Defense Inventory: Opportunities to Reduce Warehouse Space (Letter
Report, 05/24/95, GAO/NSIAD-95-64).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) inventory management system, focusing on the: (1) size
and space occupied by DOD secondary inventory; (2) cost of storing this
inventory; and (3) efforts taken to reduce DOD secondary inventory.

GAO found that: (1) DOD secondary inventory occupies about 218.8 million
cubic feet; (2) 60 percent of the secondary inventory is not needed to
satisfy current war reserve or operating requirements, however, many
items may have potential future use; (3) the inventory not currently
needed consists of 2.2 million different types of items; (4) DOD has
more than a 20-year supply for some items, but many others have
deteriorated or become obsolete; (5) DOD should get rid of unneeded
items that occupy space and exceed more than 20 years of supply; (6)
although DOD has begun programs to reduce the secondary inventory, its
efforts have been partially offset by decreasing inventory demands and
increasing returns of materials by deactivated forces; (7) DOD disposed
of secondary inventory items valued at $43 billion during the past 3
fiscal years; and (8) the Defense Logistics Agency is implementing a
pricing procedure that should increase inventory managers' incentives
for disposing of unneeded items.

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

 REPORTNUM:  NSIAD-95-64
     TITLE:  Defense Inventory: Opportunities to Reduce Warehouse Space
      DATE:  05/24/95
   SUBJECT:  Military inventories
             Inventory control systems
             Warehouse facilities
             Defense cost control
             Spare parts
             Combat readiness
             Logistics
             Surplus property
             Property and supply management
IDENTIFIER:  Norfolk (VA)
             Warner Robins (GA)
             Columbus (OH)
             San Antonio (TX)
             DLA Consumable Item Transfer Program
             Defense Business Operations Fund
             
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Cover
================================================================ COVER


Report to Congressional Committees

May 1995

DEFENSE INVENTORY - OPPORTUNITIES
TO REDUCE WAREHOUSE SPACE

GAO/NSIAD-95-64

Defense Inventory


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

  DLA - Defense Logistics Agency
  DOD - Department of Defense

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


B-259493

May 24, 1995

The Honorable Herbert H.  Bateman
Chairman
The Honorable Norman Sisisky
Ranking Minority Member
The Honorable John R.  Kasich
Subcommittee on Military Readiness
Committee on National Security
House of Representatives

The Department of Defense (DOD) is the largest inventory manager in
the world, maintaining about 600 million cubic feet of warehouse
space.  About two-thirds of the space is occupied by secondary
inventory--spare and repair parts, clothing, medical supplies, and
other items that DOD uses to support its operating forces. 

Concerned that some secondary inventory was being stored longer than
was reasonable,\1 the former Chairman and Ranking Minority Member
requested that we review DOD's management of it.  Our objectives were
to determine (1) the size of DOD's secondary inventory, (2) the
amount of space occupied by secondary inventory that DOD does not
need to satisfy current war reserve and operating requirements, (3)
the cost of storing this inventory, and (4) the time it will take to
use it.  In addition, we reviewed DOD's efforts to reduce secondary
inventory. 


--------------------
\1 A list of related GAO products appears as the last page of this
report. 


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

The Defense Logistics Agency (DLA), service headquarters, and
inventory control points are responsible for managing secondary
inventory.  Through their respective item managers, DLA and service
inventory control points ensure that needed items are available to
the operating forces when and where needed.  An item manager's tasks
include determining when to repair or purchase items, positioning
them at depots to meet demands, and disposing of unneeded items.  The
items managed by DLA and service item managers are stored at depots
operated and managed by DLA.  Depot managers have no authority over
what items are stored or whether they should be disposed of.  These
decisions are made by the item managers. 

The current DLA distribution depot system consists of two
distribution region headquarters.  They are located at New
Cumberland, Pennsylvania, and Stockton, California.  Each of the 27\2
distribution depots report to one of these regions.  For fiscal year
1994, total DOD distribution costs amounted to about $1.5 billion. 
Figure 1 shows the locations of these depots. 

   Figure 1:  Locations of DLA
   Distribution Depots

   (See figure in printed
   edition.)

