Defense Inventory: Improvements Needed to Prevent Excess Purchases by the
Air Force (Letter Report, 11/01/1999, GAO/NSIAD-00-5).

Pursuant to a congressional request, GAO reviewed inventory the Air
Force had on contract that was excess to current operating requirements.

GAO noted that: (1) the Air Force did not always cancel purchases that
exceeded current operating requirements; (2) the Air Force cancelled
contracts for $5.5 million of the $162.4 million excess inventory that
GAO reviewed, but it could have cancelled more; (3) contracts for
unnecessary items are not being cancelled primarily because the Air
Force process for cancelling contracts takes a long time, during which
costs are incurred for which the government is liable; (4) specifically,
it takes 60 to 90 days to provide managers with the requirement
information needed to make cancellation decisions; (5) also, the Air
Force model provides for over 63 months of supply--more time than needed
to order and receive items; (6) in addition, the model uses invalid
requirements that reduce quantities to be cancelled; (7) once a purchase
is considered for cancellation, Air Force managers use a model to
determine if the savings from cancelling the contract would exceed the
cost of reordering the items at a later date; (8) in several cases that
GAO reviewed, the model indicated that it was not cost beneficial to
cancel contracts for unneeded inventory items because of potential
reprocurement costs; (9) however, the model is flawed because it does
not consider parts recovered from retired weapon systems that are
available to be reused; (10) as a result, the model understates the
amount of purchases that could be cancelled; and (11) in other cases,
inaccurate records increased manager workloads by causing items to be
unnecessarily reviewed.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-5
     TITLE:  Defense Inventory: Improvements Needed to Prevent Excess
	     Purchases by the Air Force
      DATE:  11/01/1999
   SUBJECT:  Military inventories
	     Air Force procurement
	     Inventory control systems
	     Logistics
	     Cost effectiveness analysis
	     Military cost control
	     Spare parts
	     Internal controls

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Report to the Chairman, Subcommittee on National Security, Veterans
Affairs, and International Relations, Committee on Government Reform,
House of Representatives

November 1999

DEFENSE INVENTORY

Improvements Needed to Prevent Excess Purchases by the Air
Force
*****************

*****************

GAO/NSIAD-00-5

Letter                                                                     3

Appendixes

Appendix I:Scope and Methodology

                                                                         16

Appendix II:Comments From the Department of Defense

                                                                         17

Related GAO Products

                                                                         20

Table 1:  Rotor Blade Requirements               7

Table 2:  Comparison of Termination Quantities for a Disc
Brake Assembly                                   9

Table 3:  Comparison of Termination Quantities for a High-Pressure
Turbine Blade                                   10

Figure 1:  Levels of Inventory Requirements      7

DOD     Department of Defense

                                                     National Security and 
                                             International Affairs Division

B-280236

November 10, 1999

Dear Mr. Chairman:

The Honorable Christopher Shays
Chairman, Subcommittee on National Security,
Veterans Affairs, and International Relations
Committee on Government Reform
House of Representatives

This report is one in a series of reports on the Department of Defense's
(DOD) management of secondary inventory-spare and repair parts and other
items that support DOD's operating forces on land, at sea, and in the
air./Footnote1/ Over the past several years, we have testified and issued
a number of reports that cite the management of defense inventory as a
high-risk area./Footnote2/ The management of inventory involves
significant Air Force expenditures. The Air Force annually purchases about
$4.4 billion of secondary inventory and has a reported on-hand inventory
valued at about $25.9 billion. As of September 30, 1997, Air Force
inventory files showed that the Air Force had contracts for $1.5 billion
of secondary inventory, $384 million of which exceeded current operating
requirements-the inventory needed to prevent out-of-stock situations and
to meet funded war reserves.

As requested, we focused this review on inventory the Air Force had on
contract (that is, ordered but not yet delivered) that was excess to
current operating requirements. Specifically, to determine whether the Air
Force was canceling purchases that exceeded current operating
requirements, we judgmentally selected and reviewed 160 items with
inventory valued at $162.4 million on contract that exceeded current
operating requirements as of September 30, 1997. The scope and methodology
of our work are described in appendix I.

