Ammunition Industrial Base: Information on DOD's Assessment of
Requirements (Letter Report, 05/31/96, GAO/NSIAD-96-133).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) ability to meet peacetime ammunition requirements, and
to replenish the ammunition stockpile following two major regional
conflicts.

GAO found that: (1) since 1978, the production capacity of the
ammunition industrial base has dramatically decreased; (2) while
indirect fire munitions constitute the largest part of the war reserve
inventory, the decrease in war reserve requirements since the end of the
Persian Gulf War has caused the percentage of direct fire munitions to
increase; (3) the distribution of funding between government-owned and
contractor-owned facilities has remained steady since 1987; (4) the
decline of ammunition funding has not caused any significant peacetime
shortages; (5) substitute munitions or increased production rates can
compensate for any understocked items; (6) no industrial base problems
exist that would prevent replenishing the stockpile after the completion
of those two regional conflicts; (7) if the response period is shortened
or if the required replenishment level is raised, the industrial base
may not be able to simultaneously meet peacetime ammunition needs and
replenish the ammunition stockpile following the regional conflicts; and
(8) private studies of the industrial base conclude that the industrial
base is inadequate to meet munition requirements after two major
regional conflicts.

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

 REPORTNUM:  NSIAD-96-133
     TITLE:  Ammunition Industrial Base: Information on DOD's Assessment 
             of Requirements
      DATE:  05/31/96
   SUBJECT:  Defense contingency planning
             Industrial mobilization
             Military inventories
             Defense procurement
             Weapons industry
             Munitions
             Weapons
             Ammunition
             Combat readiness
IDENTIFIER:  Desert Shield
             Desert Storm
             Copperhead Projectile
             Sense and Destroy Armor Projectile
             C-4 Explosive
             
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Cover
================================================================ COVER


Report to Congressional Requesters

May 1996

AMMUNITION INDUSTRIAL BASE -
INFORMATION ON DOD'S ASSESSMENT OF
REQUIREMENTS

GAO/NSIAD-96-133

Ammunition Industrial Base

(703111)


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

  AMMO-FAST-21 -
  DOD -
  COCO -
  GOCO -
  GOGO -
  POM -

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


B-271468

May 31, 1996

The Honorable Herbert H.  Bateman
Chairman, Subcommittee on Military Readiness
The Honorable Duncan Hunter
Chairman, Subcommittee on Military Procurement
Committee on National Security
House of Representatives

In March 1995, you asked us to review the production facilities
available to support the military's ammunition requirements and the
status of the ammunition stockpile.  This report addresses your
concerns about industrial base production facilities.  Our review
focused on the Department of Defense's (DOD) assessment of the
industrial base's ability to supply ammunition to meet requirements
for peacetime and for two major regional conflicts and to replenish
the ammunition stockpile following those conflicts.  We are issuing a
separate report addressing your concerns about the status of the
ammunition stockpile.\1


--------------------
\1 Defense Ammunition:  Significant Problems Left Unattended Will Get
Worse (GAO/NSIAD-96-129, expected to be issued in June 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

According to DOD, the ammunition stockpile, which is to meet
peacetime needs and support two major regional conflicts, has no
major shortages due to the industrial base.  However, there is no
longer a requirement to surge the industrial base during conflicts. 
In addition, the most lethal, up-to-date, "preferred" munitions will
be at a premium; some requisitions will be filled with older
"substitute" ammunition items, but these items are considered
adequate by DOD to defeat the threat that U.S.  forces are expected
to encounter. 

DOD's position is based on a number of studies, including its 1994
and 1995 financial viability studies of the firms comprising the
ammunition industrial base, which concluded that the base is adequate
to meet DOD's continued production and replenishment requirements. 
DOD is confident in this position, even though it did not receive
sufficient data to evaluate the financial condition of all the firms
in the industrial base.  Although the firms were not obligated to
respond, the 57 firms that responded, and which were fully evaluated
in the 1994 study, held about 75 percent of the production capacity
in the industrial base.  DOD assumed that the remaining 45 firms that
did not respond were financially viable.  DOD officials stated that
if the firms were having financial difficulties, they would be
motivated to respond.  In their opinion, it would be in a firm's best
interests to respond if it was having financial difficulties because
that response would, in effect, be a request for DOD to help the firm
remain viable. 