When inventory is managed efficiently, enough is stored to meet
wartime and peacetime requirements and unnecessary storage costs are
avoided.  When the total on-hand and due-in inventory falls to or
below a certain level--called the reorder point--inventory control
points place an order for additional inventory.  The reorder point
includes items needed to satisfy war reserve requirements and items
to be issued during the lead time (the time between when an order is
placed and when it is received).  In addition, a safety level of
inventory is kept on hand in case of minor interruptions in the
resupply process or unpredictable fluctuations in demand.  By placing
orders when the reorder point is reached, item managers ensure that
inventory arrives before stock runs out.  Generally, the amount of
inventory ordered is based on a formula that DOD calls an economic
order quantity (also known as a replenishment formula). 


--------------------
\2 Four depots--Charleston, Pensacola, Oakland, and Tooele--have been
designated for closure under the Base Closure and Realignment Act. 
An additional four depots have been recommended for closure by the
Secretary of Defense.  These include Letterkenny, Memphis, Ogden, and
Red River.  The 27 depot total counts Tracy and Sharpe as one depot
(San Juaquin), and New Cumberland and Mechanicsburg as one depot
(Susquehanna). 


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

Over the past several years, DOD has made sizable reductions to the
number of storage depots and to the amount of inventory stored in
them.  DOD has initiatives to make further reductions and we believe
opportunities exist to build on these initiatives.  There is
substantial inventory that may never be used and a careful review of
items most likely not to be used may reduce the number of items
stored as well as storage space.  Doing so is particularly important
as DOD considers ways to make its infrastructure more efficient. 
Also, previous pricing policies did not create an incentive for
inventory managers to dispose of unneeded items. 

Specifically, we analyzed DOD secondary inventory that had an
estimated volume of 218.8 million cubic feet.  Secondary inventory
items accounting for 130.4 million cubic feet, or 60 percent of the
218.8 million cubic feet, are not needed to satisfy current war
reserve and operating requirements.  However, many of these items may
have potential future use and should be retained. 

Further analysis shows the 130.4 million cubic feet of inventory
consists of 2.2 million different types of items identified by
individual stock numbers.  About 84,000 of these items, occupying
41.7 million cubic feet, had more than a 20-year supply.  Much of
this inventory will likely never be used.  Some items have become
obsolete as technology has advanced and the weapon systems they
support have been phased out; others have deteriorated to the point
that they are no longer usable.  DOD should focus on getting rid of
unneeded items that occupy a great deal of space and have more than
20 years of supply on hand. 

DOD has begun programs to reduce the secondary inventory level;
however, its efforts have been partially offset by decreasing
inventory demands and increasing returns of material by forces being
deactivated.  During the last 3 fiscal years, DOD disposed of
secondary inventory costing about $43 billion.  Further, DLA is
implementing a pricing procedure that should provide increased
incentives for disposing of items.  Specifically, beginning in fiscal
year 1996, DLA will charge inventory managers responsible for making
storage decisions $5.15 a square foot for the covered space their
items occupy. 


   OPPORTUNITIES EXIST TO REDUCE
   INVENTORY AND STORAGE SPACE
------------------------------------------------------------ Letter :3

According to DLA, DOD's secondary inventory occupies about 360
million cubic feet of storage space and has an actual volume of about
300 million cubic feet.\3 We obtained computerized inventory data
records from DLA and each of the military services and identified
secondary inventory items with a volume of 218.8 million cubic
feet.\4 Our figure differs from DLA's 300 million cubic feet because
approximately 12 percent of the items on the DLA and service data
tapes that we used did not have storage space data. 

To determine whether there are opportunities for reductions, we
analyzed DOD's secondary inventory as it relates to war reserve and
current operational needs and in terms of the years of supply that is
on hand on an item basis.  Using this data, we visited selected
storage activities to examine the condition and reasons for
continuing to store items that appeared to be no longer needed.  This
work showed that DOD has a substantial number of items that (1) have
over a 20-year supply beyond the levels needed to meet war reserve
and operational needs, (2) are for weapon systems no longer in use,
(3) are no longer usable, and (4) are not needed. 


--------------------
\3 The actual warehouse space is about 420 million cubic feet, which
includes operating space not occupied. 

\4 We obtained computerized records by components as they were
available during the period March 31, 1993, through August 31, 1994. 


      TOTAL INVENTORY BEING STORED
---------------------------------------------------------- Letter :3.1

Our analysis of DOD's September 30, 1993, Supply System Inventory
Report and inventory stratification reports indicates that $36.3
billion of the $77.5 billion secondary inventory that DOD reported
exceeded current war reserve and operating requirements.\5

On the basis of our analysis of computerized records, we determined
that about 2.2 million different items had a volume of 130.4 million
cubic feet.  A typical DOD warehouse is approximately 595 feet long
and 180 feet deep.  DLA officials said that it would take
approximately 205 warehouses to store the 130.4 million cubic feet of
inventory.  Figure 2 shows that inventory by DOD component. 

