Defense Inventory: Status of Inventory and Purchases and Their
Relationship to Current Needs (Letter Report, 04/16/99, GAO/NSIAD-99-60).

Pursuant to a congressional request, GAO provided information on the
Department of Defense's (DOD) on-hand and on-order inventory, focusing
on whether DOD: (1) had on-hand inventory exceeding current requirements
as of September 30, 1996, and 1997; and (2) was buying inventory for
which it had no current requirements as of those same dates.

GAO noted that: (1) DOD reported reducing the secondary inventory GAO
analyzed from about $69.7 billion as of September 30, 1996, to $65.8
billion as of September 30, 1997; (2) about $39.4 billion of this
inventory exceeded DOD's requirements and represented about 60 percent
of DOD's total on-hand inventory; (3) the percentage of inventory that
exceeded current requirements remained about the same for the two
periods GAO analyzed and was about the same as of September 30, 1995;
(4) DOD could potentially reduce inventory that exceeded current
requirements when it is economical to do so; (5) DOD had no demand for
about $11 billion, or 29 percent, of $37 billion of the inventory that
exceeded requirements as of September 30, 1997, but did have customer
demands for the remaining $26 billion; (6) assuming customer demands
remain unchanged, +$3.4 billion of this inventory would last 20 or more
years and $658 million would last more than 100 years; (7) some portion
of this inventory is more economical to retain than to dispose of and
possibly repurchase; (8) however, to the extent it is economical to
dispose of the inventory, DOD's cost of operations could be reduced; (9)
DOD must continue to purchase additional inventory to replenish supply
shortages; (10) however, DOD also ordered inventory that, if received,
would add to the amount that exceeded requirements as defined by DOD and
GAO; (11) as of September 30, 1997, DOD did not need about $1.5 billion,
or 18 percent, of the inventory it had ordered to meet requirements;
(12) the requirements for these inventories frequently change after the
items are ordered; and (13) however, while the services cancel some of
the on-order inventory that is not needed, they miss many opportunities
to cancel additional orders.

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

 REPORTNUM:  NSIAD-99-60
     TITLE:  Defense Inventory: Status of Inventory and Purchases and 
             Their Relationship to Current Needs
      DATE:  04/16/99
   SUBJECT:  Military inventories
             Surplus federal property
             Inventory control systems
             Logistics
             Property disposal
             Defense cost control
             Spare parts
IDENTIFIER:  DOD Strategic Logistics Plan
             DOD Supply System Inventory Report
             
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NS99060.book GAO United States General Accounting Office

Report to the Chairman, Subcommittee on National Security,
Veterans Affairs, and International Relations, Committee on
Government Reform, House of Representatives

April 1999 DEFENSE INVENTORY

Status of Inventory and Purchases and Their Relationship to
Current Needs




GAO/NSIAD-99-60

  GAO/NSIAD-99-60

United States General Accounting Office Washington, D. C. 20548
Lett er

Page 1 GAO/NSIAD-99-60 Defense Inventory

GAO

National Security and International Affairs Division

B-279506 Letter April 16, 1999 The Honorable Christopher Shays
Chairman, Subcommittee on National Security,

Veterans Affairs, and International Relations Committee on
Government Reform House of Representatives

As part of our ongoing analysis of the Department of Defense's
(DOD) secondary inventory, we have updated our prior analyses of
DOD's reported on- hand and on- order inventory. 1 As requested,
we determined whether DOD (1) had on- hand inventory exceeding
current requirements as of September 30, 1996, and 1997, and (2)
was buying inventory for which

it had no current requirement as of those same dates. Our analyses
are based on reported secondary inventory data relating to spare
and repair parts, clothing, medical supplies, and other items to
support DOD's

operating forces. The scope and methodology of our work are
described in appendix I.

Results in Brief DOD reported reducing the secondary inventory we
analyzed from about $69.7 billion as of September 30, 1996, to
$65.8 billion as of September 30, 1997. About $39.4 billion of
this inventory exceeded DOD's requirements and represented about
60 percent of DOD's total on- hand inventory. The

percentage of inventory that exceeded current requirements
remained about the same for the two periods we analyzed and was
about the same as of September 30, 1995. 2 DOD could potentially
reduce inventory that exceeded current requirements where
economical to do so. The Department had no demand for about $11
billion, or 29 percent, of $37 billion of the inventory that
exceeded current requirements as of September 30, 1997, but did
have customer demands for the remaining $26 billion. Assuming
customer demands remain unchanged, $3.4 billion of this inventory
would last 20 or 1 Defense Logistics: Much of the Inventory
Exceeds Current Needs (GAO/NSIAD-97-71, Feb. 28, 1997)

and 1998 DOD Budget: Operation and Maintenance Program (GAO/NSIAD-
97-239R, Aug. 21, 1997). 2 In commenting on our past reports, DOD
disagreed with our definition of current requirements. We believe
that the inventory DOD needs to prevent out- of- stock situations
and to meet funded war

reserves represents current requirements. DOD adds inventory to
cover unfunded war reserves and demand for the time frame covered
by the budget-- 2 years from the end of the fiscal year. About
$22. 7 billion, or 34 percent, of on- hand inventory exceeded
DOD's measure as of September 1997.