An assessment of whether the ammunition industrial base is adequate
for replenishment depends on the assumptions used.  Because the
underlying assumptions concerning replenishment levels and time
frames form the basis of the services' ammunition requirements,
changes to the Defense Planning Guidance could cause DOD's industrial
base assessment to change even if production capacity within the
industrial base remains stable.  The sensitivity of the assessment to
changes in assumptions is illustrated by other private studies that
have concluded that the industrial base is inadequate to meet
replenishment requirements during and following a national emergency. 
Those studies are based on underlying assumptions that differ
considerably from the assumptions in the current Defense Planning
Guidance. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Army is DOD's single manager for the military services'
conventional ammunition and is responsible for ensuring that an
adequate industrial base is maintained to meet the services'
ammunition requirements.  The conventional ammunition requirements
include about 250 end items and 500 components that are grouped into
14 different families.  These requirements are derived by adding the
projected training, testing, and pipeline requirements to the war
reserve requirement that is needed for combat.  Since Operation
Desert Storm, ammunition requirements have decreased substantially,
and the reduced threat and changing conflict scenarios caused war
reserve requirements to decline by more than 70 percent between 1992
and 1994. 

In the past 20 years, DOD's ammunition planning strategy has changed
dramatically. 

  -- Before July 1976, the services stocked enough items to support
     combat consumption from the day military operations begin to
     when the production rate for an item equals combat consumption. 

  -- Beginning in July 1976, the services were to stock enough items
     to meet the first 6 months of combat consumption and the
     industrial base was assumed to be able to take over supply at
     that time.  If industry could respond before the sixth month,
     then reserve item requirements were to be reduced accordingly. 
     However, if industry could not respond by the sixth month,
     industrial preparedness actions necessary to make such a
     response possible were to be identified for funding. 

  -- The 1978 Program Objective Memorandum (POM) guidance allowed
     sizing of the industrial base to meet total mobilization
     requirements. 

  -- The 1979 POM guidance reduced the allowable size of new
     facilities to essentially that required to support an 180-day
     requirement. 

  -- The 1980 POM guidance further reduced allowable sizing to a
     90-day requirement.  This guidance was interpreted to limit
     sizing of new facilities in support of new munitions to that
     which would support production for the Five-Year Defense Plan. 
     This guidance began the movement away from surge planning. 

After the collapse of the former Soviet Union and the end of the Cold
War, requirements dropped again.  As the prospects for a long drawn
out global war declined, DOD continued to reduce its ammunition
requirements.  Surge involved emphasis on expediting the completion
of items already in process rather than sustaining production because
its only purpose was to preclude serious depletion of war reserve
stocks in a short, intense war.  The emphasis had shifted away from
huge stockpiles and an industrial base with a large surge capacity to
a "come as you are" philosophy.  Stockpile requirements declined as
DOD planned primarily for major regional conflicts rather than a
global war.  Surge capacity lost its importance because the conflicts
were assumed to be so short in duration that a surging base would not
be able to make a significant difference.  The key measurement of the
health of the industrial base became the length of time required to
replenish the stockpile after two major regional conflicts. 

DOD's war reserve requirements are now based on the need to fight two
nearly simultaneous major regional conflicts.  Key assumptions in
this new plan are (1) each conflict will be intense and short in
duration (60 to
120 days); (2) the military will rely on existing stocks for the
entire duration of the conflicts; (3) there will not be a significant
surge in ammunition production during the conflicts; and (4)
following the conflicts, ammunition items will be replenished to a
designated level within a specified time frame, to prepare for the
next conflict.  Using the two-conflict scenario, the military
services compute war reserve requirements based on target kill data
from computer simulation models and from logistics distribution
figures. 

