Defense Logistics: Requirement Determinations for Aviation Spare Parts
Need to Be Improved (Letter Report, 03/19/96, GAO/NSIAD-96-70).

GAO reviewed the Air Force's and Navy's policies and procedures for
procuring aviation spare parts, focusing on whether their requirements
and budgets reflect the amounts they actually need.

GAO found that: (1) the Air Force and Navy budgeted $132 million more
than needed for aviation spare parts because they used questionable
policies to determine their requirements and assign accountability for
depot maintenance assets; (2) the Air Force did not include $72 million
of its on-hand assets in preparing its fiscal year (FY) 1996 budget
request; (3) the Navy twice counted $60 million in depot maintenance
requirement when preparing its FY 1997 budget request; (4) Air Force and
Navy computation errors were a result of unsupported and incorrect
maintenance replacement rates, demand rates, planned program
requirements, repair costs, lead times, due-out quantities, and asset
quantities on hand and on order; and (5) of the sample items reviewed,
these errors totalled $35 million and resulted in some requirements
being overstated by as much as $25 million and some being understated by
$10 million.

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

 REPORTNUM:  NSIAD-96-70
     TITLE:  Defense Logistics: Requirement Determinations for Aviation 
             Spare Parts Need to Be Improved
      DATE:  03/19/96
   SUBJECT:  Spare parts
             Military procurement
             Logistics
             Military cost control
             Aircraft components
             Military inventories
             Aircraft maintenance
             Internal controls
             Accountability
             Inventory control systems
IDENTIFIER:  F-100 Engine
             F-404 Engine
             F/A-18 Aircraft
             F-15 Aircraft
             F-16 Aircraft
             
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Cover
================================================================ COVER


Report to the Secretary of Defense

March 1996

DEFENSE LOGISTICS - REQUIREMENT
DETERMINATIONS FOR AVIATION SPARE
PARTS NEED TO BE IMPROVED

GAO/NSIAD-96-70

Defense Logistics

(703094)


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

  DOD - Department of Defense
  NSN - National Stock Number

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


B-260432

March 19, 1996

The Honorable William J.  Perry
The Secretary of Defense

Dear Mr.  Secretary: 

We reviewed the Air Force's and the Navy's policies and procedures
for determining requirements and budgets for aviation spare parts. 
Our objective was to determine whether the Air Force's and the Navy's
requirements and budgets reflect the actual amounts needed. 


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

The Air Force and the Navy budget and spend billions annually to
procure and repair aviation spare parts.  For example, for fiscal
year 1997, the Navy budgeted $1.4 billion for this purpose.\1 For
fiscal year 1996, the Air Force budgeted $3.9 billion to procure and
repair aviation spare parts.  The Air Force's F-100 engines used on
F-15 and F-16 aircraft and the Navy's F-404 engines used on F/A-18
aircraft account for a sizable portion of the procurement and repair
budgets and expenditures for aviation spare parts. 

Both services use automated systems to compute requirements and to
prepare their annual budgets for aviation spare parts.  The systems
base the computations on past usage, acquisition lead times, flying
hour programs, maintenance replacement factors, and additional
special needs.  Requirements are then offset by the assets on hand
and on order to arrive at the amounts needed. 


--------------------
\1 Similar fiscal year 1997 data was not available for the Air Force
at the time of our review. 


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

The Air Force and the Navy budgeted $132 million more than needed for
aviation spare parts because of questionable policies concerning the
determination of requirements and the accountability for depot
maintenance assets.  The Air Force, in preparing its fiscal year 1996
budget for aviation parts, did not consider $72 million of on-hand
assets.  In preparing its fiscal year 1997 requirements for aviation
parts, the Navy counted $60 million in depot maintenance requirements
twice. 

Our sampling tests showed that the Air Force and the Navy made other
errors in computing their requirements because management oversight
procedures and internal controls were not adequate.  The Air Force
and the Navy used unsupported or incorrect (1) maintenance
replacement rates, (2) demand rates, (3) planned program
requirements, (4) repair costs, (5) lead times, (6) due-out
quantities, and (7) asset quantities on hand and on order.  These
inaccuracies totaled $35 million on the sample items alone and
resulted in some requirements' being overstated by $25 million and
others' being understated by $10 million. 