B-279506 Page 2 GAO/NSIAD-99-60 Defense Inventory

more years and $658 million would last more than 100 years. Some
portion of this inventory is more economical to retain than to
dispose of and possibly repurchase. However, to the extent it is
economical to dispose of the inventory, DOD's cost of operations
could be reduced.

DOD must continue to purchase additional inventory to replenish
supply shortages. However, DOD also ordered inventory that, if
received, would add to the amount that exceeded current
requirements as defined by DOD and us. As of September 30, 1997,
DOD did not need about $1. 5 billion, or 18 percent, of the
inventory it had ordered to meet current requirements. The
requirements for these inventories frequently change after the
items are ordered. However, while the services cancel some of the
on- order inventory that is not needed, they miss many
opportunities to cancel additional orders.

We have made a number of recommendations in the past that DOD take
actions to improve its inventory management processes and to adopt
leading edge business practices. Therefore, we are making no
additional

recommendations in this report. Background In 1990, we identified
DOD's management of secondary inventory as a

high- risk area because levels of inventory were too high and
management systems and procedures were ineffective. While some
improvements have been made, we reported in 1999 3 that these
conditions still exist. Our August 1997 report stated that DOD had
$8. 6 billion of inventory on contract or on purchase requests as
of September 30, 1996, of which $1. 6 billion, or 18. 8 percent,
exceeded current requirements. Our prior work shows that in some
cases purchases (1) were not based on valid needs, (2) were excess
to needs because the requirements changed after orders were
placed, and (3) occurred even though contracts could have been
canceled. 4 Notwithstanding these conditions, DOD must continue to
purchase other inventory items to support the needs of its
customers

because some items are in short supply. 3 High- Risk Series: An
Update (GAO/HR-99-1, Jan. 1999). 4 Navy Inventory Management:
Improvements Needed to Prevent Excess Purchases (GAO/NSIAD-98-86,
Apr. 30, 1998) and Defense Logistics (GAO/NSIAD-97-71, Feb. 28,
1997).

B-279506 Page 3 GAO/NSIAD-99-60 Defense Inventory

We have previously recommended that DOD adopt leading- edge
practices, such as prompt repair of items, supplier partnerships,
and third- party logistics, to improve its logistics operations.
In our prior work, we found that DOD recognized that it must
improve its inventory management and had initiated some pilot
projects. To further this goal, DOD set out objectives for
continued inventory improvements in the 1998 Logistics Strategic
Plan. The plan includes objectives to reengineer business

practices to increase efficiency and reduce logistics resource
requirements and minimize levels of inventory, consistent with
readiness objectives.

We reported in February 1997 that DOD had achieved some inventory
reductions; however, about 60 percent of the on- hand inventory
exceeded current requirements as defined by us. In that report, we
recognized that DOD is always going to have inventory that exceeds
current requirements and that some should be retained for economic
or contingency reasons. However, our data showed that DOD had
potential for further reductions.

The inventory that we refer to as current requirements in this
report and our previous reports represents the maximum authorized
amount of inventory required to prevent out- of- stock situations.
DOD defines this amount as its requirements objective. The major
components of the requirements objective are

 war reserves that are authorized to be purchased to ensure fast
mobilization in the event of war,  customer requisitions that have
not been filled,  a safety level to be on hand in case of minor
interruptions in the

resupply process or unpredictable fluctuations in demand,  items
to be issued during the period between when a need to buy an item
is identified and when it is received (lead time),

 minimum quantities for designated items (insurance items),  items
to be issued during the repair period for repairable items, and
an economic order quantity to ensure the quantity ordered results
in the

lowest total costs to order and hold inventory. DOD matches on-
hand and on- order inventory by individual item to their
requirements objective to determine if there is an excess or
shortage of inventory. In this report, we present summaries of our
analyses of the

item- level and summary- level budget stratification reports that
the military services and Defense Logistics Agency (DLA) use to
prepare budget

B-279506 Page 4 GAO/NSIAD-99-60 Defense Inventory

requests and to review funding. 5 We address the on- hand and on-
order inventory items that exceed the requirements. This report
does not address DOD's shortages of items that it uses to support
its budget request. We did not independently determine the
reliability of the data; however, our prior

evaluations show that some of the data used by DOD and the
services were not entirely accurate and reliable. Notwithstanding
the concerns we have about the data reliability, we believe that
the records and reports can be used to monitor the status of on-
hand and on- order inventory at the macro level.