After the Cold War, the Army Materiel Command studied the services'
ammunition industrial base needs in light of the diminished threat
that had led to force reductions and reduced ammunition requirements. 
In April 1991, the study results were published, and the Command
concluded that the base needed to be consolidated and reduced in
size.  The Army used this study to develop its ammunition facility
strategy for the 21st century (AMMO-FAST-21), a strategy that
supports reduced peacetime ammunition requirements while maintaining
the highest level of readiness possible for future contingency
operations. 

In August 1993, an independent study team from the American Defense
Preparedness Association--two retired military officers and four
corporate managers with more than 30 years experience dealing with
ammunition--endorsed the Army's AMMO-FAST-21 strategy.  The strategy
prioritizes ammunition item families and identifies the facilities
that provide the most production flexibility.  It attempts to
minimize expenditures by reshaping the industrial base to its minimum
essential size.  Redundancy within the base is limited, and excess
government facilities are disposed of or leased to commercial firms. 
AMMO-FAST-21 also attempts to preserve the balance between government
and commercial facilities and to maintain the critical equipment,
processes, and skilled personnel at both types of facilities.  The
strategy is being implemented through government-owned, group
technology centers and specified mission facilities and through
commercial facilities.  AMMO-FAST-21 established a restricted
specified base of privately owned facilities that DOD can contract
with directly for critical items and components. 

The ammunition industrial base has experienced a dramatic drop in its
production capacities.  The relative percentages of ammunition
procurement dollars going to government and commercial producers,
however, have remained relatively constant since 1987.  In addition,
recent closures of production facilities have closely reflected those
projected by the Army when it submitted its 1991 Production Base
Planning Study and 1993 update to Congress. 

DOD's primary means of maintaining the industrial base is through the
direct procurement of hardware--ammunition end items and
components--but it also procures services for the layaway of
production facilities, the maintenance of inactive facilities, and
the demilitarization of ammunition.  This report uses the term
procurement funding to refer to the procurement of ammunition end
items and components only. 


   CURRENT STATUS OF THE
   INDUSTRIAL BASE
------------------------------------------------------------ Letter :3

The ammunition industrial base has experienced dramatic changes over
the last 17 years.  Less than 50 percent of the production facilities
that existed in 1978 still exist today, and production capacity is
declining for all 14 families of ammunition.  However, the mix of
procurement funding between government-owned and contractor-owned
production facilities has remained relatively stable since 1987, with
contractor-owned facilities receiving about 65 percent of the
funding. 


      AMMO-FAST-21 IS PROCEEDING
      AS PLANNED
---------------------------------------------------------- Letter :3.1

Decreased funding has led to reductions and consolidations in both
the government and private sectors of the industrial base.  As shown
in table 1, the numbers of government-owned, government-operated
(GOGO); government-owned, contractor-operated (GOCO); and
contractor-owned, contractor-operated (COCO) ammunition plants have
all declined significantly since 1978.  There also has been a
corresponding decline in the commercial subcontractors that supply
parts to the ammunition industry. 



                                Table 1
                
                Decline in Active Ammunition Production
                               Facilities

                                                               Decline
Facilities                                1978      1995  (percentage)
------------------------------------  --------  --------  ------------
GOGOs                                        6         3            50
GOCOs                                       26       6\a            77
COCOs                                      286        52            82
----------------------------------------------------------------------
\a In addition to the 6 active facilities, there are 10 inactive
facilities that are laid away to meet replenishment requirements
after a major regional conflict. 

As table 1 shows, commercially operated production facilities have
experienced more closures than government-operated production
facilities.  However, the closures closely reflect those projected by
the Army when it submitted its 1991 Production Base Planning Study
and 1993 update to Congress. 


      PRODUCTION CAPABILITIES HAVE
      DECLINED
---------------------------------------------------------- Letter :3.2

Since the end of Operation Desert Storm, ammunition production
capacity in the United States has steadily declined.  According to
both military and industry projections, this trend will continue for
several more years before capacity stabilizes within a smaller
industrial base.  In fiscal year 1990, the Army did production
planning for 329 end items that were not commercially available.  By
fiscal year 1995, the number had dropped to 163. 