Results in Brief

The Air Force did not always cancel purchases that exceeded current
operating requirements. The Air Force canceled contracts for $5.5 million
of the $162.4 million excess inventory that we reviewed, but it could have
canceled more. Contracts for unnecessary items are not being canceled
primarily because the Air Force process for canceling contracts takes a
long time, during which costs are incurred for which the government is
liable. Specifically, it takes 60 to 90 days to provide managers with the
requirement information needed to make cancellation decisions. Also, the
Air Force model provides for over 63 months of supply--more time than
needed to order and receive items. In addition, the model uses invalid
requirements that reduce quantities to be canceled. Once a purchase is
considered for cancellation, Air Force managers use a model to determine
if the savings from canceling the contract would exceed the cost of
reordering the items at a later date. In several cases that we reviewed,
the model indicated that it was not cost beneficial to cancel contracts
for unneeded inventory items because of potential reprocurement costs.
However, the model is flawed because it does not consider parts recovered
from retired weapon systems that are available to be reused. As a result,
the model understates the amount of purchases that could be canceled. In
other cases, inaccurate records increased manager workloads by causing
items to be unnecessarily reviewed.

We are recommending that the Air Force strengthen management oversight
procedures and internal controls over the processes for canceling
purchases. For example, the Air Force needs to improve the timeliness and
accuracy of data that managers use to make contract cancellation decisions.

Background

DOD's logistics principles state that inventories will be established at
the minimum levels required to meet customer needs. Inventory management
comprises several major functions, including determining what is needed;
buying needed items; and storing, maintaining, distributing, and disposing
of these items. Five Air Force Air Logistics Centers, along with other
activities such as maintenance depots and disposal activities, perform
these inventory management functions.

In April 1999, we reported/Footnote3/ that as of September 30, 1997, $39.4
billion of DOD's $65.8 billion secondary inventory exceeded current
requirements. Our past work has shown that weaknesses in procedures used
to cancel contracts for inventory that is no longer needed to satisfy
current operating requirements have contributed to buying inventory that
should not have been purchased. This report focuses on the Air Force
process for canceling contracts for items that are in excess of current
operating requirements.

Opportunities Exist to Cancel More Contracts

Our analysis of 160 judgmentally selected items with excess inventory on
contract valued at $162.4 million showed that the Air Force canceled
contracts for 14 of the items worth $5.5 million because they were no
longer needed to meet current requirements. However, the Air Force could
have canceled more contracts. Additional contracts were not canceled
because (1) the Air Force process for canceling contracts takes a long
time (for example, 60 to 90 days to provide managers with requirements
information), during which contractors incur costs for which the
government is liable, reducing savings opportunities from canceling
contracts; (2) the Air Force model that estimates requirements provides
for over 5 years of supply, a period greater than the normal period needed
to replace the items; and (3) the model uses invalid requirements, thus
reducing the quantities to be canceled. For contracts identified for
cancellation, the Air Force termination model does not consider all
reclamation assets (material recovered from weapon systems that are not
part of the active fleet) when making cancellation decisions. In addition,
in some cases, inaccurate inventory records inappropriately identified
contracts for cancellation and unnecessarily increased managers' workloads.

Requirements Model Does Not Provide Timely Information for Canceling
Contracts 
---------------------------------------------------------------------------

DOD Materiel Management Regulation 4140.1-R states that termination
decisions generally should be reached within 30 days of notification that
contracts should be considered for termination. However, model runs
analyzing requirements for the contract being considered for cancellation
are not finalized and provided to managers until 60 to 90 days after the
runs. Reviews to verify data can take an additional 2 to 3 weeks. As a
result, it can take 3 months to finalize a requirement computation.
Further, additional time is taken to request termination costs from the
contracting office, which must request the cost information from the
contractor.

One of the factors that determine whether a contract should be terminated
is the cost that a contractor has incurred. The longer it takes to make a
decision to terminate a contract, the higher the contractor costs will be
and the less likely it will be for the termination to be economical. For
example, a contracting official said that each day termination was delayed
on a contract for torque landing gear collars the contractor incurred an
additional $5,000 in costs that the government would have to pay to cancel
the contract and not take delivery of the collars.

