Enterprise or
appropriate agencywide initiatives to include efforts

recommended by the Under Secretary of Defense Comptroller in his August
2002 study report.

Establish milestones and define how it will measure progress in
implementing the August 2002 Inventory Management Study recommendations.
In written comments, DOD generally concurred with the intent

of our recommendations, but not with the approach recommended.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 707. 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- 707, a report to the

Subcommittee on Defense, Committee on Appropriations, House of
Representatives June 2003

DEFENSE INVENTORY

The Department Needs a Focused Effort to Overcome Critical Spare Parts
Shortages

Page i GAO- 03- 707 Defense Inventory Letter 1 Results in Brief 3
Background 5 DOD*s Strategic Plan Is Aimed at Logistics Transformation,
Not

Specifically Spare Parts Shortages 8 Initiatives Focus on Weapons System
Availability, Not Critical Spare Parts Shortages 9 Recent Efforts Could
Strengthen Link Between Funding and Readiness 11 Conclusions 13
Recommendations for Executive Action 13 Agency Comments and Our Evaluation
14 Scope and Methodology 16 Appendix I Initiatives Included in the Future
Logistics

Enterprise 18

Appendix II Inventory Investment Budget Submission Material 20

Appendix III Comments from the Department of Defense 24

Appendix IV GAO Contacts and Staff Acknowledgements 27 Contents

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- 707 Defense Inventory

June 27, 2003 The Honorable Jerry Lewis Chairman, Subcommittee on Defense
Committee on Appropriations House of Representatives

Dear Mr. Chairman: The Department of Defense*s (DOD) fiscal year 2002
parts related annual operations and maintenance funding totaled
approximately $11.2 billion and working capital fund obligation authority
totaled approximately $22.9 billion. Since fiscal year 1999, it has also
received supplemental funding totaling $1.5 billion to increase the
availability of spare parts. While the Army and Defense Logistics Agency
are reporting that they are meeting the overall supply performance goal of
having parts available to meet customer demands 85 percent of the time,
the department still reports shortages of critical spare parts 1 that
affect readiness. Recognizing that spare parts shortages will never be
eliminated, it is reasonable to

expect the department to place a priority on efforts to mitigate (reduce)
those shortages that adversely affect readiness. This priority should be
inherent in the overall planning and stewardship of funds requested from
Congress and the accountability for making spare parts investment
decisions that provide a good readiness return. In our January 2003 High
Risk Series Report, we again identified DOD*s management of inventory as
high- risk because of long standing management weaknesses that could
result in unnecessary expenditures and that DOD was experiencing equipment
readiness problems because of the lack of spare parts. 2 1 Critical spare
parts shortages refer to supply items that cause a degradation of the
readiness status of the associated weapon system or equipment.

2 U. S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Defense, GAO- 03- 98 (Washington, D. C.: January
2003).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 707 Defense Inventory

This is one in a series of reports responding to your request that we
identify ways to improve the availability of spare parts. 3 As agreed,
this report addresses the strategic planning efforts of the Office of the
Secretary of Defense (OSD) to transform the way DOD conducts its logistics
business operations in order to mitigate critical spare parts shortages.
More specifically, we are reporting on the following:

1. Does OSD*s logistics strategic plan address the mitigation of critical
spare parts shortages* those that adversely affect readiness?

2. Will OSD logistics initiatives likely mitigate spare parts shortages
that affect readiness?

3. Does OSD have the ability to identify the effect on readiness of
increased investments for spare parts?

We reviewed the OSD*s current logistics strategic planning document to
determine whether it contained a focus on mitigating spare parts
shortages. We also assessed the extent to which the strategy and
initiatives provided a basis for guiding the defense agencies* and
military services* efforts and were consistent with Government Performance
and Results Act of 1993 (GPRA) guidelines for preparing a strategic plan.
4 We interviewed OSD and Joint Staff officials about the strategic
planning document to identify their views on mitigating spare part
shortages and readiness. We also compared OSD*s current initiatives to
issues identified in GAO*s High Risk Series to determine if they contained
specific goals and objectives linked to mitigating spare parts and
measures relating to readiness. To assess DOD*s ability to link funding
for spare parts to improved readiness, we reviewed DOD documents and
reports relevant to linking additional funding for spare parts to
readiness.

3 U. S. General Accounting Office, Defense Inventory: Air Force Item
Manager View of Repair Parts Issues Consistent With Issues Reported in the
Past, GAO- 03- 684R (Washington, D. C.: May 21, 2003); Defense Inventory:
The Army Needs a Plan to Overcome

Critical Spare Parts Shortages, GAO- 03- 705 (Washington, D. C.: June 27,
2003); Defense Inventory: Air Force Plans and Initiatives to Mitigate
Spare Parts Shortages Need Better Implementation, GAO- 03- 706
(Washington, D. C.: June 27, 2003); Defense Inventory: Navy Logistics
Strategy and Initiatives Need to Address Spare Parts Shortages, GAO- 03-
708 (Washington, D. C.: June 27, 2003); and Defense Inventory: Several
Actions Are Needed to

Further DLA*s Efforts to Mitigate Shortages of Critical Parts, GAO- 03-
709 (forthcoming). 4 Pub. L. 103- 62, Aug. 3, 1993.