Indirect fire munitions are used to suppress enemy fire in addition
to killing targets and have historically constituted a larger portion
of the war reserve inventory than direct fire munitions.  Indirect
fire munitions continue to make up the largest portion of the war
reserve inventory, but as the war reserve requirements have decreased
(from 2,500,000 short tons in 1992 to 650,000 short tons in 1994),
the percentage of direct fire ammunition has increased.  The indirect
fire portion of the ammunition stockpile is likely to continue its
decline.  Table 2 shows production capacity for indirect fire
systems, such as artillery,\2 is declining much faster than
production capacity for direct fire systems, such as tanks. 



                                Table 2
                
                Capacity Analysis for the 14 Ammunition
                                Families

                          (Quantity per month)

                                                 Fiscal year
                                      Fiscal            2001   Percent
Ammunition families                year 1992     projections    change
--------------------------------  ----------  --------------  --------
Small caliber                     476,000,00     165,000,000       -65
                                           0
Fuze                              35,700,000      20,000,000       -44
Cannon caliber                    18,600,000       8,100,000       -56
Grenade, mine, and demolition      7,400,000       6,800,000        -8
 charge
Propelling charge                  5,300,000         300,000       -94
Pyrotechnic                        2,000,000         500,000       -75
Mortar                             3,000,000       1,100,000       -63
Artillery                            953,000         151,000       -84
Tank                                 136,000         104,000       -24
Rocket                               136,000         135,000        -1
Scatterable mine                     152,000          33,000       -78
Navy gun                              86,000          60,000       -30
Dispenser                             15,000           6,000       -60
Bomb                                  36,000          25,000       -31
----------------------------------------------------------------------
Source:  The Army's March 10, 1995, Conventional Ammunition
Functional Area Analysis. 


--------------------
\2 See our report entitled Industrial Base:  Inventory and
Requirements for Artillery Projectiles (GAO/NSIAD-95-89, Mar.  20,
1995). 


      MIX OF FUNDING FOR
      GOVERNMENT AND PRIVATE
      FACILITIES REMAINS STEADY
---------------------------------------------------------- Letter :3.3

The ammunition industrial base has downsized considerably since 1987
as a result of significant reductions in ammunition procurement
funding (from about $4 billion in fiscal year 1986 to about $1.2
billion in fiscal year 1996).  However, the funding split between
government-owned and contractor-owned facilities has remained fairly
steady over these years.  In fiscal year 1987, government-owned
facilities received 35 percent of the procurement funding and
contractor-owned facilities received the remaining 65 percent.  In
fiscal year 1994, the numbers were 32 percent and 68 percent,
respectively (see table 3).  DOD considers these percentages "very
reasonable" and expects them to remain steady in the future. 
Likewise, in its May 1994 Conventional Munitions Assessment Report,
the Munitions Industrial Base Task Force\3 stated that "the
public/private mix of production work is approximately correct."



                                Table 3
                
                   Ammunition Procurement Funding for
                 Government-Owned and Contractor-Owned
                         Production Facilities

                                           GOGO/GOCO\a          COCO\b
Year                                        percentage      percentage
--------------------------------------  --------------  --------------
1987                                                35              65
1988                                                31              69
1989                                                35              65
1990                                                35              65
1991                                                32              68
1992                                                42              58
1993                                                40              60
1994                                                32              68
1995 (partial data)                                 37              63
1987-94 average                                     35              65
----------------------------------------------------------------------
\a GOGO and GOCO plants are generally responsible for hazardous
operations, such as manufacturing explosives and final loading,
assembling, and packing of ammunition.  Loading and packing are
performed only at government-owned plants for 9 of the 14 ammunition
families.  For the other five families, loading and packing are
performed at both government and commercial plants. 

