Army Inventory: Budget Requests for Spare and Repair Parts Are Not
Reliable (Letter Report, 01/29/96, GAO/NSIAD-96-3).

The Army continues to rely on inaccurate data to determine its inventory
requirements for spare and repair parts. For 258 items GAO reviewed, the
Army overstated the inventory shortfall by nearly $200 million. If
accurate information had been used, the shortfall for these items would
have totaled $23 million rather than the $211 million reported. Although
the Army is aware of many of the processing, policy, data, and system
problems, it has not corrected them because the Defense Department (DOD)
is developing a system to determine standard requirements for all the
services as part of its Corporate Information Management initiative. For
that reason, DOD has limited the amount that the services can spend to
change their existing systems. Army officials said that the standard
system will not be up and running for at least four years. In the
interim, the Army's budget requests may not represent its actual funding
needs for spare and repair parts. Furthermore, unless the data problems
are resolved now, the inaccurate data will be integrated into the new
system.

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

 REPORTNUM:  NSIAD-96-3
     TITLE:  Army Inventory: Budget Requests for Spare and Repair Parts 
             Are Not Reliable
      DATE:  01/29/96
   SUBJECT:  Military inventories
             Military budgets
             Spare parts
             Data integrity
             Inventory control systems
             Army procurement
             Military cost control
             Systems conversions
IDENTIFIER:  Defense Business Operations Fund
             DOD Corporate Information Management Initiative
             CIM
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Military Readiness, Committee
on National Security, House of Representatives

December 1995

ARMY INVENTORY - BUDGET REQUESTS
FOR SPARE AND REPAIR PARTS ARE NOT
RELIABLE

GAO/NSIAD-96-3

Army Inventory

(703086)


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

  ACALA - Armament and Chemical Acquisition and Logistics Activity
  ATCOM - Aviation and Troop Support Command
  CECOM - Communications-Electronics Command
  MICOM - Missile Command
  TACOM - Tank-Automotive and Armaments Command

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


B-258887

December 29, 1995

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

Dear Mr.  Chairman: 

We reviewed the accuracy of spare and repair parts data used in
determining Army inventory requirements and Defense Business
Operating Fund\1 budget requests.  Our objectives were to evaluate
(1) the accuracy of the databases used to determine item requirements
and inventory levels for budget request purposes and (2) the actions
taken to correct data problems that could affect the reliability of
the budget estimates.  Our scope and methodology are shown in
appendix I. 


--------------------
\1 Spare and repair parts at the wholesale inventory level are
procured through the Defense Business Operating Fund, a revolving
account.  Each year, the Department of Defense submits a budget
request showing what it plans to procure. 


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

The five major Army inventory control points\2 manage secondary items
and repair parts valued at $17 billion.  These items are used to
support Army track and wheeled vehicles, aircraft, missiles, and
communication and electronic systems. 

The process for identifying the items and the quantity to stock
begins with developing the budget request--the key to effective
inventory management.  If too few or the wrong items are available to
support the forces, then readiness suffers and the forces may not be
able to perform their assigned military missions.  On the other hand,
if too many items are acquired, then limited resources are wasted and
unnecessary costs are incurred to manage and maintain the items. 

The Army uses different processes for determining its spare and
repair parts budget requests and for determining which parts to buy
or repair.  The process for determining spare and repair parts budget
requests is based on data from the budget stratification reports,
which show the dollar value of requirements and inventory available
to meet the requirements.  When an item's available inventory is not
sufficient to meet the requirements, it is considered to be in a
deficit position.  The aggregate value of items in a deficit position
then becomes the Army's basis for determining its spare and repair
parts needs.  As these needs are formulated into a budget request,
the end result (budget request) is normally less than the aggregate
value of items in a deficit position.  This makes it even more
important that the true needs be based on accurate data.  Otherwise,
funds may be allocated to procuring spare and repair parts that
should be spent on other priority needs.  Using accurate data in the
requirements determination process avoids such misallocation of
funds.  We have previously issued reports pointing out data
inaccuracy problems in the Army's requirements determination process
and the effect of these inaccuracies on inventory decisions.  See
appendix IV. 

The process for determining which items to buy or repair is based on
information in the item's supply control study, which is
automatically prepared when an item reaches a point when insufficient
assets are available or due in to meet requirements.  When a study is
prepared, the item manager validates the requirements and asset
information in the study.  Based on the results of the validated
data, the item manager will decide whether to buy, repair, or not buy
the quantity recommended by the study. 