According to Air Force officials, it takes several weeks to assemble
inventory data from many sources (contractors, retail locations, and
inventory control points) for the model to make requirement computations.
The officials plan to reduce the time it takes to provide managers with
this data. The Air Force will use techniques such as data warehousing
(storing all data in a central computer repository) to improve the
accuracy and reduce the time it takes to assimilate the data required for
the requirements model.

Providing for Several Years of Supply Limits Cancellations
----------------------------------------------------------

The requirements model computes the quantity of an item that should be
purchased for inventory purposes. The period for which inventory is
purchased is referred to as the buy period. The buy period consists of an
operating period (the current period for which the Air Force has an
approved budget; for example, the last quarter of fiscal year 1998 and all
of fiscal year 1999) and a lead time (the time needed to purchase and
receive inventory, up to a maximum of 36 months). On June 30, September
30, December 31, and March 31, the operating periods are equal to 15, 12,
9, and 6 months, respectively. Therefore, the buy period may represent as
many as 51 months of supply (operating period plus lead time). The model
adds an additional 12 months to the buy period to determine what it calls
the termination period. The model further computes what is called a
worldwide termination level that, by using the greater of certain buy or
termination period requirements, may reduce the amount of inventory to be
considered for termination. Figure 1 summarizes these inventory
requirements.

Figure****Helvetica:x11****1:    Levels of Inventory Requirements

*****************

*****************

Source: Air Force data.

Because the Air Force requirements model provides for inventory to be used
during the time needed to order and receive inventory and for a safety
level to satisfy fluctuations in demand or lead time, orders can be placed
so that they arrive before out-of-stock situations occur. However, because
the operating and termination periods and the worldwide termination level
may represent from 18 to 27 months of additional supply, item managers are
prevented from considering large quantities of inventory for cancellation.
For example, a September 1997 requirement computation for a rotor blade
used on the T-33 aircraft engine protected over 49 months of supply. As
shown in table 1, requirements for the item included 15,798 blades to
cover the safety level as well as the item's 25-month lead time. The
item's 12-month operating period, the 12-month termination period, and the
worldwide level prevented an additional 13,192 items from being considered
for cancellation.

Table****Helvetica:x11****1:    Rotor Blade Requirements

------------------------------------------------------------------------
| Type of requirement    :   Quantity required :     Months of supply  |
|----------------------------------------------------------------------|
| Safety level + lead    :              15,798 :                  25+  |
| time                   :                     :                       |
|----------------------------------------------------------------------|
| Operating period       :               7,410 :                   12  |
|----------------------------------------------------------------------|
| Termination period     :               5,757 :                   12  |
|----------------------------------------------------------------------|
| Worldwide termination  :                  25 :        Not applicable |
| level                  :                     :                       |
|----------------------------------------------------------------------|
| Total                  :              28,990 :                  49+  |
------------------------------------------------------------------------

Source: Air Force inventory records.

Termination Period Limits Contract Cancellations
------------------------------------------------

While the buy period may represent enough inventory to satisfy as many as
51 months of needs, the requirements model adds 12 months of requirements
to the buy period to compute an item's termination period. Our analysis of
56 of the 160 sample items showed that the 12-month termination period
added $158 million of inventory requirements to the buy period. For
example, the 12-month termination period for a different rotor blade used
on the TF-33 aircraft engine added 4,188 blades, valued at $435,000, to
the buy period requirements. Although the buy period provides for enough
inventory to satisfy requirements during the time needed to order and
receive inventory (lead time) and an operating period that can provide
from 6 to 15 months of supply, the termination period protects an
additional 12 months of supply from consideration for termination.

Additional Termination Level Further Limits Contract Cancellations

Even though the buy and termination periods may represent as long as
63 months of needs, the Air Force computes a worldwide termination level
that reduces the quantity of inventory considered for termination. For 10
of the 160 sample items reviewed, the worldwide level reduced contract
quantities to be canceled by $1.1 million. For example, as of December 10,
1997, the Air Force had 109 disc brake assemblies on contract for the C-17
aircraft. As indicated in table 2, the requirements model showed that at
both the buy and termination periods, 84 on-contract assemblies were not
needed to meet current operating requirements. By using the greater of
certain buy or termination period requirements the model computed a
worldwide level of 77. Therefore, seven fewer assemblies were subject to
termination and the value of the items considered for cancellation was
reduced from $2,156,918 to $1,977,174, a difference of $179,744.