\b COCO plants generally produce nonlethal ammunition components or
subsystems such as metal parts, electronics, plastics, and
composites.  Although GOCO plants also manufacture major components
for all 14 ammunition families, GOGO plants produce major components
for only 3 ammunition families. 

In commenting on this report, DOD noted that the distinction between
GOCO and COCO facilities is blurring as the government leases
inactive facilities to commercial contractors. 


--------------------
\3 This task force is a coalition of the leading commercial firms in
the ammunition industrial base. 


   INDUSTRIAL BASE CONSIDERED
   ADEQUATE TO SATISFY DEFENSE
   PLANNING GUIDANCE
------------------------------------------------------------ Letter :4

The key role of the ammunition industrial base is to replenish the
ammunition stockpile.  In peacetime, the industrial base replenishes
ammunition that is used for military training and testing.  It also
makes up shortages of war reserve items and supplies new types of
ammunition to the stockpile.  Since the major regional conflicts
envisioned in the Defense Planning Guidance are short in duration,
the ammunition industrial base is not required to surge during the
conflicts.  However, according to the Defense Planning Guidance, the
key measure of the health of the base is its ability to replenish the
stockpile following two major regional conflicts. 


      DOWNSIZING HAS NOT CAUSED
      ANY SERIOUS PEACETIME
      SHORTAGES
---------------------------------------------------------- Letter :4.1

While the services have shortages of many ammunition items, very few
of these shortages appear to be due to inadequate production
capacity.  We discussed a random sample of 152 of the 752 items that
had shortages with service officials to determine whether these
shortages were attributable to industrial base problems.  In
addition, we asked them if they knew of any additional items that had
shortages due to industrial base problems. 

None of the 152 items had shortages that service officials considered
attributable to industrial base problems.  However, Army officials
identified three other items as having shortages attributable to
industrial base issues, and Marine Corps officials identified four
items.  Most of these shortages appear to be minor and can be quickly
corrected in an emergency by using substitute munitions or increasing
production rates.  Most ammunition production lines currently operate
for one or two 8-hour shifts per day, 5 days per week.  These
production lines could run three shifts per day, 5 days per week, but
worker fatigue and required maintenance of the equipment would
prevent long-term continuous operation of the production lines. 

The first item with an industrial base-related shortage is the 155-mm
Copperhead projectile.  According to DOD, the supplier base and the
technical ability to manufacture Copperhead parts have disappeared. 
Several years ago, military industrial base planners decided not to
maintain a production capacity for the Copperhead because the round
is expensive, requirements are low, the cost of maintaining a
production line in layaway status would be prohibitive, and there are
substitute items being developed.  One substitute is the 155-mm Sense
and Destroy Armor projectile, currently in low-rate initial
production. 

The second and third items are the M58A3 and M59 mine clearing
charges.  These shortages result from an inadequate supply of the C-4
explosive that is used in the charges.  Because C-4 is used in four
other types of ammunition that require about 1 pound of C-4 for each
round and the mine clearing charges require about 500 pounds of C-4
for each charge, the Army has allocated the available C-4 to the four
other types of ammunition.  The Army has no plans to increase C-4
production capacity because of cost.  However, if an emergency
arises, substitute explosives can be produced, and the Army can
increase its production of C-4 by adding shifts to its current
production line or it can use the C-4 from the other ammunition
items. 

The fourth item is the 120-mm M830A1 high explosive antitank round,
which is used by both the Army and the Marine Corps.  The Army is
planning one more procurement for this round and will layaway the
production line after that procurement because it will have an
adequate supply of the ammunition.  However, the Marine Corps
currently has a shortage of M830A1 rounds and is not scheduled to
procure any more of them due to funding priorities.  According to the
Army, the production line for this round will be inactive after its
final procurement, but the Army will still be able to produce this
ammunition on short notice for the next
2 years.  A quick production response is possible because the 120-mm
tank training rounds and the M829A2 kinetic energy round will remain
in active production through fiscal year 1998.  In commenting on this
report, DOD said without future buys, the entire tank ammunition base
would be jeopardized, not just the M830A1 rounds. 