Page 3 GAO- 03- 707 Defense Inventory

The Office of the Secretary of Defense*s logistics strategic plan is
focused on transforming the department*s logistics operations through an
emphasis on improving weapon system support, customer service, and
enterprise integration. While this could improve weapon system readiness
over time, it does not specifically focus on mitigating spare parts
shortages. In addition, although it contains some key attributes of a
strategic plan, such as broad goals and implementation strategies, it
lacks other key attributes. In June 2002, the department published the
Future Logistics Enterprise, which serves as the strategic plan behind
efforts to transform logistics operations within the department to ensure
consistent, reliable support that meets the warfighters* requirements.
This plan

presents its vision for accelerating logistics improvement, enhancing
support to the warfighter and aligning logistics processes with the
operational demands of the 21st Century. However, according to OSD
officials, because the plan is focused on the high- level goal of
transforming operations, it does not focus on specific issues such as the
need to mitigate spare parts shortages. Even though DOD considers the
Future Logistics Enterprise plan to be in its infancy, the plan includes
some key elements of a good plan. For example, it cites general goals such
as meeting warfighter requirements and implementation strategies such as
adopting Total Life Cycle Systems Management, and recognizes the need to
develop broad performance measures such as weapons system

availability. However, the plan lacks other key elements, which are
considered important. It does not contain specific goals, objectives, or
performance measures; does not require subordinate organizations such as
the Defense Logistics Agency and the services to develop supporting plans
or submit annual progress reports; and does not provide the comprehensive
overarching guidance needed to integrate the multitude of ongoing
initiatives. By not focusing on mitigating spare parts shortages as part
of a well developed overall strategy to improve logistics operations, DOD
increases the likelihood there will be ineffective or duplicate efforts
within the Defense Logistics Agency and the services to address this
important problem that affects readiness. As a result, OSD will lack
assurance that it is investing in those highest priority items, which
would yield the greatest return on investment and effect on readiness.

The Future Logistics Enterprise plan identifies six departmentwide
initiatives under three broad topical areas to improve weapon system
availability, but none of the initiatives specifically address mitigating

critical spare parts shortages. However, in a separate initiative, DOD
directed the Defense Logistics Agency to improve the availability of
critical aviation spare parts. Under the three topics of weapon system
support, customer service, and enterprise integration, OSD*s six Results
in Brief

Page 4 GAO- 03- 707 Defense Inventory

agencywide initiatives focus on improving supply operations and readiness.
In fact, two* Condition Based Maintenance Plus and Total Life Cycle System
Management* specifically identify improving readiness as an objective. For
example, the Condition Based Maintenance Plus initiative focuses on
improving maintenance capabilities and business processes that could
increase operational availability and readiness throughout the life cycle
of the department*s weapon systems. If successfully implemented, this
initiative would improve maintenance operations and might affect spare
parts shortages, but it does not have goals and performance measures
related to mitigating spare parts

shortages. As a result, DOD may not know if it is investing in those items
that would give the greatest return on investment or effect on readiness,
or may achieve readiness at a higher than necessary cost by simply buying
more parts rather than addressing the cause of shortages. While not an

agencywide initiative, DOD has directed the Defense Logistics Agency to
implement a focused effort called the Aviation Investment Strategy to
reduce specific critical spare parts shortages. Under this initiative, the
Defense Logistics Agency has spent $500 million to buy more of these
parts, thereby increasing their availability.

Recent OSD efforts to link funding to readiness could enhance its ability
to identify the effect of funding for critical spare parts on readiness.
In an August 2002 study report, the DOD Comptroller identified the value
of investing in critical parts that adversely affect readiness and
recommended the Defense Logistics Agency and the services link budget
requests to weapon system readiness rates. The Comptroller*s
recommendations stemmed from concern that the Defense Logistics Agency and
the services* inventory systems tend to purchase lowcost/ high- demand
items and not those that would most improve readiness rates. Although he
cited some improvement efforts, the Comptroller made eight
recommendations, four of which specifically focused on improving efforts
to increase investment in critical spare parts and link funding requests
to individual weapon system readiness rates. In addition, the Comptroller
changed the budget justification document (budget exhibit) to provide such
information to Congress. However, his recommendations did not cite
reporting deadlines or how OSD would measure Defense Logistics Agency and
service progress in implementing the four recommendations.

Given the adverse effect of critical spare parts shortages on readiness,
we are recommending that the Secretary of Defense incorporate clear goals,
objectives, and performance measures pertaining to mitigating spare parts
shortages in either the Future Logistics Enterprise or appropriate

Page 5 GAO- 03- 707 Defense Inventory

agencywide initiatives to include efforts recommended by the Under
Secretary of Defense Comptroller in his August 2002 study report. In
addition, we are recommending that OSD identify milestones and define how
it will measure progress in implementing the August 2002 Inventory

