Defense Inventory: Changes in DOD's Inventory, 1989-93 (Letter Report,
08/17/94, GAO/NSIAD-94-235).

The Defense Department (DOD) reports that the nominal value of the
secondary item inventory decreased by nearly $32 billion between fiscal
years 1989-93. However, after adjusting DOD's secondary inventory for
accounting changes and valuing it all at the latest acquisition cost,
GAO estimates that the total inventory decreased by about $11 billion
during that period.  The value of items in the potential
reutilization/disposal category rose by $7 billion. However, by
revaluing the latest acquisition values of DOD's inventory to reflect
needed repair costs and scrap values of potential reutilization/disposal
stock, GAO found that inventory values decreased by $15 billion between
fiscal years 1989-93 and potential reutilization stocks increased by
less than $200 million. Actual obligations for secondary item inventory
were $35.6 billion in fiscal year 1991, $27.9 billion in fiscal year
1992, and $24.7 billion in fiscal year 1993.  According to DOD, the
fiscal year 1991 amount was higher than subsequent years because of high
fuel costs and funding for Operation Desert Storm. Current budget
estimates for secondary inventory for fiscal years 1994 and 1995 are
about $25 million for each year. Actual and estimated Defense Business
Operations Fund obligational authority for purchasing secondary
inventory items is more than $19 billion for fiscal years 1993, 1994,
and 1995. DOD uses secondary item inventory to support military forces,
including military personnel, fighter aircraft, and ships.  These forces
have all decreased since fiscal year 1991 and are projected to continue
decreasing through fiscal year 1995.

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

 REPORTNUM:  NSIAD-94-235
     TITLE:  Defense Inventory: Changes in DOD's Inventory, 1989-93
      DATE:  08/17/94
   SUBJECT:  Military inventories
             Inventory control systems
             Military cost control
             Property and supply management
             Defense procurement
             Surplus property
             Budget obligations
             Future budget projections
             Military appropriations
IDENTIFIER:  Defense Business Operations Fund
             Desert Storm
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Oversight of Government
Management, Committee on Governmental Affairs, U.S.  Senate

August 1994

DEFENSE INVENTORY - CHANGES IN
DOD'S INVENTORY, 1989-93

GAO/NSIAD-94-235

Defense Inventory


Abbreviations
=============================================================== ABBREV

  DBOF - Defense Business Operations Fund
  DOD - Department of Defense

Letter
=============================================================== LETTER


B-257881

August 17, 1994

The Honorable Carl Levin
Chairman, Subcommittee on Oversight
 of Government Management
Committee on Governmental Affairs
United States Senate

Dear Mr.  Chairman: 

This report concludes our response to your request that we provide
information on changes in (1) the Department of Defense's (DOD)
secondary item inventory since fiscal year 1989 and (2) inventory
funding.  In February 1994,\1 we provided you with information on
inventory data for fiscal years 1989 to 1992 and inventory budget
figures for fiscal years 1992 to 1994.  This report provides
information on fiscal year 1993 inventory data and updated inventory
budget figures, including figures for fiscal
year 1995.  As requested, we also provided selected information on
military force levels for fiscal years 1991 through 1995. 


--------------------
\1 Defense Inventory:  Changes in DOD's Inventory Reporting, 1989-92,
(GAO/NSIAD-94-112, Feb.  10, 1994). 


   BACKGROUND
------------------------------------------------------------ Letter :1

DOD maintains stocks of spare and repair parts, clothing, medical
supplies, and other support items that are referred to as secondary
inventory items.  DOD reports the amount of its secondary item
inventory annually in its Supply System Inventory Report.  In the
report, DOD also identifies the amount of inventory that has the
potential for reuse by other DOD components or government agencies or
that may be disposed of through sale to the public.  This category of
inventory is known as potential reutilization/disposal stock.  Before
fiscal year 1991, DOD referred to it as potential DOD excess
inventory. 

The Supply System Inventory Report shows the value of inventory as of
the end of each fiscal year.  In this sense, it provides a "snapshot"
of on-hand inventory levels.  The report does not show inventory
changes such as purchases, issues, and disposals.  While our prior
work has shown accuracy problems in the systems providing data for
this report, it is the best data available on DOD-reported inventory
values. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

According to DOD's Supply System Inventory Reports, the nominal value
of the secondary item inventory decreased $31.9 billion between
fiscal years 1989 and 1993, from $109.4 billion to $77.5 billion. 
However, because of accounting changes that have taken place since
1989, these inventory values are not comparable.\2 After adjusting
DOD's secondary inventory for the changes and valuing it all at the
latest acquisition cost, we estimate that the total inventory
decreased by $11.2 billion between fiscal years 1989 and 1993.  We
also used the acquisition cost to estimate that the value of items in
the potential reutilization/disposal category increased by $7
billion. 