   AIR FORCE AND NAVY POLICIES
   RESULT IN OVERSTATED
   REQUIREMENTS
------------------------------------------------------------ Letter :3

Although Air Force and Navy policies and procedures related to
reserving on-hand assets for depot maintenance requirements differ,
both agencies' policies and procedures result in overstated
requirements.  Our review of overall budget inventory data related to
these assets and our sampling tests of F-100 and F-404 engine parts
showed that the Air Force and the Navy overstated budgeted buys and
repairs by about $132 million.  This overstatement occurred because
of questionable Air Force and Navy policies concerning the
determination of requirements and the accountability for assets held
in reserve to satisfy depot maintenance needs. 


      AIR FORCE
---------------------------------------------------------- Letter :3.1

Since 1984, Air Force policy has been to reserve on-hand consumable
parts\2 for depot maintenance needs and not to use these assets to
offset computed requirements when deciding to buy or projecting
annual budgeted buys.  This Air Force policy is unlike the Navy's,
which does require that assets held for depot level maintenance needs
be applied to computed requirements. 

The Congress has made several attempts to change the Air Force's
policy.  In response to our 1989 report,\3 the House Committee on
Armed Services directed the Air Force to consider depot supply level
assets in its requirements and budget computations.  In 1992, we
reported\4 that the Air Force continued to exclude depot supply level
assets from its requirements and budget computations.  As a result,
the Congress reduced the Air Force's operation and maintenance budget
for fiscal year 1994. 

Despite these efforts, the Air Force continues its policy of not
considering depot supply level assets in requirements and budget
computations.  Our analysis of overall inventory data for fiscal year
1995 showed that the Air Force overstated fiscal year 1996 budgeted
requirements by $72 million because assets reserved for depot
maintenance were not applied to budgeted buy requirements. 

Our sampling test of 22 F-100 engine parts for which there were
actual and budgeted buys also showed that the Air Force continues to
exclude depot supply level assets from its periodic requirement and
annual budget computations.  Of 22 sample items, 10 had depot supply
level assets valued at about $1.8 million that the Air Force did not
apply to offset recurring depot level maintenance requirements in the
periodic requirements and annual budget computations.  Of the 10
items, 3 had current buys costing about $2.7 million, which could
have been reduced by about $366,000 if depot supply level assets had
been applied to offset requirements. 

For example, in September 1994, the San Antonio Air Logistics Center
computed an initial buy quantity of 31,420 F-100 engine duct segments
(NSN 2840-01-270-7659PT) costing about $2.8 million.  In finalizing
the buy computation, the Center made changes, lowering the buy to
2,868 items costing about $307,000.  However, the computation did not
consider
3,680 depot supply assets that were available to offset requirements. 
If these assets had been applied to offset requirements, this
procurement would not have been necessary.  Similarly, the Center
overstated budget requirements by not applying these depot supply
level assets. 

According to Department of Defense (DOD) Materiel Management
Regulation 4140.1-R, dated January 1993, the inventory managers, for
the purpose of limiting buys and repairs, shall apply all retail and
wholesale assets against wholesale requirements.  Nevertheless, DOD's
and the Air Force's position is that depot supply level assets are
set aside for depot maintenance and, therefore, are not considered to
offset wholesale requirements.  We do not agree with this position
because depot supply level assets are a part of the wholesale
inventory.  They have not been issued from wholesale storage and
transferred to the depot maintenance activities.  Further, because
wholesale requirements are based on past recurring demands, it is
reasonable to expect that assets procured to meet these demands
should be considered when making future procurement decisions. 


--------------------
\2 Consumable parts are not economically reparable and are discarded
when worn out or broken.  In contrast, reparable items are parts that
can be fixed and used again. 

\3 Military Logistics:  Air Force's Management of Backordered
Aircraft Items Needs Improvement (GAO/NSIAD-89-82, June 2, 1989). 

