Defense Inventory: Inadequate Controls Over Air Force Suspended Stocks
(Letter Report, 12/22/97, GAO/NSIAD-98-29).

Pursuant to a congressional request, GAO reviewed the Department of
Defense (DOD) secondary inventory management, focusing on the: (1)
reported quantity and value of suspended inventory; (2) weaknesses in
managing suspended inventory and their potential effect on logistics
support costs and readiness; and (3) reasons why suspended inventory is
not well managed.

GAO noted that: (1) significant management weaknesses exist in the Air
Force's management of inventory that it categorizes as suspended; (2) as
a result, the Air Force is vulnerable to incurring unnecessary repair
and storage costs and avoidable unit readiness problems; (3) this
situation exists largely because management controls are not being
implemented effectively or are nonexistent; (4) among DOD components,
the Air Force reported the largest amount of suspended inventory--more
than 70 percent of the $3.3 billion of all DOD suspended inventory; (5)
in April 1997, the Air Force had 403,505 secondary items, valued at $2.4
billion, in a suspended status; (6) the Warner Robins Air Logistics
Center (ALC) had the highest reported value of suspended inventory,
accounting for about $1.3 billion (53 percent) of the Air Force's
suspended inventory; (7) the vast majority of the suspended items
reviewed are not being reviewed in a timely manner; (8) of the 1,820
suspended items reviewed with established standards, 97 percent failed
to meet these standards; (9) about 64 percent of the inventory reviewed
had been in a suspended category for over 1 year, and some had been
suspended for over 6 years; (10) delays in determining the usability of
suspended inventory can result in increased logistics support costs and
readiness problems; (11) Warner Robins had over 2,000 unfilled customer
demands (valued at about $53 million) while similar items were in
suspension; (12) over 500 of these unfilled demands (valued at about $7
million) could have potentially been filled with these items; (13) two
B-52H aircraft had not been fully operational for 175 days and 24 days
because two $16,000 data entry keyboards were not available for issue in
the Air Force supply system, yet two such keyboards had been maintained
in a suspended status for two years; (14) management controls at Warner
Robins over items categorized as suspended inventory have broken down
and contributed to inventory being in a suspended status beyond
established timeframes; (15) Air Force Materiel Command guidance does
not comply with DOD policy and safeguard against lengthy suspensions,
and Materiel Command and Warner Robins oversight of inventory management
has generally been nonexistent; (16) Warner Robins lacks clearly defined
suspended inventory management procedures for, and sufficient emphasis
on, controlling suspended inventory; and (17) further, management of
suspended inventory has not been identified in Air Force assessments of
internal controls as a significant weakness, as provided in the Federal
Managers' Financial Integrity Act of 1982.

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

 REPORTNUM:  NSIAD-98-29
     TITLE:  Defense Inventory: Inadequate Controls Over Air Force 
             Suspended Stocks
      DATE:  12/22/97
   SUBJECT:  Military inventories
             Military cost control
             Internal controls
             Military materiel
             Logistics
             Inventory control systems
             Federal property management
             Spare parts
IDENTIFIER:  B-52H Aircraft
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

December 1997

DEFENSE INVENTORY - INADEQUATE
CONTROLS OVER AIR FORCE SUSPENDED
STOCKS

GAO/NSIAD-98-29

Defense Inventory

(709254)


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

  AFMC - Air Force Materiel Command
  ALC - Air Logistics Center
  DLA - Defense Logistics Agency
  DOD - Department of Defense

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


B-276807

December 22, 1997

The Honorable J.  Dennis Hastert
Chairman
The Honorable Thomas M.  Barrett
Ranking Minority Member
Subcommittee on National Security,
 International Affairs, and Criminal Justice
Committee on Government Reform and Oversight
House of Representatives

This report is one in a series of reports on the Department of
Defense's (DOD) secondary inventory management.\1 Over the past
several years, we have issued a number of testimonies and reports
that cite the management of defense inventory as a high-risk area.\2
As requested, this review assesses selected aspects of the Air
Force's logistics system for managing inventory in a suspended
status, that is, inventory that cannot be issued because its
condition is unknown or in dispute.  Specifically, this report
addresses the (1) reported quantity and value of suspended inventory,
(2) weaknesses in managing suspended inventory and their potential
effect on logistics support costs and readiness, and (3) reasons why
suspended inventory is not well managed.  The scope and methodology
of our work are described in appendix I. 


--------------------
\1 See Related GAO Products at the end of this report. 

\2 In 1990, we began a special effort to review and report on the
federal program areas designated as high risk because of their
vulnerabilities to waste, fraud, and abuse.  This effort, which was
supported by the Senate Committee on Governmental Affairs and the
House Committee on Government Reform and Oversight, focused on
problems that were costing the government billions of dollars.  We
identified DOD's secondary inventory management as a high-risk area
at that time because of the high levels of unneeded inventory and the
lack of adequate systems for determining inventory requirements. 