However, by revaluing the latest acquisition value of DOD's inventory
to reflect needed repair costs and scrap values of potential
reutilization/disposal stock, we found that inventory values
decreased by $15 billion between fiscal years 1989 and 1993 and
potential reutilization/disposal stocks increased by less than $200
million.  Appendixes I through IV update inventory information in our
February 1994 report. 

Funds are appropriated to the military services to purchase secondary
inventory items from the Defense Business Operations Fund (DBOF) and
non-DBOF sources.  Supply managers are then responsible for obtaining
the items from suppliers.  Actual obligations for secondary item
inventory were $35.6 billion in fiscal year 1991, $27.9 billion in
fiscal year 1992, and $24.7 billion in fiscal year 1993.  According
to a DOD official, the fiscal
year 1991 amount was higher than subsequent years because of high
fuel costs and funding for Operation Desert Storm.\3 Current budget
estimates for secondary inventory for fiscal years 1994 and 1995 are
about $25 billion for each year.  Appendixes V and VI show the
secondary inventory funding levels for fiscal years 1991 through
1995. 

Appendix VII shows that actual and estimated DBOF obligational
authority for purchasing secondary inventory items is more than $19
billion for fiscal years 1993, 1994, and 1995. 

DOD uses secondary item inventory to support military forces such as
military personnel, Army divisions, attack and fighter aircraft, and
ships.  These forces have all decreased since fiscal year 1991 and
are projected to continue decreasing through fiscal year 1995, as
shown in appendixes VIII through XI. 


--------------------
\2 Recognizing that the reported figures were not comparable, DOD
included in its September 1993 Supply System Inventory Report tables
comparing the reported inventory amounts to amounts revalued using
the latest acquisition cost. 

\3 Allied contributions were sufficient to cover most of the
incremental cost of Operation Desert Storm. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

We used DOD's Supply System Inventory Reports to determine the value
of the secondary item inventory as reported by DOD.  We took
accounting changes and reporting inaccuracies into account to
estimate the latest acquisition value of both the total inventory and
the potential reutilization/disposal stock and to estimate the effect
of changes in inventory valuation methods.  We used DOD budget
justification documents, the budgets for the U.S.  government, and
other budget documents to update the information on inventory
spending levels.  The information on military forces was taken from
DOD's January 1994 Annual Report to the President and the Congress. 

We performed our work between May and July 1994 in accordance with
generally accepted government accounting standards.  We did not
obtain written DOD comments on this report.  However, we discussed
the results of our work with DOD officials from the Office of the
Comptroller and the Office of Material Resource Management Policy and
included their comments where appropriate. 


---------------------------------------------------------- Letter :3.1

We are sending copies of this report to the Secretaries of Defense,
the Army, the Navy, and the Air Force; the Directors of the Defense
Logistics Agency and the Office of Management and Budget; and other
interested parties.  We will also make copies available to others
upon request. 

Please contact me at (202) 512-8412 if you or your staff have any
questions concerning this report.  The major contributors to this
report were John Klotz, Assistant Director, and Louis Modliszewski,
Evaluator. 

Sincerely yours,

Donna M.  Heivilin
Director, Defense Management
 and NASA Issues


VALUE OF SECONDARY ITEM INVENTORY,
AS REPORTED BY DOD (FISCAL YEARS
1989-93)
=========================================================== Appendix I

                    (Dollars in billions)

                                                DOD-reported
                                                    value of
                               DOD-reported        potential
                             value of total   reutilization/
Fiscal year                       inventory   disposal stock
---------------------------  --------------  ---------------
1989                                 $109.4            $10.1
1990                                  101.7              8.1
1991                                   88.1              0.2
1992                                   80.2              0.3
1993                                   77.5              0.3
Overall change                      $(31.9)           $(9.8)
------------------------------------------------------------
Note:  Parentheses indicate a decrease. 


ACQUISITION VALUE OF INVENTORY,
ESTIMATED BY GAO (FISCAL YEARS
1989-93)
========================================================== Appendix II

                    (Dollars in billions)

                                                 Acquisition
                                Acquisition         value of
                               value of the        potential
                                      total   reutilization/
Fiscal year                       inventory   disposal stock
---------------------------  --------------  ---------------
1989                                 $108.0            $ 7.0
1990                                  106.8              8.0
1991                                  103.6              9.4
1992                                  100.4             14.0
1993                                   96.8             14.0
Overall change                      $(11.2)            $ 7.0
------------------------------------------------------------
Note:  Parentheses indicate a decrease. 