Much of DOD's Inventory Is Above Current Requirements

DOD reported reducing the secondary inventory we analyzed by $3. 9
billion, from $69.7 billion as of September 30, 1996, to $65. 8
billion as of September 30, 1997. However, $39.4 billion of the
$65. 8 billion in secondary inventory for September 30, 1997,
exceeded the current requirements shown in DOD's requirements
objective. In other words,

based on the requirements at September 30, 1997, DOD would not
have bought $39.4 billion, or about 60 percent, of the inventory
it had on hand. The percentage of inventory that exceeded current
requirements was about the same as of September 30, 1995. Although
the requirements objective represents the maximum amount of

inventory authorized to sustain current operations, including the
funded war reserves, DOD officials prefer to use the approved
acquisition objective as the measure of requirements for on- hand
inventory. The approved acquisition objective is generally the
requirements objective plus inventory to cover unfunded war
reserves and to meet demand for the time

period that DOD is budgeting-- 2 years from the end of a fiscal
year. Using DOD's calculation of approved acquisition objective,
we calculated that $22.7 billion, or 34 percent, of the $65.8
billion in inventory exceeded

DOD's requirements as of September 1997. The following table
compares the on- hand inventory with both the requirements
objective and the approved acquisition objective.

5 We use DOD's budget stratification reports to make our analyses
because item- level information is available from each service and
DLA. DOD also reports summary statistics on the status of its on-
hand inventory in the Supply System Inventory Report. See appendix
III for summary statistics and methods of valuing inventory.

B-279506 Page 5 GAO/NSIAD-99-60 Defense Inventory

Table 1: DOD Inventory That Exceeded Current Requirements as of
September 30, 1996, and 1997

a We reviewed most of the inventory in the budget stratification
records for the Army, the Navy, the Air Force, and DLA but not for
the Marine Corps. We did not analyze data for in- transit stock,
some retail inventory, and some consumable inventory, including
fuel, because the inventory either was not stratified or
represented a small portion of the total inventory. The items are
priced at latest acquisition cost. The detail by DOD component is
shown in tables II. 1 and II. 2 of

appendix II. We previously reported 6 that DOD's on- hand
inventory exceeded current requirements for many reasons. Some of
the reasons were demands decreased, fluctuated, or did not
materialize; items became obsolete when weapon systems became
obsolete or were phased out of service; and some of the initial
requirements and demand forecasts were not accurate.

DOD officials told us that once the inventory exceeds current
requirements, they must decide whether to keep it or dispose of
it. To make this decision, DOD uses models to determine how much
of the inventory will be needed beyond the 2 years of demand shown
in the approved acquisition objective. On the bases of these
models, DOD divides its inventory into groupings that (1) are more
economical to retain than dispose of and possibly repurchase, (2)
are held to support specific

contingencies, and (3) have potential for reutilization or
disposal. While it may need to retain some of this inventory, DOD
has the potential for further inventory reductions, as the
following sections indicate.

Dollars in billions

On- hand inventory exceeding On- hand inventory analyzed a
Requirements

objective Approved acquisition objective Year ending Value Value
Percent Value Percent

Sept. 30, 1996 $69. 7 $41.3 59 $25.4 36 Sept. 30, 1997 65. 8 39.4
60 22.7 34

Change ($ 3.9) ($ 1.9) ($ 2.7)

6 See Related GAO Products at the end of this report.

B-279506 Page 6 GAO/NSIAD-99-60 Defense Inventory

Some Items Have No Projected Demands

DOD reported reducing the amount of inventory that exceeded
current requirements and did not have demands from $12.5 billion
as of September 30, 1996, to $10.9 billion as of September 30,
1997. However, the amount that had no projected demand still
represented about 30 percent of DOD's inventory that exceeded the
current requirements. (See table 2.)

Table 2: Comparison of Items Without Projected Demand and the
Value of Inventory Exceeding Current Requirements

a The amounts in this table differ from table 1 primarily because
we excluded inventory called numeric stockage objective items that
DLA manages based on criteria other than demand. In addition, data
were not available to make the analysis for the approved
acquisition objective for all services.

We further analyzed this inventory by service (see tables II. 3
and II. 4 of app. II) and found that the Navy and the Air Force
held about $11.8 billion of the $12. 5 billion in inventory with
no projected demand as of September 1996 and $10.4 billion of the
$10.9 billion in inventory as of September 1997. While this macro
measure shows that all of this inventory has no projected

customer demand, it does not show the extent that DOD has
determined it is more economical to keep the inventory rather than
dispose of and possibly repurchase. We provided, however, in our
February 1997 report, several examples where items with no demand
may never be used.

We excluded about $3 billion of DLA's inventory that exceeded the
requirements objective from each year of this analysis because DLA
does not manage these items based on demand. Although these items
are not managed based on demand, they are similar to items with no
demand and have potential for inventory reductions. According to a
DLA official, the services transferred about 60 percent of this
inventory to DLA. He said that these items have infrequent and
erratic demands, making forecasting extremely difficult and
disposal somewhat problematic.

