Defense Inventory: Navy Logistics Strategy and Initiatives Need  
to Address Spare Parts Shortages (27-JUN-03, GAO-03-708).	 
                                                                 
Since 1990, GAO has identified DOD inventory management as high  
risk because of long-standing management weaknesses. In fiscal	 
years 2001 and 2002, Congress provided the Navy with more than $8
billion in operations and maintenance funds to purchase spare	 
parts in support of the service's operations. Nevertheless, spare
parts availability has fallen short of the Navy's goals in recent
years. GAO examined the extent to which Navy strategic plans	 
address mitigation of critical spare parts shortages, the	 
likelihood that key supply system improvement initiatives will	 
help mitigate spare parts shortages and enhance readiness, and	 
the Navy's ability to identify the impact on readiness of	 
increased spare parts investments.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-708 					        
    ACCNO:   A07401						        
  TITLE:     Defense Inventory: Navy Logistics Strategy and	      
Initiatives Need to Address Spare Parts Shortages		 
     DATE:   06/27/2003 
  SUBJECT:   Spare parts					 
	     Combat readiness					 
	     Equipment inventories				 
	     Logistics						 
	     Military inventories				 
	     Strategic planning 				 
	     DOD Logistics Strategic Plan			 
	     Navy High Yield Logistics Transformation		 
	     Plan						 
                                                                 
	     P-3 Aircraft					 
	     Orion Aircraft					 

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GAO-03-708

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

United States General Accounting Office

GAO

June 2003 DEFENSE INVENTORY

Navy Logistics Strategy and Initiatives Need to Address Spare Parts
Shortages

GAO- 03- 708

The Navy*s servicewide strategic plan does not specifically address means
to mitigate critical spare parts shortages. Its 2001 plan contained
strategic goals, objectives, and performance measures, but the service did
not use it to

systematically manage implementation of logistics reform initiatives. The
Navy is developing a new logistics strategic plan, but this document has
not yet been published. Consequently, the service presently lacks an
effective top- level plan that integrates a specific focus on mitigating
spare parts shortages into its logistics transformation initiatives.
Without such a plan, the Navy lacks guidance necessary to ensure its
logistics initiatives mitigate critical spare parts shortages.

GAO examined six of the key initiatives that the Navy has undertaken to
improve the economy and efficiency of its supply system. While some of
these initiatives have increased availability of select spare parts, GAO
cannot determine their potential to mitigate critical spare parts
shortages because they were not designed specifically to remedy this
problem. For example,

the Performance Based Logistics initiative aims to improve supply support
at equal or lower cost by outsourcing a broad range of services. Though
the initiative has increased availability of certain items, GAO could not
measure the extent to which Performance Based Logistics contracts have
mitigated critical spare parts shortages.

The Navy has determined that an additional investment of $1.2 billion
would be necessary to achieve supply availability levels that support the
service*s readiness objectives. However, the Navy did not ask for this
funding in its fiscal year 2004 budget request, nor did it report linkages
between resource levels and readiness rates for individual weapon systems,
as recommended by the Office of the Secretary of Defense in 2002. The Navy
did provide aggregate readiness data to the Office of the Secretary of
Defense, but officials stated that they lacked information technology
necessary to link readiness rates by weapon system to budget categories.
DOD has an 85 percent supply availability goal, which means that 85
percent of the requisitions sent to wholesale supply system managers can
be immediately filled from on- hand inventories. Navy supply system models
are focused on achieving this goal in the aggregate. However, the Navy*s
overall wholesale supply system performance has fallen short of
expectations in each of the last 3 fiscal years for both aviation- and
ship- related repairable spare parts. Supply availability ranged between
approximately 69 percent and 71 percent

for aviation- related items, and between 79 percent and 84 percent for
shiprelated parts. Since 1990, GAO has identified DOD inventory management
as

high risk because of long- standing management weaknesses. In fiscal years
2001 and 2002, Congress provided the Navy with more than $8 billion in
operations and maintenance funds to purchase spare parts in support of the

service*s operations. Nevertheless, spare parts availability has fallen
short of the Navy*s goals in recent

years. GAO examined the extent to which Navy strategic plans address
mitigation of critical spare parts shortages, the likelihood that key
supply system improvement initiatives will help mitigate spare parts
shortages and enhance readiness, and the Navy*s ability to identify the
impact on readiness of increased spare parts investments. GAO recommends
that the

Secretary of Defense

develop a framework for mitigating critical spare parts shortages as part
of either the Sea Enterprise Strategy or the Naval Supply Systems Command
Strategic Plan, and

implement, with a specific completion milestone, the Office of the
Secretary of Defense*s recommendation to report the impact of funding on
weapon system readiness.

In written comments, DOD generally concurred with the intent of our
recommendations, but not with the specific actions.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 708. 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- 708, a report to the

Subcommittee on Defense, Committee on Appropriations, House of
Representatives.

June 2003

DEFENSE INVENTORY

Navy Logistics Strategy and Initiatives Need to Address Spare Parts
Shortages

Page i GAO- 03- 708 Defense Inventory Letter 1 Results in Brief 3
Background 5 Navy Logistics Strategic Plans Do Not Specifically Focus on

Mitigating Spare Parts Shortages 8 Several Key Initiatives Show Potential
for Improved Spare Parts Support 10 Impact of Additional Spare Parts
Funding on Supply Availability and Readiness Estimated but Not Reported 21
Conclusions 22 Recommendations 23 Agency Comments and Our Evaluation 23
Scope and Methodology 25 Appendix I Comments from the Department of
Defense 27

Figure

Figure 1: Investment Criteria and Funding Trends for Logistics Engineering
Change Proposals 17 Contents

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Page 1 GAO- 03- 708 Defense Inventory

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

Dear Mr. Chairman: In fiscal years 2001 and 2002, the Navy spent $8.1
billion from operations and maintenance appropriations for spare parts. 1
At the end of fiscal year 2002, the Navy maintained inventories of spare
parts with an estimated value of $30 billion. 2 However, the Navy
continues to report that its parts availability level is below the 85
percent goal. While recognizing that spare parts shortages may never be
eliminated, it is reasonable to expect the services to place a priority on
efforts to mitigate (reduce) those shortages that adversely affect
readiness. This priority should be inherent in the service*s overall
planning and stewardship of funds they request from Congress, and in their
accountability for making spare parts investment decisions that provide a
good readiness return. Since 1990, we have identified the Department of
Defense*s (DOD) inventory management as high risk because of long-
standing management weaknesses. In our January 2003 High Risk Series
Report, we wrote that DOD was experiencing equipment readiness problems
because of a lack of key spare parts, and we recommended that DOD take
actions to address those shortages. 3 As recently as August 2002, DOD
recognized the need to

1 These figures are based on the Navy*s OP- 31 Budget exhibits, about
which we recently reported concerns. See U. S. General Accounting Office,
Defense Inventory: Better Reporting on Spare Parts Spending Will Enhance
Congressional Oversight, GAO- 03- 18 (Washington, D. C.: Oct. 24, 2002).

