Defense Inventory: Actions Needed to Improve Inventory Retention
Management (25-MAY-06, GAO-06-512).
Maintaining the right amount and types of items in its
inventory--a key aspect of supply chain management--has been a
long-standing challenge for the Department of Defense (DOD) and
has been on GAO's list of high-risk areas since 1990. DOD retains
inventory above its normal operating requirements for various
reasons including for contingency purposes or because it is more
economical to keep items than dispose and repurchase them later.
DOD's inventory levels have grown in recent years to almost $80
billion in fiscal year 2005. GAO was asked to assess the
management of contingency retention inventory to determine
whether (1) the Army, Air Force, Navy, and Defense Logistics
Agency have followed inventory guidance and (2) DOD is providing
oversight of inventory across these components. Also, GAO
provided an update on the progress DOD has made in implementing
GAO's past recommendations on the components' management of
economic retention inventory.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-512
ACCNO: A54727
TITLE: Defense Inventory: Actions Needed to Improve Inventory
Retention Management
DATE: 05/25/2006
SUBJECT: Inventory control
Inventory control systems
Military inventories
Military policies
Property and supply management
Supply chain management
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GAO-06-512
* Results in Brief
* Background
* DOD Inventory Management Policies and Procedures Pertaining
* DOD Inventory Management Policies and Procedures Pertaining
* DOD's Inventory Management Agencies
* Some DOD Inventory Management Centers Are Not Following Poli
* Army's Aviation and Missile Command and Air Force's Ogden Ai
* Some Inventory Management Centers Are Retaining Items in Con
* Some DOD Inventory Management Centers Are Not Conducting Ann
* DOD Is Not Providing Sufficient Oversight to Ensure That Com
* DOD Has Made No Progress in Implementing Our 2001 Recommend
* Conclusions
* Recommendations
* Agency Comments and Our Evaluation
* Appendix I: Scope and Methodology
* Appendix II: Comments from the Department of Defense
* Appendix III: GAO Contact and Staff Acknowledgments
* GAO Contacts
* Acknowledgments
* Order by Mail or Phone
Report to the Subcommittee on Readiness and Management Support, Committee
on Armed Services, U.S. Senate
United States Government Accountability Office
GAO
May 2006
DEFENSE INVENTORY
Actions Needed to Improve Inventory Retention Management
GAO-06-512
Contents
Letter 1
Results in Brief 4
Background 7
Some DOD Inventory Management Centers Are Not Following Policies and
Procedures in Managing Their Contingency Retention Inventories 12
DOD Is Not Providing Sufficient Oversight To Ensure That Components are
Conducting Annual Reviews of Contingency Retention Inventory 19
DOD Has Made No Progress in Implementing Our 2001 Recommendations on
Economic Retention Inventory Management 20
Conclusions 23
Recommendations 24
Agency Comments and Our Evaluation 26
Appendix I Scope and Methodology 29
Appendix II Comments from the Department of Defense 32
Appendix III GAO Contact and Staff Acknowledgments 36
Tables
Table 1: Primary Logistics Agency and Its Inventory Management Centers 12
Table 2: Examples Illustrating When DOD's Items Were Placed into Inventory
and the Last Reported Demand Date Through January 2006 16
Table 3: Component Ceilings on Economic Retention Inventories 21
Figure
Figure 1: Categorization of Inventory for an Air Force Circuit Card
Assembly 8
Abbreviations
DLA Defense Logistics Agency DOD Department of Defense LMI Logistics
Management Institute OUSD AT&L Under Secretary of Defense for Acquisition,
Technology, and Logistics
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separately.
United States Government Accountability Office
Washington, DC 20548
May 25, 2006
The Honorable John Ensign Chairman The Honorable Daniel K. Akaka Ranking
Minority Member Subcommittee on Readiness and Management Support Committee
on Armed Services United States Senate
The Department of Defense (DOD) maintains a military force with
unparalleled capabilities but continues to confront a pervasive,
decades-old supply chain management1 problem that relates to retaining the
appropriate amount of inventory. At a time when our forces are expected to
perform missions in the homeland and abroad, it is necessary for DOD to
retain those inventory items that are needed to sustain current military
operations and dispose of those items that will no longer support current
and future operations. DOD reported that, as of September 2005, it owned
about $80 billion of secondary inventory.2 This represents a $17 billion,
or 27 percent, increase since fiscal year 2001, when the department had
about $63 billion in inventory. Because DOD is challenged to compete for
available resources in an increasingly fiscally constrained environment
and conduct high-level military operations, it is imperative that it has
good stewardship over the hundreds of billions of dollars invested in its
inventory. To ensure the sustainment of its missions, the Army, Navy, Air
Force, and the Defense Logistics Agency (DLA)3 each maintains separate
inventories of spare and repair parts above and beyond normal operating
requirements.4
1 DOD's supply chain management comprises several major functions,
including determining requirements; purchasing needed items; and storing,
maintaining, distributing, and disposing of inventory.
2 Secondary inventory includes reparable components, subsystems, and
assemblies, consumable repair parts, bulk items and material, subsistence,
and expendable end items, including clothing and other personal gear.
3 Hereafter referred to as DOD's components.
Inventory that exceeds the normal operating requirements is divided into
three categories:
o economic retention: excess inventory determined more economical
to keep than to dispose of because it is likely to be needed in
the future;
o contingency retention: inventory exceeding the economic
retention level but retained for specific contingencies such as
military (items needed to meet military contingencies), potential
security assistance (items held for foreign military sales), and
general contingency (items held based on potential usefulness,
extreme reprocurement problems, or nonmilitary contingencies, such
as civil emergencies or natural disaster relief); and
o potential reutilization and/or disposal materiel: inventory
exceeding the contingency retention level but identified as either
potentially reusable or disposable-typically through public sale.
While DOD's components each have their own policies and procedures
for managing their secondary inventories, DOD has an overarching
policy-the DOD Supply Chain Materiel Management Regulation5-that
provides the components with overall guidance.
In 2001, we reported6 that the components did not have sound
analytical support for determining which items should be kept in
economic retention inventory. We also reported that the components
were not conducting annual reviews of the methodologies they used
to make economic retention inventory decisions, as required by the
DOD regulation.7 At that time, we recommended that the components
establish milestones for reviewing their economic retention
approaches and that they conduct annual reviews of their
approaches.
As requested, this report focuses on DOD's inventory retention
policies and procedures. Our objectives were to assess the
management of contingency retention inventory to (1) determine the
extent to which DOD components have followed departmentwide and
individual components' policies and procedures to ensure they are
retaining the appropriate amount of inventory, and (2) assess the
extent to which DOD is providing oversight of inventory across the
components. In addition, we are providing information on the
progress that DOD has made in implementing our 2001
recommendations on the components' management of economic
retention inventory.
To determine the extent to which DOD components have followed
policies and procedures for retaining the appropriate amount of
contingency retention inventory, we (1) reviewed the components'
regulations and interviewed officials to determine how they
implement these regulations; (2) obtained and analyzed secondary
inventory (spare parts) retention records; and (3) visited four
components' inventory management centers to assess their policies,
procedures, and practices for managing contingency retention
inventory. The results of our review cannot be generalized to the
total contingency retention inventory population, due to the use
of a nonprobability sample of 205 cases (national stock numbers)
valued at $890 million. We assessed the reliability of DOD's
automated inventory management system data by (1) obtaining
information from the components' management on their data
reliability procedures and (2) interviewing components' officials
knowledgeable about the data. We determined the data were
sufficiently reliable for the purposes of this report. Further, to
assess the extent to which DOD is providing oversight of
contingency retention inventory management across the components,
we reviewed DOD regulations and directives and interviewed
officials from the Office of the Deputy Under Secretary of Defense
for Supply Chain Integration on their roles and responsibilities
for supply chain materiel management. Also, to assess the progress
that DOD has made in implementing our 2001 recommendations on the
components' management of economic retention inventory, we
reviewed related policies and procedures and interviewed officials
from the Deputy Under Secretary of Defense for Supply Chain
Integration. We conducted our review from May 2005 through May
2006 in accordance with generally accepted government auditing
standards. Further details on our scope and methodology are
described in appendix I.