   Figure 2:  Cubic Feet of
   Inventory Not Needed to Satisfy
   Current War Reserve and
   Operating Requirements (by DOD
   component)

   (See figure in printed
   edition.)

DLA estimates that the holding costs for the 130 million cubic feet
are approximately $94 million per year, which is less than 1 percent
of the inventory value.  This is low when compared to industry
experience, which according to one study, ranges from 5 to 15
percent.  For purchase decisions, some inventory control points use a
percentage of the item's value, which can be as high as 18 to 22
percent of the value.  However, DOD believes that the holding costs
for items already on hand is considerably less than the 18 to 22
percent.  As discussed later, DOD has an effort underway to benchmark
its holding costs with private industry (see p.  17). 

The concern about unnecessary secondary inventory storage is not new. 
In 1992, we reported that storing unneeded secondary inventory would
prevent DLA from realizing savings from depot consolidations.\6 We
recommended that DLA reduce this inventory so that fewer depots would
be required. 


--------------------
\5 The $77.5 billion and the $36.3 billion includes inventory that
has been revalued to reflect the value of items that need to be
repaired and the scrap value of items to be disposed of.  We estimate
that if all the inventory were valued at its acquisition cost, the
values would be $96.8 billion and $48.4 billion, respectively. 

\6 Defense Inventory:  DOD Actions Needed to Ensure Benefits From
Supply Depot Consolidation Efforts (GAO/NSIAD-92-136, May 29, 1992). 


      SUBSTANTIAL AMOUNTS OF
      STORED INVENTORY EXCEED 20
      YEARS OF SUPPLY
---------------------------------------------------------- Letter :3.2

To estimate the years of supply for each of the types of items, we
divided the on-hand inventory by past or projected demand data.\7 We
had demand data for about 488,000 of the 2.2 million items that were
not needed to satisfy current war reserves or operating requirements. 
Those items occupied about 73 percent (95.7 million cubic feet) of
the 130.4 million cubic feet of space; 84,000 of the items (41.7
million cubic feet) had more than a 20-year supply.  The 1.7 million
items that did not have demand data\8 occupied 34.7 million cubic
feet of space.  In figure 3, we show the years of supply by service. 
Figure 4 shows the space occupied by these items. 

   Figure 3:  Years of Supply for
   Secondary Inventory Not Needed
   to Satisfy Current War Reserves
   and Operating Requirements

   (See figure in printed
   edition.)

   Figure 4:  Years of Supply for
   Secondary Inventory Not Needed
   to Satisfy Current War Reserves
   and Operating Requirements
   (cubic feet)

   (See figure in printed
   edition.)

To identify items that will likely never be used, we (1) used DLA and
service databases to determine the amounts of stock on hand, (2)
discussed with item managers the likelihood of these items being used
and plans to dispose of them, and (3) visited supply depots to
inspect items that had been in storage for an extensive period of
time with little or no demand.  Some examples of the items we
identified follow. 


--------------------
\7 Since demand projections were not available for DLA items, we used
demands during the past year. 

\8 We are not certain why there was no demand for these items. 
However, DOD does stock certain items that do not have past or
projected demands because of their essentiality to certain weapon
systems.  All 1.7 million items had stock on hand in excess of those
requirements needed to meet current operating requirements and war
reserves. 


      ITEMS THAT HAVE BEEN IN
      STORAGE FOR YEARS
---------------------------------------------------------- Letter :3.3

At the Fleet Industrial Supply Center, Norfolk, Virginia, three pump
rotors (costing about $22,000 each) for a ship water pump have
remained in storage since 1970.  Recently, these items were
transferred to DLA for management under the Consumable Item Transfer
Program.  Under this program, DLA assumes management responsibility
for selected consumable items used by more than one service.  Because
DLA now manages these items, they will not be considered for disposal
for at least 2 years due to DLA's disposal policy. 

At the same location, 10 bearings ($5,590 each) for a gear assembly
on an aircraft carrier had been in storage since 1986.  After our
discussions with the item manager, the Navy disposed of all 10 of
these bearings.  Figure 5 shows the bearings in storage. 