2 This figure includes investments of about $21 billion in wholesale-
level inventories and about $9 billion in retail- level inventories kept
at Navy shore stations and aboard ship. The figure does not include the
value of government- owned spare parts and equipment purchased by program
sponsors and kept at end- use sites, such as naval warfare centers,
maintenance depots, and naval contractors. 3 U. S. General Accounting
Office, Major Management Challenges and Program Risks:

Department of Defense, GAO- 03- 98 (Washington, D. C.: Jan. 2003).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 708 Defense Inventory

overcome critical spare parts shortages and recommended changes to improve
weapon system readiness. 4 This is one in a series of reports that respond
to your request that we

identify ways to improve the availability of spare parts for aircraft,
ships, vehicles, and weapon systems. 5 As agreed with your office, this
report addresses the following questions:

 Does the Navy*s strategic plan for logistics address the mitigation of
critical spare parts shortages* those that adversely affect readiness? 6 
Will key Navy logistics initiatives likely mitigate spare parts shortages

that affect readiness?  Does the Navy have the ability to identify the
impact on readiness of

increased investments for spare parts? To accomplish these objectives, we
analyzed plans and initiatives applicable to the management of the Navy*s
inventory management system. We interviewed officials and obtained
information on inventory management practices at Navy headquarters, the
Naval Supply Systems Command, the Naval Inventory Control Point, the Naval
Sea Systems Command, and the Naval Air Systems Command. We reviewed
project plans, implementation status, and performance measures for six
supply system improvement initiatives that Navy headquarters and Supply
Systems Command officials highlighted as key efforts for mitigating future
spare parts shortages and enhancing equipment readiness. We used the

4 Office of the Secretary of Defense, Inventory Management Study
(Washington, D. C.: Aug. 2002). 5 U. S. General Accounting Office, Defense
Inventory: The Department Needs a Focused Effort to Overcome Critical
Spare Parts Shortages, GAO- 03- 707 (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: The Army Needs a Plan to Overcome Critical Spare Parts
Shortages,

GAO- 03- 705 (Washington, D. C.: June 27, 2003); Defense Inventory:
Several Actions Are Needed to Further DLA*s Efforts to Mitigate Shortages
of Critical Parts, GAO- 03- 709 (forthcoming); Defense Inventory: Air
Force Item Manager Views of Repair Parts Issues Consistent With Issues
Reported in the Past, GAO- 03- 684R (Washington, D. C.: May 21,

2003). 6 For this report, critical spare parts are defined as those parts
that directly affect the readiness of weapon systems. For example, the
Navy periodically identifies parts such as nose landing gear for the F- 18
aircraft as *top degraders* of weapon system readiness.

Page 3 GAO- 03- 708 Defense Inventory

Government Performance and Results Act of 1993, prior GAO reports, and
other key DOD documents as criteria to evaluate the Navy*s strategic plans
and initiatives. 7 More details on our scope and methodology may be found
on page 25.

The Navy*s servicewide strategic plan does not specifically address means
to mitigate critical spare parts shortages. As a result, the Navy lacks
overarching guidance on how to systematically reduce these shortages and
assess progress toward improving related readiness. In fiscal year 2001,
the Navy published its High Yield Logistics Transformation Plan, which was
aimed at improving Navy logistics overall. This plan contained attributes
of an effective strategic plan, such as goals, objectives, and performance
measures, but it did not specifically address the mitigation of spare
parts shortages. Similarly, while a key subordinate plan the Naval Supply
Systems Command*s strategic plan* has a strategy to ensure that

the availability of spare parts meets required performance levels, its
objectives do not specifically focus on mitigating critical spare parts
shortages. This plan also did not incorporate strategic objectives
identified in the Navy*s High Yield Logistics Transformation Plan.
Furthermore, after

DOD published a new strategic plan, called the Future Logistics
Enterprise, in June 2002, which outlined several new transformation
strategies and goals, the Navy stopped tracking and reporting its progress
in implementing the High Yield Logistics Transformation Plan initiatives.
In October 2002, the Navy embarked on a new strategic planning effort,
referred to as Sea Enterprise. 8 The Navy expects the Sea Enterprise
strategy to address how it will improve the efficiency and effectiveness
of all aspects of its business operations, including organizational
alignments, logistics requirements, and reinvestment of savings, to
purchase new weapon systems and enhance combat capability. However, the
Sea Enterprise strategy has not been published, and as a result, the
service presently lacks an effective top- level plan that integrates a
specific focus on mitigating spare parts shortages into its logistics
transformation initiatives. Without such a plan, the Navy lacks guidance
necessary to ensure its logistics initiatives mitigate critical spare
parts shortages.

7 Pub. L. No. 103- 62, Aug. 3, 1993. 8 The Sea Enterprise plan is part of
the Navy*s Sea Power 21 initiative that defines capabilities of naval
forces in the 21st century. The vision for the 21st century will be
achieved through a triad of new organizational processes called Sea Trial,
Sea Warrior, and Sea Enterprise. Results in Brief

Page 4 GAO- 03- 708 Defense Inventory

We reviewed six initiatives that Navy officials identified as key to
improving the economy and efficiency of supply support. While some of
these initiatives have improved the overall supply availability of some
spare parts, we cannot determine their potential for mitigating critical
parts shortages because they were not designed to specifically address
this problem. 9 For example, through the Performance Based Logistics
initiative, the Navy aims to improve supply support at equal or reduced
cost by outsourcing various logistics services, such as spare parts
warehousing, repair, and inventory requirements analysis. The Total Asset
Visibility initiative was undertaken to ensure full accountability of
items in the Navy*s spare parts inventories and to facilitate
redistribution of parts between Navy customers. Lastly, the Logistics
Engineering Change Proposals initiative provides funding to improve the
reliability of spare parts. These initiatives have a potential for
improving the efficiency of the Navy*s supply system. However, in the
absence of an overarching plan that specifically addresses critical spare
parts shortages, we cannot measure

the impact of each initiative on critical spare parts availability, nor
can we assess any related effects on weapon system readiness.

The Navy has analyzed the impact of additional funding on the availability
of spare parts and equipment readiness, but has not reported this
information as part of its budget documentation. For example, it has
determined that an additional $1.2 billion would be necessary to support
the Chief of Naval Operations* readiness objectives. The Navy*s analysis
shows that constraints in repair pipeline requirement models accounted for
a 6 to 8 percent decline in supply availability, which equates to an
estimated 5 to 6 percent decline in fully mission capable rates for naval
aircraft. 10 However, the service did not ask for this funding as part of
its fiscal year 2004 budget request, but may do so for fiscal year 2005.
Also, its fiscal year 2004 budget materials did not report the link
between resource levels and readiness for individual weapons, as
recommended by the Office of the Secretary of Defense in an August 2002
study. While the service provided aggregate readiness information to the
Office of the Secretary of Defense, Navy officials said that the service
cannot directly link funding to readiness data by weapon system and budget
category until

9 Supply availability refers to the percentage of time that a fleet-
requisitioned item is immediately available from the Navy*s wholesale
supply system. These data include both consumable and repairable items for
maritime and aviation weapon systems. 10 Fully mission capable rates
measure the ability of an aircraft to perform all of its assigned
missions.

Page 5 GAO- 03- 708 Defense Inventory

better information technology becomes available. Information linking parts
availability and individual weapon system readiness would be valuable
information to DOD in making inventory investment decisions and to
Congress when deciding how best to allocate resources to reduce shortages
and improve readiness.