Some DOD inventory management centers have not followed
departmentwide and individual components' policies and procedures
to ensure they are retaining the appropriate amount of contingency
retention inventory. To ensure DOD inventory management centers
are retaining the appropriate amount and types of items, inventory
retention policies require the components to (1) use category
codes that describe reasons to retain items in contingency
retention inventory,8 (2) hold items that correspond to current
and future force level requirements,9 and (3) perform annual
reviews of their contingency inventory decisions.10 It is also an
objective of DOD's policy that items from the inventory that no
longer support DOD's mission be removed. According to DOD policy,
DOD places serious emphasis on purging from its inventory items
which no longer support the mission and needlessly consume
warehouse space.11 However, several inventory management centers
are not following policy. For example, we identified that
o The Army's Aviation and Missile Command is not properly
assigning category codes that describe the reasons they are
holding items in contingency retention inventory. While the Army
inventory retention policy requires the use of codes to identify
the reasons to hold items in contingency retention inventory, we
found that the Aviation and Missile Command does not consistently
assign these codes to categorize the reasons for holding items in
contingency retention inventory. We identified items valued at
$193 million that did not have codes to identify the reasons why
they were being held, and therefore we were unable to determine
the contingency retention category for the items. Furthermore,
according to Command officials, the Army's current inventory
management system is not programmed to categorize some contingency
retention inventory items. However, we identified that the system
does have codes that designate the reasons items are held in
contingency retention inventory, but the Army is not currently
using these codes.
o Some inventory management centers are retaining items in
contingency retention inventory that have experienced little or no
recent demands. For example, the Aviation and Missile Command is
retaining items in contingency retention inventory that (1) have
experienced no demands since the mid 1990s and (2) no longer meet
operational needs. For example, we found that the Command
continued to retain items to support an early warning sensor that
was phased out by the Army in June 2003. Command officials told us
that they retained these items in contingency retention because
they did not receive direction from the Army to remove them from
the inventory.
o Some inventory management centers are not conducting annual
reviews as required to verify reasons for retaining contingency
retention inventory. For example, the Defense Supply Center
Richmond had not conducted annual reviews since 2000 to verify the
reasons for retaining some items in contingency retention
inventory. We identified from the Center's entire population of
contingency retention items that approximately 2,200 items had not
been reviewed since 2000. According to Center officials, the
reviews were not conducted because the items had no stock on hand
or had experienced no recent demands or requests from customers.
As a result of our review, the Defense Supply Center Richmond
initiated disposal actions to potentially remove 40 stock
numbers-a total quantity of about 26,000 items valued at over
$742,500.
Since some DOD inventory management centers are not following
policies and procedures for managing their contingency
inventories, they may be retaining unnecessary inventory, which
results in the needless consumption of warehouse space. Moreover,
while our work only focused on a limited number of inventory
management centers, it is unknown whether these issues are
occurring at other DOD inventory management centers. However,
every inventory management center where we conducted audit work
was not following policies. Furthermore, by not conducting annual
reviews of their inventory retention decisions, the inventory
management centers cannot be certain that they are retaining the
appropriate spare parts to support military operations and
readiness. Also, without complying with inventory retention
policies and procedures, the DOD inventory management centers can
accumulate high levels of inventory without knowing whether they
meet warfighter requirements in the most efficient manner.
DOD is not providing sufficient oversight to ensure that
components are conducting annual reviews of their contingency
retention inventory. According to the DOD Supply Chain Materiel
Management Regulation issued by the Office of the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness,
components are required to annually review the contingency
retention decisions. The regulation does not state, however, who
is responsible for ensuring the components conduct these reviews.
Another policy, the DOD's Supply Chain Materiel Management
Policy12 requires that the Under Secretary of Defense for
Acquisition, Technology, and Logistics (OUSD AT&L) ensure that DOD
materiel management policies are implemented in a uniform manner
throughout the department. OUSD AT&L officials said they rely on
DOD's Supply System Inventory Report13 as their oversight
mechanism to review DOD components' reported inventory retention
levels and ensure the components are conducting the annual
reviews. However, while the annual Supply System Inventory Report
provides DOD with financial inventory information, it does not
provide the department with the information it needs to ensure
that all of the components are conducting annual reviews of
contingency retention inventory decisions. For example, DOD's
failure to recognize the inventory management centers'
noncompliance with DOD's regulation requiring them to conduct
annual reviews of their contingency retention decisions
illustrates DOD's insufficient oversight. By not ensuring that the
components are conducting annual reviews of their contingency
retention decisions, DOD cannot be certain that all components are
retaining the right amount of contingency retention inventory to
meet the military's operating requirements in the most effective
and efficient manner.
DOD had made no progress in implementing our 2001 recommendations
concerning the components' management of economic retention
inventory.14 We reported then that (1) components were not
properly documenting their approaches in making economic retention
decisions, (2) they lacked sound analytical support for the
maximum levels of economic inventory they used in calculating how
much inventory should be retained, and (3) they had not annually
reviewed their approaches as required by DOD policy.15 After we
issued our report, DOD determined that further review was
necessary to determine appropriate approaches to economic
retention inventory decisions and subsequently tasked the
Logistics Management Institute (LMI) in 2001 and again in 2003 to
examine whether current economic retention policy requirements and
procedures could be improved. While LMI's review yielded similar
recommendations to ours, DOD's components are still not conducting
annual reviews of economic retention decisions. According to some
DOD component officials, they have not been conducting annual
reviews of their economic retention decisions because of either
the cost to conduct these reviews, manpower limitations, or other
competing priorities. We continue to believe that DOD should
implement the recommendations to make meaningful improvements to
its economic retention management practices.
We are recommending that the Secretary of Defense direct the Under
Secretary of Defense for Acquisition, Technology, and Logistics to
ensure the DOD inventory management centers properly categorize
the reasons for holding items in contingency retention inventory,
determine whether items no longer needed should be disposed, and
conduct annual reviews of contingency retention inventory as
required by DOD's Supply Chain Materiel Management Regulation and
the components' policies. In addition, we are recommending that
the Under Secretary revise DOD's Supply Chain Materiel Management
Regulation to make clear who is responsible for providing
recurring oversight to ensure that the inventory management
centers are performing annual reviews of their contingency
retention inventory decisions. In reviewing a draft of this
report, DOD concurred with six of our recommendations and
partially concurred with one. The Department's responses are
reprinted in appendix II and our evaluation of them appears later
in the report.
DOD divides secondary inventory into two categories: active
inventory and inactive inventory. Active inventory is materiel
that DOD budgets for and consists of the approved acquisition
objective: items needed to meet current operating requirements,
items that are expected to be used within the budget period (2
years), and items purchased to meet specific war reserve
requirements. Items that exceed the approved acquisition objective
are referred to as inactive inventory. Inactive inventory is
materiel that is not expected to be consumed within the budget
period but is likely to be utilized in future years.16 These items
preclude future procurement and repairs and do not impact
components' budgets because the costs were incurred when the items
were initially procured. Inactive inventory levels are categorized
as economic retention, contingency retention, and potential
reutilization and/or disposal materiel.
An Air Force circuit card assembly used on the 968H Air Early
Warning System, for example, illustrates DOD's inventory
categories. On March 31, 2005, the Air Force had 18 of these
circuit card assemblies on hand, each valued at $2,172. As shown
in figure 1, 4 of the circuit card assemblies satisfied the item's
approved acquisition objective. Of the remaining 14 circuit card
assemblies, 3 were held as economic retention stock, 1 was held as
contingency retention stock, and 10 were categorized as potential
reutilization and/or disposal materiel.