Management Study recommendations. DOD concurred with the intent of our
first recommendation, but not all of the suggested actions. DOD stated
that spare parts shortages are a symptom of imperfect supply chain
processes and that components of the Future Logistics Enterprise would

transform these processes. Furthermore, the August 2002 recommendation has
been incorporated in the Financial Management Regulation and their
implementation would be reviewed in annual budget conferences. Therefore,
DOD does not need to incorporate additional goals, objectives and
performance measures into the strategy or agencywide initiatives to
address this issue. We recognize OSD*s focus on transforming logistics
processes and endorse the actions taken to monitor implementation of the
August 2002 study report recommendations. However, we believe that process
improvements alone do not meet the intent of our recommendation. Further,
we continue to believe that including a focus on mitigating spare parts
with clear goals, objectives and performance measures included in its
logistics strategy or agencywide initiatives is needed to provide the
framework for ensuring this issue is addressed as part of DOD*s overall
logistics effort. DOD partially concurred with the second recommendation
in that it believes separate reporting milestones to measure the progress
in implementing the Under Secretary of Defense, Comptroller*s August 2002
recommendations are not needed because progress would be measured as an
integral part of the resource allocation process in its annual budget
conferences. When implemented, these actions meet the intent of our
recommendation provided goals, objectives, and performance measures
pertaining to mitigating spare parts shortages are included in the
scorecard. The department*s comments and our evaluation are on page 14 of
this report.

To support the warfighter, DOD maintains an extensive supply system to
provide the spare parts necessary to keep weapons systems operational. The
department currently maintains an inventory in excess of $60 billion, with
annual sales to operating forces of approximately $30 billion. The
operating forces rely on operations and maintenance appropriations to
procure spare parts from this supply infrastructure. In recent years,
Congress has fully funded the operation and maintenance budget request of
the department and has provided supplemental funding targeted for spare
parts. Traditionally, the department has measured the effectiveness of
supply operations in terms of supply availability rate* the frequency
Background

Page 6 GAO- 03- 707 Defense Inventory

with which a part is available for delivery upon a customer*s first
request. The current supply availability goal is 85 percent and the Army
and Defense Logistics Agency report they are achieving this goal.
Nevertheless, the Defense Logistics Agency and the services continue to
experience critical spare parts shortages that affect the operational
readiness of the warfighter.

The department, Congress, and GAO have long recognized the importance of a
supply system that operates efficiently and effectively. The department
has taken a number of actions to improve the logistics system. First,
beginning in fiscal year 1994, the Under Secretary of Defense for
Acquisition and Technology developed the department*s initial strategic
plan for guiding improvements to the logistics support systems. This
planning effort continued with the development of the fiscal year 2000
Logistics Strategic Plan to direct the transformation of the logistics
system. This plan required the services and defense commands to develop
implementation plans that reflected the vision, objectives, and metrics of
the departmentwide plan. Although GAO identified shortcomings in the
departmentwide and subordinate plans, we acknowledge that this planning
effort was a positive step toward improving the economy and efficiency of
logistics support systems. 5 In fiscal year 2002, this strategic plan was
replaced with the current Future Logistics Enterprise, which focused on
three key areas with the overall goal of operating DOD logistics as a
single end- to- end enterprise. In achieving this end, the Future
Logistics Enterprise is designed to support the national defense strategy,
meet the requirements of the warfighter, support the ongoing initiatives

within the services, and focus the objectives of corrective actions. In
section 362 of the National Defense Authorization Act for fiscal year
2000, 6 Congress directed an independent study of DOD*s secondary
inventory and parts shortages to focus on any items that adversely affect
readiness. This study, performed by the Logistics Management Institute and
the Center for Naval Analysis, found that while overall supply
availability met department goals, declining inventory levels had resulted
in reduced aircraft readiness. DOD also recognized the need to improve

supply performance in its August 2001 Defense Planning Guidance which 5 U.
S. General Accounting Office, Defense Logistics: Strategic Planning
Weaknesses Leave Economy, Efficiency and Effectiveness of Future Support
Systems at Risk, GAO- 02- 106 (Washington, D. C.: October 11, 2001). 6
Pub. L. 106- 65, Oct. 5, 1999.

Page 7 GAO- 03- 707 Defense Inventory

directed a review of inventory management practices and stockage levels
during the fiscal year 2003 program/ budget review. The initial results of
this study were included in the fiscal year 2002 Program Budget Decision
422, which recommended the department further study inventory management
including developing a plan to streamline inventory management practices
and improve supply chain management. More specifically, it suggested the
department address the effect of inventory levels on weapons systems
readiness. In August 2002, the DOD Comptroller published the results of
these further efforts in the Inventory Management Study report, which
outlined eight recommendations for improving inventory and supply
readiness, four of which are directly aimed at improving efforts to
increase investments in readiness related spares and link funding requests
to readiness rates. In addition to these departmentwide plans and
policies, according to Deputy Under Secretary of Defense for Logistics and
Material Readiness, there are about 500 logistics improvement initiatives
underway at various DOD activities.