   Figure 5:  Bearings Stored at
   Fleet Industrial Supply Center,
   Norfolk, Virginia

   (See figure in printed
   edition.)

At Warner Robins Air Logistics Center, Warner Robins, Georgia, 79
modular radio transmitters belonging to the Army and valued at
approximately $16,000 were in storage.  Although 69 of these items
are excess, the Air Force had not taken any action to determine
whether they were needed by the Army.  Air Force officials told us
that they planned to contact the Army for disposal authority.  Figure
6 shows the modular radio transmitters in storage. 

   Figure 6:  Modular Radio
   Transmitters Stored at Warner
   Robins Air Logistics Center,
   Warner Robins, Georgia

   (See figure in printed
   edition.)

At the Defense Construction Supply Center, Columbus, Ohio, we were
informed that 65 housings for air cylinders used on a electric
generating unit have had no demand in years, and no demand is
forecasted for the coming year.  The item manager indicated that it
is unlikely that all the housings will be used, but they cannot be
disposed of until additional information is available concerning
possible uses for them. 


      ITEMS RETAINED FOR WEAPON
      SYSTEMS NO LONGER IN USE
---------------------------------------------------------- Letter :3.4

Some items have become obsolete as technology has advanced and weapon
systems and equipment have been phased out of the inventory.  At the
Fleet Industrial Supply Center in Norfolk, Virginia, we located two
electric pumps valued at approximately $90,700 (about $45,350 each). 
Though these pumps were for destroyer class ships no longer in the
U.S.  inventory, they remained in storage.  When we questioned this
retention decision, the Navy item manager informed us that the pumps
were being retained for potential foreign military sales.  Despite
the absence of U.S. 

military users, responsibility for their management was transferred
to DLA under the Consumable Item Transfer Program.  Thus, the
electric pumps will be stored for at least 2 years.  Figure 7 shows
them in storage. 

   Figure 7:  Electric Pumps
   Stored at Fleet Industrial
   Supply Center, Norfolk,
   Virginia

   (See figure in printed
   edition.)

DLA also assumed management responsibility for four large
distillation units for which there were no known users.  The items
(costing $72,140 each) have been in storage since 1968 and were used
to distill water on Navy ships.  According to the Navy, the decision
to retain the items was predicated on their high cost.  Because of
this cost, the Navy chose to research the possible uses of these
items before disposing of them.  Like other items transferred to DLA,
they will not be considered for disposal for at least 2 years. 
Figure 8 shows the distillation units stored at the Fleet Industrial
Supply Center, Norfolk, Virginia. 

   Figure 8:  Distillation Units
   Stored at Fleet Industrial
   Supply Center, Norfolk,
   Virginia

   (See figure in printed
   edition.)

At Warner Robins Air Logistics Center, Warner Robins, Georgia,
4,044 missile control systems (a total cost of approximately $21
million) are being phased out of the inventory.  These items have
been in storage for many years with no demands.  However, subsequent
to our visit, the item manager received approval to dispose of them. 

Also, at Warner Robins Air Logistics Center, three equalizer
assemblies costing approximately $75,000 had been in storage for at
least 3 years.  The assemblies were part of the F-4 aircraft
reconnaissance system.  Though the items were obsolete to DOD, they
were being retained for possible foreign military sales.  Figure 9
shows the assemblies in storage. 

   Figure 9:  Equalizer Assemblies
   Stored at Warner Robins Air
   Logistics Center, Warner
   Robins, Georgia

   (See figure in printed
   edition.)


      ITEMS THAT ARE NO LONGER
      USABLE
---------------------------------------------------------- Letter :3.5

Many items have deteriorated to the point that they are no longer
usable.  For example, at the Fleet Industrial Supply Center, in
Norfolk, Virginia, a hoisting antenna (which cost about $48,500) had
been stored outside so long that grass and rust covered it.  The Navy
item manager informed us that the item is no longer usable and will
be disposed of.  Figure 10 shows the antenna in outside storage. 

   Figure 10:  Hoisting Antenna
   Stored at Fleet Industrial
   Supply Center, Norfolk,
   Virginia

   (See figure in printed
   edition.)

Also, at the Fleet Industrial Supply Center in Norfolk, Virginia,
13 modernization kits for the P-3C aircraft have been in storage
since 1978.  These kits (which cost about $4,480 each, for a total
cost of approximately $58,240) are obsolete.  During subsequent
discussions with Navy officials, they indicated that these items will
be disposed of. 