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

At the end of fiscal year 1996, the Air Force reported that it was
managing inventory valued at $29.3 billion.\3 DOD uses a coding
system to categorize the condition of its inventory.  These codes are
intended to indicate whether stored inventory is (1) issuable without
qualification, (2) in need of repair, (3) usable for only a limited
time, or (4) unrepairable and ready for disposal.  DOD's inventory
management goal is to achieve a cost-effective system that provides
the inventory needed to maintain readiness.  When items in DOD's
inventory cannot be readily placed in one of these categories, DOD
uses other condition codes to indicate suspended inventory.  Because
these codes do not indicate an item's usability, item managers must
direct that the item be inspected or tested to determine its
usability.  The primary suspended inventory condition codes are as
follows: 

  -- J -- inventory at storage warehouses that is awaiting inspection
     to determine its condition (hereafter referred to as material in
     inventory),

  -- K -- inventory returned from customers or users to storage
     warehouses and awaiting condition classification (hereafter
     referred to as customer returns),

  -- L -- inventory held at storage warehouses pending litigation or
     negotiation with contractors or common carriers (hereafter
     referred to as inventory in litigation),

  -- Q -- quality-deficient inventory returned by customers or users
     due to technical deficiencies (hereafter referred to as
     quality-deficient inventory), and

  -- R -- inventory returned by salvage activities that do not have
     the capability to determine the material condition (hereafter
     referred to as reclaimed inventory). 

Appendix II contains a detailed explanation of DOD's supply condition
codes. 

Inventory categorized as suspended is not available for use until it
has been tested to determine whether it is usable.  In some
instances, inventory in this category that has been found to be
usable can meet customer needs, thus contributing to overall military
capability.  DOD recognizes that inventory in a suspended status for
long periods can adversely affect the availability of resources and
the effectiveness and economy of supply operations.  To minimize the
amount of items in suspended inventory, DOD set standards for the
amount of time inventory should remain categorized as suspended. 
These standards consider the reason for suspending the inventory and
the difficulty of determining the usability of the items.  The time
standards by suspension category are shown in table 1. 



                                Table 1
                
                  DOD Time Standards for Resolving the
                     Status of Suspended Inventory

Suspension code                           Number of days
----------------------------------------  ----------------------------
Material in inventory (J)                 90

Customer returns (K)                      10

Inventory in litigation (L)\a             No specific time limit

Quality-deficient inventory (Q)\a         No specific time limit

Reclaimed inventory (R)                   180
----------------------------------------------------------------------
\a Although no specific time limits have been set for inventory in
litigation (L) and quality-deficient inventory (Q), DOD regulations
emphasize that suspensions should not last indefinitely. 

A number of organizations are involved in the management and control
of suspended inventory.  The Air Force Materiel Command (AFMC)
administers the Air Force supply system and provides suspended
inventory management policies and procedures.  AFMC has five Air
Logistics Centers (ALC) that are located in different regions
throughout the United States.\4 Within each ALC, item managers are
responsible for maintaining the records for suspended inventory,
initiating efforts to determine the usability of suspended inventory,
deciding whether to procure items in addition to those in suspended
status, and deciding whether suspended items should be returned to
inventory or disposed.  Suspended inventory is stored at warehouses
operated and managed by the Defense Logistics Agency (DLA).  These
storage activities receive, store, and issue inventory and maintain
inventory records.\5 Once the usability of suspended inventory has
been determined, storage activities reclassify the inventory as ready
for issue, in need of repair, or ready for disposal. 


--------------------
\3 Although we and others have previously questioned the accuracy of
DOD's and the Air Force's inventory reports, we cite them in this
report to help reflect the magnitude of the inventory involved. 

\4 In July 1995, the Defense Base Realignment and Closure Commission
recommended that two of the five ALCs--Sacramento and San Antonio--be
closed or realigned. 

\5 DLA bills the Air Force for these functions and the storage space
assigned to its items.  The storage costs range from $0.75 per square
foot to $7.17 per square foot depending on whether the items are in
open or covered storage. 


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

Significant management weaknesses exist in the Air Force's management
of inventory that it categorizes as suspended.  As a result, the Air
Force is vulnerable to incurring unnecessary repair and storage costs
and avoidable unit readiness problems.  This situation exists largely
because management controls are not being implemented effectively or
are nonexistent. 

Among DOD components, the Air Force reported the largest amount of
suspended inventory--more than 70 percent of the $3.3 billion of all
DOD suspended inventory.\6

In April 1997, the Air Force had 403,505 secondary items, valued at
$2.4 billion, in a suspended status.  The Warner Robins Air Logistics
Center had the highest reported value of suspended inventory,
accounting for about $1.3 billion (53 percent) of the Air Force's
suspended inventory. 

We reviewed 1,971 out of 60,575 items in suspension at Warner Robins. 
The vast majority of the suspended items we reviewed are not being
reviewed in a timely manner.  Of the 1,820 suspended items we
reviewed with established standards, 97 percent failed to meet these
standards.  About 64 percent of the inventory that we reviewed had
been in a suspended category for over 1 year, and some had been
suspended for over 6 years.  Delays in determining the usability of
suspended inventory can result in increased logistics support costs
and readiness problems.  Warner Robins had over 2,000 unfilled
customer demands (valued at about $53 million) while similar items
were in suspension.  Over 500 of these unfilled demands (valued at
about $7 million) could have potentially been filled with these
items.  Two B-52H aircraft had not been fully operational for 175
days and 24 days because two $16,000 data entry keyboards were not
available for issue in the Air Force supply system, yet two such
keyboards had been maintained in a suspended status for 2 years. 