Beginning in 1990, GAO identified the department*s management of secondary
inventories as a high- risk area because inventory levels were too high
and management systems and procedures were ineffective and wasteful. In
the most recent high- risk report, 7 GAO identified the need to address
seven key weaknesses, one of which is overcoming key spare parts
shortages. More importantly, the report focused on the need for an
overarching strategic plan to guide the department*s logistics
transformation efforts. GPRA provides guidance to executive agencies for
establishing and monitoring strategic plans. GPRA specifies that virtually
every agency is required to prepare multiyear strategic plans, annual
performance plans, and annual performance reports. These strategic plans
are to include an agency*s mission statement, long- term general goals,
and the strategies that the agency will use to achieve these goals. GPRA
also

requires executive agencies to prepare an annual performance plan
including among other things, (1) the performance goals for agencies*
major programs and activities; (2) the performance indicators or measures
that will be used to gauge performance; (3) the processes, skills,
technology and resources required to achieve the performance goals; and
(4) the procedures that will be used to verify and validate performance
information. Finally, GPRA requires each agency to prepare annual reports
on program performance for the previous fiscal year.

7 GAO- 03- 98.

Page 8 GAO- 03- 707 Defense Inventory

The Office of the Secretary of Defense*s strategic logistics plan is
focused on transforming the department*s logistics operations through an
emphasis on improving weapon system support, customer service, and
enterprise integration. While this could improve weapon system readiness
over time, it does not specifically focus on mitigating spare parts
shortages. According to OSD officials, the plan*s focus on the higher-
level goal of improving weapon systems availability subsumes the issue of

critical spare parts shortages. In addition, while that planning document*
the Future Logistics Enterprise* includes some key elements of an
effective strategic plan, others are not included. The department*s Future
Logistics Enterprise published in June 2002

replaced the 2000 strategic plan and is intended to accelerate the
department*s implementation of its integrated logistics systems and its
commercial information system to meet warfighter needs. The ultimate
objective of this plan is to ensure that the logistics system provides
consistent, reliable support that meets the warfighters requirements. To
accomplish this, the Future Logistics Enterprise concentrated on changing
policy, processes, and systems within the logistics environment that could
improve weapon system support, customer service, and enterprise
integration. The Future Logistics Enterprise contains some key elements
necessary for

a good strategic plan, but other key elements are missing. Because DOD
considers this plan to be in its infancy, it has focused on initiating
these efforts, setting policy for the new initiatives, and exploring
potential approaches for evaluating progress toward achieving the
objectives. The plan contains general goals such as meeting warfighter
requirements and strategies to be employed such as implementing the
agencywide initiatives. In addition, DOD is currently developing the
performance measures to measure the effect of the plan. However, other
essential elements are missing. For example, although, specific
initiatives may require the Defense Logistics Agency and the services to
develop an implementation plan for that initiative, there is no
requirement for the development of Defense Logistics Agency and service
plans or annual progress reports in support of the Future Logistics
Enterprise. In addition, the plan is not all- inclusive and does not
provide the overarching guidance necessary to integrate some 500 ongoing
initiatives at the service and defense agencies or recommendations from
DOD studies such as those cited in the August 2002 Inventory Management
Study. For example, the 2002 study identified weaknesses in the models
used by the Defense Logistics Agency and the services to determine which
items they should buy to meet the 85 percent supply availability goal.
Specifically the study DOD*s Strategic Plan

Is Aimed at Logistics Transformation, Not Specifically Spare Parts
Shortages

Page 9 GAO- 03- 707 Defense Inventory

concluded that the models do not routinely account for factors such as
intended use, cost, or criticality in terms of readiness when establishing
inventory requirements. Consequently, the models favor procurement of low-
cost/ high- demand items and do not provide sufficient weight to highcost/
low- demand items that were found to be a problem for aviation platforms.
In addition to recommending that the Defense Logistics Agency and the
services apply higher supply targets for these items in the shortterm, the
study recommended that all new supply systems be capable of supporting
readiness based sparing models. However, there is no apparent

linkage of the study results and recommended actions to the Future
Logistics Enterprise. Other key elements missing from the strategic plan
include (1) how the department should be organized in the future to
fulfill evolving logistics requirements and (2) the facilities and
personnel needed

to fulfill its future logistics requirements. GAO identified these same
weaknesses in the department*s fiscal year 2000 Logistics Strategic Plan.
8 Without these elements of a good plan, the department can not ensure
that

efforts undertaken by the Defense Logistics Agency and the services will
support and achieve the department*s logistics transformation goals.

The department*s Future Logistics Enterprise concentrates on three key
areas* weapon systems support, customer service and enterprise
integration* to focus the six agencywide initiatives that have the
potential to affect readiness, but none specifically address mitigating
critical spare parts shortages. Under a separate initiative, however, DOD
has directed the Defense Logistics Agency to increase inventories of
critical aviation spare parts. The six initiatives aligned with these
areas include (1) Depot Maintenance Partnerships, (2) Conditioned Based
Maintenance Plus, (3) Total Life Cycle Systems Management, (4) End- to-
End Distribution, (5) Executive Agents, and (6) Enterprise Integration
(see app. I). Of these, the Conditioned Based Maintenance Plus and the
Total Life Cycle Systems Management initiatives specifically address
improving readiness. While not specifically focused on, each of the
departmentwide initiative has the potential to help reduce spare parts
shortages. Although not agencywide, DOD has directed specific efforts such
as the Aviation Investment Strategy

to address specific critical spare parts problems. The Conditioned Based
Maintenance Plus initiative is designed to increase operational
availability and readiness throughout the weapon system life