The fifth item is the 81-mm infrared illumination round.  The
manufacturer that developed this item declined further orders after
supplying the Army with a quantity sufficient for a year.  The Army
is working toward establishing a production capability for this item
at Crane Army Ammunition Activity, and it plans to load, assemble,
and pack the round at Pine Bluff Arsenal. 

The last two items are the M821 and M889 81-mm high explosive mortar
rounds.  At the time of our review, the production line for these two
rounds was shut down while engineers corrected a problem with the
propellant charge.  In addition, an engineering change proposal was
pending that could delay production.  However, according to Army
officials, a fully automated production line that is presently in
layaway status could be restarted if necessary. 


      NO INDUSTRIAL BASE PROBLEMS
      TO PREVENT FIGHTING TWO
      MAJOR REGIONAL CONFLICTS OR
      REPLENISHING THE STOCKPILE
---------------------------------------------------------- Letter :4.2

When we discussed the ammunition shortages caused by industrial base
problems with service officials and reviewed DOD's industrial base
studies, we did not identify any industrial base problems that would
keep the military from fighting two major regional conflicts, as
required by the current Defense Planning Guidance, or from
replenishing the stockpile.  However, ammunition shortages that
result from funding problems will not be filled by a surging
industrial base because the current guidance does not require the
base to have a surge capability, as in the past.  DOD officials
stated that shortages of preferred munitions will be likely if two
major regional conflicts arise and that shortages will be met with
substitute munitions.  This substitution is in accordance with the
current Defense Planning Guidance. 

Army officials stated that although the industrial base is able to
meet the replenishment requirements following a major regional
conflict, replenishment is likely to be costly.  Because production
facilities for new items are being built for efficient production at
peacetime requirement levels, funds will be required to expand some
of these facilities to meet replenishment requirements. 


   DOD'S FINANCIAL VIABILITY
   STUDIES OF INDUSTRIAL BASE
   FIRMS
------------------------------------------------------------ Letter :5

DOD's assessment of the adequacy of the industrial base is based on
the results of several studies, the annual functional area analysis,
and ongoing production planning efforts, including the single
manager's June 1995 Production Base Plan.  Two of the key studies
were DOD's 1994 and 1995 studies that attempted to evaluate the
financial viability of all the firms comprising the industrial base. 
Although DOD did not receive responses from all the firms in the
base, between the two studies it captured adequate financial data for
the firms holding most of the base's production capacity.  From the
data, DOD concluded that the industrial base was adequate to meet the
services' ammunition requirements. 

In 1994, DOD attempted to evaluate the financial status of 102 key
commercial producers\4 and assess their projected financial viability
during the 1995 through 1997 time frame based on the firms'
profitability in 1992 and DOD's planned future ammunition spending. 
DOD obtained some financial data for about 80 firms but received
enough financial data to perform break-even analyses for only 57
companies.  The 57 firms that were fully evaluated held about 75
percent of the production capacity in the ammunition industrial base,
according to Army officials.  DOD assumed that the remaining 45 firms
were financially viable, even though it did not have enough financial
data to perform break-even analyses.  While the validity of this
assumption is open to question, it is important to note that DOD
could not compel the firms to provide the requested information and
none of the 45 firms were single or sole source producers.\5

DOD's break-even analyses revealed that 16 of the 57 firms needed
more detailed evaluations, based on their projected financial
viability for 1995 through 1997.  After further evaluation, DOD found
that the production capabilities of most of the 16 firms could be
absorbed by the remaining producers within the ammunition sector. 
However, three of the firms were single source producers.  DOD
concluded that if these three firms went out of business, their
production capabilities could not be absorbed by the remaining
producers within the ammunition sector.  Therefore, DOD is continuing
to monitor these firms to ensure it retains its necessary production
capacity. 