To ensure that Navy customers have an adequate supply of critical spare
parts when and where they are needed, we are recommending the Secretary of
Defense direct the Secretary of the Navy to include as a part of ongoing
and anticipated updates to the Navy strategic planning process, a
framework for mitigating critical spare parts shortages that include
longterm goals; measurable, outcome- related objectives; implementation
goals; and performance measures. We also recommend the Navy provide
decision makers with information that links investments in spare parts
inventories to weapon system readiness targets. In written comments on a
draft of this report, DOD generally concurred with the intent of our
recommendations, but not all suggested actions. DOD said the Navy would
address spare parts shortages by improving its overall supply support
processes. However, they stated that the Navy would not be modifying the
Naval Supply Systems Command Strategic Plan or the higher- level Sea
Enterprise strategy to include a specific focus on the mitigation of spare
parts shortages. They also cited several key process improvements that are
designed to lessen the overall need for spare parts. We endorse the Navy*s
efforts to pursue the planned process improvements, but disagree that
these process improvements alone are sufficient to satisfy our
recommendation. We continue to believe that the

effectiveness of the service*s efforts would be enhanced if its strategic
plans and initiatives included goals, objectives, and milestones for
mitigating critical spare parts shortages. DOD also stated that the Navy
would be linking spare parts investments to individual weapon system
readiness in future budget submissions when the required data becomes
available. However, we remain concerned that the Navy has not specified a
time frame for developing information systems that link readiness and

spare parts budget data, and have modified our second recommendation
accordingly. The Department*s comments and our evaluation are on pages 23-
25 of this report.

In prior reports, we have identified major risks associated with DOD*s
spare parts inventory management practices. In 1996, and then again in
Background

Page 6 GAO- 03- 708 Defense Inventory

1998, we reported that the Navy*s logistics system often could not provide
fleet customers with necessary parts in a timely manner, despite billions
of dollars invested in inventory. 11 In 2001, we found that chronic spare
parts shortages had degraded combat readiness for selected Navy weapon
platforms and had also contributed to problems in retaining skilled
maintenance personnel. 12 Navy item managers interviewed for the 2001
report indicated that spare parts shortages resulted from inaccurate spare
parts requirements forecasts, as well as contracting problems with private
companies and repair delays at military and privately owned facilities.
Most recently, in our January 2003 report on major management challenges
and program risks, we recommended that DOD take action to address key
spare parts shortages as part of a long- range strategic vision and a
department wide, coordinated approach for improving logistics management
processes. 13 In addition to the risk associated with ineffective spare
parts management

practices, DOD recently voiced concerns over the adverse impact spare
parts shortages have on readiness of weapon systems. In its August 2002
report on its inventory management practices, DOD said that the models it
uses to determine inventory purchases are generally biased towards the
purchase of low- cost items with high demands, not necessarily the items
that would improve readiness the most. 14 The report recommended that the
services improve their ability to make inventory purchase decisions based
on weapon system readiness. Furthermore, the report recommended that the
services* requests for funds to increase inventory investments be
justified on the basis of the corresponding increase in weapon system
readiness.

11 U. S. General Accounting Office, Inventory Management: Adopting Best
Practices Could Enhance Navy Efforts to Achieve Efficiencies and Savings,
GAO/ NSIAD- 96- 156 (Washington, D. C.: July 12, 1996), and Inventory
Management: DOD Can Build on Progress by Using Best Practices for
Reparable Parts, GAO/ NSIAD- 98- 97 (Washington, D. C.: Feb. 27, 1998). 12
U. S. General Accounting Office, Navy Inventory: Parts Shortages Are
Impacting Operations and Maintenance Effectiveness, GAO- 01- 771
(Washington, D. C.: July 31, 2001). 13 U. S. General Accounting Office,
Performance and Accountability Series: Major Management Challenges and
Program Risks: Department of Defense, GAO- 03- 98 (Washington, D. C.: Jan.
2003).

14 Office of the Secretary of Defense, Inventory Management Study
(Washington, D. C.: Aug. 2002).

Page 7 GAO- 03- 708 Defense Inventory

The Navy provides the fleet with spare parts through a multitiered
inventory system.

 Retail inventory refers to spare parts that are stored shipside or
planeside in accordance with standardized spare parts allowance lists.
Retail level spare parts are funded by the Navy*s procurement and
operations accounts. Funding for initial outfitting parts is provided by
procurement appropriations, while funding for replenishment parts is

provided by operations and maintenance appropriations.  Wholesale
inventory refers to spare parts the Navy buys to replenish

retail inventory. Initially Navy program managers tasked with developing
weapon systems purchase parts directly from vendors using money from the
procurement accounts. However, once a weapon system is fully developed and
integrated into the fleet, the Naval Supply Systems Command assumes full
responsibility for supporting that system through funding provided by the
Navy Working Capital Fund. 15 At this point, fleet customers use funding
from outfitting procurement

and operations accounts to purchase parts from the Navy*s wholesale
inventory. The wholesale system functions as a middleman by purchasing
spare parts from vendors with Navy Working Capital Fund dollars, and then
reselling these parts to fleet customers. In order to avoid inventory
shortages, the wholesale system must accurately forecast demand for spare
parts and factor in lead times for procurement and repair actions to
mitigate delays in delivery of parts to the fleet. Furthermore, the
wholesale system must maintain a cash balance in the Navy Working Capital
Fund that approximates 7 to 10 days and, consequently, cannot stock more
parts than it expects to resell to the fleet.

 Sponsor- owned inventory refers to items that program managers purchase
with appropriated funds to develop, test, and sustain weapon systems.
Program managers store sponsor- owned materials to support work conducted
at various locations, including air and sea warfare centers. DOD guidance
provides, in part, that when items are no longer needed, they may be
returned to the wholesale supply system or reissued to other fleet
customers. 16 15 The Navy refers to this weapons development milestone as
the Material Support Date.

16 Department of Defense, Materiel Management Regulation, DOD 4140. 1- R,
May 1998.

Page 8 GAO- 03- 708 Defense Inventory

The Deputy Chief of Naval Operations for Fleet Readiness and Logistics is
responsible for strategic planning of logistics functions and ensures that
the logistics system supports the Navy*s readiness objectives. The Naval
Supply Systems Command develops inventory management policies, determines
spare parts requirements, and formulates the Navy Working Capital Fund
budget. Within the Naval Supply Systems Command, the Naval Inventory
Control Point is assigned primary responsibility for material management
tasks, such as computing requirements and providing procurement,
distribution, disposal, and rebuild direction. The Naval Air Systems
Command, the Naval Sea Systems Command, and the Space and Naval Warfare
Systems Command, collectively referred to as the hardware systems
commands, interact with the wholesale supply system to ensure that it
procures sufficient quantities of spare parts to satisfy the fleet*s
allowance requirements.