At the Defense Supply Depot, New Cumberland, Pennsylvania, seven
obsolete Army clutch assemblies were in storage.  They cost
approximately $5,334 and were previously used on the M125 10-ton
Prime Mover.  As a result of our visit, the Army decided to dispose
of all seven items.  In addition, at the San Antonio Air Logistics
Center in San Antonio, Texas, two maintenance antennae valued at
approximately $230,000 each had been in storage for at least 5 years. 
Though these items were in need of repair, both were being retained,
and the Air Force has no plans to dispose of them.  The item manager
informed us that the items would have to be researched to determine
any possible users before any disposal action could be taken, but as
of November 30, 1994, the item manager had not initiated this action. 
Figure 11 shows the maintenance antennae in storage. 

   Figure 11:  Maintenance
   Antennae Stored at the San
   Antonio Air Logistics Center,
   San Antonio, Texas

   (See figure in printed
   edition.)


      NAVY ITEMS THAT WERE NOT
      NEEDED IN 1990 BUT ARE STILL
      BEING STORED
---------------------------------------------------------- Letter :3.6

In 1990, we reported on 57 Navy items that we identified as
candidates for disposal that had little or no potential for future
use.\9 During that review, we sampled 100 items that had unneeded
inventory and identified 57 items that had one or more of the
following characteristics:  (1) no active users, (2) no demands in
the previous 2 years, and (3) no demands forecasted. 

When we followed up on these items in 1994, we found that of the 57
items that were on hand in 1990, 32 were still in the inventory.  The
Navy still manages 26 of these items, which have approximately $2.7
million in stock exceeding the reorder point and replenishment
formula.  The other six had been transferred to DLA.  Six of the
items still under Navy management had demand forecasted for the
following year.  Four of these had excessive stock on hand, ranging
from 6 to more than 20 years of supply. 


--------------------
\9 Growth in Ship and Submarine Parts (GAO/NSIAD-90-111, Mar.6,
1990). 


   DOD HAS MADE PROGRESS REDUCING
   ITS INVENTORY
------------------------------------------------------------ Letter :4

DOD has implemented several programs--some DOD-wide and others
service specific--to reduce secondary inventory.  Over the last 3
years, DOD disposals have amounted to about $43.4 billion.\10 (See
table 1.)



                           Table 1
           
           Value of Secondary Inventory Disposals,
                     Fiscal Years 1992-94

                    (Dollars in billions)


Organization                    1992    1993  1994\a   Total
----------------------------  ------  ------  ------  ------
Air Force                       $4.3   $10.8  $5.0\b   $20.1
Army                           1.2\c     3.8     2.4     7.4
DLA                              0.5     1.9   1.0\d     3.4
Navy                             4.4     3.2     4.9    12.5
============================================================
Total                          $10.4   $19.7   $13.3   $43.4
------------------------------------------------------------
\a As of June 1994. 

\b Estimated by Air Force. 

\c Includes three of the Army's five inventory control points. 

\d Estimated by DLA. 


--------------------
\10 The $43.4 billion represents acquisition cost.  We estimate that
based on DOD's method for determining the scrap value of material to
be disposed of, this material would have been about $914 million, or
about 2 percent of its acquisition value, at the time of disposal. 


      PRICING INCENTIVES DID NOT
      EXIST TO INCREASE DISPOSALS
---------------------------------------------------------- Letter :4.1

One reason more progress has not been made is because incentive for
the disposal of secondary items was lacking.  In 1992, DOD
consolidated its industrial and stock funds into the Defense Business
Operations Fund.  DOD was partly motivated to consolidate the funds
in order to improve the visibility of storage costs.  However,
neither the inventory control points nor the weapon system program
managers have an incentive to reduce storage costs.  The service unit
(customer) that requests and uses the inventory pays for the cost of
storage because cost is included in the price charged the customer. 

For fiscal year 1996, DLA plans to begin charging inventory control
points for storing the material they manage.  Although rates will
vary by type of commodity and storage, the rate for covered storage
(which applies to most secondary items) will be $5.15 a square foot. 
This charge should be an incentive for item managers to dispose of
material that is not needed. 

In addition, DOD has initiated a study to determine its inventory
holding costs.  As part of this study, DOD will compare its holding
costs with those of private industry.  In commenting on a draft of
this report, DOD said that it had no preconceptions as to what
impact, if any, the project would have on retention or disposal
decisions.  The project is scheduled for completion in the spring of
1995. 