\4 Air Force Requirements:  Cost of Buying Aircraft Consumable Items
Can Be Reduced by Millions (GAO/NSIAD-93-38, Nov.  18, 1992). 


      NAVY
---------------------------------------------------------- Letter :3.2

The Navy's policies and procedures related to assets reserved for
depot maintenance needs, unlike the Air Force's policies and
procedures, require the Navy to apply these assets to computed
requirements.  However, we found that some Navy requirements are
duplicated, resulting in overstated requirements.  On the basis of
our review of overall fiscal year 1995 budget data for aviation parts
and our sampling test of 12 F-404 engine parts, we found that the
Navy overstated fiscal year 1997 stock fund budgets by at least $60
million.  This occurred because the Navy included reserve level depot
maintenance requirements in periodic requirements and annual budget
computations twice.  These reserve levels are included once as
recurring demands based on past depot maintenance usage and again in
a planned program requirements category that is not based on
recurring demands. 

For example, in May 1995, the Aviation Supply Office budgeted a
fiscal year 1997 buy for 4,734 F-404 nozzle segments (NSN
2840-01-166-4886TN) costing about $7.8 million.  We found that the
budgeted buy requirement was overstated by 1,008 units, valued at
about $1.7 million, because this requirement was included twice.  It
was included as a separate, identifiable nondemand-based requirement
and again as part of the recurring demand-based requirements. 

Aviation Supply Office officials told us that the apparent
duplication of requirements in the fiscal year 1997 aviation parts
budget was offset by the application of assets reserved for depot
maintenance to the recurring demand requirements.  We disagree that
the duplication of requirements is entirely offset by the application
of these assets because the requirements are still incorrectly
included as both recurring and nonrecurring demand requirements, but
the assets are only applied once. 


   COMPUTATIONS ARE INACCURATE
------------------------------------------------------------ Letter :4

We reviewed a sample of 34 F-100 and F-404 engine parts for which the
Air Force and the Navy projected high-dollar buys or repairs in
fiscal year 1995.  We identified inaccuracies in the periodic
requirement or budget computations for 22 items (64 percent of the
sample items) that resulted in under or overstated requirements
valued at $35 million.  These inaccuracies were due to the use, in
requirement computations, of unsupported or incorrect (1) maintenance
replacement rates, (2) demand rates, (3) planned program
requirements, (4) due-out quantities, (5) lead times, (6) repair
costs, and (7) asset quantities on hand and on order. 


      AIR FORCE
---------------------------------------------------------- Letter :4.1

We reviewed 22 F-100 engine consumable parts and found inaccuracies
in the Air Force's computations for 12 items.  The inaccuracies
caused the fiscal year 1995 budget requirements to be understated by
about $2 million on some items and overstated by about $10 million on
others.  The inaccuracies occurred because inventory managers used
incorrect requirement and asset information or did not make necessary
changes when updating budget requirement computations.  The
inaccurate information included incorrect (1) lead times, (2) due-out
quantities, and (3) asset quantities on hand and on order. 

For example, in September 1994 the San Antonio Air Logistics Center
computed an initial buy quantity of 756 F-100 engine ring assemblies
(NSN 2840-01-327-2917PT).  In finalizing the buy computation, the
Center made changes to reflect updated information that decreased
lead time and due-out requirements and increased on-hand and on-order
assets.  As a result, the computation changed from a 756 buy to a
zero buy.  Changes made on buy computations also affect budget
requirement projections.  However, in this case the Center did not
make these changes in the final budget requirements computation.  As
a result, budget requirements were overstated by $4.3 million. 

In another example, the San Antonio Air Logistics Center
(in September 1994) computed an initial buy quantity of 21,524 F-100
engine stage compressor blades (NSN 2840-00-371-2217PT).  In
finalizing the buy computation, the Center made changes to reflect
updated information that decreased lead time and due-out requirements
and increased on-hand and on-order assets.  As a result, the
computation changed from a 21,524 buy to a zero buy.  However, the
changes were not reflected in the final budget requirements
computation.  As a result, budget requirements were overstated by
$1.1 million. 