The Navy*s servicewide strategic plans do not specifically address means
to mitigate critical spare parts shortages. The Navy*s fiscal year 2001
High Yield Logistics Transformation Plan focused on improving logistics

overall, but did not state how the Navy expects to reduce spare parts
shortages. Also, while a key subordinate plan developed by the Naval
Supply Systems Command has a strategy to ensure the availability of spare
parts meets required performance levels; its objectives do not
specifically focus on mitigating critical spare parts shortages. This
subordinate plan does focus on improving supply availability and reducing
customer wait

time, but does not specifically address mitigation of spare parts
shortages. Although the Navy is developing a new strategy, the Sea
Enterprise plan, it has not been published, and therefore we do not know
whether it will address ways to mitigate critical spare parts shortages.

In fiscal year 2001, the Navy published a servicewide strategic plan* the
High Yield Logistics Transformation Plan* that identified initiatives
undertaken by its major support commands to improve the service*s
logistics overall and to address objectives listed in DOD*s Fiscal Year
2000 Logistics Strategic Plan. While the High Yield Plan contained
attributes of an effective strategic plan consistent with the Government
Performance and Results Act of 1993 (GPRA), such as long- term goals,
objectives, and performance measures, it did not specifically address key
objectives for Navy Logistics

Strategic Plans Do Not Specifically Focus on Mitigating Spare Parts
Shortages

Page 9 GAO- 03- 708 Defense Inventory

mitigating critical spare parts shortages. 17 The High Yield Plan
identified nine major goals, six of which are linked to DOD*s fiscal year
2000 Logistics Strategic Plan, and three that are unique to the Navy. The
plan served as a compendium of initiatives undertaken by Navy commands and
program offices to improve overall logistics support processes. In total,
the plan identified 80 individual initiatives; however, the plan did not
contain information that highlighted specific efforts to mitigate spare
parts shortages. Navy headquarters officials told us they stopped efforts
to report to DOD on the status of the 80 initiatives after DOD published a
new logistics strategic plan in June 2002, entitled the Future Logistics
Enterprise, that contained several new transformation strategies.

The Naval Supply Systems Command Strategic Plan has a strategy to ensure
that the availability of spare parts meets required performance levels and
includes numerous goals, objectives, and initiatives to improve supply
availability. However, this strategy does not specifically focus on
mitigating spare parts shortages, nor does it incorporate the objectives
of the Navy*s High Yield Transformation Plan. In November 2001, the Naval

Supply Systems Command updated its 1999 strategic plan to deliver combat
capability through delivery of quality supplies and services on a timely
basis. The plan identified 5 major goals, 16 implementation strategies,
and 63 individual initiatives. Implementation status of each initiative is
recorded in an automated tracking system and briefed to command leadership
several times each year. Under its third goal* to achieve and demand the
highest quality of service* one of the Command*s strategies is to ensure
the availability of spare parts meets required performance levels, but its
objectives do not specifically focus on mitigating critical spare parts
shortages, nor does the strategy link directly to higher- level DOD and
Navy strategic plans. Navy officials told us they

expect to start updating the plan during the summer of 2003. Without a
focus on mitigating spare parts shortages and linkage to the higher- level
plans, the Navy may lack assurance that its overall strategic goals and
objectives will be effectively addressed and that its key initiatives will
systematically address spare parts shortages.

In October 2002, the Navy embarked on a new servicewide strategic planning
effort, referred to as the Sea Enterprise, that seeks to improve the 17
GPRA requires establishment of a strategic plan for program activities by
each agency that includes, among other things, a mission statement
covering major functions and operations, outcome- related goals and
objectives, and a description of how these goals and objectives are to be
achieved.

Page 10 GAO- 03- 708 Defense Inventory

efficiency and effectiveness of all aspects of the service*s business
operations, including organizational alignments, refining logistics
requirements, and reinvesting savings to purchase new weapon systems and
enhance combat capability. 18 As of March 2003, the Sea Enterprise plan
had not been published, and the extent to which the new plan will address
the mitigation of critical spare parts shortages is unclear. Navy
documents indicate that officials were reviewing hundreds of ongoing and
planned initiatives for improving business operations, and that they

planned to select projects with the highest potential savings. The Navy
expects to have preliminary project plans and savings estimates available
for consideration in the fiscal year 2005 budget deliberations. Once key
initiatives are identified for the Sea Enterprise plan, a board of
directors will oversee development of implementation plans and monitor
progress toward achieving anticipated savings.

We reviewed six initiatives that the Navy has undertaken to improve the
economy and efficiency of supply support. While some of these initiatives
have improved the overall supply availability and reliability of some
spare

parts, we cannot measure their potential for mitigating critical parts
shortages and their impact on weapon system readiness because they were
not designed to specifically address this problem. The initiatives
included projects to (1) obtain more cost effective and timely support
from contractors, (2) improve the efficiency of inventory management
practices, and (3) increase the reliability of parts provided to military
customers.

Performance based logistics contracts have generally improved supply
support to the fleet, but the Navy does not assess the extent to which
better supply availability mitigates critical spare parts shortages or
enhances the fleet*s combat readiness. Through performance based logistics
contracts, the Navy has outsourced a broad range of supply support
activities that have traditionally been carried out by the Navy*s organic
supply system, such as warehousing, repairing and distributing parts, and
determining spare parts requirements. According to Navy and interim DOD
guidance, the primary objective of performance based logistics is to
improve supply support while maintaining or reducing

18 The Sea Enterprise plan is part of the Navy*s Sea Power 21 initiative,
which defines capabilities of naval forces in the 21st century. The vision
for the 21st century will be achieved through a triad of new
organizational processes called Sea Trial, Sea Warrior, and Sea
Enterprise. Several Key Initiatives Show Potential for

Improved Spare Parts Support

Performance Based Logistics Contracts Have Improved Availability of Spare
Parts

Page 11 GAO- 03- 708 Defense Inventory

costs. 19 Under more extensive partnerships, contractors may redesign
weapon system configurations to optimize system performance, and may also
reengineer or replace spare parts to mitigate the effects of scarcity or
obsolescence. In the most advanced partnerships, contractors provide

technical and engineering support to fleet customers, perform weapon
system overhauls, and guarantee timely delivery of quality spare parts to
fleet customers.

Our review of Navy aggregate and individual program statistics indicated
that performance based logistics arrangements have generally improved
supply support to the fleet. From January 2001 to July 2002, the Navy*s
quarterly supply availability averaged 79.6 percent through a combination
of organic and contractor supply support. Without performance based
logistics contracts factored in to these data, quarterly supply
availability

averaged 71. 5 percent. We judgmentally examined 10 of 118 active
performance based logistics contracts, and found that one contract had no
specific vendor performance standards. 20 In 7 of the 9 remaining
contracts, we found that vendors either satisfied or exceeded supply
support goals.

Moreover, for select cases in which data were available for comparison
with baseline data, we found that performance based logistics partnerships
improved supply support. For instance, one vendor increased availability
of parts for an aviation computer system 21 from pre- contract levels of
61 percent to current levels of 100 percent, and filled all 489
outstanding backorders within 13 months after the contract was awarded.
Similarly, another vendor increased overall supply availability for the
ARC210 radio assembly from pre- contract levels of 60 to 70 percent to a
current average of 91 percent.