8 GAO- 02- 106. Initiatives Focus on

Weapons System Availability, Not Critical Spare Parts Shortages

Page 10 GAO- 03- 707 Defense Inventory

cycle using real time diagnostic and prognostic techniques to determine
the current operating status and predict the future condition of
equipment. Data from these techniques will be utilized to better
anticipate the maintenance requirements of the weapon system and its
components. Currently, four Condition Based Maintenance Plus programs are
being piloted within the military services: (1) the Army Diagnostic
Improvement Program, (2) the Integrated Condition Assessment System, (3)
the Joint

Strike Fighter Prognostic Health Management, and (4) the Integrated
Mechanical Diagnostics- Health Usage Monitoring System. These pilots
demonstrate the use of diagnostic and prognostic tools on both existing
weapon systems and systems in the acquisition pipeline. For example, the
Integrated Mechanical Diagnostics- Health Usage Monitoring System provides
in- flight monitoring and collects engine and mechanical drive

systems information on the H- 53 and H- 60 helicopters, as well as
accurate flight hour recording. Among the cited benefits of this program
is a 10 percent reduction in total aviation depot level reparable/
consumable costs due to vibration related maintenance actions. If
successfully implemented, this initiative would improve maintenance
operations and might affect spare parts shortages, but it does not have
goals and performance

measures related to mitigating spare parts shortages. The Total Life Cycle
Systems Management initiative makes the program manager responsible for
all activities associated with the acquisition, development, production,
fielding, sustainment, and disposal of a weapon system across its life
cycle. The goal is to create a procurement action where the sustainability
and maintainability, as well as the operational needs of the warfighter,
are incorporated into the acquisition decision. Performance Based
Logistics is the preferred strategy to support Total Life Cycle System
Management activities and enhance weapon system product

support within the department. Under this concept, the program manager
enters into contractual relationships for support of the weapon system or
components that are based on the vendor meeting specific performance
requirements for weapon system availability. In essence, the management
risk for the spare parts support of the weapon system or component is
transferred to the vendor through the performance requirements included in
the contracts. By focusing on weapon system or component availability,

OSD claims the effect of spare parts shortages on readiness could be
mitigated to a level deemed acceptable to the warfighter.

Although not an agencywide initiative, in 1999 DOD directed the Defense
Logistics Agency to focus on particular shortages of aircraft parts. The
Aviation Investment Strategy specifically targeted critical aviation spare
parts. In 1999- 2000 the Office of the Secretary of Defense, Program

Page 11 GAO- 03- 707 Defense Inventory

Analysis and Evaluation, with support from the Logistics Management
Institute, completed a study that concluded low stockage levels of
highcost/ low- demand items were the predominant cause of supply related
Not Mission Capable rates. As a result, the Office of the Secretary of
Defense added $500 million in the 1999 Program Review to increase
inventory levels for high- cost/ low- demand aviation parts managed by the
Defense Logistics Agency. Since then, the Defense Logistics Agency has
been buying more of these parts and increasing the amount of inventory on
hand, but as discussed in our report on Defense Logistics Agency
initiatives, 9 over half of these parts still remain below the 85 percent
supply availability goal. Although DOD has long been monitoring readiness,
it has recently

undertaken efforts to link funding to readiness by weapons system. The
department*s ability to link funding for critical spare parts to readiness
should improve when the Defense Logistics Agency and the services
implement four recent recommendations by the DOD comptroller. The
Comptroller*s recommendations stemmed from concern that the Defense
Logistics Agency and the services* inventory systems tend to purchase low
cost/ high demand items and not those that would most improve readiness
rates. Although the Comptroller cited some improvement efforts, he made
four recommendations specifically aimed at improving their efforts to
increase investment in critical spare parts and link funding requests to
readiness rates. In addition, the Comptroller changed the budget
justification material (budget exhibit) to provide such information to
Congress. However, the report conveying these recommendations did not cite
deadlines or how DOD would measure the Defense Logistics Agency and the
services* progress in implementing the four recommendations.

In the August 2002 report, the DOD Comptroller issued the Inventory
Management Study report in response to Program Budget Decision 422, in
which the Comptroller cited problems with the supply models currently
being used by the Defense Logistics Agency and the services. Foremost, the
models tended to purchase low- cost/ high demand items* not necessarily
those that would most improve readiness rates. This occurred because the
model forecasted inventory purchases based on historical demand for an
item and aimed, as a goal, to have that part available for the customer 85
percent of the time. Although the report noted numerous

9 GAO- 03- 709. Recent Efforts Could

Strengthen Link between Funding and Readiness

Page 12 GAO- 03- 707 Defense Inventory

commercial practices and supply management initiatives under way that need
to be continued, it also stated that additional efforts are required to
make better parts investment decisions based on readiness. For example,
the report cited OSD*s continuing efforts to help supply managers identify
where to focus their resources for optimal readiness gains. He also

modified the budget justification material (budget exhibit) to show the
rates at which each major weapon system is not available due to supply
problems so that funding requests submitted to the Congress could be
evaluated based on their ability to improve readiness. More specifically,
the Comptroller made eight recommendations for improving inventory and
supply readiness, four of which are directly aimed at improving efforts to
increase investments in readiness related spares and link funding requests
to readiness rates. The four recommendations are as follows:

 The Under Secretary of Defense, Acquisition, Technology, and Logistics
should ensure that the logistics systems are capable of supporting
readiness based sparing models and readiness drivers. The systems should
also support life- cycle cost and trade- off analyses. All requests for
systems initiatives or Enterprise Resource Planning must have Office of
the Under Secretary of Defense, Comptroller approval through the Financial

Management Modernization Plan before investment of milestone decisions.