Table****Helvetica:x11****2:    Comparison of Termination Quantities for a
                                Disc Brake Assembly 

                                                                   
-------------------------------------------------------------------------
| Requirementsa/ass :  Buy period :      Termination : Worldwide level  |
| ets               :             :           period :                  |
|-----------------------------------------------------------------------|
| Base stock level  :          94 :               96 :              96  |
|-----------------------------------------------------------------------|
| Depot safety level:           8 :                1 :               8  |
|-----------------------------------------------------------------------|
| War reserve       :          43 :               43 :              43  |
|-----------------------------------------------------------------------|
| Repair cycle      :          22 :               27 :              27  |
|-----------------------------------------------------------------------|
| Total requirements:         167 :              167 :             174  |
|-----------------------------------------------------------------------|
| On-hand assets    :         142 :              142 :             142  |
|-----------------------------------------------------------------------|
| On-contract assets:         109 :              109 :             109  |
|-----------------------------------------------------------------------|
| Total assets      :         251 :              251 :             251  |
|-----------------------------------------------------------------------|
|  Difference       :          84 :               84 :              77  |
-------------------------------------------------------------------------

aBase stock level and depot safety level requirements are used to permit
continued operations in the event of minor interruptions of the normal
replenishment process or a fluctuation in demand. The war reserve
requirement is used to ensure fast mobilization in the event of war, and
the repair cycle requirement represents stock to satisfy demands while
items are being repaired.

Source: Air Force inventory records.

According to Air Force officials, the Air Force uses the larger of the
individual requirement levels to determine the quantities to be terminated
to increase mission support while recognizing that some on-order inventory
may not be needed later. However, because the buy period already includes
requirements for war reserves and safety levels, it is not clear how
stockpiling items that are not needed to meet current operating
requirements increases mission support.

Invalid Requirements Limit Cancellations
----------------------------------------

The Air Force requirements model includes prestocked requirements--
requirements for items used to augment war reserve readiness spares
packages and peacetime operating stocks--in computing the amount of
inventory that needs to be purchased. However, the Air Force does not
authorize item managers to buy inventory to satisfy the prestocked
requirements because these requirements are not considered important
enough to be funded within the budget process. As a result, item managers
reduce the amount of inventory to be purchased by the prestocked
requirements. However, when the model identifies contract quantities for
cancellation, the prestocked requirements are counted as valid
requirements. Thus, the model decreases the quantity to be canceled by the
amount of the prestocked requirements.

In our review of 160 sample items, we identified 9 items for which
prestocked requirements of more than $4 million decreased the quantity of
inventory to be canceled. For example, in September 1997, 186 slats (the
leading edge of an aircraft wing) were on contract, costing $13,472 each,
for the E-3 B/C aircraft. The requirements model computed a termination
quantity of four slats. However, the termination quantity could have been
increased to nine slats if the prestocked requirement of five had not been
included in the computation. In another example, in September 1997, the
Air Force had 18,869 high-pressure turbine blades on hand and another
9,987 on contract. The blades cost $400 each and are used on the F-16 C/D
aircraft. As shown in table 3, based on requirements for 26,371 blades,
which included a prestocked requirement of 1,982 blades, 2,485 blades were
subject to termination. By eliminating the prestocked requirement, the
termination quantity would have increased to 4,467 blades.

Table****Helvetica:x11****3:    Comparison of Termination Quantities for a
                                High-Pressure Turbine Blade 

                                                                  
-----------------------------------------------------------------------
| Requirements/assets                :     Including :       Without  |
|                                    :    prestocked :    prestocked  |
|                                    :   requirement :   requirement  |
|---------------------------------------------------------------------|
| Assets on hand                     :        18,869 :        18,869  |
|---------------------------------------------------------------------|
| Assets on contract                 :         9,987 :         9,987  |
|---------------------------------------------------------------------|
| Total assets                       :        28,856 :        28,856  |
|---------------------------------------------------------------------|
| Prestocked requirements            :         1,982 :             0  |
|---------------------------------------------------------------------|
| Other requirements                 :        24,389 :        24,389  |
|---------------------------------------------------------------------|
| Total requirements                 :        26,371 :        24,389  |
|---------------------------------------------------------------------|
| Termination quantity               :         2,485 :         4,467  |
-----------------------------------------------------------------------

Source: Air Force inventory records.