--------------------
\2 The five inventory control points are the Armament and Chemical
Acquisition and Logistics Activity (ACALA), Aviation and Troop
Support Command (ATCOM), Communications-Electronics Command (CECOM),
Missile Command (MICOM), and Tank-Automotive and Armaments Command
(TACOM). 


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

The Army's September 30, 1994, budget stratification report, the
latest information available at the time of our review, contained
numerous instances where an item's deficit inventory position was
based on inaccurate requirements or inventory data.  Our review of
258 items\3 with a reported deficit inventory value of $519 million,
or 69 percent of the total deficit value, showed that the deficit
position for $211 million of the items was not reported correctly. 
If accurate information had been used, the inventory deficit would
have been $23 million rather than the $211 million reported. 

Although the Army is aware of many of the processing, policy, data,
and system problems, it has not made changes to correct them because
the Department of Defense is developing a standard requirements
determination system for all the services as part of its Corporate
Information Management initiative.  For that reason, Defense has
limited how much the services can spend to change their existing
systems.  Army officials said that they had submitted requests to
correct many of the data problems to the Department of Defense.  In
their opinion, the cost to implement these changes would be minimal
compared to the potential benefits.  Nevertheless, the requests have
not been funded for implementation because Defense is reluctant to
spend resources on a system that will be replaced by a standard
system. 

Army officials said that the standard system will not be implemented
for at least 4 years and that much of the existing data will be
integrated into the standard system.  In the interim, the Army lacks
assurance that its budget requests represent its actual funding needs
for spare and repair parts.  Furthermore, unless the systemic data
problems are corrected now, the inaccurate data will be integrated
into the new system when it is finally implemented. 


--------------------
\3 The universe of items we reviewed consisted of items with a
deficit value of $500,000 or more. 


   INACCURATE DATA CAUSED ITEMS TO
   BE ERRONEOUSLY REPORTED IN A
   DEFICIT POSITION
------------------------------------------------------------ Letter :3

As of September 30, 1994, we reviewed 258 items from a universe of
8,526 items with a deficit inventory position.  The selected items
represented 3 percent of the items in a deficit position but
accounted for $519 million, or 69 percent, of the $750 million
deficit inventory value.  We found that 94 of the 258 items, with a
reported deficit inventory value of $211 million, had data errors
that affected the items' requirements or inventory available to
satisfy the requirements. 

Table 1 shows the results of our review for the Army's inventory
control points. 



                                     Table 1
                     
                       Items Selected for Review That Were
                       Reported in a Deficit Position as of
                                September 30, 1994

                              (Dollars in millions)



Inventory
control
point         Number     Value    Number     Value    Number     Value   Percent
----------  --------  --------  --------  --------  --------  --------  --------
ACALA          2,099      $174        62      $120        27       $37        44
ATCOM          1,608       326       105       265        46       149        44
CECOM          2,059       125        45        73         8         7        18
MICOM          1,691        96        39        47        11        11        28
TACOM          1,069        29         7        14         2         7        29
================================================================================
Total          8,526      $750       258      $519        94      $211        36
--------------------------------------------------------------------------------
Overstated requirements and understated inventory levels were the
major reasons items were erroneously reported in a deficit position. 
In addition, some items were incorrectly included in the process for
determining funding requirements.  If the items' inventory position
had been correctly reported, the true deficit value for the 94 items
would have been about $23 million rather than $211 million. 

Table 2 shows the major reasons why items were incorrectly classified
as deficit. 



                                Table 2
                
                   Reasons Why Items Were Erroneously
                   Classified as Deficit Items (as of
                          September 30, 1994)

                         (Dollars in millions)

                                                               Deficit
                                Number         Deficit  position based
                                    of       inventory     on accurate
Reason                           items  value reported            data
------------------------------  ------  --------------  --------------
Overstated requirements             53          $121.6           $15.5
Understated inventory level         26            59.9             4.2
Item should not have been            9             9.7             0.1
 included in stratification
 process
All others                           6            19.6             3.0
======================================================================
Total                               94          $210.8           $22.8
----------------------------------------------------------------------

      OVERSTATED REQUIREMENTS
---------------------------------------------------------- Letter :3.1

When insufficient inventory is on hand and due in to meet an item's
requirements, the budget stratification process will report the item
as being deficit.  If the item's deficit position is caused by
overstated requirements, this means that resources could be wasted
buying unneeded items. 

As shown in table 2, overstated requirements caused 53 items to be
erroneously reported as being in a deficit position.  The overstated
requirements resulted from inaccurate demand data, inaccurate
leadtime data, and lower-than-expected requirements.  Table 3 shows
the number of instances where these reasons caused the items'
requirements to be overstated. 