Dollars in billions

On- hand inventory exceeding requirements

objective a Inventory exceeding requirements objective that had no
demand

Date Value Value Percentage

Sept. 30, 1996 $39. 8 $12. 5 31 Sept. 30, 1997 37.0 10.9 29

Change ($ 2. 8) ($ 1.6)

B-279506 Page 7 GAO/NSIAD-99-60 Defense Inventory

Inventory Exceeding Current Requirements Represents Many Years of
Projected Supply Needs

Of the $37 billion in secondary inventory that exceeded current
requirements as of September 30, 1997, $26 billion had projected
customer demands. Using the projected demand data, we grouped the
$26 billion to show years of supply based on current demand data
(see fig. 1). This analysis assumes demand patterns across the
summary of items will remain unchanged. Increases or decreases in
actual demand by item do

occur; consequently, this data is only an indicator of potential
excess inventory held by DOD.

Figure 1: Value of Items With Inventory Exceeding the Requirements
Objective Shown by Years of Supply for September 30, 1996, and
1997

Note: The amounts in this figure also exclude the DLA inventory
items that are not managed based on demand.

The detail by DOD component is shown in tables II. 7 and II. 8 of
appendix II.

0 1

2 3

4 5

6 7

8 9

10 Less than 2

years 2 to 5 years 5 to 10 years 10 to 20 years 20 to 50 years 50
to 100 years 100 or more

years September 30, 1996 September 30, 1997

Dollars in billions Years of supply

B-279506 Page 8 GAO/NSIAD-99-60 Defense Inventory

These data show  about $9.3 billion (36 percent of $26 billion)
represented the first 2 years of demand that exceeded the
requirements objective but would

generally be included in the approved acquisition objective,  the
remaining items represented about $16.7 billion (64 percent of

$26 billion) that would last more than 2 years after the
requirements objective was met, and  about $3. 4 billion would
last 20 or more years and $658 million would

last 100 or more years after the requirements objective was met.
Some Inventory on Order Exceeds Current Requirements

DOD must order inventory on a routine basis to meet supply
shortages. To do this, DOD orders inventory based on the
requirements objective. We found that as of September 30, 1996,
and September 30, 1997, some of the on- order inventory was no
longer needed. We previously reported in February 1997, August
1997, and April 1998 that ordering inventory that was beyond
requirements was a continuing problem. For example, our work
showed that in some cases purchases (1) were not based on valid
needs, (2) were excess to needs because the requirements changed
after orders were placed, or (3) were for weapon systems that had
not been activated. We reported that some of the changes could not
have been

anticipated, but DOD could have done a better job of canceling
those purchases that exceeded requirements. A DOD official told us
that while the services cancel some orders that exceed current
requirements, sometimes it is more economical to receive the
orders than to cancel them. However, we reported in April 1998
that ineffective and inefficient inventory management practices
result in purchasing resources being applied to items where there
is already sufficient inventory to support needs. Furthermore, to
the extent that DOD receives these orders, it increases the on-
hand inventory that exceeds current requirements and DOD must
determine whether it is more economical to keep or dispose of.

As of September 30, 1997, the services and DLA had $8 billion of
inventory on order, of which $1. 5 billion would not have been
ordered based on current requirements. This is slightly better
than September 30, 1996, when the amount was $8. 9 billion of
inventory on order or on purchase request, of which $1.7 billion
would not have been ordered based on current

requirements. In both cases, the portion that exceeded current
requirements stayed at about 18 percent. Using DOD's approved

B-279506 Page 9 GAO/NSIAD-99-60 Defense Inventory

acquisition objective, $609 million, or 8 percent, of its
purchases exceeded current requirements as of September 30, 1997.
(See table 3.)

Table 3: Inventory on Order That Exceeded Current Requirements as
of September 30, 1996, and 1997

a Eighty percent of the $1. 5 billion as of September 1997, was
"on- order: contract," which is due in from procurement for which
funds have been obligated, and 20 percent was "on- order:
commitment," for which a procurement request had been initiated
but a contract had not been awarded.

Tables II. 5 and II. 6 of appendix II detail our analysis for each
of the military services and DLA. This analysis does not show how
much of the on- order inventory could economically be canceled. In
our April 1998 report on the Navy's purchases, we provided reasons
that on- order inventory became excess to current requirements.

 Some requirements to purchase items were not valid.  Customer
demands decreased or did not materialize after the order was

placed.  Engineering estimates for requirements had not
materialized.  The item or system on which the item was used
became obsolete.

We reported that in some cases, the changes could not have been
anticipated. However, in other cases, better management could have
eliminated or reduced the accumulation of inventory that exceeded
requirements. For example, we reported that while the Navy
canceled some orders, it missed many opportunities to cancel
additional orders for inventory that was no longer needed.

Dollars in millions

On- order inventory exceeding On- order inventory analyzed
Requirements

objective Approved acquisition objective Date Value Value Percent
Value Percent

Sept. 30, 1996 $8,852. 2 $1,711. 6 19 $708. 4 8 Sept. 30, 1997 8,
002. 7 1, 470.6 a 18 608. 9 8

Change ($ 849.5) ($ 241.0) ($ 99. 5)

B-279506 Page 10 GAO/NSIAD-99-60 Defense Inventory

Conclusions The data indicate that DOD has made some progress in
reducing its total inventory; however, it still has substantial
on- hand inventory that exceeds current requirements. The portion
that exceeded current requirements stayed at about 60 percent of
total inventory for the time periods we analyzed. In addition,
about $11 billion of on- hand inventory that exceeded

current requirements had no demand, and more than $3 billion of
on- hand inventory would last 20 or more years after current
requirements were met. DOD uses models to evaluate this inventory
to determine if it should be

kept for economic reasons, for contingencies, or disposed of.
However, our data indicate the potential for further reductions.