Although the Air Force has not funded prestocked requirements for a number
of years, Air Force officials believe that those requirements represent
reasonably valid requirements that allow for fluctuations in needs during
times of conflict.

Reclamation Assets Are Not Always Considered in Cancellation Decisions
----------------------------------------------------------------------

The Air Force did not always take into account the full impact of ongoing
or planned asset reclamation projects in its termination model.
Reclamation projects are specifically designed to increase on-hand assets
through the recovery of spare parts from weapon systems that are not part
of the active fleet. Because the influx of reclaimed assets is only
considered for 2 years into the future, all potentially available
reclamation assets are not considered when making termination decisions.

In our review of the 160 sample items, we identified 7 items for which
reclamation assets affected reprocurement quantities and cancellation
decisions. For example, in September 1997, the Air Force had the purchase
of 64 turbine spacer assemblies on contract. The $1,200-spacer assemblies
are used on the TF-33 aircraft engine. Because the requirement computation
included reclaimed assets, the entire on-contract quantity became excess
to requirements. However, the item manager used the termination model to
determine that it was not economical to terminate at that time. The
termination model only considered 2 years of reclaimed assets when
computing the reprocurement quantity, even though the spacer assemblies
will be reclaimed beyond the 2-year period. Considering all potential
reclamation assets may have caused the termination to be economical.

Inaccurate Records Overstated Excess Inventory on Contract
----------------------------------------------------------

Records for the 160 items in our sample showed that $162.4 million of
inventory on contract was not needed to meet current operating
requirements. However, inventory records for 32 items were inaccurate. For
example,

o   requirements were not recorded for eight items,

o   on-contract quantities for five items had been delivered but showed
  up both as on-hand and due-in inventory,

o   on-contract quantities for four items were for foreign military sales
  and should not have been considered as Air Force assets, and

o   contracts for three items had been canceled, but due-in quantities
  remained on record.

As a result, the $162.4 million in inventory which was identified as not
needed to meet current operating requirements was overstated by
$26.3 million and manager workloads were unnecessarily increased because
items were mistakenly identified for cancellation review.

For example, a September 1997 requirement computation identified three
data entry keyboards, costing $162,381 each, as on-contract inventory and
subject to termination. The item manager attempted to cancel the contract
but found that the three keyboards had been delivered to the Air Force in
October 1996. Records had not been updated to show that the keyboards had
been shipped.

In another case, Air Force records for September 30, 1997, showed 24
thermal insulation tiles used on the B-2 aircraft on hand and an additional
7 on contract. By May 1998, the tiles had been replaced by another type of
insulation tile, and when the item manager attempted to terminate the
contract for the seven tiles, he was informed by a contracting official
that the on-contract quantity was in error. The tiles, which cost $5,400
each, had been delivered a year earlier in May 1997.

According to Air Force officials, managers are responsible for insuring
that all due-in and on-order assets used in computing requirements are
accurate and for correcting those that are not accurate. Air Force
officials recognize that data accuracy problems exist, and a requirements
improvement team has been formed to address problems relating to the
accuracy of on-hand and on-order inventory data.

Conclusions

Ineffective and inefficient inventory management practices result in
buying items where there is already sufficient inventory to support needs.
Correcting these problems would make more funds available where needs are
not being met. While we cannot precisely quantify the overall extent of
the problems discussed in this report, canceling purchases that exceed
requirements could free up resources for higher priority needs.

Because the Air Force requirements model does not provide managers timely
information, the government incurs additional contractor costs that reduce
savings from canceling contracts. Due to lengthy operating and terminating
periods and the worldwide termination level, managers are prevented from
considering large quantities of inventory for cancellation. The Air Force
model already provides for a safety level and lead time inventory to
minimize out-of-stock situations. Therefore, the lengthy periods and
additional levels are not necessary and tie up scarce financial resources
in inventory. Further, including invalid prestocked requirements in
termination decisions understates the amount of inventory subject to
cancellation.