Furthermore, as manager of DOD's depot system, DOD and DLA have
developed strategic plans for reducing DOD's storage capacity as
secondary item inventories are reduced.  DLA officials told us that a
number of contributing factors, including Base Closure and
Realignment Commission actions and its own efforts, have resulted in
storage facilities being vacated and substantial reductions in
storage requirements during the past 2 fiscal years.  DLA projects
that DOD's secondary inventory will be reduced to approximately $54
billion by 2001 and that its total requirement for covered space will
be reduced to approximately 400 million cubic feet.  According to DLA
officials, these reductions take into account additional requirements
generated as a result of units returning secondary items from Europe,
as well as moving items currently stored outside into covered
storage. 


   RECOMMENDATION
------------------------------------------------------------ Letter :5

We believe that DOD's efforts are a good start and that continued
emphasis should be placed on getting rid of inventory that is not
needed.  Therefore, we recommend that the Secretary of Defense
develop a systematic approach for reviewing the secondary inventory
currently on hand.  The Secretary could begin by instructing
inventory control points and program managers to focus their
inventory reduction efforts on the material that occupies a great
deal of storage space and has more than 20 years of supply on hand. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :6

In commenting on a draft of this report (see app.  I), DOD said that
it generally agrees that inventories should be reduced and excess
storage capacity should be eliminated.  DOD partially agreed with our
findings and recommendations.  While DOD agrees that it holds
secondary inventory that will probably never be used and should be
disposed of, it does not agree with the criteria we used for
assessing the potential for reducing the amount of inventory it
currently holds. 

Our analysis focused on the stock that exceeded the war reserve and
current operating requirements.  We believe this is a logical
starting point and our report points out that we are not suggesting
that DOD dispose of all stock that exceeds that level.  Rather, we
point out that DOD should focus its reduction efforts on stock that
occupies a great deal of space and has more than 20 years of supply
on hand.  DOD expressed concern that the implication of using our
criteria would be that this material should be disposed of and the
related warehouse space eliminated.  It also points out that our
criteria are used for ordering stock, not for making decisions
concerning whether to retain it.  However, in its 1993 material
management regulation, DOD used this same criteria as the maximum
quantity of material to be maintained on hand or on order to sustain
current operations and core war reserves.  DOD stated that in
hindsight it would not order much of the stock it has on hand, but
wants to be careful not to dispose of any stock that might be needed
in the future. 

DOD stated that it might already have disposed of much of the
material we discuss in our report.  We acknowledge that some of this
material might have been disposed of while our review was on going. 
However, we do not believe that DOD had the opportunity to dispose of
most of this material.  We obtained the computerized records on which
we based our analysis from DLA and the services as they were
available.  The tapes for DLA, for example, were not obtained until
August 1994, and therefore, DLA would have had limited opportunity to
dispose of DLA material we identified. 

DOD partially concurred with our recommendation that DOD develop a
systematic approach for reducing inventories.  DOD emphasized that it
already has in place a systematic approach to reducing inventory and
is tracking its progress toward meeting established goals.  DOD
agreed that the number of storage locations should be reduced, but
stated that the depot system is already being downsized.  DOD
indicated that its requirement for covered storage space had been
reduced more than 180 million cubic feet, or 28 percent, between
September 1992 and September 1994. 

In the draft of this report submitted to DOD for comment, we included
a recommendation for the Secretary to consider the significant amount
of inventory that exceeds current requirements when determining the
number of depots to close or consolidate in the 1995 base closure and
realignment process.  Since the Secretary's recommendations to close
and realign bases have been made, we deleted this recommendation from
our final report.  We conducted our work between January 1993 and
September 1994 in accordance with generally accepted government
auditing standards.  (See description of our scope and methodology in
app.  II.)


---------------------------------------------------------- Letter :6.1

Unless you publicly announce this report's contents earlier, we plan
no further distribution of this report until 30 days after its issue
date.  At that time, we will send copies of this report to the
Chairmen, Senate Committee on Armed Services, Senate and House
Committees on Appropriations, and House Committee on National
Security; the Secretaries of Defense, the Air Force, the Army, and
the Navy; and the Directors of the Defense Logistics Agency and the
Office of Management and Budget.  We will also make copies available
to others upon request. 

If you have any questions, I may be reached at (202) 512-8412.  Major
contributors to this report are listed in appendix III. 