DOD must continue to routinely order inventory to meet supply
shortages. However, DOD ordered some inventory that, if received,
would add to the amount that exceeded current requirements. Our
April 1998 report indicates there are opportunities to improve
DOD's buying practices to avoid buying items that may not be used.

We have previously recommended that DOD take actions to improve
the effectiveness and efficiency of its inventory activities and
to adopt new leading- edge business practices. DOD has identified
various initiatives in response to these recommendations.
Therefore, we are making no recommendations in this report. We
will continue to review DOD's inventory management practices to
identify further actions to improve the inventory management
systems. Agency Comments and

Our Evaluation DOD provided comments to clarify its position on
the contents of our draft report. (See app. IV for DOD's complete
comments.) DOD's comments focused on our approach to considering
inventory requirements when

measuring inventory levels and an explanation of the just released
Supply System Inventory Report (SSIR) for the end of fiscal year
1998.

DOD expressed disagreement with our approach to measuring
inventory against requirements. DOD noted that to discuss the
budget stratification reports used to determine purchase
requirements and the SSIR used to report inventory on hand is not
an accurate comparison. Also, DOD stated

that the draft report refers to overages in budget stratification
reports but does not address the shortages in those same reports.
According to DOD, ignoring the shortages, while citing the
overages, does not give a balanced picture of what the
stratification reports actually show.

B-279506 Page 11 GAO/NSIAD-99-60 Defense Inventory

DOD also stated that the SSIR should be the only source for
inventory data. However, we noted that DOD uses both the budget
stratification and the SSIR reports to make management decisions.
Our report recognizes the differences in the two reports. Item-
level analysis is needed to identify the characteristics of
inventory that exceeds current requirements, such as (1) inventory
that has no projected customer demand, (2) years of supply that
exceeds current requirements, and (3) inventory on order that is
no longer needed to meet current requirements. To do that
analysis, we used the item- level records that are the basis for
both the budget stratification and the SSIR reports. The analyses
in our report cannot be made from the SSIR, which is a summary
level report.

Our report was revised to more clearly recognize that DOD has
supply shortages. Although we concentrated on inventory that
exceeds current needs, we realize that DOD must continue to
purchase other inventory items to support the needs of its
customers because some items are in short supply. Replenishing
inventory is a normal part of the supply system

process and DOD uses analyses of these needs to support budget
requests. Additionally, DOD stated that the SSIR is its official
report on inventory and provided just released statistics showing
$61.2 billion of secondary inventory in current dollars for the
end of fiscal year 1998--$ 3.6 billion

better than DOD's National Performance Review goal. Our review
focused on the 1997 inventory because that was the most recent
data available at the time of our work. Appendix III shows the
SSIR statistics for the end of fiscal year 1997.

We are sending copies of this report to the appropriate
congressional committees; to the Honorable William S. Cohen,
Secretary of Defense; the Honorable Louis Caldera, Secretary of
the Army; the Honorable Richard Danzig, Secretary of the Navy; the
Honorable F. Whitten Peters, Acting Secretary of the Air Force;
Lieutenant General Henry T. Glisson, Director, DLA; and the
Honorable Jacob J. Lew, Director, Office of Management and Budget.

B-279506 Page 12 GAO/NSIAD-99-60 Defense Inventory

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

Sincerely yours, David R. Warren, Director Defense Management
Issues

Page 13 GAO/NSIAD-99-60 Defense Inventory

Page 14 GAO/NSIAD-99-60 Defense Inventory

Contents Letter 1 Appendix I Scope and Methodology

17 Appendix II Inventory Analyses by Service and DLA for

September 30, 1996, and 1997 20

Appendix III DOD Secondary Inventory Reports

24 Appendix IV Comments From the Department of Defense

28 Appendix V Major Contributors to This Report

30 Related GAO Products 32 Tables Table 1: DOD Inventory That
Exceeded Current Requirements as of

September 30, 1996, and 1997 5 Table 2: Comparison of Items
Without Projected Demand and the

Value of Inventory Exceeding Current Requirements 6 Table 3:
Inventory on Order That Exceeded Current Requirements

as of September 30, 1996, and 1997 9

Contents Page 15 GAO/NSIAD-99-60 Defense Inventory

Table II. 1: DOD Inventory That Exceeded Current Requirements by
Component as of September 30, 1996 20 Table II. 2: DOD Inventory
That Exceeded Current Requirements by

Component as of September 30, 1997 20 Table II. 3: Items Without
Projected Demand and the Value of

Inventory Exceeding Current Requirements by Component as of
September 30, 1996 21 Table II. 4: Items Without Projected Demand
and the Value of