Figure 1: Categorization of Inventory for an Air Force Circuit
Card Assembly
The DOD Supply Chain Materiel Management Regulation provides the
components with overarching guidance on how to manage contingency
retention inventory. The DOD regulation requires that (1)
components be able to provide the rationale for holding items in
contingency inventory, (2) items are retained in accordance with
current and future force level requirements, and (3) the
methodology for making decisions to hold items in contingency
retention be reviewed and validated annually.17 In addition, the
regulation says that components should categorize the contingency
retention items as (1) military contingency if the assets are
retained to meet military contingencies for U.S. forces; (2)
general contingency if the procurement problems or for other
special considerations involvinonmilitary contingencies, such as
civil emergencies or natural disastrelief; or (3) potential
security assistance (also referred to as foreign military sales)
if the assets are held in expectation of foreign military
demand.18 Each component has policies and procedures that describe
their respective personnel should manage contingency retention
inventory.
contingency retention inventory, each of the components has its
own policies and procedures for determining what items to retain
for potencontingencies. Most DOD components categorize contingency
retention inventory in one of these categories: military, foreign
military, or general contingency. Also, they retain contingency
retention inventory for additional reasons. For example, DLA19
retains items with applicatiospecific weapon systems to preclude
them from disposal at the request othe military services. Military
services use some of the following reasons for excluding items
with application to specific weapons systems from disposal: aging
weapon system not planned for phase-out in the near future; parts
that have very infrequent use, but with expected
demandout-of-production, sole source items. Additionally, the Air
Force policy20 allows for retention of assets in contingency
retention inventory when a one-time buy has been made for an
explicit reason or when the decision tretain was made by
Headquarters Air Force Materiel Command. In addition to the three
contingency categories described in the DOD pthe Army's secondary
item retention policy21 authorizes item managers to retain
chemical, biological, nuclear, or serviceable or unserviceable
hazardous materiel based on the Department of the Army or
DOD-levdirectives in contingency retention inventory. The Navy22
uses several categories to retain and protect inventory from
disposal. A few of the reasons include: retention of assets for
cannibalization for lower assemretention of assets to support a
weapon system throughout its expected life cycle (life of system
buy); and retention of excess assets for nuclear reactor plans. In
addition, the DOD components have policies and procedures to
conduct annual reviews to ensure the decisions to hoitems in
contingency retention inventory are valid. The components
alsrequire justification for the retention decision to be
maintained on file.
no prescribed methodologies to determine contingency retention
inventory levels.23 Instead, DOD component officials rely on
subjecreasoning to determine and justify retaining items in
contingency retentinventories in support of their missions. While
there is no established DOD process for identifying and reviewing
contingency requirements and decisions, the components follow
similar processes. Typically an itemmanager will make the decision
to retain assets in contingency, althoughin some cases, the
decision may be made by a component's headquarters or another
component. For example, a component's materiel commands or another
service may request that certain assets be retained in contingency
retention inventory to meet future needs. Upon identassets on hand
that exceed an item's approved acquisition objective and economic
retention requirement, the item manager determines if some orall
of the assets need to be retained in contingency retention
inventory for a specific reason. If so, the item manager will then
determine the level of assets needed to be retained in contingency
and establish a requirement. Some of the common criteria item
managers use to determine the retention of items in contingency
retention inventory include: the expected life span or age of the
weapon system the asset supports;wear-out rate of the item; the
nonrecurring or unpredictable demand of item; the potential sale
or transfer of items to a foreign country; or diminishing
manufacturing sources for an item.
determines if there is a continued need to retain all or some of
the assein contingency retention. If the item manager makes the
decision to retainassets in contingency retention, the item
manager's rationale for the current retention decision must be
available upon request and is maintained in the item file or
inventory management system. If it is determined there is no
longer a need for an item's contingency retention requirement, the
assets that exceed the approved acquisition objectiveconomic
retention requirement will be allocated as potential reuand/or
disposal materiel. According to the DOD guidance, an economic
analysis used to calculate whether to retain an inven
a
their economic analysis the cost of retaining items, the potential
long-term demand for the items, potential repurchase costs, and
for items essential to the operation of a weapon system, the
expected life of the weapon system, and the number of systems in
use. As the amount of inactive stoincreases, the cost of retention
increases (more items cost more to hold) and the cost of disposal
decreases (with greater amounts of an item on hand, the likelihood
of having to repurchase the items becomes less). Equilibrium is
reached when the additional cost of retention equals that of
disposal. This equilibrium level of inventory is the economic
retention level--the largest amount of an item that can be
justified by economic analysis.24 DOD relies on a number of
individual processes and activities, known collectivel
a
Materiel Command, (2) the U.S. Air Force Materiel Command, (3) the
Defense Logistics Agency, and (4) the Naval Inventory Control
Point. Table 1 shows each primary logistics agency and its
inventory management centers.
Table 1: Primary Logistics Agency
and Its Inventory Management Centers Primary logistics invento
Ogden Air Logistics Center
locations.
Some DOD components' inventory management centers are not
following policies and procedures in managing their contingency retention
inventories. For example, we found some inventory centers do not
properly categorize the reasons items are kept for contingency retention
purposes, as required by DOD policy. Also, some inventory centers
are retaining items that have not experienced any recent demands
andlonger meet operational needs. In addition, some DOD inventory
management centers have not complied with DOD's policy as well as
their own policies, which require them to conduct annual reviews
of contingency retention inventory to ensure the reasons for
retaining inventory are valid. As a result, there is the
likelihood for them to inventory for a number of years and
accumulate high levels of inventory that may not be needed to meet
current and future operational nMoreover, while our work only
focused on the inventory managemencenters we reviewed, it is
unknown whether these issues are occurring aother DOD inventory
management centers. The Army's Aviation and Missile Command and
Air Force's Ogden Air Logistics Center are not properly assigning
category codes that describthe reasons they are holding items in
contingency retention inventory. DOD policy requires DOD
components to id
that identifies why contingency retention inventory should be in
the military, foreign military sales, and general category.25 Some
DOD components use codes in their inventory management systems to
identithe reasons to hold items in contingency retention
inventory. The codes are reviewed to validate the contingency
retention decisions. We found, however, that the Army's Aviation
and Missile Commannot consistently assign codes to categorize the
reasons for holding items incontingency retention inventory. Of
the 55 Army Aviation and Missile Command items we selected for
review, 50 of the items valued at $1
and therefore we were unable to determine the contingency
retention category for the items. Furthermore, according to
Command officials, the Army's current inventory management system,
the Commodity CommaStandard System, is not programmed to
categorize some contingency retention inventory.26 However,
according to Army Materiel Command officials, the contingency
retention code was added to the Commodity Command Standard
System27 in the mid-1990s but the functionality to use the code in
the system was not completed because of the planned replacement of
the Commodity Command Standard System with the Logistics
Modernization Program in 1999. Army officials stated that it
isunlikely any updates or modifications to the current system to
ensure thfunctionality of the coding feature will be approved to
properly categorize contingency retention inventory. While the new
system is expectedcontingency retention codes, the Army is not
currently planning to complete fielding the Logistics
Modernization Program until 2009, whichmeans that it will not be
using codes at least until then. As an interim solution, Army
Material Command officials have indicated that they will
reemphasize that item managers use the manual contingency
retention approval forms that will include the codes. However,
without the usthe codes in the inventory management system, the
Army's Aviation and Missile Command will not be able to (1)
readily identify the reasons foholding items in contingency
retention inventory and know whether the items they are retaining
are useful for current and future operations and(2) analyze trends
in contingency levels that may require management scrutiny and
attention. Also, at the Army's Aviation and Missile Command, we
identified 30 itemsthat were retained for anticipated foreign
military sales. Of the 30 items valued at $134 million, only 5 had
the proper coding. At the time of our review, several item ma
items to be identified with a specific code. We informed Command
inventory materiel management officials that some item managers
were unaware of this policy. The officials identified this as a
training issue anplan to develop a training module for item
managers that will address thismatter. However, at the time we
completed our audit work in January 2006, the Command had not
developed the training. We also found that the Air Force's Ogden
Air Logistics Center had some contingency retention inventory
items that were not properly categorized and, as a result, the
items had been inappropriately retained in contingency retention
inventory. Specifically, we ide
Materiel Command directed the Center to retain in contingency
retentioninventory that were not properly categorized. When we
brought this to theattention of the Air Force Materiel Command,
officials discoverthese 3 items were among a larger population of
974 items that had beeimproperly coded. Upon investigation,
officials found that in 2001 the contingency retention codes were
removed from the weapon systems thatthese items supported, but not
from the items themselves. According to the Air Force Materiel
Command, the 974 items are managed at the OgdAir Logistics Center,
as well as the Warner Robins and Oklahoma City AirLogistics
Centers. The Command officials explained that due to a
systedeficiency in the Air Force's Application Programs, Indenture
system, it did not remove the items' codes when the weapon
systems' codes were removed and, as a result, the items continued
to be categorized as contingency retention inventory. As a result
of these items being inappropriately retained in contingency
retention inventory, the contingency retention inventory level has
been overstated. We estimatedin 2006 that the Air Force's
contingency retention inventory value includ$138 million worth of
items, the value of the 974 contingency retentitems that should
not have been included. As a result of our reviewForce Materiel
Command system programming activity correcteddeficiency in March
2006 by removing the codes from the system. According to Command
officials, the items support some weapon systemthat are still used
in the Air Force, but some items support the F-111 aircraft that
the Air Force retired in the mid-1990s. When the codes areremoved
for this aircraft, some of the 974 items that are no longer n
to retain these items for foreign military sales. Air Force policy
indicates that the failure to remove items from contingency
retention inventoryare no longer needed can cause too much
inactive inventory to negativeaffect warehouse costs and spaces.