                                Table 3
                
                  Reasons for Overstated Requirements

                         (Dollars in millions)

                                              Number  Reported deficit
Reason                                      of items          position
------------------------------------------  --------  ----------------
Inaccurate demand data                            28             $61.1
Requirements did not materialize                  19              44.1
Inaccurate leadtime and safety level data          6              16.4
======================================================================
Total                                             53            $121.6
----------------------------------------------------------------------
The following examples illustrate the types of inaccurate data that
caused overstated requirements: 

  -- The item manager for an aircraft floor item used on the CH-47
     Chinook helicopter said that the database still included demands
     from Operations Desert Shield and Desert Storm.  Including these
     demands in the requirements determination caused the budget
     stratification process to erroneously classify the item as
     having a deficit inventory position of about $500,000.  If the
     outdated demands had been purged from the system, the item would
     not have been in a deficit position. 

  -- According to the item manager for the front lens assembly item
     used on the AN/PVS-7B Night Vision Goggles, the item
     requirements shown in the budget stratification report did not
     materialize.  She said that the report showed the item as having
     a deficit inventory position of $2.4 million.  However, when it
     came time to procure the item, the project leader reduced the
     planned procurement quantity because the field units indicated
     they did not like the item.  The item's actual deficit position
     should have been only $18,000. 

  -- According to the item manager, an angle drive unit used on the
     M2/M3, M2A1/M3A1 Bradley Fighting Vehicle system had an inflated
     safety level requirement in the budget stratification report. 
     The report showed a safety level of 6,887 units instead of the
     correct safety level of 355.  As a result, a deficit inventory
     position of $6.6 million was reported. 


      UNDERSTATED INVENTORY LEVELS
---------------------------------------------------------- Letter :3.2

When a prime stock number has authorized substitute items, the
requirements and inventory for the prime and substitute items are
supposed to be added and shown as one requirement and one inventory
level under the prime number.  This did not happen.  The requirements
for both types of items were shown as one requirement but the
inventory was not.  As a result, the inventory to meet the overall
requirement was understated, and the item was placed in a deficit
position.  For example, according to the item manager for a night
window assembly used on the TOW subsystem for the M2/M3 Bradley
Fighting Vehicle, the budget stratification report showed a deficit
supply position of $800,000 for the item.  This occurred because
inventory belonging to a substitute item was not counted toward the
prime item's requirements.  The item manager said the true deficit
for the assembly was $65,000. 

There were also requirements problems for items being repaired at
maintenance facilities.  The requirements system did not accurately
track stock in transit between overhaul facilities and the depots. 
According to item managers at several inventory control points, they
had problems either tracking the physical movement of inventory
between the depots and repair facilities, or ensuring that all
records were processed so the database accurately accounted all
applicable assets.  These problems could cause items to be
erroneously reported as being in a deficit position. 

Table 4 shows how often these reasons resulted in understated
inventory levels. 



                                Table 4
                
                Reasons for Understated Inventory Levels

                         (Dollars in millions)

                                                              Value of
                                                Number         deficit
Reason                                        of items        position
--------------------------------------------  --------  --------------
Overhaul items not considered                       21           $39.3
Substitute items not accurately tracked              5            20.6
======================================================================
Total                                               26           $59.9
----------------------------------------------------------------------

      ITEMS INCORRECTLY INCLUDED
      IN THE BUDGET STRATIFICATION
      PROCESS
---------------------------------------------------------- Letter :3.3

Our review of selected items identified nine items that should have
been excluded from the budget stratification process.  By including
these items, the budget stratification process identified funding
needs for the items when, in fact, the funds to procure the items
were being provided by another service, a foreign country under a
foreign military sales agreement, or another appropriation. 

Table 5 shows the number of items that were incorrectly included in
the budget stratification process. 



                                Table 5
                
                  Items That Should Have Been Excluded

                         (Dollars in millions)

                                                      Number
Reason                                              of items     Value
--------------------------------------------------  --------  --------
Foreign military sales items                               4      $5.7
Item purchased with procurement appropriation              2       2.1
 funds
Item miscoded as Army item                                 1       0.7
Item miscoded as project manager item                      1       0.7
End item miscoded as secondary item                        1       0.5
======================================================================
Total                                                      9      $9.7
----------------------------------------------------------------------
The following examples illustrate the effect of including "excluded"
items in the budget stratification process: 

  -- According to the item manager for a fire control electronic unit
     used on the M1A2 main battle tank, the Army issued a contract in
     August 1993 to procure items to meet the Army's requirements as
     well as foreign military sales.  Because the Army is reimbursed
     for foreign military sale items, these items should have been
     excluded from the budget stratification process.  However, the
     items were included in the stratification process and were
     reported as having a deficit inventory position of $2.3 million. 