Inventory Exceeding Current Requirements by Component as of
September 30, 1997 21 Table II. 5: Inventory on Order That
Exceeded Current Requirements

by DOD Component as of September 30, 1996 22 Table II. 6:
Inventory on Order That Exceeded Current Requirements

by DOD Component as of September 30, 1997 22 Table II. 7: Years of
Supply That Exceeded Current Requirements

as of September 30, 1996 23 Table II. 8: Years of Supply That
Exceeded Current Requirements

as of September 30, 1997 23 Table III. 1: DOD Reduces Secondary
Inventory Fiscal Year 1995

Constant Dollars 26 Table III. 2: DOD Reduces Secondary Inventory
Current- Year

Dollars 27 Figures Figure 1: Value of Items With Inventory
Exceeding the

Requirements Objective Shown by Years of Supply for September 30,
1996, and 1997 7 Figure III. 1: Relationship of the SSIR to the
Budget Stratification

Records Provided to Us as of September 30, 1997 25

Abbreviations

DLA Defense Logistics Agency DOD Department of Defense SSIR Supply
System Inventory Report

Page 16 GAO/NSIAD-99-60 Defense Inventory

Page 17 GAO/NSIAD-99-60 Defense Inventory

Appendix I Scope and Methodology Appendi x I

We analyzed September 30, 1996, and September 30, 1997, inventory
stratification reports for the Army, the Air Force, the Navy, and
the Defense Logistics Agency (DLA) to determine whether the
Department of Defense (DOD) bought and retained more inventory
than it needed to meet current requirements. We used analyses that
we had developed in two prior

reviews to determine the extent that DOD's inventory exceeded its
current requirements as defined by the requirements objective and
the approved acquisition objective. We determined the percentage
of each category to overall inventory and measured the change
between the two time periods. We analyzed records of inventory
valued at $69.7 billion for September 30,

1996, and $65.8 billion for September 30, 1997. Appendix III
explains how this inventory is valued and the relation between the
two reports that DOD uses to manage secondary inventory. We
reviewed $65.8 billion of secondary inventory stratified by the
Army, the Navy, the Air Force, and DLA for September 30, 1997. We
did not analyze about $17.3 billion of the secondary inventory,
including (1) the Marine

Corps' secondary inventory; (2) in- transit stock; (3) retail
inventory; and (4) DLA's fuel supply, subsistence, and base
operating support inventory. The Marine Corps' inventory
represented a small part of the universe and the retail inventory,
in- transit stock, and fuel are not stratified. All of the

inventory items were priced at latest acquisition cost. Generally,
we used computerized individual item records and summary
stratification reports for the two time periods. However, to make
a detailed analysis of demand rates, DLA provided us computerized
data that were as

of August 31, 1996, and June 30, 1998, rather than the September
dates requested. The information represents the requirements,
demand rates, and asset positions of the inventory as of these
specific points in time.

Although the information can change daily for individual items,
our analyses over more than one time period indicate that the
position of the total inventory is relatively stable. We revalued
Army and Navy inventory to the latest acquisition cost by removing
surcharges prescribed by the Defense Finance Accounting Service to
cover the costs to operate the supply system. Air Force and DLA
inventory were already priced at latest acquisition cost.

To make our analysis, we did the following.  Compared requirements
reported for individual items with on- hand

assets to identify inventory in excess of requirements. We used
both the requirements objective and the approved acquisition
objective

Appendix I Scope and Methodology

Page 18 GAO/NSIAD-99-60 Defense Inventory

whenever possible. The Army and DLA did not provide us sufficient
information to make some of the analyses for the approved
acquisition objective.  Determined whether the reported on- hand
inventory that exceeded the

requirements objective had projected demand in the automated item
records. We reported the value of the items without demand;
however, we excluded DLA's inventory items that have intermittent
demands but it considered essential to stock (numerical stock
objective). To determine the years of supply for the items with
demand, we divided the

total inventory on hand by the annual demand.  Determined how much
of the inventory on- order contract and on- order commitment
exceeded the requirements objective and approved

acquisition objective. We discussed inventory requirements and
procurement issues and inventory reduction initiatives with
inventory management officials at the Office of the Assistant
Deputy Under Secretary of Defense (Materiel and Distribution
Management), and the Army, the Navy, the Air Force, and the DLA
headquarters.

We did not validate the accuracy of the inventory items,
requirements, or asset quantities and values DOD reported in the
computerized records or summary stratification reports. While
neither we nor DOD made a comprehensive assessment of the
databases underlying the stratification reports, we knew from this
review, and our previous reviews of DOD inventory management, that
the stratification reports contained some inaccurate data. Our
previous evaluations show that DOD has a history of some data
accuracy problems with its inventory and requirements information.
1 Thus, while the data DOD and the services use in the

day- to- day management of secondary inventory are not entirely
accurate and reliable, it is the basis for DOD's budget requests
for all of the services, and the reports were the best source of
data available to us at the time of our review. Notwithstanding
these concerns about data reliability, the

records and reports can be used to monitor the status of on- hand
and onorder inventory at the macro level. 1 We reviewed 46 of our
reports and found that we questioned some aspect of the accuracy
of information in over 50 percent of the reports. The information
was either directly from the inventory stratification database or
from other inventory records that directly or indirectly provided
input to the inventory stratification.