In 1995, at the urging of the Munitions Industrial Base Task Force,
DOD conducted another financial viability study of the ammunition
industrial base.  This study was broader in scope than the 1994
study, covering 154 firms that the task force had identified as part
of the industrial base.  DOD sent out surveys requesting financial
data to all 154 firms, but only 29 firms responded in a timely
manner.\6 DOD officials attributed this low response rate to two
reasons.  First, DOD did not pay the contractors for this
information.  Second, many of the contractors had provided the same
information the year before, for DOD's 1994 study.  Once again, DOD
assumed firms that did not submit timely responses were financially
viable. 

The 29 firms with timely responses comprised only about 35 percent of
the industrial base production capacity.  Of the 29 respondents, 19
were identified to be at financial risk.  Secondary screenings that
were done on these firms from an industrial base perspective
disclosed that none were essential to the industrial base. 
Therefore, no detailed on-site reviews were conducted. 

During its two surveys of ammunition producers, DOD assumed that
nonresponding firms were financially viable.  DOD said this was a
reasonable assumption because the purpose of the survey was to
identify firms that would exit the business without special DOD
action.  DOD stated that firms facing financial difficulties would be
inclined to complete the financial viability surveys.  Most of the
firms that did not complete the survey were the smaller firms in the
industry. 


--------------------
\4 According to the DOD study, the ammunition sector was composed of
105 major producers (including 3 GOGO plants) and a large number of
supporting commodity suppliers.  Nine of the 102 commercial producers
manufactured ammunition or parts in government-owned facilities,
while the remainder produced ammunition or parts in commercial
facilities. 

\5 A single source is one in which DOD acquires goods or services
from only one producer.  There may be other producers available.  A
sole source is one which DOD has identified as the only producer with
the capability required to produce the goods or services. 

\6 Although the deadline for submission of financial data was
extended from March 15, 1995, to April 15, 1995, five firms still
submitted data after the deadline.  These five firms were not
included in DOD's analysis. 


   ASSESSMENT OF THE ADEQUACY OF
   THE INDUSTRIAL BASE DEPENDS ON
   ASSUMPTIONS USED
------------------------------------------------------------ Letter :6

If the key assumptions in the Defense Planning Guidance and DOD's
industrial base studies are correct, the industrial base will be
capable of simultaneously supplying peacetime ammunition needs and
replenishing the ammunition stockpile as required, following one or
two major regional conflicts.  However, the ability of the industrial
base to adequately respond to the military's replenishment
requirements depends heavily on both the amount of ammunition that
must be replenished and the time period over which the replenishment
is to occur.  Thus, if the response period is shortened, or if the
required replenishment level is raised from that stated in current
guidance, the industrial base may not be able to adequately respond
to replenishment requirements. 

The Army's annual functional area analyses help to illustrate the
role replenishment levels and time frames play in assessments of the
industrial base.  The 1994 analysis painted a bleak picture of the
industrial base's replenishment capability.  However, in the 1995
analysis, the base's replenishment capability improved dramatically. 
While part of the improvement was due to increased funding, much of
the improvement was caused by changes in the replenishment levels and
time frames. 

Army officials acknowledged that future changes in readiness
requirements could affect their assessment of the industrial base's
viability.  In addition, they pointed out that once the existing
industrial base is disposed of, there is a long time and a high cost
involved in reestablishing it. 


      NON-DOD STUDIES USE MORE
      PESSIMISTIC ASSUMPTIONS TO
      ASSESS THE ADEQUACY OF THE
      INDUSTRIAL BASE
---------------------------------------------------------- Letter :6.1

In addition to the DOD industrial base studies, several private
organizations have studied the industrial base.  However, most of the
private studies have concluded that the industrial base is inadequate
to meet the services' ammunition requirements.  One such study was
completed in June 1994 by the Committee for the Common Defense, the
national security arm of the Alexis de Tocqueville Institution.  The
study concluded that the nation's ammunition industrial base was
"rapidly-deteriorating." The report based this conclusion primarily
on the Korean War experience, but it also pointed out that the
323,000 tons of preferred munitions\7

in the current U.S.  stockpile represented less than the amount of
ammunition sent to the Persian Gulf region in 1990 and 1991 for
Operation Desert Storm.\8 A private study conducted for the Munitions
Industrial Base Task Force also found that the ammunition industrial
base could not repeat the performance of Operations Desert Shield and
Desert Storm.  It stated that the industrial base could not support
the demands of one major regional conflict, much less two
simultaneously.  However, the task force study assumed that the major
regional conflicts would last 180 days, much longer than DOD's
projected 60-120 days. 