Management controls at Warner Robins over items categorized as
suspended inventory have broken down and contributed to inventory
being in a suspended status beyond established timeframes.  Air Force
Materiel Command guidance does not comply with DOD policy and
safeguard against lengthy suspensions, and Materiel Command and
Warner Robins oversight of inventory management has generally been
nonexistent.  Also, Warner Robins lacks clearly defined suspended
inventory management procedures for, and sufficient emphasis on,
controlling suspended inventory.  Further, management of suspended
inventory has not been identified in Air Force assessments of
internal controls as a significant weakness, as provided in the
Federal Managers' Financial Integrity Act of 1982. 


--------------------
\6 We relied on DOD information systems during the conduct of our
work.  To the extent that DOD had not completed a reliability
assessment of the data contained in those systems, analyses in this
report are qualified.  (See app.  I for more details.)


   REPORTED VALUE OF SUSPENDED
   INVENTORY IS OVER $3 BILLION
------------------------------------------------------------ Letter :3

DOD reported that about $3.3 billion of secondary items was in a
suspended status between April and June 1997.\7 Figure 1 shows the
distribution of the reported value of suspended inventory among DOD
components. 

   Figure 1:  Reported Value of
   Suspended Inventory by DOD
   Component

   (See figure in printed
   edition.)

The Warner Robins ALC accounted for about $1.3 billion (53 percent)
of the Air Force's suspended inventory.  Figure 2 summarizes the
value of suspended inventory by ALC, and figure 3 shows the value of
suspended inventory by condition code at Warner Robins.  Appendix III
contains additional details on the quantity and value of suspended
inventory items. 

   Figure 2:  Reported Quantity
   and Value of Suspended
   Inventory by ALC (as of Apr. 
   1997)

   (See figure in printed
   edition.)

Note:  Figures do not add due to rounding. 

   Figure 3:  Reported Quantity
   and Value of Suspended
   Inventory Managed by the Warner
   Robins ALC (as of Apr.  1997)

   (See figure in printed
   edition.)

Note:  Figures do not add due to rounding. 


--------------------
\7 We revalued the inventory at the latest acquisition cost by
removing surcharges covering the costs to operate the supply system. 
The $3.3 billion represents the revalued amount by removing the
surcharge. 


   INEFFECTIVE MANAGEMENT CAN
   INCREASE COSTS AND REDUCE
   READINESS
------------------------------------------------------------ Letter :4

Significant management weaknesses exist for inventory categorized as
suspended.  The Air Force is not reviewing the status of these items
in a timely manner and has miscategorized a significant amount of
inventory.  As a result, the Air Force is likely incurring
unnecessary logistics costs and missing opportunities to support
operational units' needs in a timely manner. 

At Warner Robins, a substantial number of items failed to meet time
standards for inspection.  As a result, items that may have been
needed for use in the supply system were not being considered for
use.  We reviewed 1,971 judgmentally selected suspended inventory
items, valued at about $67 million, to determine the length of time
the inventory remained in a suspended status.  Of the 1,820 sample
items with standards, valued at $65.8 million, 1,757 items failed to
meet the applicable DOD time standards.  The remaining 151 sample
items without time standards remained in suspension, with times
ranging from 22 days to over 8 years.  Figure 4 summarizes the number
of sample items that met or failed to meet DOD time standards, and
figure 5 shows the time items remained in a suspended status by
suspension category.  Appendix III contains specific details of our
analysis. 

   Figure 4:  Our Analysis of
   Suspended Inventory That Met or
   Failed to Meet DOD Time
   Standards

   (See figure in printed
   edition.)

   Figure 5:  Our Analysis of the
   Time Items Remained Suspended

   (See figure in printed
   edition.)


      TIMELY REVIEWS OF SUSPENDED
      INVENTORY MAY PRECLUDE
      UNNECESSARY REPAIRS
---------------------------------------------------------- Letter :4.1

The Air Force may unnecessarily invest millions of dollars to send
some inventory for repair when the need may have been met from
inventory in suspension.  Since Warner Robins was not making timely
reviews of its inventory in suspension, usable items may have existed
in that category that could have been used to meet supply system
demands.  Our review indicated that Warner Robins officials had
improperly identified 3,418 customer return items, worth $115
million, as inventory in need of repair.  Because these items were
improperly identified as needing repair, Warner Robins officials did
not inspect them to determine their usability, which in turn meant
that the Air Force may have incurred costs to repair other items when
usable items were actually in suspension.  We were not able to
determine the value of these unnecessary repair costs. 