Despite positive supply availability effects attributed to performance
based logistics contracting, we could not measure the initiative*s overall
impact on spare parts shortages. These contracts vary widely in scope and,
according to Navy policy, are intended to improve logistics support while

19 Department of the Navy, Office of the Assistant Secretary, Research,
Development and Acquisition: Performance Based Logistics Guidance
Document, Jan. 27, 2003; Deputy Secretary of Defense: Interim Guidance
Regarding Defense Acquisitions, Oct. 30, 2002.

20 This contract, initiated in 1994, was for a commercial off- the- shelf
item that the Naval Inventory Control Point had not managed organically.
Consequently, the Naval Inventory Control Point lacked baseline inventory
management data necessary to establish vendor performance standards. 21
The stores management system is a computer interface installed on aircraft
that monitors, selects, launches, and jettisons weapons.

Page 12 GAO- 03- 708 Defense Inventory

maintaining or reducing costs. Consequently, these contracts do not aim
specifically to increase the availability of spare parts that experience
chronic shortages, and are generally approved only if they can generate
savings for the Navy*s wholesale supply system. While Navy officials
stated that improved supply support is linked to enhanced equipment
readiness, we could not determine whether performance based logistics
contracts have mitigated the readiness effects of spare parts shortages.

The Navy*s inability to quantify cost savings* or losses* generated by
individual contracts impedes the service*s ability to prove the initiative
is achieving its objective. Navy and interim DOD guidance specify that
each performance based logistics contract is to improve supply support to
the warfighter without increasing cost; however, the Navy does not track
individual contract savings. Instead, Navy officials approximate aggregate
savings attributable to performance based logistics contracting. Although
the Navy reports that it has reduced estimated expenditures for spare

parts and labor by approximately $100 million for the fiscal year 2000-
2005 period, it does not have the information that its leadership and
other decision makers may likely need in order to determine whether
individual contracts satisfy the initiative*s cost saving objective.

Under the Total Asset Visibility initiative, the Naval Supply Systems
Command has established asset visibility over a large portion of the
service*s spare parts inventories. However, changing completion milestone
dates, difficulties in linking data contained in numerous nonstandard
automated data systems, and concerns over the lack of top- level
management emphasis* including effective business rules and incentives
that encourage customers to share parts* have hindered the initiative*s

timely and effective implementation. Because of these limitations, the
extent to which this initiative will help mitigate critical spare parts
shortages and improve weapon system readiness is uncertain. The Supply
Systems Command has recognized these difficulties and prepared a longterm
plan to centrally manage supply, but the Navy has not yet approved the
plan for implementation.

The Total Asset Visibility initiative is intended to facilitate
redistribution of materials between Navy customers by allowing Navy supply
managers to fill critical orders from excess or unneeded stocks held by
other Navy customers. DOD*s Material Management Regulation, issued in May
1998, requires the services to provide timely and accurate information on
the location, movement, and status of all material assets. The regulation
stipulates that wholesale- level inventory managers should have visibility
of The Potential for Total Asset Visibility Initiative to

Improve Inventory Management Practices Hindered by Implementation
Challenges

Page 13 GAO- 03- 708 Defense Inventory

all in- storage materials, including assets held by military units,
maintenance depots, and shipyards. Item managers may use this information
to mitigate critical spare parts shortages by redistributing items from
one customer*s storage facility to another customer with more urgent
needs. In our October 1999 report, we stated that the Navy characterized
its Total Asset Visibility program as a *mature* initiative that would be
fully implemented by September 2002. 22 To improve the potential for
timely and effective implementation, in our October 1999 report we

recommended that the Navy establish clearly defined goals, quantifiable
performance measures, and implementation milestones to better assess the
initiative*s impact on supply system effectiveness. However, the Navy has
yet to establish such a plan.

At the end of fiscal year 2002, Navy data indicated that the Navy had
established asset visibility over 96 percent of the $42 billion inventory
that the service had targeted for inclusion under the program. In May
2003, a Navy official stated that this data collection did not target the
full range of government- owned materials kept at naval shipyards,
aviation repair depots, and commercial contractor facilities. Our work
shows that while the Navy supply managers currently have visibility over
Navy- managed items held at naval retail storage facilities and most
sponsor- owned inventories kept at naval warfare centers, access to
unneeded materials held at these locations must be arranged on a case- by-
case basis. For example, the Navy has implemented an inventory management
visibility system for its retail- level spare parts inventories held
aboard ship and at major shore stations. However, these assets are *owned*
by the operating fleet commands, and in practice are not subject to
redistribution outside

the command. An official at the Naval Inventory Control Point the activity
responsible for management of wholesale level inventories and processing
customer requisitions stated that while they have visibility over retail
level inventories held aboard ship and at shore stations controlled by the
fleet operational commands, they rarely ask for a part, even though the
retail* level inventories may have accumulated parts in excess of local
needs. The use of the asset visibility system as a tool for mitigating
spare parts shortages between Navy commands could benefit from the
development of business rules and management incentives that

22 U. S. General Accounting Office, Defense Inventory: Improved Management
Framework Needed to Guide Navy Best Practice Initiatives, GAO/ NSIAD- 00-
1 (Washington, D. C.: Oct. 21, 1999).

Page 14 GAO- 03- 708 Defense Inventory

encourage Navy customers to relinquish control and ownership of unneeded
supplies.

Progress toward achieving total asset visibility and accountability at
some storage locations has been hampered by difficulties in linking data
contained in numerous nonstandard information systems. For example, after
a 5- year test, the Naval Sea Systems Command terminated efforts to
establish centralized visibility and accountability over an estimated $4.3
billion in government- furnished materials provided to commercial
shipbuilders. The test was terminated for a variety of reasons, including
the lack of common information systems that would allow the transfer of
data between commands, the lack of coordinated management emphasis, and
difficulties changing legacy contractual reporting requirements. Moreover,
at the Naval Air Systems Command, officials stated that their subordinate
activities currently record inventory data on four different management
information systems.

Recognizing current Navy supply system inefficiencies, the Naval Supply
Systems Command has proposed a single worldwide inventory management
system whereby a national inventory manager would determine requirements
for all wholesale inventories, retail ashore, and afloat allowances. The
national inventory manager would direct the distribution of materials and
maintain day- to- day visibility and control of spare parts inventories
regardless of location or funding source. The national inventory manager
would also retain ownership of the material until the items were consumed,
at which time the stock fund would receive a reimbursement to finance the
cost of stock replenishment. At the time of our review, the Navy had not
approved the plan. Naval Supply Systems Command representatives believe
this concept would eliminate many of the redundancies and inefficiencies
in the current inventory management framework. In addition, they said
effectiveness of the concept would be dependent upon the full and timely
implementation of a common information system shared by all Navy customers
regardless of location, or their place in the command hierarchy. Navy
officials are planning to replace many of their nonstandard information
systems within the next 5 to 10 years.

Page 15 GAO- 03- 708 Defense Inventory

The Navy*s Logistics Engineering Change Proposal initiative has
demonstrated potential to enhance equipment readiness by improving the
quality of spare parts, and thus reducing the frequency of maintenance
actions. However, our work shows that the initiative*s impact may be
limited by criteria that require rapid return on investment in spare parts
engineering projects and discourage large investments in such projects. By
reducing expenditures on low- quality items, this initiative has generated
measurable savings for the Navy supply system, and could yield further
savings if expanded to include more types of spare parts.