  -- The inventory control point procured a gas-particulate filter
     unit used in producing modular collective protective equipment. 
     According to the item manager, procurement appropriation funds,
     provided by the program manager's office, were used to buy the
     items.  Because the stratification process is only supposed to
     deal with items procured by the Defense Business Operating Fund,
     the item should not have been included in the stratification
     process and a deficit inventory position of about $800,000
     should not have been reported. 

  -- According to the item manager, the Air Force manages and makes
     all procurements for a panel clock item.  The Army's budget
     stratification report showed this item had a deficit inventory
     position of $700,000.  However, because the Air Force managed
     this item, the panel clock should not have been coded as an Army
     secondary item for inclusion in the budget stratification
     report. 

  -- The item manager for an electronic component item said that the
     item should have been coded as an inventory control point asset
     rather than a project manager's office asset.  Because project
     manager items are not available for general issue, these items
     were not counted against the item's requirements in the budget
     stratification report.  If these items had been properly coded,
     the item would not have been reported as having a
     $700,000-deficit inventory position. 

  -- According to the item manager, an electronic component item
     should have been coded as a major end item rather than a
     secondary item and not included in the budget stratification
     process.  The item was reported as having a deficit inventory
     position of $500,000. 


   ARMY IS AWARE OF THE DATA
   PROBLEMS, BUT IS WAITING TO
   MAKE CORRECTIONS
------------------------------------------------------------ Letter :4

The Army is aware of many of the processing, policy, and data
problems affecting the accuracy of the requirements data. 
Furthermore, the Army has identified 32 change requests to correct
problems with the requirements determination and supply management
system. 


      SYSTEM CHANGE REQUESTS
---------------------------------------------------------- Letter :4.1

According to Army officials, the cost to implement the 32 change
requests would be about $660,000, and in their opinion, the benefits
would greatly outweigh the added costs.  The officials said these
changes would correct many of the problems, including some of the
ones we identified during our review.  Nevertheless, not all of the
requests have been approved for funding because the Department of
Defense is developing a standard requirements system as part of its
Corporate Information Management initiative and does not want to
spend resources to upgrade existing systems.  As a result, it has
limited the changes that the services can make to their existing
systems. 

Army officials said that the standard system is not expected to be
implemented for at least 4 years.  Furthermore, major parts of the
existing system will probably be integrated into the standard system. 
Therefore, unless the data problems are corrected, they will be
integrated into the standard system and the Army will still not have
reliable data. 


      PROCESSING PROBLEMS
---------------------------------------------------------- Letter :4.2

Army officials also cited examples where processing change requests
are needed to correct other data problems in the requirements
determination system.  For example, the depots do not always confirm
material release orders/disposal release orders received from the
inventory control points.  As a result, the inventory control points
do not know if the depots actually received the orders.  They
identified numerous instances where the depots put the release orders
in suspense because of higher priority workloads.  This resulted in
the release orders not being processed in a timely manner, processed
out of sequence, or lost and not processed at all. 

Because the inventory control points could not adequately track the
release orders, they could have reissued the release orders.  The
reissuance could have caused duplicate issues or disposals,
imbalances in the records between the inventory control points and
the depots, and poor supply response to the requesting Army units. 

A system change request was initiated in November 1994 to address
this problem, but the request has not yet received funding approval. 
Although Army officials could not provide a cost estimate to
implement the change request, it could save about $1 million in
reduced workload for the inventory control points and depots. 


      POLICY PROBLEMS
---------------------------------------------------------- Letter :4.3

According to Army officials, one programming application in the
requirements determination system uses reverse logic to calculate the
supply positions of serviceable and unserviceable assets.  It
compares the supply position of all serviceable assets to the funded
approved acquisition objective (current operating and war reserve
requirements).  However, for the same item, the program compares the
supply position of all unserviceable assets to the total of the
current operating and war reserve requirements, the economic
retention quantity, and contingency quantity.  The effect of this is
that serviceable inventory can be sent to disposal while
unserviceable inventory is being returned to the depots. 

According to Aviation and Troop Command records, the Command disposed
of $43.5 million of serviceable assets at the same time that $8.5
million of unserviceable assets, of the same kind, were returned to
the depots between March and September 1994.  By September 1995, the
Command had disposed of $62 million of serviceable assets.  Command
officials said that a system change request was initiated in November
1994 to correct the programming logic problem.  However, the request
did not receive funding approval because it violated Department of
Army policy, even though the estimated cost to implement the change
request would be less than $20,000. 