The private studies' conclusions about the industrial base differed
from DOD's conclusions largely because of differences in the studies'
methodologies and underlying assumptions.  For example, the Munitions
Industrial Base Task Force study used three scenarios to compute
ammunition requirements:  a global war, two major regional conflicts,
and operations other than war.  In contrast, DOD's ammunition
requirements were established based on two major regional conflicts. 
Also, the private studies used information for 2 years, the budget
year and the out-year, while DOD's studies took into account planned
expenditures over its entire 5-year POM. 


--------------------
\7 The report did not use substitute munitions in these calculations. 
However, the Army has stated that after using its preferred munitions
it will rely on substitute munitions to meet any remaining
requirements. 

\8 Much of that ammunition was returned, unused at the conclusion of
the war. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

DOD reviewed a draft of this report and provided written comments
that concurred with the report.  Some minor technical comments were
received earlier and incorporated into the final report.  DOD's
comments are reprinted in appendix I. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To determine the current status of the ammunition industrial base, we
examined statistics the Army, as the single manager, had gathered and
met with Army industrial readiness officials.  Specifically, we
reviewed industrial base trend data concerning the number of
production facilities, the public/private mix of facilities, and the
capacity of the production facilities. 

To determine the industrial base's ability to meet current peacetime
ammunition requirements, we met first with military officials to
determine how requirements are established.  Next, we obtained
requirements data and stockpile levels and determined which items had
shortages and which items had overages.  (We relied on the data
supplied by the services and did not physically verify the ammunition
stockpile levels or trace requirements data back to the systems that
generated the requirements.) Then, we randomly selected 152
ammunition items that had shortages and discussed these items with
ammunition officials from the services.  We also asked them to
identify any additional items that had shortages due to industrial
base problems.  Finally, we investigated the causes of the industrial
base shortages and the Army's plans to address these shortages, as
the single manager for conventional ammunition. 

To determine whether the industrial base could respond as required,
after one or more major regional conflicts, we reviewed (1) the
current Defense Planning Guidance, (2) the Army's 1992 strategy to
maintain adequate ammunition facilities into the 21st century and an
independent assessment of that strategy, (3) DOD's 1994 and 1995
financial viability assessments, and (4) reports from industry
officials and other non-DOD sources that addressed the industrial
base's ability to provide adequate ammunition during a national
emergency.  We identified the differences in underlying assumptions
that caused wide differences in the reports' conclusions.  DOD's
Defense Planning Guidance contains several assumptions that are open
to question.  However, since that guidance establishes the framework
for all military actions, not just ammunition procurements, we used
those assumptions in forming our conclusions. 

We conducted our review from July 1995 to March 1996 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the Secretaries of Defense
and each of the military services; the Commanding General, Army
Materiel Command; the Commanding General, Army Industrial Operations
Command; and other interested parties.  We will also make copies
available to others upon request. 

Please contact me at (202) 512-5140 if you or your staffs have any
questions concerning this report.  Major contributors to this report
are listed in appendix II. 

Mark E.  Gebicke
Director, Military Operations
 and Capabilities Issues




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


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


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

Sharon A.  Cekala, Associate Director
Joan B.  Hawkins, Assistant Director
Raymond Dunham, Adviser
Michael J.  Ferren, Evaluator


   CHICAGO/DETROIT FIELD OFFICE
-------------------------------------------------------- Appendix II:2

Antanas Sabaliauskas, Evaluator-in-Charge
David A.  Bothe, Evaluator


*** End of document. ***