The Navy undertook the Logistics Engineering Change Proposal initiative to
systematically provide Navy customers with more reliable and less costly
spare parts. This initiative*s primary objective is to make up- front
investments in high- quality replacement parts as a means of avoiding
higher long- term material and labor costs associated with frequent
replacement of low- quality items. Through the engineering change proposal
process, the Navy identifies items with high failure or turnover rates,
and then conducts a logistics and engineering assessment to determine how
the quality of these items could be improved. In some instances, parts are
reengineered; in other cases, alternative parts are tested for reliability
and system compatibility, and then installed to replace lower quality
items. To ensure that engineering change proposals offer a cost- effective
alternative to standard components, the Navy conducts a cost analysis for
each project. To be approved, projects must be expected to realize a 2-
to- 1 return on investment over the first 5 years after the redesigned
part is initially installed in the fleet.

We reviewed 21 projects in which reengineered parts had been fully
installed in operational equipment. All 13 projects for which comparative
performance data were available demonstrated gains in reliability. 23
These reliability improvements implicitly mitigate spare parts shortages
and enhance fleet readiness by reducing the frequency of maintenance
actions. The Replacement Inertial Navigation Unit* a navigation component
installed on P- 3 aircraft* illustrates this point. 24 According to Navy
documents, the original item was no longer in production, and was costly
to maintain due to high failure rates. The replacement model, however,
boosted the part*s mean time between failure from 56 to 5,375 hours, and
23 Eight projects lacked data necessary to measure reliability
improvements. 24 The P- 3 is a long- range maritime surveillance aircraft.
Logistics Engineering Change Proposals Provide

More Reliable Spare Parts at Lower Cost, but Investment Criteria Limit the
Initiative*s Scope

Page 16 GAO- 03- 708 Defense Inventory

is expected to save the Navy approximately $69.4 million in spare parts
expenditures over the lifetime of the project.

While material quality improvements resulting from engineering change
projects implicitly enhance fleet readiness, we believe that this
initiative*s scope and overall impact are limited because of restrictive
return on investment criteria. 25 Navy officials told us several potential
projects had been rejected in recent years due to insufficient projected
return on investment. For example, officials said that a reengineered F-
18 navigation component that offered superior reliability over the
existing component was rejected because its predicted return on investment
would fall substantially below the return on investment threshold.
Moreover, they stated that the Navy considered the project*s anticipated
first year investment of approximately $155 million unaffordable. Figure 1
illustrates the changes in investment criteria and funding since the
inception of the engineering change initiative. As shown, the return on
investment expectation ranged from break even in 5 years to the current
criterion, which requires a 2- to- 1 return on investment over the first 5
years after the redesigned part is initially installed. In addition, the
amount of available investment funding declined from more than $100
million in fiscal years 1997 and 1998 to a current total of about $40
million.

25 Navy officials told us that the Navy is reviewing plans to facilitate
project approval by relaxing current return on investment criteria.

Page 17 GAO- 03- 708 Defense Inventory

Figure 1: Investment Criteria and Funding Trends for Logistics Engineering
Change Proposals

Because of the long- term nature of these investments, they typically do
not yield savings in the early years while initial costs are being
incurred. According to the Navy*s most recent assessment, 62 approved
aviation projects yielded about $2 million in net savings from fiscal year
1997

through fiscal year 2002. These projects, along with 11 forthcoming ones,
are expected to generate additional savings of approximately $785 million
from fiscal year 2003 to fiscal year 2010. 26 In addition, Navy officials
noted that unmeasured savings may accrue through cost avoidance resulting
from reduced maintenance, processing, and transportation of broken or
defective items. Navy officials told us that the service is reviewing
plans to facilitate project approval by relaxing current return on
investment criteria. Management attention to the investment criteria could
expand the number of eligible parts, help mitigate spare parts shortages,
and increase the readiness return on investment.

26 Ten projects are scheduled to begin during fiscal year 2003, and one
project is scheduled for fiscal year 2004.

Page 18 GAO- 03- 708 Defense Inventory

The Navy*s Serial Number Tracking initiative shows potential to improve
supply support, as well as increase fleet readiness, by strengthening
controls over in- transit items and facilitating weapons system
maintenance. Furthermore, according to preliminary Navy estimates, the
Serial Number Tracking initiative will likely generate savings that exceed
the costs of program implementation. However, we could not assess its
impact on spare parts shortages because the initiative will not be fully
implemented until May 2004, and because the initiative*s performance
metrics are not designed to measure its impact on spare parts shortages.

The Naval Supply Systems Command undertook this initiative in response to
the Navy*s Aviation Maintenance Supply Review, which recommended that
specific actions be taken to reduce overall maintenance and supply costs,
increase readiness, and make systemic improvements in support of naval
aviation forces. Since 1990, we have regarded DOD inventory management as
a high- risk area because of vulnerabilities to waste, fraud, abuse, and
mismanagement. In 1999, we reported that the Navy was unable to account
for over $3 billion in inventory that was in- transit within and between
storage facilities, repair facilities, and end- users. 27 A business

case analysis commissioned by the Naval Supply Systems Command in support
of the Serial Number Tracking initiative found that improper accounting of
in- transit repair items generates considerable material losses, as well
as additional labor costs associated with lost maintenance history data
and reconciling records for lost or missing parts.

The Navy*s Serial Number Tracking program has potential to enhance the
efficiency of maintenance and repair processing in a number of ways. Once
the program is fully implemented, parts transferred between Navy
customers, storage facilities, and repair sites will be marked with bar
codes, which maintenance and supply personnel will scan at every transfer
point to record each item*s transit history. Navy customers will then be
able to access this information by logging in to a centralized database.
The Navy expects this process to minimize the risk of in- transit part
loss, as well as the chance of maintenance record errors resulting from
manual data entry. In addition to bar coding, the Serial Number Tracking
initiative provides for select aviation components to be outfitted with
computer chips, called contact memory buttons, that store critical
maintenance

27 U. S. General Accounting Office, Defense Inventory: Navy*s Procedures
for Controlling In- Transit Items Are Not Being Followed, GAO/ NSIAD- 99-
61 (Washington, D. C.: Mar. 31, 1999). The Serial Number

Tracking Initiative Is Expected to Reduce Part Loss and Facilitate
Maintenance

Page 19 GAO- 03- 708 Defense Inventory

history and warranty information. As parts circulate through the repair
pipeline, maintenance personnel will be able to scan the memory buttons in
order to identify what maintenance work has been previously executed, and
then determine what additional maintenance actions should be taken.

According to the Navy*s analysis, serial number tracking will streamline
maintenance work by facilitating identification of maintenance problems
and part defects, measurement of part reliability, and investigations of
spare part engineering. Moreover, the initiative could reduce time
required to complete certain maintenance actions. 28 The Navy has budgeted
approximately $58 million over 5 years to

implement Serial Number Tracking. This amount includes engineering
research to determine which components are compatible with contact memory
button technology, installation of contact memory buttons and barcodes,
and outfitting maintenance facilities with scanning equipment. Despite
these start- up costs, the Navy anticipates that this initiative will
yield net savings of more than $193 million over 7 years, resulting
primarily from reduced spare parts loss.