By not including all potential reclamation assets in the termination
model, the Air Force understates the amount of inventory on hand. This
practice ties up resources in inventory that may never be used. In
addition, inaccurate records increase manager workloads and misdirect
their efforts by causing items to be unnecessarily reviewed.

Recommendations

To improve the process for canceling purchases that exceed current
requirements, we recommend that the Secretary of Defense direct the
Secretary of the Air Force to (1) provide managers with the requirements
information needed to cancel contracts in a timely manner, (2) examine the
necessity for using lengthy operating and termination periods and
additional levels of supply (worldwide termination levels) when
identifying contracts for termination, and (3) eliminate prestocked war
reserve requirements that are not authorized for purchase from all
calculations that affect contract cancellation decisions. We further
recommend that the Secretary (1) consider all potential reclamation assets
when making cancellation decisions and (2) take measures to improve the
accuracy of inventory management records, such as ensuring that
requirements and on-contract inventory are properly recorded.

Agency Comments and Our Evaluation

In commenting on a draft of this report. DOD partially agreed with the
report and our recommendations. (See app. II for DOD's complete comments.)
The Department agreed with our recommendations for
(1) providing information needed to cancel contracts in a timely manner,
(2) examining the necessity for using lengthy operating and termination
periods and worldwide termination levels when identifying contracts for
termination, and (3) improving the accuracy of inventory management
records. The Department stated that the Air Force will issue memorandums
addressing these recommendations by the end of calendar year 1999. These
memorandums will direct the Air Force Materiel Command to (1) modify the
requirements system to help expedite decisions in canceling contracts, (2)
examine operating and termination periods and the worldwide termination
levels, and (3) take appropriate management actions to improve the
accuracy of inventory management records.

DOD did not agree with our recommendation to eliminate prestocked
requirements from all calculations that affect contract cancellation
decisions. DOD stated that prestocked war reserve requirements allow for
fluctuations in need during potential conflicts and should be considered
in contract termination decisions. As our report points out, the Air Force
requirements model specifically provides separate safety levels of
inventory to accommodate fluctuations of demand. Including prestocked
requirements simply increases the size of the safety levels. Further, the
Air Force neither funds nor authorizes managers to purchase prestocked
requirements. We believe that if the requirements are not sufficiently
important to be purchased, they should not be considered in cancellation
decisions. Therefore, we continue to believe that our recommendation has
merit.

DOD also did not agree with our recommendation to consider all potential
reclamation assets when making cancellation decisions. DOD stated that in
view of the aging of aircraft, it is not prudent to increase reliance on
potential reclamation assets. Our report points out that when computing
reprocurement quantities, the Air Force termination model only considered
assets to be reclaimed for a 2-year period, even though supporting
documents indicated that parts will be reclaimed beyond that time. We
recognize that some parts cannot be recovered from weapon systems that are
not part of the active fleet. However, since on-contract inventory is
considered for cancellation 1-1/2 years to 5 years into the future, there
is sufficient opportunity to identify all usable reclamation assets.
Regardless of the age of aircraft, these assets are a viable source of
parts for keeping aircraft operational and should be considered when
making cancellation decisions. Thus, we continue to believe that our
recommendation has merit.

We are sending copies of this report to the appropriate congressional
committees; to the Honorable William S. Cohen, Secretary of Defense; the
Honorable F. Whitten Peters, Secretary of the Air Force; and the Honorable
Jacob J. Lew, Director, Office of Management and Budget.

Please contact me at (202) 512-8412 if you have any questions. Key
contributors to this report were Charles Patton, James Murphy, Louis
Modliszewski, and David Keefer.

Sincerely yours,

*****************

*****************

David R. Warren, Director
Defense Management Issues

--------------------------------------
/Footnote1/-^See Related GAO Products at the end of this report.
/Footnote2/-^In 1990, we began a special effort to review and report on
  the federal program areas that we had identified as high risk because of
  vulnerabilities to waste, fraud, abuse, and mismanagement. This effort,
  which was supported by the Senate Committee on Government Affairs and
  the House Committee on Government Reform, brought a much needed focus on
  problems that were costing the government billions of dollars. We
  identified inventory management as high risk in our 1992, 1995, 1997,
  and 1999 high-risk reports because of the high levels of inventory in
  excess of current needs and the lack of adequate systems for determining
  inventory requirements.
/Footnote3/-^Defense Inventory: Status of Inventory and Purchases and
  Their Relationship to Current Needs (GAO/NSIAD-99-60, Apr. 16, 1999).