Our review identified a need to strengthen existing procedures and
practices for management level review and validation of budget
requirement computations.  Air Force Materiel Command Regulation
57-6, dated January 29, 1993, assigns primary responsibility for the
accuracy and integrity of consumable item requirements to Air
Logistics Center management.  However, the regulation allows
management personnel at the centers to delegate authority to lower
level analysts to carry out certain quality review and control
functions.  We found that periodic requirements and annual budget
computations for the 22 sample items generally were signed off at the
supervisor level.  However, this level of review is not ensuring that
necessary requirement changes are reflected in the budget requirement
computations. 


      NAVY
---------------------------------------------------------- Letter :4.2

We reviewed 12 F-404 engine parts and found inaccuracies in the
Navy's computations for 10 items.  The inaccuracies caused buys and
repairs to be understated by about $8 million on some items and
overstated by about $15 million on others.  These inaccuracies
included unsupported or incorrect (1) maintenance replacement rates,
(2) demand rates, (3) planned program requirements, (4) repair costs,
and (5) lead times. 

For example, in March 1995, the Aviation Supply Office computed a
repair requirement for 328 F-404 engine compressor rotor assemblies
(NSN 2840-01-288-1767) costing $26.6 million.  The computation
overstated repair requirements by 76, valued at about $6.1 million,
because an incorrect maintenance demand rate and an erroneous parts
application was used.  We could find no data supporting the
maintenance demand rate used.  The Office provided data that showed a
lower demand rate should have been used.  Also the data indicated
that the rotor assembly was applicable only to one type of fan and
not to a second fan, which also was included in the computation. 

In another case, in May 1995, the Aviation Supply Office budgeted
fiscal year 1997 funds for the repair of 554 F-404 engine
high-pressure rotors (NSN 2840-01-201-1357) costing $19.1 million. 
The budgeted repair cost was understated by $7.2 million because an
outdated unit repair cost was used.  The Office used a unit repair
cost of $34,479, but the latest negotiated unit repair cost was
$47,577. 

Our review identified a need to strengthen existing procedures and
practices for management level review and validation of requirement
and budget computations.  For example, we noted that repair
computations were not receiving higher management level review and
approval.  These computations contained a large portion of the
inaccuracies identified. 


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

We recommend that the Secretary of Defense direct the Secretary of
the Air Force to

  revise buy and budget requirement computation policies and
     procedures to require that on-hand assets reserved for depot
     maintenance needs be considered in periodic requirement and
     annual budget computations and

  strengthen management oversight procedures and internal controls to
     ensure that key elements (such as on-hand and due-out quantities
     and lead times) of requirement and budget computations are
     accurate. 

We also recommend that the Secretary of Defense direct the Secretary
of the Navy to

  revise policies and procedures for buy and budget requirement
     computations to eliminate duplication of depot maintenance
     requirements and

  strengthen management oversight procedures and internal controls to
     ensure that key elements of requirement and budget computations
     are accurate. 


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

DOD agreed that action should be taken to improve the accuracy of
requirement determination processes and stated that the Air Force and
the Navy are taking such actions (see app.  I for DOD's complete
comments).  The Air Force is issuing a new instruction that will
establish levels of management review depending on the dollar value
of the requirement actions.  This instruction is expected to provide
a stronger management overview that will ensure that key elements of
the requirements computation are more accurately maintained.  The
Navy is implementing an automated system to improve data element
validation.  The system will provide an on-line checkoff list of key
data elements for the item manager to validate when making decisions
on requirements execution and budget development. 

DOD did not agree that current Air Force and Navy procedures related
to reserving on-hand assets for depot maintenance resulted in
overstated requirements.  With regard to the Air Force, DOD stated
that if assets were applied to maintenance requirements, as we
believe they should be, those assets would not be available to meet
other requirements.  DOD also stated the issue is becoming moot
because wholesale management of nearly all Air Force consumable items
are being transferred to the Defense Logistics Agency. 