      SUSPENDED INVENTORY IS OFTEN
      NOT CONSIDERED AS A WAY TO
      SATISFY CRITICAL OPERATIONAL
      UNIT DEMANDS
---------------------------------------------------------- Letter :4.2

Inventory managers have missed opportunities to fill orders with
usable items because of the untimely handling of suspended inventory. 
As a result, suspended inventory is not available for use when needed
by customers.  When demands are made on the supply system and assets
are not available to fill those demands, backorders result.  For the
suspended items in our sample, Warner Robins had over 2,000
concurrent backorders, worth about $53 million.  About 65 percent of
these backorders were essential to a weapon system's operation and
thus adversely affected the system's ability to carry out all or
portions of its assigned operational missions.  If the duration of
suspensions had been monitored and usability had been determined
within a reasonable amount of time, over 500 of our sample items,
worth about $7 million, could have been used to fill some of the
backorders, as shown in table 2. 



                                Table 2
                
                Number of Unfilled Customer Orders That
                Could Have Been Met With Suspended Items

                                                             Suspended
                                                                 items
                                                          available to
                                      Suspende  Unfilled   potentially
Suspension code                        d items    orders   fill orders
------------------------------------  --------  --------  ------------
Material in inventory (J)                  332       310            43
Customer returns (K)                        12       138            11
Quality-deficient inventory (Q)             42       771            34
Reclaimed inventory (R)                    639       871           413
======================================================================
Total                                    1,025     2,090           501
----------------------------------------------------------------------
The following examples show how weaknesses in the management of
suspended inventory can affect access to potentially usable
inventory: 

  -- Warner Robins had four data entry keyboards on backorder--two of
     which were classified as mission critical.  The keyboards,
     valued at $16,000 each, are used on B-52H aircraft.  Warner
     Robins inventory records showed two keyboards (see fig.  6) had
     been suspended in reclaimed inventory for over 2 years.  In
     August 1997, two B-52H aircraft were not fully operational
     (i.e., unable to fly portions of their missions) due to the
     unavailability of these keyboards.  One aircraft had been unable
     to fly portions of its mission for 175 days and the other for 24
     days.  At the time of our visit, the item manager had not taken
     action to resolve the status of the keyboards. 

   Figure 6:  Data Entry Keyboard
   in R Condition at the Warner
   Robins Warehouse

   (See figure in printed
   edition.)

  -- Warner Robins had 11 signal converters on backorder--all of
     which were classified as mission critical.  The converters,
     valued at $36,000 each, are used on the B-52H aircraft.  Warner
     Robins inventory records showed three converters (see fig.  7)
     had been in reclaimed inventory for 2 years, from June 1995 to
     June 1997.  In June 1997, two B-52H aircraft were not
     operational (i.e., grounded and unable to fly any portion of
     their missions) due to the unavailability of these converters. 
     One aircraft had been grounded for 33 days and the other for 6
     days.  After we brought this matter to the attention of Warner
     Robins officials, they informed us that testing would be
     performed on the three converters in reclaimed inventory to
     determine their potential use in satisfying backorders. 

   Figure 7:  Signal Converter in
   R Condition at the Warner
   Robins Warehouse

   (See figure in printed
   edition.)


      MAINTAINING UNNEEDED
      INVENTORY INCREASES STORAGE
      COSTS
---------------------------------------------------------- Letter :4.3

Inventory that cannot be applied to any foreseeable need is declared
excess and subject to disposal action.  Warner Robins reported over
5,300 items on hand, worth over $184 million, as excess for the
sample items we reviewed.  Prompt disposal of such unneeded items can
reduce suspended inventory and reduce inventory holding costs. 
Maintaining inventory that is not needed is expensive and does not
contribute to an effective, efficient, and responsive supply system. 
DLA and private industry organizations have previously estimated that
holding costs ranged from less than 1 to 15 percent or higher of an
item's inventory value.  Although it is difficult to determine the
precise costs to manage and maintain excess stocks, our review
indicates that these costs would be millions of dollars each year. 


   WEAK MANAGEMENT CONTROLS EXIST
   FOR INVENTORY IN SUSPENDED
   CATEGORIES
------------------------------------------------------------ Letter :5

AFMC and the Warner Robins ALC lack adequate internal management
controls over suspended inventory.  A number of factors contributed
to delays in resolving the status of suspended inventory and
prolonged inventory suspensions.  First, AFMC guidance hampers the
proper identification, timely inspection, and prompt reclassification
of suspended inventory.  Second, Warner Robins lacks local policies
and procedures that prescribe levels of responsibility and
accountability for managing suspended material.  Third, AFMC and
Warner Robins do not provide adequate oversight and monitoring of
suspended inventory. 


      AFMC GUIDANCE RESULTS IN
      IMPROPER CLASSIFICATIONS AND
      UNTIMELY RESOLUTION
---------------------------------------------------------- Letter :5.1

AFMC supplemental guidance enabled $846 million of inventory in need
of repair stored at Warner Robins to be improperly assigned to the
customer returns suspension code, thus overstating the magnitude of
the Air Force's and Warner Robins' suspended inventory.  Although our
review was limited to Warner Robins, the remaining four ALC's are
also required to comply with the supplemental policy.  Consequently,
the magnitude of the suspended inventories at the other ALCs may also
be overstated. 