Also, by not properly categorizing the reasons for holding items
in contingency retention inventory, some DOD components are unable
to determine the rationale for holding the items and do not
readily know the potential usefulness of their contingency
retention inventories and whether the items could meet components'
operational needs. Some DOD inventory management centers are
retaining items in contingency retention inventory that have
experienced little or no recedemands. For exam
5
customers in over 10 years. There is the likelihood for the
inventomanagement centers to retain items that no longer meet
operational needs. Table 2 shows for each inventory management
center we rexamples of when items were placed into the inventory
and the last reported demand through January 2006.
4 Operating requirements consist of the approved acquisition objective:
items needed to meet current needs, items expected to be used within 2
years, and items to meet war requirements.
5 Office of the Deputy Under Secretary of Logistics and Materiel
Readiness, Department of Defense Supply Chain Materiel Management
Regulation, DOD 4140.1-R (May 2003).
6 GAO, Defense Inventory: Approach for Deciding Whether to Retain or
Dispose of Items Needs Improvement, GAO-01-475 (Washington, D.C.: May
2001).
7 DOD 4140.1-R, Section C2.8.1.1.2.
Results in Brief
8 DOD 4140.1-R, Section C2.8.1.2.4. and C2.8.1.2.6.
9 DOD 4140.1-R, Section C2.8.1.1.2.
10 DOD 4140.1-R, Section C2.8.1.2.6.
11 DLA, Department of Defense, Defense Inactive Item Program, DOD
4140.32-M, Foreword (Aug. 13, 1992).
12 Department of Defense Directive 4140.1, Supply Chain Materiel
Management Policy (April 22, 2004).
13 This annual financial report summarizes DOD secondary inventory by
component and inventory category and is used as a management tool to
monitor changes in inventory levels.
14 GAO, Defense Inventory: Approach for Deciding Whether to Retain or
Dispose of Items Needs Improvement, GAO-01-475 (Washington, D.C.: May
2001).
15 GAO-01-475 .
Background
16 Office of the Deputy Under Secretary of Defense for Logistics and
Materiel Readiness, Department of Defense Materiel Supply Chain Management
Regulation, DOD 4140.1-R, appendix 1 (May 2003).
DOD Inventory Management Policies and Procedures Pertaining to Contingency
Retention Inventory
17 DOD 4140.1-R, Section C2.8.1.1.1.3 and C2.8.1.1.2.
19Defense Logistics Agency Invprovides the guidance for the agency's The
20 The Air Force Materiel Command Manual 23-1, Requirements for Secondary
Items, (Mar. 16, 2005), and the Air Force Manual 23-110, Volume 3, Part 1
(Jan. 1
the guidance for the Air Force's contingency retention activities. 21
Inventory Management: Centralized Inventory Management of the Army Supply
System, Army Regulation 710-1 (Sept. 6, 2005) and the Memorand
Army Materiel Command, subject: Revised Secondary Item Retention Policy
(Oct. 28, 2005), provide the guidance for the Army's contingency retention
activities. 22 Ship Parts Control Center Instruction 4400.47D, 27 (May
1994), provides the guidancefor the Navy's contingency retention
activities.
23 According to the DOD regulation, DOD 4140.1-R, Section C2.8.1.2.1, the
methodology used to calculate economic retention levels should be based on
an economic analysis that balances the cost of retention and the cost of
disposal.
Economic RetenInventory
24 Logistics Management Institute and Center for Naval Analysis,
Independent Study of Secondary Inventory and Parts Shortages, LG009R1
(McLean, Va.: July 2001), and Logistics Management Institute: Economic
Retention Within the Department of Defense, LG301T1 (McLean, Va.: December
2003).
Warner Robins Air Logistics Center
Army Materiel Commanda
Aviation and Missile Life Cycle Man
Communications-Electronics Life Cy
Tank-automotive and Armaments Lif
Defense Logistics Agency
Defense Supply Center Columbus
Defense Supply Center Philadelphia
Defense Supply Center Richmond
Naval Inventory Control Poin
Naval Inventory Control Point Mecha
Naval Inventory Control Point Philadel
ce: GAO analysis of DOD data. a
Sometimes these commands are referred to as the Aviation and
MiCommunications-Electronics Command, and the Tank
bThe Naval Inventory Control Point is carried out by
Policies and Procedures in Managing Their Contingency Retention Inven
Properly CategorizingReasons to Hold Items in Contingency Retention Inventory
25 DOD 4140.1-R, Sections C2.8.1.1.1.3 and C2.8.1.2.6.
26 While the inventory management system does not allow the Command to use
codes to categorize military and general contingency retention inventory,
it does provide a code to identify items designated for foreign military
sales.
27 The Commodity Command Standard System is also used at the
Tank-automotive and Armaments Command.
Inventory that HaExperienced Little or No Recent Demands
Table 2: Examples Illustrating When DOD's Items Were Placed into Inventory
and the Last Reported Demand Date Through January 2006
Number
Year item of
entered Number of Year years
Inventory into years in of from
management Name of Name of inventory inventory last last
center item weapon system system system demand demand
Air Force's Electronic Missile 1968 38 1984 22
Ogden Air switch Warning and
Logistics Defense
Center Division
System
Army's Aviation Spur gear Target 1990 16 1995 11
and Missile Acquisition
Command Designation
Sight and
Pilot Night
Vision Sensor
Navy Inventory Rod Battleship 1953 53 1999 N/A
Control Point assembly Guns
Mechanicsburga
Defense Supply Direct Airlifter 1971b 35 2002 4
Center Richmond current Aircraft
motor
Source: GAO analysis of DOD data.
aThe Navy's inventory management system does not retain demand (request)
information beyond 5 years, and therefore, we were unable to determine
when these items were actually last requested.
bIndicates the year Defense Logistics Agency assumed management of the
item from a DOD component.
We also reported28 in 2004 that some items had inventory categorized as
either economic or contingency retention stock and had been in the
inventory system for 15 or more years. Some of the items had been placed
in service prior to 1989 and some placed during the 1960s. These items
included antennae, aircraft rudders, auxiliary power units, propeller
blades, and circuit card assemblies that were used on versions of the Air
Force's C-130 and F-15 aircraft, the Army's UH-60 helicopter, and other
weapon systems.