 The Defense Logistics Agency and the military services should continue
efforts to ensure that high- cost/ low- demand weapon system items are
available when needed.

 Requests for funds to increase inventory investments should be justified
by corresponding increases in weapon system readiness rates.

 OSD for Program Analysis and Evaluation should continue to investigate
links between inventory funding levels and readiness to establish a
readiness outcome metric for use in resource allocation and performance
measurement processes.

Although these recommendations are aimed at significantly improving
inventory management and the spare parts investment decision process, the
Comptroller did not establish milestones for their implementation or their
performance measures. Without deadlines and performance measures, it is
uncertain when these recommendations will be implemented and what results
should be expected. For example, while the DOD Comptroller specified how
the Defense Logistics Agency and the services should report data linking
funding to readiness in the Financial

Page 13 GAO- 03- 707 Defense Inventory

Management Regulation, the services ability to report this information is
linked to the status of their efforts to develop logistics data systems
capable of collecting and performing the necessary trade off analyses. As
a result, in the February 2003 budget submission, the Air Force was able
to fully implement this reporting recommendation while the Army and Navy
did not provide all of the desired information (see app. II).

Due to the significant funding DOD receives annually to provide spare
parts, the long- standing problems concerning critical spare parts, and
accountability issues pertaining to the effective tracking of investment
of these funds, it is important that the department*s strategic goals and
objectives guide its effort to transform the logistics system and mitigate
spare parts shortages that reduce readiness. Although the department has
taken several significant steps to improve the economy and efficiency of
the logistics support system and possibly provide valuable information for
making future investment decisions that may result in better logistics
support to the warfighter, its Future Logistics Enterprise lacks a
specific focus on spare parts shortages and some of the elements needed
for a strategic plan. Without a comprehensive strategic plan linked to
subordinate plans, the results will likely be less effective or
potentially

duplicative efforts within the Defense Logistics Agency and the services.
In addition, the lack of a departmentwide goal to address the issue of
critical spare parts shortages could result in continued spare parts
shortages that negatively affect readiness. Furthermore, without specific
initiatives to address critical spare parts shortages that links to the
strategic plan*s goals, objectives, and performance measures, the
department may be unable to significantly reduce the effect of spare parts
shortages on readiness and there is no assurance that investments in spare
parts will be based on the greatest return on investment or effect on
readiness. Finally, because OSD did not establish deadlines or how it
would measure progress in implementing its August 2002 recommendations to
provide Congress with information linking increased investments in spare
parts inventories to include weapon system readiness

rates, there is no assurance when this information will be available to
Congress for use in making future funding decisions.

In order to improve the department*s logistics strategic plan to achieve
results for overcoming spare parts shortages, improving readiness, and
address the long- standing weaknesses that are limiting the overall
economy and efficiency of logistics operations, we recommend that the
Conclusions

Recommendations for Executive Action

Page 14 GAO- 03- 707 Defense Inventory

Secretary of Defense direct the Under Secretary for Acquisition,
Technology and Logistics to

 incorporate clear goals, objectives, and performance measures pertaining
to mitigating spare parts shortages in the Future Logistics Enterprise or
appropriate agencywide initiatives to include efforts recommended by the
Under Secretary of Defense, Comptroller in his August 2002 study report;
We also recommend that the Secretary of Defense direct the Under

Secretary of Defense, Comptroller to  establish reporting milestones and
define how it will measure progress in

implementing the August 2002 Inventory Management Study recommendations
related to mitigating critical spare parts shortages.

In written comments on this report, DOD generally concurred with the
intent of the recommendations, but not all of the specified actions we
recommended. DOD*s written comments are reprinted in their entirety in
appendix III.

In concurring with the intent of our first recommendation, DOD expressed
concern that because spare parts shortages are a symptom of imperfect
supply management processes, its plans must focus on improving those
processes, not the symptoms. According to DOD, the Future Logistics
Enterprise focuses on achieving improvement through three threads: Weapon
System Support, End- to- End Warfighter Support, and Enterprise
Integration. Specifically, End- to- End Warfighter Support implements
performance based agreements that include goals, objectives, and
performance measures between the source of supply and the customer to
eliminate potential gaps in support to ensure the readiness of weapons
systems. Weapon system support focuses on a fully integrated life- cycle
development process where weapon system managers procure performance of
the weapon system including sustainment. According to DOD, this represents
a major shift in the approach to weapon system support by emphasizing
purchasing a predetermined level of availability to meet the warfighter*s
objectives rather than buying set levels of spares, repairs and data. In
addition, DOD said that Enterprise Integration enables these transformed
supply processes by allowing collaboration across the logistics domain and
will enhance the ability to forecast supply and demand to ensure weapon
system readiness. Furthermore, efforts recommended by the Under Secretary
of Defense, Comptroller in his Agency Comments

and Our Evaluation

Page 15 GAO- 03- 707 Defense Inventory

August 2002 study report have already been incorporated into the Financial
Management Regulation. The implementation of the efforts by the Defense
Logistic Agency and military services will be reviewed within the annual
budget conferences. Therefore, DOD does not agree that additional goals,
objectives, and performance measures or additional initiatives are needed
to mitigate spare parts shortages.