According to DOD policy, material returned in an unknown condition by
a customer should be assigned to customer returns and reclassified
within 10 days.  AFMC supplemental guidance, on the other hand,
states that two-level maintenance items returned for repair should be
assigned to this same category.\8 When we informed AFMC officials
that both customer returns and repair items were commingled in the
customer returns suspension code, one official acknowledged that
items not in need of repair may not receive management attention. 
When we brought this same matter to the attention of Warner Robins
officials, they told us that, in complying with the supplemental
guidance, they assumed all items (including $115 million worth of
items in an unknown condition that were returns from customers) were
in need of repair, and thus made no attempts to inspect and
reclassify them.  At Warner Robins, none of the
31 customer returns we reviewed met the 10-day DOD time standard; in
fact, 17 of the customer returns had been suspended for over 1 year. 


--------------------
\8 The Air Force has a three-level (organizational, intermediate, and
depot) and a two-level (organizational and depot) maintenance concept
to repair component parts.  Under the two-level maintenance concept,
broken parts that were previously repaired at the intermediate base
maintenance level are now repaired at the depot level. 


      WAIVER GUIDANCE RAISES
      QUESTIONS
---------------------------------------------------------- Letter :5.2

DOD policy for managing reclaimed inventory states that these items
should be reclassified in 180 days.  AFMC supplemental guidance
waives the standard because of a shortage of repair funds that
hindered item managers' ability to schedule reclaimed inventory for
inspection within the 180-day limit.  However, waiving the standard
exacerbates existing problems with lengthy suspensions.  At Warner
Robins, 99 percent of the 990 reclaimed inventory items we sampled
remained suspended more than 180 days, and 62 percent of the
inventory had been suspended over
2 years.  Table 3 shows the number of reclaimed inventory items that
had been suspended for more than 2 years. 



                                Table 3
                
                  Number of Sample Items in Reclaimed
                       Inventory for Over 2 Years

Years in suspension                                    Number of items
----------------------------------------  ----------------------------
2 to 3                                                             597
3 to 4                                                              10
4 to 5                                                               4
======================================================================
Total                                                              611
----------------------------------------------------------------------

      WARNER ROBINS LACKS
      SUSPENDED INVENTORY
      PROCEDURES
---------------------------------------------------------- Letter :5.3

Warner Robins lacks specific procedures for resolving the status of
items, assigning responsibility for carrying out these procedures,
and prescribing related accountability.  Air Force policy indicates
that ALCs are responsible for preparing comprehensive, explicit
instructions essential to effectively manage inventory. 

Warner Robins item managers and DLA warehouse personnel did not agree
as to who within their organizations is responsible for resolving
suspended inventory.  Item managers told us that warehouse personnel
are responsible for taking the necessary actions to monitor
reclassification of suspended inventory because those personnel have
physical possession of the material.  Warehouse personnel told us
that item managers must direct disposition of suspended material. 
Consequently, neither level assumed responsibility.  When we pointed
out the need for clearly defined responsibilities to Warner Robins
top management officials, they told us that item managers are
responsible for resolving suspended inventory issues and indicated
that Warner Robins would begin drafting suspended inventory
regulations for its item managers. 


      SUSPENDED INVENTORY
      RECLASSIFICATION EFFORTS ARE
      NOT MONITORED
---------------------------------------------------------- Letter :5.4

DOD policy requires periodic reviews of suspended inventory items to
ensure that their usability is determined in a timely manner. 
However, this requirement is not carried out.  For the majority of
our sample items, the item managers could not tell us why the items
had been suspended or who had directed suspension and could not
easily determine how long the items had been suspended.  Warner
Robins officials told us they do not monitor the age of suspended
inventory, even though DOD policy requires that monitoring be done to
keep within prescribed time limits.  Warner Robins officials stated
that they did not regularly compile data on the quantity, value, or
length of time material is suspended or report such data to AFMC
because resolving suspended items' status was not a high priority. 
Further, AFMC officials told us that they have not monitored
suspended inventory management since the late 1980s. 

Adequate management oversight could have highlighted prolonged
suspensions and indicated the necessity for routine monitoring of the
quantity, value, and length of time items are suspended.  If Warner
Robins had monitored the duration of some suspensions, their
usability could have been resolved within a reasonable time.  For
example: 

  -- In May 1986, in anticipation of a patent infringement
     litigation, an item manager was instructed to retain records and
     files involving a supplier of M-16 rifle conversion kits for 20
     years.  At the time of our visit, one M-16 rifle conversion kit
     (see fig.  8) had been suspended for almost 9 years.  An
     additional 985 kits were being held in an issuable condition,
     according to the item manager.  Subsequent to our visit, we were
     informed that the item manager misinterpreted the retention
     instructions.  Rather than just retaining the records and files,
     the item manager had also been unnecessarily holding all 986
     kits.  The item manager informed us that all 986 kits are excess
     and initiated action to dispose of them. 

   Figure 8:  Conversion Kit in L
   Condition at the Warner Robins
   Warehouse

   (See figure in printed
   edition.)