In addition, we found that the Aviation and Missile Command is retaining
items in contingency retention inventory, which further demonstrates how
components can retain items that have experienced (1) no recent demands
and (2) no longer meet operational needs. DOD policies require that items
held in contingency retention should correspond to current and future
force levels.29 It is also an objective of DOD's policy that items from
the inventory system that no longer support DOD's mission should be
removed.30 During our review, we identified 4 out of 55 contingency
retention items that support an obsolete early warning sensor that was
phased out by the Army in June 2003. According to Command officials these
items were retained in contingency retention because officials did not
receive direction from the Army to remove the obsolete items from the
inventory. Also, Command officials stated that they are considering
offering the weapon system and support items to the foreign military sales
program. If the foreign military sales program does not assume management
of the items, the Command officials said they will initiate the disposal
process. While we do not know the extent to which this is a predominant
condition at the Command because we only identified 4 items which the
Command is retaining that do not support a current requirement and have
not experienced any recent demands, it is possible that the Army may be
retaining several other contingency retention items that no longer meet
operational needs. According to DOD policy, items that no longer support
DOD's mission needlessly consume warehouse space that will impact total
supply operations and DOD places serious emphasis on the purging of
unneeded items from the inventory.31
28 GAO, Defense Inventory: Analysis of Consumption of Inventory Exceeding
Current Operating Requirements Since September 30, 2001, GAO-04-689
(Washington, D.C.: Aug. 2, 2004).
Some DOD Inventory Management Centers Are Not Conducting Annual Reviews to
Verify Reasons for Retaining Contingency Retention Inventory
The Defense Supply Center Richmond, the Naval Inventory Control Point
Mechanicsburg, and the Army's Aviation and Missile Command are not
conducting annual reviews to verify the reasons for retaining items in
contingency retention inventory. DOD's and the components' policies
require the components to conduct annual reviews so that the components
can validate their reasons for retaining items in this inventory category.
Additionally, we found that one of the Defense Logistics Agency's centers,
the Defense Supply Center Richmond, had not conducted reviews since 2000
on some contingency retention items. We found that no annual reviews had
been conducted for 35 of the 48 items we reviewed from the Center's 2004
total population of contingency retention inventory. We later identified
from the Center's total population of contingency retention inventory that
approximately 2,200 items had not been reviewed since 2000. According to
Center officials, the reviews were not conducted because the items had no
stock on hand or they had experienced no recent demands from customers.
Based on our review, the Defense Supply Center Richmond initiated actions
to (1) review the stock numbers, (2) remove their contingency retention
levels if required, and (3) establish a review cycle that would identify
these types of items in the future. After the Center reviewed the items,
it proposed disposal actions to remove 40 stock numbers: a total quantity
of about 26,000 items valued at over $742,500.
29 DOD 4140.1-R, Section C2.8.1.1.2.
30 DOD 4140.32-M, Foreword.
31 DOD 4140.32-M, Foreword.
Also, the Naval Inventory Control Point Mechanicsburg had not conducted
annual reviews for some contingency retention inventory established by the
weapon system program manager. Like the other components, Navy policy
requires an annual review of the reasons for retaining an item in
contingency inventory. However, we identified 4 out of 45 items in our
review for which weapon system program managers had not conducted annual
reviews for the contingency retention inventory. At the time of our
review, these items had not been reviewed since 2000. For example, one
Navy program manager had not conducted annual reviews for 3 items in our
review since 2000 because the date to conduct the reviews in the inventory
management system was not set for every year. Navy inventory management
officials were unaware that some weapon system program managers were not
conducting annual reviews of contingency retention inventory. As a result
of our review, the Naval Inventory Control Mechanicsburg revised the
policy for weapon system program managers to conduct annual reviews.
Furthermore, we found that the Army Materiel Command has not conducted
reviews of some items in contingency retention inventory specifically
retained for foreign military sales. For example, we identified 10 out of
the 55 selected Army Aviation and Missile Command contingency items
(valued at $10.1 million) that had not been reviewed annually by the
component to verify the reasons for retaining the items in contingency
retention. Army policy requires an annual review of contingency
requirement decisions for all items including items retained for foreign
military sales. These 10 items support the Hawk and Chaparral Missile
Systems and are retained for the foreign military sales program. A 2003
memorandum of agreement between the Army's Aviation and Missile Command's
Missile System Directorate and the Security Assistance Management
Directorate directs the Army to retain management of the items until the
quantities on hand have been depleted. Once this occurs, the Security
Assistance Management Directorate assumes inventory accountability for the
items. According to the Army Aviation and Missile Command officials, these
items are managed by the Army because the Security Assistance Management
Directorate is not authorized to procure assets from the Command in
anticipation of foreign military sales demands. Also, Command officials
indicated that annual reviews were not conducted because the missile
systems' items were retained due to direction of the memorandum of
agreement. The purpose of these annual reviews would be to identify
whether these items are still needed to support the weapon systems in the
foreign military sales program. By not conducting annual reviews, the
Command is not in compliance with DOD and Army policies and procedures.
DOD Is Not Providing Sufficient Oversight to Ensure That Components Are
Conducting Annual Reviews of Contingency Retention Inventory
DOD is not providing sufficient oversight to ensure that components are
conducting annual reviews of contingency retention inventory across the
components. According to the DOD Supply Chain Materiel Management
Regulation issued by the Office of the Deputy Under Secretary of Defense
for Logistics and Materiel Readiness, the DOD components are required to
annually review and validate the contingency retention inventory. However,
the regulation does not state who bears responsibility for ensuring the
components conduct these annual reviews. The DOD's Supply Chain Materiel
Management Policy requires the Under Secretary of Defense for Acquisition,
Technology, and Logistics (OUSD AT&L) to ensure that DOD materiel
management policies are implemented in a uniform manner throughout the
department. This policy applies to all phases of materiel management, from
an item's introduction into the supply system to operational requirements
through the weapon system phase-out and retirement. Also, the OUSD AT&L is
responsible for monitoring the overall effectiveness and efficiency of the
DOD logistics system, and for continually developing improvements. In
addition, the Standards for Internal Control in the Federal Government
recommend that ongoing monitoring occur in the course of normal operations
to ensure policies and procedures are enforced. OUSD AT&L officials said
that they rely on the DOD's Supply System Inventory Report as their
oversight mechanism to ensure DOD components conduct annual reviews. While
the annual Supply System Inventory Report provides DOD with financial
inventory information, it does not specifically provide the information
DOD needs to determine whether the components are conducting annual
reviews of contingency retention inventory. OUSD AT&L officials said that
if the report identifies noticeable changes in the components' contingency
retention inventory levels, they would ask the components to explain those
changes.
Also, OUSD AT&L officials said that several additional measures could be
taken to determine why the components' contingency retention inventory
levels have increased. For example, DOD officials said they may request
assistance from the Department of Defense Inspector General's Office,
establish a joint process review team, or request contractor support to
examine noticeable changes in the components' inventory levels. We found
that the Department of Defense Inspector General's Office has not
conducted any recent reviews on contingency retention inventory. According
to DOD officials, they are currently using a contractor to determine why
DOD components' inventory levels have increased. However, DOD's failure to
recognize the inventory management centers' noncompliance with DOD's
regulation requiring them to conduct annual reviews of their contingency
retention decisions illustrates DOD's insufficient oversight of inventory
management at the departmentwide level. There is no requirement for the
components to report the results of their annual reviews to DOD, and the
Supply System Inventory Report does not address the annual reviews.
Because DOD does not provide the oversight to ensure that components are
conducting annual reviews of their contingency retention decisions, DOD
cannot be certain that components are retaining the right amount of
contingency retention inventory to meet the military's operating
requirements.