We continue to disagree with the DOD position because wholesale
requirements include depot maintenance needs that are based on past
recurring demands.  We believe it would be reasonable inventory
management and would save money to use reserved assets to offset
wholesale requirements when making procurement decisions.  As for the
transfer of consumable item management to the Defense Logistics
Agency, this transfer is not scheduled to be completed until late
1997.  Once the transfer is made, the Defense Logistics Agency must
ensure that the Air Force pays for assets when they are received at
the depots.  Otherwise, the Air Force may continue to reserve assets
for depot maintenance, thereby precluding the Defense Logistics
Agency from considering them when making procurement decisions. 

With regard to the Navy, DOD stated that both planned program and
recurring demand requirements are needed to provide sufficient supply
support, but do not result in overstated requirements.  However, DOD
acknowledged that, in some situations, depot demands are considered
twice.  We believe that DOD is wrong in stating that this duplication
does not result in overstated requirements.  Some of the demands to
satisfy depot maintenance needs are included once as recurring
demands based on past usage and again as nonrecurring demands to meet
planned program requirements.  The Navy needs to eliminate this
duplication to improve the accuracy of procurement and budget
requirement computations and to save money. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

We reviewed Air Force and Navy policies and procedures relating to
periodic requirement and annual budget computations for aviation
spare parts.  We discussed the rationale for current policies and
procedures with officials of the Air Force's San Antonio Air
Logistics Center and the Navy's Aviation Supply Office. 

At the San Antonio Air Logistics Center, we reviewed 22 consumable
F-100 aircraft engine parts for which the Center projected
high-dollar buys for fiscal year 1995.  At the Aviation Supply
Office, we reviewed
12 consumable and reparable F-404 aircraft engine parts for which the
Office projected high-dollar buys or repairs for fiscal year 1995. 
At both locations, we evaluated periodic requirement and annual
budget computations.  We analyzed related supporting documentation on
which these buy or repair projections were based and discussed the
computations with inventory managers and their supervisors. 

We obtained and reviewed fiscal years 1995 and 1996 buy and repair
budgets for the Air Force's aviation spare parts.  We obtained and
reviewed fiscal years 1995 and 1997 buy and repair budgets for the
Navy's aviation spare parts.  We also obtained and analyzed Air Force
and Navy reserve depot maintenance asset totals for fiscal year 1995. 

We performed our review between March and November 1995 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :7.1

The head of a federal agency is required by 31 U.S.C.  720 to submit
a written statement on actions taken on our recommendations to the
Senate Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight not later than 60 days after the date
of the report.  A written statement also must be sent to the Senate
and House Committees on Appropriations with the agency's first
request for appropriations made more than 60 days after the date of
the report. 

We are sending copies of this report to the appropriate congressional
committees; the Secretaries of the Navy and the Air Force; and the
Director, Office of Management and Budget. 

Please contact me at (202) 512-5140 if you have any questions.  The
major contributors to this report are listed in appendix II. 

Sincerely yours,

Mark E.  Gebicke
Director, Military Operations
 and Capabilities 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.)


The following are GAO's comments on the Department of Defense's (DOD)
letter dated February 13, 1996. 


   GAO COMMENTS
------------------------------------------------------------ Letter :8

1.  We have decreased the amount of assets reserved for depot
maintenance needs from $226 million to $132 million.  This reflects a
reduction in the Navy's assets from at least $154 million to at least
$60 million.  We made this reduction because more current information
provided by the Aviation Supply Office indicates that the issuance of
some reparable reserve assets does not duplicate requirements.  These
issues do not register as recurring demands in the wholesale supply
system. 

2.  We deleted this recommendation from the final report.  Subsequent
to the completion of our fieldwork, the Aviation Supply Office
furnished us an instruction outlining procedures for management
review and approval of buy and repair computations.  In reviewing the
repair computations, we found that these procedures were not being
followed in that the repair computation documents did not show
evidence of management level review and approval.  Implementation of
our recommendation to strengthen management oversight procedures and
internal controls should help eliminate this problem. 


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


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

James Murphy
Thomas Wells
Melvin Wagman


   DALLAS REGIONAL OFFICE
-------------------------------------------------------- Appendix II:2

Calvin Phillips
Enrique E.  Olivares
Bonifacio Roldan-Galarza
Richard Madson
Donald McCuistion


*** End of document. ***