We disagree that the actions taken are sufficient to address our
recommendation. We believe that modification of the Financial Management
Regulation reporting requirements along with actions taken in response to
our second recommendation are sufficient to address the

recommendations made by the Under Secretary of Defense, Comptroller.
Furthermore, our report recognizes that the Future Logistics Enterprise
focuses on transforming DOD*s logistics operations and that improving
logistics processes is part of the solution to mitigating spare parts
shortages. However, we believe that process improvements alone do not meet
our recommendation. The intent of our recommendation was for OSD to
include a focus on mitigating spare parts shortages in either the Future
Logistics Enterprise or agencywide initiatives. Without a focus on
mitigating spare parts shortages that includes clear goals, objectives,
and milestones included in the strategic plan or departmentwide
initiatives, we

believe DOD efforts will not establish the framework necessary to assess
the department*s progress in addressing this issue. In addition, without
this framework, DOD*s progress in mitigating spare parts shortages will be
limited because it efforts may be ineffective or duplicative in mitigating
spare parts shortages that are critical to equipment readiness. Therefore,
we continue to believe implementation of our recommended actions is
necessary for improving readiness of legacy and future weapon systems.

In partially concurring with our second recommendation, DOD stated that
progress in implementing the Under Secretary of Defense, Comptroller
recommendations would be measured as an integral component of its resource
allocation process and that separate reporting milestones are not needed.
DOD also stated that budget guidance for fiscal year 2005 will

include additional performance metrics that will be further refined as the
logistics balanced scorecard 10 is implemented under the Future Logistics
Enterprise and Business Management and Modernization Program initiatives.
Successful implementation of these actions and DOD*s ongoing

10 The balanced scorecard links strategic goals, strategies, objectives
and performance measures to an organization*s strategic plan..

Page 16 GAO- 03- 707 Defense Inventory

development of a balanced scorecard as a mechanism for measuring progress
in implementing these recommendations will meet the intent of our
recommendation provided goals, objectives, and performance measures
pertaining to mitigating spare parts shortages are included in the
scorecard.

To determine the adequacy of DOD*s current strategic plans to address
spare parts shortages, we obtained current DOD logistics and strategic
planning documents that identified guidance on improving spare parts
support for military readiness.

To determine how adequately the strategic plan addressed spare parts
shortages, we reviewed the Future Logistics Enterprise and supporting
documents to ascertain whether the plan addressed mitigating spare parts
shortages as one of its objectives or goals. We also reviewed the Future
Logistics Enterprise to determine whether it contained the elements
necessary for a strategic plan as outlined in the Government Performance
and Results Act of 1993 (GPRA). 11 In addition, we interviewed key
officials responsible for logistics and strategic planning efforts in the
Office of the Secretary of Defense and the Joint Chiefs of Staff. To
determine how likely the initiatives in the Future Logistics Enterprise

were to achieve the intended results and contribute to mitigating spare
parts shortages to improve readiness, we reviewed the six initiatives to
determine if any had goals and objectives related to readiness or
mitigating spare parts shortages. We focused our analysis on whether the
initiatives addressed spare parts shortages and the need for quantifiable
and measurable performance targets as identified in GPRA. In addition, we

interviewed officials responsible for each of the initiatives within the
Office of the Secretary of Defense.

To determine the extent to which the department can identify the effect of
increased funding for spare parts on readiness, we reviewed the Inventory
Management Study completed in August 2002. In addition, we interviewed

officials at the Office of the Secretary of Defense to determine the
status of efforts to establish a link between funding for spare parts and
readiness.

11 Pub. L. 103- 62, Aug. 3, 1993. Scope and

Methodology

Page 17 GAO- 03- 707 Defense Inventory

Further, we compared the Future Logistics Enterprise initiatives to GAO*s
High Risk Series and GPRA to determine if the initiatives contained (1) a
clear mission and vision, (2) specific objectives and attributes linked to
spare parts and readiness, (3) milestones, and (4) performance metrics and
reporting requirements. We also coordinated our efforts with the four
other GAO engagements evaluating strategic planning documents and
initiatives for mitigating spare parts shortages within the Defense
Logistics Agency, Army, Navy, and Air Force.

We performed our review from July 2002 through May 2003 in accordance with
generally accepted government auditing standards. We are sending copies of
this report to the Secretary of Defense and other interested congressional
committees and parties. 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. Major contributors to this report are
included in appendix III.

Sincerely yours, William M. Solis, Director Defense Capabilities and
Management

Appendix I: Initiatives Included in the Future Logistics Enterprise

Page 18 GAO- 03- 707 Defense Inventory

The following six initiatives represent the department*s integrated
approach to accelerate logistics improvement, enhance support to the
warfighter, and align logistics processes with the operational demands of
the 21st century.