DOD Has Made No Progress in Implementing Our 2001 Recommendations on Economic
Retention Inventory Management
DOD has made no progress in implementing our 2001 recommendations32 on
economic retention inventory management. We recommended that DOD (1)
establish milestones for reviewing their approaches for making economic
retention decisions, and (2) conduct annual reviews of their approaches,
as directed by the DOD regulation,33 to ensure they have sound support for
determining economic retention inventory levels. In 2001, we reported that
components had not properly documented the approaches they have taken in
making economic retention decisions, lacked sound analytical support for
the maximum levels they used, and had not annually reviewed their
approaches. We also reported that while DOD components, with the exception
of the Air Force, developed individual economic models designed to place
inactive inventory in economic status as early as 1969, they had not used
the models since 1994. Instead, components lowered maximum levels of
inventory-known as ceilings-to make economic retention determinations that
would help achieve agency inventory reduction goals. We also reported that
the components judgmentally developed their ceilings for economic
retention inventory, which differed and had yielded lower levels of
economic retention inventory than the levels calculated by the economic
retention models. In addition, we reported that while components' ceilings
varied in the span of years of demand, they also varied in the total years
of inventory covered.
32 GAO, Defense Inventory: Approach for Deciding Whether to Retain or
Dispose of Items Needs Improvement, GAO-01-475 (Washington, D.C.: May
2001).
33 DOD 4140.1-R, Section C2.8.1.1.2.
During 1994-96, the components established different ceilings for items in
economic retention. A ceiling imposes an upper constraint on years of
demand-the quantity needed on an annual basis to meet requirements-and how
much inactive inventory can be retained. For example, the Army ceiling is
applied to inventories above active inventory requirements. The Air Force,
Navy, and Defense Logistics Agency ceilings apply to their entire
inventory requirements, including active inventory. The ceilings currently
used by the components are summarized in table 3.
Table 3: Component Ceilings on Economic Retention Inventories
Component Ceilings levels used to retain inventory
Air Force 13 years of total maximum demand for all items
Army (By Life Cycle CECOM, 7 years of demand above requirements for
Management Commands)a serviceable reparables, 6 years for unserviceable
reparables, 5 years of demand above requirements
for all other items AMCOM and TACOM, 83.25 years
of demand above requirements for serviceable and
unserviceable reparables
Navy 12 years of total attrition demand for new
weapons systems
8 years of total attrition demand for "steady"
weapon systems
4 years of total attrition demand for weapons
systems approaching obsolescence
Defense Logistics Agency 6 years of total demand
Source: GAO analysis of DOD data.
aArmy has three major subordinate commands that manage spare parts for
major weapon systems. They include the Aviation and Missile Life Cycle
Management Command (AMCOM), Communications-Electronics Life Cycle
Management Command (CECOM), and the Tank-automotive and Armaments Life
Cycle Management Command.
DOD partially concurred with our 2001 recommendations, agreeing that its
components needed to annually review the appropriateness of their economic
retention inventory levels. In response to a 2001 congressionally mandated
study, the Logistics Management Institute (LMI) examined whether the
current economic retention policy requirements and procedures could be
improved.34 Specifically, the study concluded that DOD could possibly
achieve additional cost savings by determining economic retention levels
using heuristics35 based on years of no demand when determining economic
retention levels rather than using economic retention models and years of
supply. LMI attributed the problems of using a generalized economic
retention model to the uncertainty of long-term demand, the negligible
marginal cost of storage, and the small return from disposal. In addition,
the LMI study suggested DOD employ a new standard of 7 years of inactivity
to determine economic retention levels. DOD determined that further review
was necessary to determine appropriate approaches to economic retention
inventory decisions and subsequently tasked LMI to examine whether current
economic retention policy requirements and procedures could be improved.
LMI conducted a follow-up study on economic retention in 2003 and found
that even though the economic retention models used by DOD components
allow for demand variability, they assume the average demand for items is
relatively stable from year to year. The study also stated that if the
average demand is not stable, future demand cannot be predicted and
retention limits will not be accurate.
Based on its 2003 independent study, LMI recommended that DOD procedural
guidance for setting economic retention limits should call for the use of
minimum-retention limits as a viable means of dealing with the uncertainty
in forecasting long-term demand. In addition, LMI recommended that in
accordance with the DOD regulation, the DOD components should review their
retention methodologies at least annually and adapt the general models and
options in the study's analysis to their specific items.36 DOD did not
advise the components to adopt recommendations from the 2003 LMI study
because, according to an official with the Office of the Assistant Deputy
Under Secretary of Defense, they were designed to show components how best
to determine economic retention. A program director with LMI said DOD
indicated that they were still looking at ways to implement
recommendations from the 2003 study, but competing demands from Operation
Iraqi Freedom, the Base Realignment and Closure Act for 2005, the
Quadrennial Defense Review, and other activities have taken priority.
Furthermore, while DOD agreed with our 2001 recommendations to comply with
DOD policy and perform annual reviews of the economic retention
methodologies, we found that some of the components were not complying
with the DOD regulation to review and validate their methodologies for
economic retention decisions. For example, at the time of our review, the
Army and Defense Logistics Agency had not reviewed and validated their
methodologies for economic retention decisions within the last year, nor
were they able to provide documentation illustrating when the last review
had been conducted. A Defense Logistics Agency official stated that other
competing priorities and a focus on the agency's new inventory management
system have prevented them from conducting annual reviews. However,
according to an official with the Defense Logistics Agency, a plan to
revise their economic retention model and ceilings will begin in late
2006. We also found that the Air Force had not conducted annual reviews
and validated its methodologies for economic retention decisions since
1991. According to Air Force officials, annual reviews of economic
retention decisions are not conducted because it is an expensive
undertaking and because of manpower limitations. The Air Force is
currently conducting a study of its economic retention model. In addition,
in 2005, the Navy conducted a review of its economic retention model and
recommended the following actions: (1) find methods to improve cost
estimates in retention decisions, and (2) explore reductions in minimum
retention limits.
34 National Defense Authorization Act for Fiscal Year 2000, Pub. L. No.
106-65, S: 362 (1999) directed the Department of Defense to sponsor an
independent study on secondary inventory and spare parts.
35 Heuristics is a rule of thumb, simplification, or educated guess that
is offered as a decision-making tool.
36 Logistics Management Institute, Economic Retention Within the
Department of Defense, LG301T1 (McLean, Va.: December 2003).
Conclusions
DOD's inventory management centers are using subjective reasons to justify
which items they retain in their contingency retention inventories in
support of their missions. While each center has policies and procedures
to review and validate their inventory retention decisions, they are not
complying with these policies and therefore cannot ensure that they are
retaining the appropriate amount of contingency retention inventory for
current and future operations. For example, since some inventory
management centers do not properly assign reasons for holding the
contingency retention inventory, they do not know whether the
justifications to hold items are consistent with the reasons prescribed in
their existing policies and procedures. Similarly, until some DOD
inventory management centers determine whether retained items support
their operational needs, they could be retaining inventory that needlessly
consumes valuable warehouse space for many years. Without periodic reviews
that verify the reasons for holding items in contingency retention
inventory, there is the potential for the DOD centers to use this
inventory category to justify accumulating high levels of inventory
without knowing whether the items they are retaining are potentially
useful for current and future force operating requirements. The
components' inventory retention policies and procedures are in place to
help meet the needs of the warfighter. Until the components comply with
these policies and procedures, they will be unable to take meaningful
steps to improve their inventory management processes to support the
warfighter. Moreover, while our work only focused on the inventory
management centers we reviewed, it is unknown whether these issues are
occurring at other DOD inventory management centers.
DOD's insufficient oversight to ensure the inventory management centers
are conducting annual reviews of contingency retention inventory shows the
lack of DOD accountability to ensure materiel management polices and
procedures are implemented in a uniform manner throughout the department.
The lack of DOD's accountability stems from DOD's Supply Chain Materiel
Management Regulation, which does not clearly assign responsibility for
ensuring the inventory management centers conduct the annual reviews.