David R.  Warren, Director
Defense Management and NASA Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of Defense's (DOD)
letter dated March 23, 1995. 


   GAO COMMENTS
------------------------------------------------------------ Letter :7

1.  The points raised in DOD's transmittal letter are addressed in
the section of this report entitled agency comments and our
evaluation. 

2.  By using the criteria we selected for assessing DOD's use of
warehouse space, we do not believe that all the material we
identified as exceeding current war reserve and operating
requirements needs to be disposed of.  As we stated in our report,
many of these items may have potential future use and should be
retained. 

3.  We agree that a certain amount of uncertainty is associated with
projecting spare parts usage.  DOD has insurance items to account for
the fact that accidents, abnormal equipment or system failures, or
other unexpected demands occur.  The requirements for these items are
included in operating stocks that we excluded from our analyses. 

4.  We believe that DOD's comment supports our position.  Even after
disposing of excess stock, the supply system was able to satisfy
customer demand. 

5.  DOD commented that during hostilities, items (particularly
insurance items) with more than 100 years of supply can very quickly
become exhausted.  Our analysis considered only items with demand. 
Insurance items, because they had no demand, were excluded.  With
respect to the noninsurance items with more than 100 years of supply,
it is unlikely that all the quantities will be used.  We agree,
however, that DOD should focus not only on the number of years of
supply on hand, but also on the space that the items occupy. 

6.  DOD commented that the Defense Logistics Agency's (DLA) inventory
managers are authorized to dispose of stocks transferred to DLA by
other services sooner, with approval from the losing service. 
However, DLA's item managers informed us that they do not consider
disposing of such material for 2 years. 

7.  We reported in August 1994\1 that DOD's reported inventory values
decreased by $31.9 billion between fiscal years 1989 and 1993, from
$109.4 billion to $77.5 billion.  However, because of accounting
changes, the values were not comparable.  When the inventory was
valued on a comparable basis, we estimated that the total reduction
was $11.2 billion, not $31.9 billion.  We believe that there are
further opportunities for inventory reductions with appropriate
incentives. 

8.  We agree with DOD that, to date, the major incentive to reduce
inventory has been imposed externally by the Congress in the form of
budget reductions.  We believe that internal incentives, such as
DOD's future plan to charge organizations that cause inventory to be
stored for storage costs, should be effective in reducing unneeded
inventory. 

9.  We believe that DOD is capable of further inventory reductions. 
The statement that inventory disposals have been insufficient to
offset increases in material returns is from DOD officials.  Since
DOD took exception with the statement, we removed it from the report. 

10.  DOD stated that it holds inventory that will likely never be
used.  In view of the number of items with more than 20 years of
supply, we believe that it is unlikely that much of this inventory
would have to be repurchased if DOD systematically reviewed and
disposed of material for which it forecasted no need. 


--------------------
\1 Defense Inventory:  Changes in DOD's Inventory, 1989-93,
(GAO/NSIAD-94-235, Aug.  17, 1994). 


SCOPE AND METHODOLOGY
========================================================== Appendix II

We visited the following sites to review policies,\1 procedures, and
documents related to retaining and disposing of inventory: 

  Headquarters installations: 

the Office of the Deputy Under Secretary of Defense for Logistics;

the Army, the Navy, and the Air Force headquarters, Washington, D.C.;
and

the Defense Logisics Agency, Alexandria, Virginia.

  Inventory commands: 

the Army Material Command, Alexandria, Virginia;

the Naval Supply Systems Command, Washington, D.C.;

the Air Force Material Command, Wright-Patterson Air Force Base,
Ohio; and

the Defense Logistics Services Center, Battle Creek, Michigan.

  Inventory control points: 

Army--Tank-Automotive Command, Warren, Michigan;

Navy--Aviation Supply Office, Philadelphia, Pennsylvania and the
Ships Parts Control Center, Mechanicsburg, Pennsylvania;

Air Force--Ogden Air Logistics Center, Ogden, Utah; Oklahoma City Air
Logistics Center, Oklahoma City, Oklahoma; San Antonio Air Logistics
Center, San Antonio, Texas; and Warner Robins Air Logistics Center,
Warner Robins, Georgia; and

DLA--Defense Construction Supply Center, Columbus, Ohio.

  Supply depots: 

Naval Fleet Industrial Supply Center, Norfolk, Virginia;

the Air Logistics Centers at Tinker Air Force Base, Oklahoma; Warner
Robins Air Force Base, Georgia; Kelly Air Force Base, Texas; and Hill
Air Force Base, Utah; and

DOD Supply Depot, Columbus, Ohio. 