  -- According to warehouse records, one electron tube worth $2,400
     had been suspended in litigation for 362 days.  The item manager
     did not know why the item was suspended, who suspended the item,
     or when the item was placed in suspension.  However, Warner
     Robins warehouse records showed that the tube had been returned
     by a customer because it was not the item requested from supply. 
     When warehouse personnel realized that the serviceable item was
     being erroneously held in litigation, they reclassified the
     electron tube to an issuable condition. 

  -- Four digital computers for the F-4G aircraft had been suspended
     in reclaimed inventory for over 4 years.  According to the item
     manager, there has been little or no demand for the computers,
     valued at $73,300 each, because in 1996 the F-4G aircraft was
     taken out of service.  As a result of our findings, the item
     manager informed us that the digital computers would be
     recommended for disposal. 


      SUSPENDED INVENTORY
      MANAGEMENT WEAKNESSES HAVE
      NOT BEEN IDENTIFIED IN
      FINANCIAL INTEGRITY ACT
      ASSESSMENTS
---------------------------------------------------------- Letter :5.5

The Federal Managers' Financial Integrity Act of 1982 requires agency
heads to assess their internal controls annually and report their
findings to the President and the Congress.  The Air Force provides
its assessments to DOD for inclusion in the Secretary of Defense's
report to the Congress. 

We reviewed internal control assessments by Warner Robins, AFMC, and
the Air Force to determine if the Air Force had reported suspended
inventory management by ALCs as a material weakness and found that it
had not.  One criterion for determining whether an internal control
weakness is material is if it significantly weakens safeguards
against waste.  The problems we identified demonstrate that suspended
inventory management is vulnerable to waste and warrants special
emphasis in future Financial Integrity Act assessments. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

The management of DOD's inventory of spare parts and other secondary
items has been considered a high-risk area for several years. 
Therefore, DOD's reported $3.3 billion suspended inventory is a
problem that warrants management attention.  In terms of reported
dollar value of suspended inventory, the Air Force represents the
biggest problem among the services; within the Air Force, the Warner
Robins ALC accounts for the largest share.  At Warner Robins, we
found significant weaknesses in its management of suspended
inventory.  Since there are standard policies for managing suspended
inventory items across the ALCs and the weaknesses in the process
contribute to some of the problems we identified, other ALCs may have
similar problems.  Air Force and DOD officials have generally stated,
and our review confirmed, that ineffective management and delays in
determining the usability of suspended inventory can result in
increased logistics and support costs and affect readiness. 

At Warner Robins, (1) item managers generally were not complying with
DOD standards for determining the usability of suspended inventory
items, (2) about 64 percent of the items we sampled had been in the
suspended category for more than 1 year and some longer than 6 years,
(3) item managers were following AFMC guidance that does not comply
with DOD and Air Force policy, (4) written procedures for controlling
suspended inventory were lacking, and (5) management oversight of
suspended inventory was limited.  Further, neither Warner Robins nor
the Air Force has identified suspended inventory as a material
management weakness under the Federal Managers' Financial Integrity
Act. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

To improve the management of suspended items, we recommend that the
Secretary of Defense direct the Secretary of the Air Force to ensure
that, at Warner Robins (1) suspended inventory is properly
identified, monitored, inspected, and classified within established
DOD timeframes and (2) suspended items receive adequate visibility at
all management levels, up to and including the service headquarters,
through targeting suspended inventory problems as an issue for review
in the Federal Managers' Financial Integrity Act assessments. 

Also, we recommend that the Secretary of the Air Force direct Warner
Robins ALC to establish explicit guidance on responsibility and
accountability for resolving suspended inventory status, carry out
necessary actions, and follow up to make sure that the actions have
been promptly and correctly taken.  Finally, we recommend that the
Secretary conduct assessments of suspended inventory practices at the
four other ALCs to determine the need for similar remedial actions
and direct any affected ALC to take such actions. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

In written comments on a draft of this report, DOD agreed with our
recommendations (see app.  IV).  DOD stated that on November 13,
1997, Air Force Headquarters provided guidance to the Air Force
Materiel Command requesting a plan to correct deficiencies in
managing suspended stock and initiate aggressive corrective actions. 
The plan is due to the Air Force by mid-December 1997. 


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

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

Please contact me at (202) 512-8412 if you have any questions
concerning this report.  Major contributors to this report are listed
in appendix V. 

David R.  Warren, Director
Defense Management Issues


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

To quantify the number and value of the Department of Defense's (DOD)
suspended inventory, we obtained computerized inventory records of
inventory between April 1997 and June 1997 in suspended condition
codes at all military services and Defense Logistics Agency (DLA)
inventory control points.  We removed surcharges covering the costs
to operate the supply system, and we revalued the suspended inventory
at the latest acquisition cost.  These databases generate the
records, statistics, and reports that DOD uses to manage its
inventories, make decisions, and determine requirements.  We did not
independently verify the accuracy of the military services' and DLA's
inventory databases from which we obtained data.  Therefore, our
report notes that these data are reported values. 