SCOPE AND METHODOLOGY
=====================

We analyzed September 30, 1997, inventory stratification reports, which
match on-hand and due-in inventory to requirements, for overall data
regarding Air Force secondary inventory purchases. We did not validate the
Air Force's automated inventory database; however, we did note database
discrepancies during our review of documents and discussions with item
managers. In collecting data on individual sample items, we used the same
data the Air Force uses for inventory management, reporting, and budgeting
purposes.

We used the data to identify Air Force inventory items that had inventory
on contract or on purchase request that exceeded then-current
requirements. We identified 1,560 items that had $384.1 million of
inventory on contract that exceeded needs. We focused our efforts on items
that were on contract because they represented the bulk of the inventory
being purchased that exceeded requirements.

To determine the adequacy of the Air Force process for canceling purchases
that exceed current operating requirements, we judgmentally selected 160
items with about $162.4 million of inventory on contract in excess of
current operating requirements (80 items with $46.4 million on contract
managed at the Air Force Air Logistics Center, Ogden, Utah;
70 items with $68.7 million on contract managed at the Air Force Air
Logistics Center, Oklahoma City, Oklahoma; and 10 items with $47.3 million
on contract managed at the Air Force Air Logistics Center, San Antonio,
Texas). Of the 160 items, 95 were repairable items and 65 were consumable
items. We selected items that had the highest values and quantities of
inventory on order in excess of needs, as well as a cross section of the
remaining items.

For the items, we analyzed data from the September 1997 inventory
stratification reports and information and documents from item managers on
requirement computations and efforts to cancel contracts that exceeded
requirements. We used the information and documents as a basis for follow-
up questions and discussions with item managers. We also met with other
Air Force officials, as needed, to discuss various subjects and concepts
relevant to overall Air Force inventory management. We valued inventory
items at the latest acquisition cost.

We performed our review from May 1998 through September 1999 in accordance
with generally accepted government auditing standards.

COMMENTS FROM THE DEPARTMENT OF DEFENSE
=======================================

*****************

*****************

*****************

*****************

*****************

*****************

RELATED GAO PRODUCTS
====================

Defense Inventory: Management of Repair Parts Common to More Than One
Military Service Can Be Improved (GAO/NSIAD-00-21, Oct. 20, 1999).

Defense Inventory: Status of Inventory and Purchases and Their
Relationship to Current Needs (GAO/NSIAD-99-60, Apr. 16, 1999).

Defense Inventory: DOD Could Improve Total Asset Visibility Initiative
With Results Act Framework (GAO/NSIAD-99-40, Apr. 12, 1999).

Defense Inventory: Navy's Procedures for Controlling In-Transit Items Are
Not Being Followed (GAO/NSIAD-99-61, Mar. 31, 1999).

Major Management Challenges and Program Risks: Department of Defense
(GAO/OCG-99-4, Jan. 1999).

High Risk Series: An Update (GAO/HR-99-1, Jan. 1999).

Inventory Management: More Information Needed to Assess DLA's Best
Practices Initiatives (GAO/NSIAD-98-218, Sept. 2, 1998).

Navy Inventory Management: Improvements Needed to Prevent Excess Purchases
(GAO/NSIAD-98-86, Apr. 30, 1998).

Inventory Management: DOD Can Build on Progress by Using Best Practices
for Reparable Parts (GAO/NSIAD-98-97, Feb. 27, 1998).

Defense Inventory: Inadequate Controls Over Air Force Suspended Stocks
(GAO/NSIAD-98-29, Dec. 22, 1997).

Defense Logistics: Much of the Inventory Exceeds Current Needs (GAO/NSIAD-
97-71, Feb. 28, 1997).

Defense Inventory: Spare and Repair Parts Inventory Costs Can Be Reduced
(GAO/NSIAD-97-47, Jan. 17, 1997).

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