The Naval Supply Systems Command and its Inventory Control Point staff are
implementing a project to redesign and shorten the time required for
unserviceable items to be returned to repair facilities. Navy officials
told us they anticipate that the reengineered process will reduce the
number of unfilled customer requisitions and create efficiencies in the
scheduling and repairing of broken parts. At the time of our review,
responsibility for overall project management was transitioning from the
Naval Supply Systems Command to the Naval Inventory Control Point. Because
there is no documented performance plan, the extent to which data will be

available to document the initiative*s impact on equipment readiness and
mitigation of critical spare parts shortages is unclear.

Currently, Navy officials said, the typical unserviceable item is handled
and processed 3 to 5 times during an average period of 35.8 days from
initial turn- in by the fleet customer to receipt of the broken part at
the

designated repair activity. The Navy envisions a computer Web- based 28 A
Navy official cited the example of a maintenance team that had reduced the
time necessary to conduct an airframe maintenance inventory from 3 days to
4 hours by using contact memory button technology. Initiative to Improve

Procedures for Returning Unserviceable Items to Repair Sources Lacks
Performance Measures

Page 20 GAO- 03- 708 Defense Inventory

system whereby a sailor aboard ship can query a computer system and get
immediate shipping and packaging instructions. This will reduce the number
of shipping destinations and enable the Navy to reduce overall costs.
However, without a management plan that specifies performance goals and
implementation milestones, the Navy cannot be assured that the initiative
will be fully implemented and achieve intended results.

The Navy*s use of the Readiness- Based Sparing initiative as a criterion
for stocking parts aboard ships appears to have potential for improving
critical spare parts availability and operational capability of selected
weapon systems. 29 However, according to DOD, because this model is not
fully supported by current data collection processes, much of the analysis
must be developed off- line. Currently, Navy officials stated that they
have used readiness based sparing techniques in determining spare parts

allowances in support of some older weapon systems and all new systems
being provided to the fleet.

The Naval Supply Systems Command is continuing to develop computer models
that base allowances for weapon system component parts on readiness
considerations. Under the traditional approach, allowances are largely
based on historical failure rates of individual parts. The Navy*s new
readiness- based models are geared to the operational readiness
requirements of selected critical subsystems, and consider how random part
failures might adversely affect the ability of the installed component to
perform the overall mission. Officials explained that the traditional
demand- based sparing model works well for mechanical- type parts, which
tend to break down at regular intervals as a result of usage. However,
experience has shown that newer electronic components have much less
predictable failure patterns. To compensate for this, weapon system
designers sometimes build in redundancies that enable equipment to
continue working even after random part failures occur. For example, by
using the readiness based sparing process, Navy officials anticipate that
the operational availability of the Close- In Weapons System will improve
from 45 percent under the demand- based approach to 87 percent under

29 We are reporting separately on the Navy*s overall efforts to improve
spare parts support to the operational fleet commanders. Readiness- Based
Sparing

Initiative Could Help Mitigate Critical Spare Parts Shortages If Expanded

Page 21 GAO- 03- 708 Defense Inventory

the readiness- based allowance model, and the AEGIS system from 24 percent
to 91 percent, respectively. 30 The Navy has analyzed how additional
wholesale supply funding would

affect the availability of spare parts as well as equipment readiness
rates, and has determined that an additional investment of $1.2 billion
would be necessary to support readiness objectives established by the
Chief of Naval Operations. However, the Navy did not ask for this funding
as part of its fiscal year 2004 budget request, nor did its budget
estimates link

planned spending to individual weapon system readiness, as recommended by
the Office of the Secretary of Defense in an August 2002 study.

DOD has an 85 percent supply availability goal, which means that 85
percent of the requisitions sent to wholesale supply system managers can
be immediately filled from on- hand inventories. Navy supply system models
are focused on achieving this goal in the aggregate. However, the Navy*s
overall wholesale supply system performance has fallen short of
expectations in each of the last 3 fiscal years for both aviation- and
shiprelated repairable spare parts. Supply availability ranged between
approximately 69 percent and 71 percent for aviation- related items, and
between 79 percent and 84 percent for ship- related parts. Navy officials
commented that they have had difficulty achieving the desired 85- percent
goal for aviation parts due to a number of reasons, including increased
demand stemming from aging weapon systems and accelerated operational
requirements.

The Navy has estimated that an extra investment in the working capital
fund of approximately $1.2 billion would increase aviation- and
shiprelated spare parts inventories to levels that support current
readiness standards. 31 According to a recent study conducted by the Naval
Supply Systems Command, constraints in repair pipeline requirement models
accounted for a 6 to 8 percent decrease in supply availability for
aviation parts, which equated to an estimated 5 to 6 percent decline in
fully mission

30 The Close- In Weapons System is a radar controlled rapid- fire gun
system that is installed on Navy ships to defend against anti- ship cruise
missiles. The AEGIS system is a shipboard defensive system that is capable
of automatically detecting, tracking, and destroying airborne, seaborne,
and land- launched weapons. 31 We did not validate the accuracy of the
Navy*s additional investment, spare parts

availability, or readiness estimates. Impact of Additional Spare Parts
Funding

on Supply Availability and Readiness Estimated but Not Reported

Page 22 GAO- 03- 708 Defense Inventory

capable rates for naval aircraft. 32 This study concluded that a working
capital fund investment of $225 million would remedy wholesale inventory
deficiencies resulting from inaccurate requirements models, and that
another $688.5 million would prevent further decline in supply
availability of aviation spare parts resulting from constraints that
prevent the working capital fund from procuring new inventory requirements
driven by increased demand. Furthermore, the study calculated that an
additional $300 million investment would be required to increase supply
availability across all inventory segments to 85 percent.

In its budget estimate submitted to Congress in February 2003, however,
the Navy did not ask for additional investment in the working capital fund
to meet the supply availability and aviation readiness rates described

above. At present, it is unclear whether the Navy will choose to request
funding for these requirements in later years. In its fiscal year 2004
budget exhibits, the Navy linked its planned working capital fund
expenditures to

aggregate spare parts availability, but not to mission capable supply
rates or other readiness rates for individual weapon systems. The benefit
of such a link was cited in an August 2002 study by the Office of the
Secretary of Defense, which recommended that service requests for funds
for spare parts inventories be linked to specific weapon system readiness.
The service did provide aggregate ship and aviation readiness information
to the Office of the Secretary of Defense. However, Navy officials said
that the service cannot directly link spare parts funding and readiness
data by

budget category until better information technology becomes available.
Without information that links funding to readiness, the Navy*s budget
package does not provide Congress the return on readiness investment
information it may need to make resource decisions.