Although this change will not reduce the reported deficit quantities,
it will allow the commands to keep more serviceable items in lieu of
unserviceables, and it will reduce overhaul costs.  Furthermore,
according to Command records, this policy is causing the disposal of
high-dollar, force modernization items that could result in
re-procurement and adversely affect stock availability to field
units. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :5

We recommend that the Secretary of Defense direct the Secretary of
the Army to proceed with the pending system change requests to
correct the data problems.  Doing so could correct many of the
problems identified in our report.  Furthermore, the corrective
actions would improve the overall reliability and usability of
information for determining spare and repair parts requirements. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

The Department of Defense agreed with the report findings and
partially agreed with the recommendation.  It said that instead of
the Secretary of Defense directing the Army to proceed with the
system change request, the Army will be requested to present a
request for funding for the system changes to the Corporate
Configuration Control Board at the Joint Logistics Systems Center. 
The Board, as part of the Corporate Information Management
initiative, was established to consider and resolve funding matters
related to changes to existing systems. 

In our opinion, the action proposed by the Department of Defense
achieves the intent of our recommendation, which was for the Army to
seek funds to correct the data problems in its requirements
determination system.  Defense's comments are presented in their
entirety in appendix II. 


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

We are sending copies of this report to the Secretary of the Army;
the Director, Office of Management and Budget; and the Chairmen,
House Committee on Government Reform and Oversight, Senate Committee
on Governmental Affairs, the House and Senate Committees on
Appropriations, House Committee on National Security, and Senate
Committee on Armed Services. 

Please contact me on (202) 512-5140 if you have any questions
concerning this report.  Major contributors to this report are listed
in appendix III. 

Sincerely yours,

Mark E.  Gebicke
Director, Military Operations
 and Capabilities Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

We held discussions with responsible officials and reviewed Army
regulations to determine the process used by the Army to identify its
spare and repair parts needs for its budget development process.  We
focused on the process used to identify items in a deficit
position.\1 As part of these discussions, we also studied the budget
stratification process, which is the major database input used in the
budget development process. 

To identify the items in a deficit position, we obtained the
September 30, 1994, budget stratification data tapes for the five
Army inventory control points:  Army Munitions and Chemical Command,
Aviation and Troop Command, Communications-Electronics Command,
Missile Command, and Tank-Automotive Command.  From the total
universe of
8,526 secondary items with a deficit inventory position valued at
$750 million, we selected all items that had a deficit position of
$500,000 or more.  This resulted in a sample of 258 items with a
total inventory deficit position of $519 million, or 69 percent of
the total deficit.  For each of the 258 selected items, we obtained
information from the responsible item manager to determine whether
the item was actually in a deficit position as of September 30, 1994. 
For those items that the budget stratification process had
erroneously placed in a deficit position, we determined the reason
for its misclassification.  We obtained this information by reviewing
item manager files and discussing the items with responsible item
management personnel. 

We categorized the reasons for the erroneous classifications to
determine frequency distribution for each type of reason.  We then
determined through discussions with item management officials and
review of system change requests what actions were taken or planned
to correct the identified problems. 

We performed our review from October 1994 to July 1995 in accordance
with generally accepted government auditing standards. 



(See figure in printed edition.)Appendix II

--------------------
\1 An item in a deficit position is one where the requirements exceed
the inventory available to the requirements. 


COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)


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


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

Sharon A.  Cekala
Robert J.  Lane


   KANSAS CITY REGIONAL OFFICE
------------------------------------------------------- Appendix III:2

Leonard C.  Hill
Robert C.  Sommer
Mark T.  Amo

RELATED GAO PRODUCTS

Army Inventory:  Growth in Inventories That Exceed Requirements
(GAO/NSIAD-90-68, Mar.  22, 1990). 

Defense Inventory:  Shortcomings in Requirements Determination
Processes (GAO/NSIAD-91-176, May 10, 1991). 

Army Inventory:  Need to Improve Process for Establishing Economic
Retention Requirements (GAO/NSIAD-92-84, Feb.  27, 1992). 

Army Inventory:  More Effective Review of Proposed Inventory Buys
Could Reduce Unneeded Procurement (GAO/NSIAD-94-130, June 2, 1994). 

Defense Inventory:  Shortages Are Recurring, But Not a Problem
(GAO/NSIAD-95-137, Aug.  7, 1995). 


*** End of document. ***