Appendix I Scope and Methodology

Page 19 GAO/NSIAD-99-60 Defense Inventory

We performed our review between January 1998 and December 1998 in
accordance with generally accepted government auditing standards.

Page 20 GAO/NSIAD-99-60 Defense Inventory

Appendix II Inventory Analyses by Service and DLA for September
30, 1996, and 1997 Appendi x I I

Table II. 1: DOD Inventory That Exceeded Current Requirements by
Component as of September 30, 1996 Table II. 2: DOD Inventory That
Exceeded Current Requirements by Component as of

September 30, 1997 Dollars in billions

On- hand inventory exceeding On- hand inventory analyzed
Requirements

objective Approved acquisition objective Component Value Value
Percent Value Percent

Army $8. 1 $3. 9 48 $2. 3 28 Navy 18. 2 11. 1 61 7. 3 40 Air Force
35. 0 22.0 63 12. 9 37 DLA 8. 4 4.3 51 2. 9 35

Total $69. 7 $41.3 59 $25. 4 36

Dollars in billions

On- hand inventory exceeding On- hand inventory

analyzed Requirements objective Approved acquisition

objective Component Value Value Percent Value Percent

Army $7.5 $3.5 47 $1.6 21 Navy 16.6 9. 7 58 6.1 37 Air Force 32.7
21.3 65 11.8 36 DLA 9. 0 4.9 54 3. 2 36

Total $65.8 $39. 4 60 $22.7 35

Appendix II Inventory Analyses by Service and DLA for September
30, 1996, and 1997

Page 21 GAO/NSIAD-99-60 Defense Inventory

Table II. 3: Items Without Projected Demand and the Value of
Inventory Exceeding Current Requirements by Component as of
September 30, 1996

a DLA's data exclude inventory called numeric stockage objective
items that are managed based on criteria other than demand.

Table II. 4: Items Without Projected Demand and the Value of
Inventory Exceeding Current Requirements by Component as of
September 30, 1997

a DLA's data exclude inventory called numeric stockage objective
items that are managed based on criteria other than demand.
Dollars in billions

On- hand inventory exceeding requirements

objective a Inventory exceeding requirements objective that had no
demand

Date Value Value Percentage

Army $3. 9 $0. 6 15 Navy 11. 1 4. 0 36 Air Force 22. 0 7. 8 35 DLA
a 2.8 0. 1 4

Total $39. 8 $12.5 31

Dollars in billions

On- hand inventory exceeding requirements

objective a Inventory exceeding requirements objective that had no
demand

Date Value Value Percentage

Army $3. 5 $0. 3 9 Navy 9.7 2. 9 30 Air Force 21. 3 7. 5 35 DLA a
2.5 0. 2 8

Total $37. 0 $10.9 29

Appendix II Inventory Analyses by Service and DLA for September
30, 1996, and 1997

Page 22 GAO/NSIAD-99-60 Defense Inventory

Table II. 5: Inventory on Order That Exceeded Current Requirements
by DOD Component as of September 30, 1996

a DLA did not provide us records for on- order inventory that is
held to meet numeric stock objectives.

Table II. 6: Inventory on Order That Exceeded Current Requirements
by DOD Component as of September 30, 1997

a DLA did not provide us records for on- order inventory that is
held to meet numeric stock objectives. Dollars in millions

On- order inventory exceeding On- order inventory analyzed
Requirements

objective Approved acquisition objective Component Value Value
Percent Value Percent

Army $1, 443. 9 $78.3 5 $52. 9 4 Navy 1, 647. 6 120.6 7 45. 7 3
Air Force 2, 435. 5 843.6 35 359. 2 15 DLA a 3, 325. 2 669.1 20
250. 6 8

Total $8, 852. 2 $1, 711. 6 19 $708. 4 8

Dollars in millions

On- order inventory exceeding On- order inventory analyzed
Requirements

objective Approved acquisition objective Component Value Value
Percent Value Percent

Army $1, 300. 2 $171. 8 13 $124. 8 10 Navy 1, 322.9 76. 7 6 34. 5
3 Air Force 1, 732. 9 408. 9 24 136. 8 8 DLA a 3, 646.7 813. 2 22
312. 8 9

Total $8, 002.7 $1,470. 6 18 $608. 9 8

Appendix II Inventory Analyses by Service and DLA for September
30, 1996, and 1997

Page 23 GAO/NSIAD-99-60 Defense Inventory

Table II. 7: Years of Supply That Exceeded Current Requirements as
of September 30, 1996

Table II. 8: Years of Supply That Exceeded Current Requirements as
of September 30, 1997