Initiative Objective/ goals Accomplishments/ additional actions Weapon
System Support

Depot Maintenance Partnership Increase the level of public- private
partnerships resulting in  greater private sector investment,

 better facility utilization,

 reduced ownership cost,

 workforce integration,

 more efficient business processes,

 greater credibility, and

 more collegial working relationship with Congress. Accomplishments:

 Legislative changes included in the National Defense Act for fiscal year
2002

 Policy memorandum promulgated

 Three Legislative Proposals under consideration

 Service implementation plans Additional Actions:

 Develop reports and measures Condition Based Maintenance Plus Increase
operational availability and readiness throughout the weapon system life
cycle at a reduced cost.

Additional Actions:

 Draft policy completed

 Incorporated in DOD 5000 series

 Service implementation plans Total Life Cycle System Management Improve
weapon system sustainment

through

 timely acquisition of weapon systems,

 meeting warfighter performance requirements,

 integration of sustainment and maintainability during the acquisition
process, and

 weapon system sustainment to meet warfighter performance requirements at
a best corporate value.

Accomplishments:

 Improved Defense Acquisition University curriculum

 Service Performance Based Logistics implementation schedules

 Revised DOD publications 5000.1.5000.2 Additional Actions:

 Develop financial mechanisms with Under Secretary of Defense

Customer Service

End- to- End Distribution Streamlining warfighter support by providing
material from the source of supply or point of origin to the point of use
or disposal on a worldwide basis. The intent is to influence acquisition,
sourcing, positioning, and transportation to facilitate the flow of
material and

ensure that deployment and sustainment are synchronized.

Accomplishments:

 Identify additional improvements in the management of end- to- end
distribution Additional Actions:

 Synchronize policies and initiatives for end- to- end distribution

 Advocate greater consideration of distribution in acquisition decisions

Executive Agents Assess and align Executive Agent designations with
warfighter requirements arising from the National Defense Strategy.

Additional Actions:

 Prepare a schedule for assessing potential EA assignments for
construction and medical material

 Prepare Concept of Operations and draft DOD directives for bulk
petroleum and subsistence

 Complete initial analyses of emerging Executive Agents

Appendix I: Initiatives Included in the Future Logistics Enterprise

Appendix I: Initiatives Included in the Future Logistics Enterprise

Page 19 GAO- 03- 707 Defense Inventory

Initiative Objective/ goals Accomplishments/ additional actions Enterprise
Integration

Enterprise Integration Create highly trained and skilled people within DOD
logistics enterprise to have access to near real time, actionable
information from modern, commercially based software produces that will
enable reengineered logistics processes and business rules.

Additional Actions:

 Incorporate Triangle Working Groups plans of action and milestones 
Implement phase two of fact finding review of Enterprise Initiatives 
Draft Policy Recommendations Source: GAO.

Appendix II: Inventory Investment Budget Submission Material

Page 20 GAO- 03- 707 Defense Inventory

February 2003 Working Capital Fund Budget submissions for the Air Force,
Army, and Navy provide an example of the information reported by each
service pertaining to inventory investment.

1 NMCSR * Not Mission Capable Supply Rate is the percentage of time a
weapon system is down for parts. Assuming no other factors impact aircraft
availability, then the aircraft availability is computed 1 minus NMCSR.
NMCSR is computed only for weapon systems. NMCSR is not computed for
weapon system parts such as engines.

Legend SOF * Special Operating Forces Common EW * Common Electronic
Warfare1 NIMSC5 * Nonconsumable Item Material Support Code 5

Appendix II: Inventory Investment Budget Submission Material

Appendix II: Inventory Investment Budget Submission Material

Page 21 GAO- 03- 707 Defense Inventory

Legend MSE * Mobile Subscriber Equipment MLRS * Multiple Launch Rocket
System HMMWV * High Mobility Multipurpose Wheeled Vehicle

Appendix II: Inventory Investment Budget Submission Material

Page 22 GAO- 03- 707 Defense Inventory

Legend SNT * Serial Number Tracking NIS PBL * Not In Stratification
Performance Based Logistics PBL Savings * Performance Based Logistics
Savings LECP * Logistics Engineering Change Proposal

Appendix II: Inventory Investment Budget Submission Material

Page 23 GAO- 03- 707 Defense Inventory

Appendix III: Comments from the Department of Defense

Page 24 GAO- 03- 707 Defense Inventory Appendix III: Comments from the
Department of Defense

Appendix III: Comments from the Department of Defense Page 25 GAO- 03- 707
Defense Inventory

Appendix III: Comments from the Department of Defense Page 26 GAO- 03- 707
Defense Inventory

Appendix IV: GAO Contacts and Staff Acknowledgments Page 27 GAO- 03- 707
Defense Inventory

Richard G. Payne (757) 552- 8119 John Wren (757) 552- 8235

In addition to those named above, Latrealle Lee, Margaret Giammarco,
Marjorie Jane Hunt, and Barry L. Shillito also made significant
contributions to this report. Appendix IV: GAO Contacts and Staff

Acknowledgments GAO Contacts Acknowledgments

(350252)

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