TOTAL INVENTORY REVALUED TO
REFLECT REPAIR COSTS AND SCRAP
VALUES, AS ESTIMATED BY GAO
(FISCAL YEARS 1989-93)
========================================================= Appendix III

                    (Dollars in billions)

                            Inventory
                                   at
                           acquisitio  Revaluatio   Revalued
Fiscal year                   n value           n  inventory
-------------------------  ----------  ----------  ---------
1989                           $108.0     $(15.6)    $92.5\a
1990                            106.8      (15.1)       91.7
1991                            103.6      (15.4)       88.1
1992                            100.4      (20.2)       80.2
1993                             96.8      (19.3)       77.5
Overall change                $(11.2)                $(15.0)
------------------------------------------------------------
Note:  Parentheses indicate a decrease. 

\a The actual figure is $92.46 billion and has been rounded to $92.5
billion. 


POTENTIAL REUTILIZATION/DISPOSAL
STOCK REVALUED TO REFLECT SCRAP
PRICES, AS ESTIMATED BY GAO
(FISCAL YEARS 1989-93)
========================================================== Appendix IV

                    (Dollars in billions)

                        Inventory at
                         acquisition  Revaluatio    Revalued
Fiscal year                    value           n   inventory
----------------------  ------------  ----------  ----------
1989                           $ 7.0     $ (6.8)      $0.154
1990                             8.0       (7.8)       0.175
1991                             9.4       (9.2)       0.207
1992                            14.0      (13.7)       0.321
1993                            14.0      (13.7)       0.286
Overall change                 $ 7.0                  $0.132
------------------------------------------------------------
Note:  Parentheses indicate a decrease. 


OBLIGATIONS FOR SECONDARY ITEM
INVENTORY (FISCAL YEARS 1991-95)
=========================================================== Appendix V

                              (Dollars in billions)



                          Actual      Actual      Actual    Estimate    Estimate
--------------------  ----------  ----------  ----------  ----------  ----------
Operation and
 maintenance
Supplies, materials,     $24.514     $17.737     $17.071    $16.943\     $17.337
 equipment, and
 other purchases
DBOF fuel                  2.338       0.820       0.741       0.883       0.664
DBOF materials and         3.563       3.566       3.602       4.155       3.867
 supplies
Procurement                2.423       2.489       2.391       2.096       2.139
Personnel                  0.555       0.461       0.496       0.518       0.535
Research and               0.332       0.319       0.306       0.334       0.316
 development
Family housing             0.029       0.027       0.033       0.066       0.066
Military                   0.002       0.003       0.002       0.002       0.002
 construction
DBOF                       1.861       2.441       0.017       0.012       0.005
================================================================================
Total\a                $35.616\b     $27.862     $24.658     $25.008     $24.931
--------------------------------------------------------------------------------
Note:  The amounts for fiscal years 1991 through 1993 are actual
obligations and the amounts for fiscal years 1994 and 1995 are fiscal
year 1995 estimates. 

\a Totals may not add due to rounding. 

\b The fiscal year 1991 amount is higher than subsequent year amounts
because of higher fuel costs and because of Desert Storm funding. 


ACTUAL AND ESTIMATED OBLIGATIONS
FOR SECONDARY ITEM INVENTORY FOR
FISCAL YEARS 1991-95
========================================================== Appendix VI



   (See figure in printed
   edition.)


ACTUAL AND ESTIMATED DBOF
OBLIGATIONAL AUTHORITY FOR
SECONDARY INVENTORY ITEMS (FISCAL
YEARS 1993-95)
========================================================= Appendix VII

                    (Dollars in billions)



                              Actual    Estimate    Estimate
------------------------  ----------  ----------  ----------
Inventory purchases            $15.3       $15.6       $15.5
Cost of operations               4.2         4.1         3.7
============================================================
Total                          $19.5       $19.7       $19.2
------------------------------------------------------------
Source:  Department of Defense. 


ACTIVE MILITARY PERSONNEL (FISCAL
YEARS 1991-95)
======================================================== Appendix VIII



   (See figure in printed
   edition.)

Source:  DOD's Annual Report to the President and the Congress,
January 1994. 


ACTIVE ARMY DIVISIONS (FISCAL
YEARS 1991-95)
========================================================== Appendix IX



   (See figure in printed
   edition.)

Source:  DOD's Annual Report to the President and the Congress,
January 1994. 


ACTIVE NAVY, MARINE CORPS AND AIR
FORCE ATTACK AND FIGHTER AIRCRAFT
(FISCAL YEARS 1991-95)
=========================================================== Appendix X



   (See figure in printed
   edition.)

Source:  DOD's Annual Report to the President and the Congress,
January 1994. 


NAVY SHIP BATTLE FORCES (FISCAL
YEARS 1991-95)
========================================================== Appendix XI



   (See figure in printed
   edition.)

Source:  DOD's Annual Report to the President and the Congress,
January 1994.