Although DOD has several measures to monitor contingency retention
inventory levels, they do not provide assurance that the reviews of
contingency retention decisions are conducted. Without sufficient
oversight, DOD does not have the information it needs to understand why
components may not be following certain inventory retention policies or
procedures. Furthermore, the department cannot be assured that it has a
complete and accurate picture of its inventory retention management and
may be unable to identify areas that need attention to improve the
department's supply chain management.
Recommendations
We are recommending that the Secretary of Defense take the following seven
actions:
To ensure DOD inventory management centers properly assign codes to
categorize the reasons to retain items in contingency retention inventory,
direct the Under Secretary of Defense for Acquisition, Technology, and
Logistics to:
o Direct the Secretary of the Army to instruct the Army Materiel
Command to modify the Commodity Command Standard System so it will
properly categorize the reasons for holding items in contingency
retention inventory.
o Direct the Secretary of the Air Force to instruct the Air Force
Materiel Command to correct the Application Programs, Indenture
system's deficiency to ensure it properly categorizes the reasons
for holding items in contingency retention inventory.
To ensure that the DOD inventory management centers retain
contingency retention inventory that will meet current and future
operational requirements, direct the Under Secretary of Defense
for Acquisition, Technology, and Logistics to:
o Direct the Secretary of the Army to instruct the Army Materiel
Command to require the Aviation and Missile Command to identify
items that no longer support operational needs and determine
whether the items need to be removed from the inventory. The Army
Materiel Command should also determine whether its other two
inventory commands, the Communications-Electronics Command and
Tank-automotive and Armaments Command, are also holding obsolete
items, and if so, direct those commands to determine whether the
disposal of those items is warranted.
To ensure that DOD inventory management centers conduct annual
reviews of contingency retention inventory as required by DOD's
Supply Chain Materiel Management Regulation, direct the Under
Secretary of Defense for Acquisition, Technology, and Logistics
to:
o Direct the Director of the Defense Logistics Agency to require
the Defense Supply Center Richmond to conduct annual reviews of
contingency retention inventory. The Defense Logistics Agency
should also determine whether its other two centers, the Defense
Supply Center Columbus and the Defense Supply Center Philadelphia,
are conducting annual reviews, and if not, direct them to conduct
the reviews so they can ensure the reasons for retaining the
contingency retention inventory are valid.
o Direct the Secretary of the Navy to instruct the Naval
Inventory Control Point Mechanicsburg to conduct annual reviews of
contingency retention inventory. The Naval Inventory Control Point
should also determine if its other organization, Naval Inventory
Control Point Philadelphia, is conducting annual reviews and if
not, direct the activity to conduct the reviews so it can ensure
the reasons for retaining the contingency retention inventory are
valid.
o Direct the Secretary of the Army to instruct the Army Materiel
Command to require the Aviation and Missile Command to conduct
annual reviews of contingency retention inventory. The Army
Materiel Command should also determine if its other two inventory
commands, the Communications-Electronics Command and
Tank-automotive and Armaments Command, are conducting annual
reviews and if not, direct the commands to conduct the reviews so
they can ensure the reasons for retaining the contingency
retention inventory are valid.
To ensure that DOD inventory management centers implement
departmentwide policies and procedures for conducting annual
reviews of contingency retention inventories, direct the Office of
the Deputy Under Secretary of Defense for Logistics and Materiel
Readiness to take the following action:
o Revise the DOD's Supply Chain Materiel Management Regulation to
make clear who is responsible for providing recurring oversight to
ensure the inventory management centers conduct the annual reviews
of contingency retention inventory.
In written comments on a draft of this report, DOD concurred with
six of our recommendations and partially concurred with one. Also,
DOD cited specific actions it plans to take to implement the six
recommendations. Specifically, DOD indicated that the Air Force
has corrected the system deficiency in the Applications Program,
Indenture, by removing all remaining system-deferred disposal
codes from the system. Also, DOD stated that the Army will review
contingency retention inventory for items that no longer support
operational needs. Furthermore, DOD noted that the Army, the Navy,
and the Defense Logistics Agency plan to conduct annual reviews of
contingency retention inventories to ensure the reasons for
retaining the items are valid.
DOD partially concurred with our recommendation to instruct the
Army Materiel Command to modify the Commodity Command Standard
System so it will properly categorize the reasons for holding
items in contingency retention inventory. The department said that
it does not plan to modify the current legacy system to include
the contingency retention codes. Instead, the department prefers
to devote its resources to implementing the Army's Logistics
Modernization Program that will include the category contingency
retention codes. However, we reported that the department does not
plan to implement the new system until 2009, and as an interim
remedy, it plans to have item managers use manual contingency
retention approval forms that will include the codes. We do not
believe this remedy will allow the Army to readily (1) identify
the reasons for holding items in contingency retention inventory
and (2) know whether they are retaining items that are useful for
current and future operations. Therefore, we continue to believe
that the Army should modify the current system to properly
categorize the reasons for holding items in contingency retention
inventory.
While DOD concurred with our recommendation to revise DOD's Supply
Chain Materiel Management Regulation to clarify who is responsible
for providing recurring oversight to ensure the inventory
management centers conduct the annual reviews of contingency
retention inventory, its response focused on updating the
regulation to rely on the military services and Defense Logistics
Agency headquarters to ensure the reviews are conducted. The
intent of our recommendation, however, was to clarify who bears
responsibility for ensuring the components conduct annual reviews.
We continue to believe that DOD (Under Secretary of Defense for
Acquisition, Technology, and Logistics) should perform this
oversight responsibility to obtain a complete and accurate picture
of inventory retention management in the department.
DOD also provided a technical comment for our consideration in the
final report and we incorporated changes as appropriate. DOD's
formal comments appear in appendix II.
We are sending copies of this report to the Secretary of Defense;
Secretaries of the Air Force, Army, and Navy; and the Director,
Defense Logistics Agency. We will also provide copies to others
upon request. In addition, this report will be available at no
charge on the GAO Web site at http://www.gao.gov .
If you or your staff have any questions about this report, please
contact me at (202) 512-8365 or [email protected] . Contact points
for our Offices of Congressional Relations and Public Affairs may
be found on the last page
of this report. GAO staff who made major contributions to this
report are listed in appendix III.
William M. Solis Director Defense Capabilities and Management
The objectives of our audit were to (1) determine the extent to
which Department of Defense (DOD) inventory components have
followed departmentwide and individual component policies and
procedures to ensure they are retaining the appropriate amount of
contingency retention inventory, and (2) assess the extent to
which DOD is providing oversight of contingency retention
inventory management across the components. We also provided
updated information on the progress that DOD has made in
implementing our 2001 recommendations on the components'
management of economic retention inventory. We obtained current
DOD and component guidance on retaining inventory that exceed
operating requirements. Also, we interviewed officials from Office
of the Secretary of Defense (OSD) for Acquisition, Technology, and
Logistics, Arlington, Virginia; Air Force Materiel Command,
Wright-Patterson Air Force Base, Ohio; Defense Logistics Agency,
Ft. Belvoir, Virginia; Defense Supply Center Richmond, Virginia;
U.S. Army Materiel Command, Ft. Belvoir, Virginia; Naval Inventory
Control Point Mechanicsburg, Pennsylvania; and Ogden Air Logistics
Center, Hill Air Force Base, Utah, and the U.S. Army Aviation and
Missile Command, Huntsville, Alabama, to discuss their roles and
responsibilities, as well as the criteria and guidance they used
in performing their duties for managing, reviewing and validating
reasons for retaining contingency retention inventory.
To evaluate whether the components have followed departmentwide
and individual component policies and procedures with respect to
contingency retention inventory, we obtained secondary inventory
(spare parts) retention inventory records from the following DOD
components' automated inventory management systems:
o Defense Logistics Agency's Standard Automated
Materiel Management System;
o Navy's Uniform Inventory Control Point;
o Air Force's Central Secondary Item Requirement
System; and
o Army's Commodity Command Standard System.