In conducting our work, we used the same computer files, records, and
reports that DOD uses to make stocking decisions for secondary items. 
We did not independently determine the reliability of these sources. 

  To determine the extent of inventory not needed to satisfy current
     war reserve and operating requirements, we analyzed computerized
     files of DLA and service inventories between March 31, 1993, and
     August 31, 1994.  Specifically, we compared, on an item-by-item
     basis, on-hand inventory needed to satisfy war reserve and
     current operating requirements to the total inventory that was
     on hand. 

  To determine why inventory was being retained and whether retention
     was justified, we selected a sample of approximately 150 line
     items from computerized inventory records for the inventory
     control points visited.  At the inventory control points, we
     reviewed inventory records and interviewed officials to identify
     the reasons for retaining inventory. 

  To determine the extent of space required to store items beyond the
     current war reserve and operating requirements, we matched DLA
     and service inventory files with the cube information DOD
     provided by national stock number.  Approximately 12 percent of
     the items analyzed had no cube data in the DLA or service
     computer records and were assigned a cube size of zero.  This
     reduced our calculation of the space occupied by secondary
     inventory.  When we visited the depots, we observed selected
     items to determine the accuracy of the cube data in DOD's
     databases and found this data to be relatively accurate. 

  To compute years of supply for the Army, the Navy, and the Air
     Force, we used DOD's computerized inventory records to
     determine, on an item-by-item basis, the amount of inventory
     that was not needed to satisfy war reserve and operating
     requirements.  We divided that inventory by projected annual
     demands to determine how many years it would take to use the
     inventory.  By excluding items that did not have projected
     demands from this analysis, we were able to avoid computing
     years of supply for insurance items that had no projected
     demand.  Because projected demands were not available for DLA
     items, we used historical demands in lieu of projected demands
     to compute years of supply.  We excluded items that had no
     historical demand data from this analysis. 


--------------------
\1 We excluded the Marine Corps from our review because of the small
number of items it stores.  On September 30, 1993, the Marine Corps
inventory was valued at $693 million, or 0.9 percent of the total DOD
inventory. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:1

John J.  Klotz
Louis V.  Modliszewski
Harry E.  Taylor, Jr.
Tracy Banks
Sandra Epps
Jeanett Reid
Thomas Bloom
Dirk Schumacher

RELATED GAO PRODUCTS

Organizational Culture:  Use of Training to Help Change DOD Inventory
Management Culture (GAO/NSIAD-94-207, Aug.  30, 1994). 

Army Inventory:  Unfilled War Reserve Requirements Could Be Met With
Items From Other Inventory (GAO/NSIAD-94-207, Aug.  25, 1994). 

Defense Inventory:  Changes in DOD's Inventory, 1989-93
(GAO/NSIAD-94-235, Aug.  17, 1994). 

Navy Supply:  Improved Material Management Can Reduce Shipyard Costs
(GAO/NSIAD-94-181, July 27, 1994). 

Commercial Practices:  DOD Could Reduce Electronics Inventories by
Using Private Sector Techniques (GAO/NSIAD-94-129, June 29, 1994). 

Army Inventory:  Changes to Stock Funding Repairables Would Save
Operations and Maintenance Funds (GAO/NSIAD-94-131, May 31, 1994). 

Defense Management Initiatives:  Limited Progress in Implementing
Management Improvement Initiatives (GAO/AIMD-94-105, Apr.  14, 1994). 

Commercial Practices:  Leading-Edge Practices Can Help DOD Better
Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, Apr.  13, 1994). 

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

Defense Inventory:  More Accurate Reporting Categories Are Needed
(GAO/NSIAD-93-31, Aug.  12, 1993). 

Commercial Practices:  DOD Could Save Millions by Reducing
Maintenance and Repair Inventories (GAO/NSIAD-93-110, June 4, 1993). 

Army Inventory:  Current Operating and War Reserve Requirements Can
Be Reduced (GAO/NSIAD-93-119, Apr.  14, 1993). 

Defense Logistics Agency:  Why Retention of Unneeded Supplies
Persists (GAO/NSIAD-93-29, Nov.  4, 1992). 

Army Inventory:  Divisions' Authorized Levels of Demand-Based Items
Can Be Reduced (GAO/NSIAD-93-09, Oct.  20, 1992). 

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