With the use of the inventory records, we identified the Air Force
and Warner Robins Air Logistics Center (ALC) as the DOD component and
its inventory control activity with the highest reported dollar value
of suspended items.  At Warner Robins, we reviewed a judgmental
sample of 1,971 suspended items (valued at $67 million and
representing 101 different inventory numbers).  We excluded
depot-level repairables suspended in the repair cycle process (M
condition) from our review because this status is a normal condition
for this type of material and the items are routinely considered as
assets in the requirement computations of the inventory control
activities.  We also excluded suspended ammunition (N condition)
because this inventory is held for emergency combat use. 

We reviewed policies and procedures and obtained other relevant data
related to suspended inventory management from officials at the DLA
Headquarters, Alexandria, Virginia; Air Force Materiel Command,
Wright-Patterson Air Force Base, Ohio; and Warner Robins ALC and
Defense Distribution Depot, Georgia. 

To determine the age of our sample items, we held discussions with
item managers and reviewed storage activity data and inventory
records.  To learn whether issues associated with suspended items
were promptly resolved and the reasons for delays in resolving the
inventory status of suspended items, we reviewed Air Force and Warner
Robins implementing guidance and assessments of internal controls. 
Such information provided the basis for conclusions regarding the
management of suspended inventory.  To determine if the Air Force had
emphasized suspended inventory management as part of its assessment
of internal controls, we reviewed assessments from Warner Robins for
fiscal years 1993-97, Air Force Materiel Command for fiscal years
1995-96, and the Air Force Headquarters for fiscal years 1993-96. 

To assess the accuracy of data maintained for our sample items, we
reviewed the results of several recent Warner Robins inventory
accuracy assessments.  To ensure the accuracy of inventory records
for our sample items, we obtained additional evidence from Warner
Robins item managers and warehouse personnel.  Consequently, we are
confident that our findings represent material conditions for the
items we reviewed. 

We performed our review between April and October 1997 in accordance
with generally accepted government auditing standards. 


SUPPLY CONDITION CODES
========================================================== Appendix II

Code       Title               Definition
---------  ------------------  -------------------------------------------------
A          Serviceable         New, used, repaired, or reconditioned materiel
           (issuable without   that is serviceable and issuable to all customers
           qualification)      without limitation or restriction.

B          Serviceable         New, used, repaired, or reconditioned materiel
           (issuable with      that is serviceable and issuable for its intended
           qualification)      purpose but is restricted from issue to specific
                               units, activities, or geographical areas by
                               reason of its limited usefulness or short service
                               life expectancy.

C          Serviceable         Items that are serviceable and issuable to
           (priority issue)    selected customers but must be issued before
                               supply condition codes A and B materiel to avoid
                               loss as a usable asset.

D          Serviceable (test/  Serviceable materiel that requires test,
           modification)       alteration, modification, technical data marking,
                               conversion, or disassembly, not including items
                               that must be inspected or tested immediately
                               before issue.

E          Unserviceable       Materiel that involves only limited expense or
           (limited            effort to restore to serviceable condition and is
           restoration)        accomplished in the storage activity in which the
                               stock is located. The materiel may be issued to
                               support ammunition requisitions coded to indicate
                               acceptability of usable stock.

F          Unserviceable       Economically reparable materiel that requires
           (reparable)         repair, overhaul, or reconditioning, including
                               reparable items that are radioactively
                               contaminated.

G          Unserviceable       Materiel requiring additional parts or components
           (incomplete)        to complete before issue.

H          Unserviceable       Materiel that has been determined to be
           (condemned)         unserviceable and does not meet repair criteria.

J          Suspended (in       Materiel in stock that has been suspended from
           stock)              issue, pending condition classification or
                               analysis, when the true condition is not known.

K          Suspended           Materiel returned from customers or users and
           (returns)           awaiting condition classification.

L          Suspended           Materiel held pending litigation or negotiation
           (litigation)        with contractors or common carriers.

M          Suspended (in       Materiel that has been identified on an inventory
           work)               control record but turned over to a maintenance
                               facility or contractor for processing.

N          Suspended           Ammunition stocks suspended from issue except for
           (ammunition         emergency combat use.
           suitable for
           emergency combat
           use only)

P          Unserviceable       Materiel that is determined to be unserviceable
           (reclamation)       and uneconomically reparable, as a result of
                               physical inspections, teardown, or engineering
                               decision, but contains serviceable components or
                               assemblies to be reclaimed.

Q          Suspended           Quality-deficient exhibits returned by customers
           (quality-           or users as directed by the Integrated Materiel
           deficient           Manager, due to technical deficiencies reported
           exhibits)           by Quality Deficiency Reports. (This code is for
                               intra-Air Force use only.)

R          Suspended           Assets turned in by reclamation activities that
           (reclaimed items    do not have the capability (e.g., skills,
           awaiting condition  personnel, or test equipment) to determine
           determination)      materiel condition. Actual condition will be
                               determined before induction into maintenance
                               activities for repair or modification.

S          Unserviceable       Materiel that has no value except for its basic
           (scrap)             materiel content.
--------------------------------------------------------------------------------
Note:  Condition codes I, O, and T through Z are not assigned and
reserved for future DOD assignment. 

Source:  DOD. 