For each of the DOD component systems used in our work, we
assessed the reliability of the data by (1) obtaining information
from the component management on their data reliability
procedures, (2) reviewing system documentation, (3) reviewing
related audit agency reports, and (4) performing electronic
testing of the contingency retention inventory data to identify
obvious errors in accuracy and completeness. We verified database
control totals, where appropriate. Based on these procedures, we
determined that the DOD data were sufficiently reliable for
purposes of our analysis and findings. The contingency retention
inventory data we obtained covered different periods, depending on
the DOD component providing the data. Although the period for the
components' data was from the years 2004 and 2005, the data we
obtained had different cutoff dates as follows:
o For Defense Logistics Agency, the cutoff date was
October 1, 2004.
o For the Army, the cutoff date was November 14,
2005.
o For the Navy, the cutoff date July 19, 2005.
o For the Air Force, the cutoff date was March 31,
2005.
To illustrate how inventory management centers establish and
review contingency retention inventory, we conducted case studies
of a nonprobability sample of inventory management centers
including the Defense Supply Center Richmond, Virginia; Naval
Inventory Control Point Mechanicsburg, Pennsylvania; Ogden Air
Logistics Center, Hill Air Force Base, Utah; and U.S. Army
Aviation and Missile Command, Huntsville, Alabama. We selected
these centers for review based on the number of items and value of
contingency retention inventory. At each center, we reviewed the
population of inventory retention data, and developed a
nonprobability sample of inventory retention items (spare parts)
at each center for further review, based on the number, types, and
costs of inventory at each location. For example, we selected for
review spare parts with (1) highest and lowest dollar value, (2)
date of earliest and latest request date, (3) earliest and latest
date items placed into inventory record, and (4) highest and
lowest quantity. The selection resulted in a review of 205 cases
(national stock numbers) for the centers we visited, and equates
to 1.6 million spare parts valued at $890 million. Also, we used a
data collection instrument to assist the team in gathering
information and interviewing officials at the four locations. The
purpose of the data collection instrument was to help the team
ensure consistent, accurate, and complete recording of information
at each location. Although the case study approach does not enable
us to generalize findings to all centers, it does provide in-depth
information about problems at selected centers, which may provide
insight into problems with contingency retention inventory
management in general.
To determine DOD's oversight responsibility for ensuring the DOD
inventory management centers implement the contingency retention
policies and procedures, we reviewed DOD regulations and
directives and interviewed officials from the Office of the Deputy
Under Secretary of Defense for Supply Chain Integration on their
roles and responsibilities for supply chain materiel management.
Also, we reviewed GAO's Standards for Internal Control in the
Federal Government, which provides the overall framework for
establishing and maintaining internal control and for identifying
and addressing major performance and management challenges.
To assess the progress that DOD has made in implementing the
recommendations from our 2001 report on the components' management
of economic retention inventory, we obtained copies of DOD's and
the components' policies and procedures for retaining economic
retention inventories and discussed this with DOD officials. We
also analyzed DOD's and its components policies and procedures to
determine their internal controls/oversight functions and
responsibilities for validating and annually reviewing their
methodologies for making economic retention decisions. Also, we
reviewed reports from GAO and the Logistics Management Institute
on economic retention inventory. In addition, we conducted
interviews with component officials from each of the following
offices: the Office of Secretary of Defense Acquisition,
Technology, and Logistics, Arlington, Virginia; the Army Materiel
Command, Fort Belvoir, Virginia; the Army's Aviation and Missile
Command, Huntsville, Alabama; the Air Force Materiel Command,
Wright-Patterson Air Force Base, Ohio; the Air Force's Ogden Air
Logistics Center, Hill Air Force Base, Utah; Defense Logistics
Agency Headquarters, Fort Belvoir, Virginia; Defense Supply Center
Richmond, Virginia; and, the Naval Inventory Control Point
Mechanicsburg, Pennsylvania.
We performed our review from May 2005 through May 2006 in
accordance with generally accepted government auditing standards.
William M. Solis, (202) 512-8365 or [email protected]
In addition to the contact named above, David Schmitt, Assistant
Director; Sarah Baker; Carleen Bennett; Alissa Czyz; Curtis
Groves; K. Nicole Harms; Latrealle Lee; Rebecca Shea; and Darby
Smith made key contributions to this report.
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Agency Comments and Our Evaluation
Appendix I: Scope and Methodology
Appendix II: Comments from the Department of Defense
Appendix III: GAO Contact and Staff Acknowledgments
GAO Contacts
Acknowledgments
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Highlights of GAO-06-512 , a report to the Subcommittee on Readiness and
Management Support, Committee on Armed Services, U.S. Senate
May 2006
DEFENSE INVENTORY
Actions Needed to Improve Inventory Retention Management
Maintaining the right amount and types of items in its inventory-a key
aspect of supply chain management-has been a long-standing challenge for
the Department of Defense (DOD) and has been on GAO's list of high-risk
areas since 1990. DOD retains inventory above its normal operating
requirements for various reasons including for contingency purposes or
because it is more economical to keep items than dispose and repurchase
them later. DOD's inventory levels have grown in recent years to almost
$80 billion in fiscal year 2005. GAO was asked to assess the management of
contingency retention inventory to determine whether (1) the Army, Air
Force, Navy, and Defense Logistics Agency have followed inventory guidance
and (2) DOD is providing oversight of inventory across these components.
Also, GAO provided an update on the progress DOD has made in implementing
GAO's past recommendations on the components' management of economic
retention inventory.
What GAO Recommends
GAO recommends that DOD direct the inventory centers to take the steps
necessary to follow existing inventory management policies and procedures
and provide oversight to ensure the components' compliance. In reviewing a
draft of this report, DOD generally agreed with GAO's recommendations.
Some DOD inventory management centers have not followed DOD-wide and
individual policies and procedures to ensure they are retaining the right
amount of contingency retention inventory. While policies require the
centers to (1) use category codes to describe why they are retaining items
in contingency inventory, (2) hold only those items needed to meet current
and future needs, and (3) perform annual reviews of their contingency
inventory decisions, one or more centers has not followed these policies.
For example, the Army's Aviation and Missile Command is not properly
assigning category codes that describe the reasons they are holding items
in contingency inventory because the inventory system is not programmed to
use the codes. GAO found that items valued at $193 million did not have
codes to identify the reasons why they were being held, and therefore GAO
was unable to determine the items' contingency retention category. GAO
also found that some inventory centers have held items such as gears,
motors, and electronic switches, even though there have been no requests
for some of them by the services in over 10 years. Moreover, some centers
are not annually reviewing their contingency retention decisions. Navy
Inventory Control Point Mechanicsburg's officials, for example, were
unaware that program managers had not conducted the required reviews until
GAO brought this to their attention. Since GAO's work only focused on the
centers it reviewed, it is unknown if these issues are occurring at other
DOD inventory centers. By not following policies for managing contingency
inventory, DOD's centers may be retaining items that are needlessly
consuming warehouse space, and they are unable to know if their
inventories most appropriately support current and future operational
needs.
DOD has provided insufficient oversight of inventory retention management
across the components. DOD's Supply System Inventory Report, which DOD
uses to oversee the components' inventory management, only requires the
components to report to DOD financial information about their inventories
and does not capture if the components are following management policies.
Without sufficient oversight of the components' inventory retention
practices, DOD cannot be certain that the components have the correct
amount or type of items in contingency retention inventory.
Lastly, DOD has made no progress to implement GAO's 2001 recommendations
requiring the components to (1) establish milestones for reviewing their
approaches for making economic retention inventory decisions, and (2)
conduct annual reviews of these approaches, as required by DOD policy. At
the time GAO issued its report, DOD agreed with the recommendations but
stated that further review was necessary before it implemented changes.
While subsequent studies reaffirmed the recommendations, DOD has still not
taken action. GAO continues to believe that DOD should implement the
recommendations to make meaningful improvements to its economic retention
management practices.
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