Since 1990, we have repeatedly reported that DOD*s inventory management
practices are high risk. In our 2003 High Risk Series Report we
recommended that DOD take action to address key spare parts shortages as
part of a long- range strategic vision and a departmentwide, coordinated
approach to logistics management. However, our work shows that the Navy
currently lacks a servicewide strategic logistics plan and supporting plan
that include a specific focus on mitigating critical spare parts
shortages. In addition, the Navy*s current key logistics initiatives to

32 Fully mission capable rates measure the ability of aircraft to perform
all of their assigned missions. Conclusions

Page 23 GAO- 03- 708 Defense Inventory

improve the efficiency of supply and inventory management practices do not
include a specific focus on mitigating these shortages. Instead, these
initiatives address many underlying issues, such as reducing customer wait
time, increasing asset visibility, improving the management of items
turned in for repair, and increasing the reliability of repair parts.
Without a focus on mitigating spare parts shortages, the Navy lacks a
coordinated approach, with attributes of an effective plan, such as goals,
objectives and performance measures, to systematically address the
shortages and assess progress in mitigating them. The ongoing development
of the Sea Enterprise plan and imminent update of the Naval Supply Systems
Command Strategic Plan provide an opportunity to include this focus and
provide the coordination needed to ensure that the Navy*s key logistics
initiatives we reviewed can achieve their maximum financial and readiness
benefits. Lastly, without information that links spare parts funding to
individual weapon system readiness and provides assurance that investments
in spare parts are based on the greatest readiness returns, such as that
recommended in the August 2002 Inventory Management Study, Congress and
other decision makers cannot determine how best to prioritize and allocate
future funding.

We recommend that the Secretary of Defense direct the Secretary of the
Navy

 develop a framework for mitigating critical spare parts shortages that
includes long- term goals; measurable, outcome- related objectives;
implementation goals; and performance measures as a part of either the
Navy Sea Enterprise strategy or the Naval Supply Systems Command Strategic
Plan, which will provide a basis for management to assess the extent to
which ongoing and planned initiatives will contribute to the mitigation of
critical spare parts shortages, and

 implement the Office of the Secretary of Defense*s recommendation to
report, as part of budget requests, the impact of funding on individual
weapon system readiness with a specific milestone for completion.

In written comments on a draft of this report, DOD generally concurred
with the intent of both recommendations, but not the specific actions.
DOD*s written comments are reprinted in their entirety in appendix I.

In concurring with the intent of our first recommendation, DOD expressed
concern that because spare parts shortages are a symptom of higher- level
Recommendations

Agency Comments and Our Evaluation

Page 24 GAO- 03- 708 Defense Inventory

problems, including the need for more reliable spare parts and more
effective life cycle support processes, its management improvement plans
must focus on improving the processes, rather than on the symptoms.
According to DOD, the Naval Supply Systems Command*s current strategic
plan and planned revisions are/ will be focused on improving the Navy*s
overall supply support processes to ensure that its naval forces have
sufficient support to achieve required readiness performance levels.
Therefore, DOD does not agree that the Navy needs to modify the Naval
Supply Systems Command Strategic Plan or include provisions in the

evolving Sea Enterprise strategy that are specifically focused on spare
parts shortages. DOD stated that the Navy*s process improvement
initiatives are intended to reduce the need for spare parts through the
use of more effective inventory management practices aboard ship,

standardizing the use of readiness based sparing concepts on board ship
and at shore facilities, and developing an effective total asset
visibility plan. DOD believes that these efforts will improve the
efficiency and effectiveness of the Navy*s supply system and inherently
minimize any future shortages of critical spare parts.

We disagree that these process improvements alone are sufficient to meet
our recommendation. Our report recognizes that the Navy*s logistics plans
focus on efforts to improve overall logistics support practices, and upon
successful implementation will likely contribute to improved supply

availability. Based on our report*s findings, however, we believe that the
goals, objectives and milestones of the Naval Supply Systems Command*s
strategic plans, or the higher- level Sea Enterprise plan, should include
a focus on the mitigation of critical spare parts shortages. Without such
a focus the Navy*s efforts to address the problem of critical spare parts
shortages are more likely to be duplicative or ineffective. Therefore, we
believe implementation of our recommended actions is necessary to ensure
improved equipment readiness for the Navy*s legacy and future weapon
systems.

In concurring with the intent of our second recommendation, DOD stated
that the Navy is investing in information systems to help it link
inventory investment decisions with weapon system readiness. DOD stated
that the Navy will provide information to link weapon system readiness and
inventory investments for its major weapon systems as information becomes
available. Because the Financial Management Regulation already requires
the Navy to submit this information as part of its annual budget
submission, DOD stated that more specific direction from DOD is not
necessary, and that current Navy actions satisfy the intent of our
recommendation.

Page 25 GAO- 03- 708 Defense Inventory

We support the Navy*s actions, but remain concerned that the service has
not specified milestones for developing information systems that link
readiness and spare parts budget data. Providing this information in a
timely manner will strengthen the Navy*s stewardship and accountability of
requested funds, and will assist the Congress in making spare parts
investment decisions that provide a good readiness return. We have
therefore modified our second recommendation to include a provision that
the Navy establish completion milestones for implementing the reporting
requirement, as discussed above.

To determine if the Navy*s strategic plans address spare parts shortages,
we obtained and analyzed pertinent spare parts and logistics planning
documents. We focused our analysis on whether these strategic plans
addressed spare parts shortages and included the performance plan
guidelines identified in the Government Performance and Results Act. We

interviewed officials in the Office of the Deputy Chief of Naval
Operations for Fleet Readiness and Logistics and in the Naval Supply
Systems Command to clarify the content, status, and linkage of the various
strategic plans.

To determine the likelihood that key supply system initiatives will
mitigate critical spare parts shortages and improve weapon system
readiness, we obtained and analyzed service documentation on six of the
initiatives that Navy officials believe are key to the future economy and
efficiency of the service*s supply operations. We interviewed officials in
the office of the Deputy Chief of Naval Operations, the Naval Supply
Systems Command, the Naval Inventory Control Point, the Naval Air Systems
Command, and the Naval Sea Systems Command. We obtained and analyzed Navy
data pertaining to plans, objectives, performance goals, and
implementation

status and challenges for each of the six selected management initiatives.
To determine the extent to which the Navy can identify the impact of
additional investments in spare parts inventories, we interviewed
officials and analyzed documents at the Naval Inventory Control Point. We
also reviewed the Navy*s fiscal years 2004 and 2005 budget estimates
provided to the Congress in February 2003, and considered DOD*s

recommendations in its August 2002 Inventory Management Study. However, we
did not independently validate or verify the accuracy of the Navy*s supply
availability performance data or the analysis that estimated

the increased funding needed to achieve the targeted supply system
performance. Scope and

Methodology

Page 26 GAO- 03- 708 Defense Inventory

We performed our review from August 2002 through March 2003 in accordance
with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Defense; the
Secretary of the Navy; the Director, Office of Management and Budget; 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 or Richard Payne on (757) 552- 8119
if you or your staff have any questions concerning this report. Key
contributors to this report were Glenn Knoepfle, Paul Rades, Barry
Shillito, George Surosky, and Susan Woodward.

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

Appendix I: Comments from the Department of Defense

Page 27 GAO- 03- 708 Defense Inventory Appendix I: Comments from the
Department of Defense

Appendix I: Comments from the Department of Defense Page 28 GAO- 03- 708
Defense Inventory

Appendix I: Comments from the Department of Defense

Page 29 GAO- 03- 708 Defense Inventory (350250)

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GAO Reports and Testimony

Order by Mail or Phone To Report Fraud, Waste, and Abuse in Federal
Programs Public Affairs
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