ADDITIONAL INFORMATION ON
SUSPENDED MATERIAL AND DOD TIME
STANDARDS
========================================================= Appendix III

Table III.1 shows the reported quantity and value of suspended
inventory items by ALC, and table III.2 shows this information
specifically for Warner Robins ALC.  Table III.3 shows the number of
items in our sample that met or failed to meet DOD time standards,
and table III.4 shows the number of items that were in a suspended
status at the time of our review and the amount of time that the
items were suspended. 



                              Table III.1
                
                Reported Quantity and Value of Suspended
                   Material by ALC (as of Apr. 1997)

                         (Dollars in millions)

ALC                                Number of items               Value
------------------------------  ------------------  ------------------
Oklahoma City                               26,900              $218.6
Ogden                                      279,300               567.3
San Antonio                                 31,700               298.1
Sacramento                                   5,000                30.4
Warner Robins                               60,600             1,260.4
======================================================================
Total                                      403,500            $2,374.8
----------------------------------------------------------------------


                              Table III.2
                
                Reported Quantity and Value of Suspended
                 Inventory Managed by the Warner Robins
                         ALC (as of Apr. 1997)

                         (Dollars in millions)

Suspension code                    Number of items               Value
------------------------------  ------------------  ------------------
Material in inventory (J)                   17,300               $54.5
Customer returns (K)                        38,800             1,087.0
Inventory in litigation (L)                    100                 0.4
Quality-deficient inventory                    500                19.2
 (Q)
Reclaimed inventory (R)                      3,900                99.3
======================================================================
Total                                       60,600            $1,260.4
----------------------------------------------------------------------


                                   Table III.3
                     
                     Our Analysis of Sample Items that Met or
                        Failed to Meet DOD Time Standards

                        Items meeting standard      Items not meeting standard
                      --------------------------  ------------------------------
Suspen          Time
sion        standard
code       (in days)        Number         Value        Number             Value
------  ------------  ------------  ------------  ------------  ----------------
Materi            90            59      $671,956           740       $28,797,864
 al in
 inven
 tory
 (J)
Custom            10             0             0            31           687,000
 er
 retur
 ns
 (K)
Reclai           180             4        99,883           986        35,512,041
 med
 inven
 tory
 (R)
================================================================================
Total                           63      $771,839         1,757       $64,996,905
--------------------------------------------------------------------------------


                                   Table III.4
                     
                     Our Analysis of the Time Items Remained
                              in a Suspended Status

                               Number of days in suspension
           ---------------------------------------------------------------------
Suspensio    0-    31-             91-    181-                  730 or
n code       30     60   61-90     180     365     366-730        more     Total
---------  ----  -----  ------  ------  ------  ----------  ----------  --------
Material      4      1      54     208     303         103         126       799
 in
 inventor
 y (J)
Customer      0      0       0       5       9          16           1        31
 returns
 (K)
Inventory     0      0       0       0       1           0          88        89
 in
 litigati
 on (L)
Quality-      1      8      19      30       2           2           0        62
 deficient
 inventor
 y (Q)
Reclaimed     0      0       0       4      63         312         611       990
 inventory
 (R)
================================================================================
Total         5      9      73     247     378         433         826     1,971
--------------------------------------------------------------------------------



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


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Charles I.  Patton, Jr.
Lawson (Rick) Gist, Jr.
James Murphy

NORFOLK FIELD OFFICE

Sandra F.  Bell
Dawn R.  Godfrey

KANSAS CITY FIELD OFFICE

Robert C.  Sommer

RELATED GAO PRODUCTS

High-Risk Series:  Defense Inventory Management (GAO/HR-97-5, Feb. 
1997). 

Defense Logistics:  Much of the Inventory Exceeds Current Needs
(GAO/NSIAD-97-71, Feb.  28, 1997). 

Defense Inventory:  Spare and Repair Parts Inventory Costs Can Be
Reduced (GAO/NSIAD-97-47, Jan.  17, 1997). 

Logistics Planning:  Opportunities for Enhancing DOD's Logistics
Strategic Plan (GAO/NSIAD-97-28, Dec.  18, 1996). 

1997 DOD Budget:  Potential Reductions to Operation and Maintenance
Program (GAO/NSIAD-96-220, Sept.  18, 1996). 

Defense IRM:  Critical Risks Facing New Materiel Management Strategy
(GAO/AIMD-96-109, Sept.  6, 1996). 

Navy Financial Management:  Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, Aug.  16, 1996). 

Defense Logistics:  Requirements Determinations for Aviation Spare
Parts Need to Be Improved (GAO/NSIAD-96-70, Mar.  19, 1996). 

Defense Inventory:  Opportunities to Reduce Warehouse Space
(GAO/NSIAD-95-64, May 24, 1995). 

Defense Supply:  Inventories Contain Nonessential and Excessive
Insurance Stocks (GAO/NSIAD-95-1, Jan.  20, 1995). 

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

Air Force Logistics:  Improved Backorder Validation Procedures Will
Save Millions (GAO/NSIAD-94-103, Apr.  20, 1994). 

Air Force Logistics:  Some Progress, but Further Efforts Needed to
Terminate Excess Orders (GAO/NSIAD-94-3, Oct.  13, 1993). 


*** End of document. ***