Dollars in millions

Years of supply Army Navy Air Force DLA Total

Less than 2 $595.4 $2, 016.5 $5,556.5 $517.9 $8, 686.3

2 to 5 1, 239.6 2, 196. 4 3,144.9 687. 0 7, 267.9

5 to 10 780. 6 1, 375. 5 1, 890. 7 372. 9 4, 419.7

10 to 20 316.1 702. 4 1,476.5 426. 5 2, 921.5

20 to 50 247.1 507. 9 1,309.8 325. 7 2, 390.5

50 to 100 44.3 174. 7 444.9 143. 6 807.5

100 or more 70.4 143. 0 376.1 211. 4 800.9 Total $3, 293.5 $7,
116. 4 $14,199.4 $2, 685.0 $27,294. 3

Dollars in millions

Years of supply Army Navy Air Force DLA Total

Less than 2 $827.2 $1, 918.7 $6,119.4 $478.5 $9, 343.8

2 to 5 1, 195.7 2, 268. 5 3,137.5 497. 1 7, 098.8

5 to 10 703. 2 1, 256. 3 1, 487. 3 443. 4 3, 890.2

10 to 20 199.0 650. 9 1,063.1 373. 4 2, 286.4

20 to 50 138.7 406. 6 1,080.2 282. 7 1, 908.2

50 to 100 27.7 145. 9 570.6 91.2 835.4

100 or more 36.9 150. 8 328.6 141. 8 658.1 Total $3,128.4 $6,
797.7 $13, 786.7 $2, 308.1 $26,020. 9

Page 24 GAO/NSIAD-99-60 Defense Inventory

Appendix III DOD Secondary Inventory Reports Appendi x I I I

DOD uses the Supply System Inventory Report (SSIR) to monitor on-
hand inventory and the budget stratification report to support its
secondary item inventory budget and to perform reporting and
funding reviews. Although both are developed from the same source
records, the items are valued differently and not all items in the
SSIR are stratified. The following sections show (1) the
relationship of the value of items in the two reports

and (2) the dollar value of DOD's inventory reduction goals and
actual reductions as shown in the SSIR for September 30, 1996, and
1997.

Relationship of SSIR and Budget Stratification Reports

In the SSIR, DOD values serviceable inventory that is ready for
issue at latest acquisition cost; repairable inventory that is not
ready for issue at the latest acquisition cost less the expected
repair cost; and inventory that can

be disposed of at an annual salvage rate, which was 2.7 percent of
latest acquisition cost in 1997. On the other hand, the value of
items we reviewed in the stratification reports (also called
Central Secondary Item Stratification Report), including those
needing repair and potential disposal, was at latest acquisition
cost. The data that the services and DLA provided to us did not
include all the items in the SSIR. (See additional detail in scope
and methodology section.) Figure III. 1 shows the comparison of
the value of the inventory reported in the SSIR to the inventory
reported in the stratification reports that we used for our
analysis. We determined that the full latest acquisition

cost of the $64.8 billion in the SSIR as of September 30, 1997,
was about $83.1 billion. The services and DLA provided us budget
stratification records for $65.8 billion of the $83.1 billion of
items at latest acquisition cost.

Appendix III DOD Secondary Inventory Reports

Page 25 GAO/NSIAD-99-60 Defense Inventory

Figure III. 1: Relationship of the SSIR to the Budget
Stratification Records Provided to Us as of September 30, 1997

Legend Bar 1: SSIR inventory with latest acquisition cost values
discounted for repair costs and potential excess. We analyzed
about $52 billion of the $64.8 billion of inventory in the SSIR.

Bar 2: SSIR inventory valued at full latest acquisition cost was
about $83.1 billion. We analyzed about $65.8 billion of the
inventory reported in the SSIR at full value. Bar 3: $65.8 billion
of inventory in the budget stratification reports provided to us
at full value.

DOD Inventory Reductions as Measured in SSIR

DOD uses the SSIR to measure the extent it meets its logistics
goals for on- hand inventory. In its 1998 Logistics Strategic
Plan, DOD set objectives across a broad range of areas to reduce
the total cost of logistics. One of

the guiding principles is that inventories and inventory costs at
all echelons will be established at the minimal levels that are
required to meet customerdriven support objectives. Specifically,
it set a goal to reduce secondary 0 10

20 30

40 50

60 70

80 90

Inventory analyzed Inventory not analyzed

64. 8 83. 1

65. 8 Dollars in billions

SSIR Revalued SSIR Stratification 12. 8

52 17. 3

65. 8

Appendix III DOD Secondary Inventory Reports

Page 26 GAO/NSIAD-99-60 Defense Inventory

inventory by $3 billion per year from September 1996 to September
1997. DOD set this goal in fiscal year 1995 constant dollars to
remove the impact of inflation.

The SSIR showed that DOD exceeded its goal by reducing its
secondary item inventory by $4. 7 billion in fiscal year 1995
constant dollars ($ 3.7 billion in current- year dollars) from
September 30, 1996, to September 30, 1997. DOD reported that (1)
some inventory reductions were made using a number of better
business practices, such as direct vendor deliveries; (2) demand
for items decreased as the force structure was reduced; (3)
inventory was held for shorter periods in retention categories
before being transferred to disposal; and (4) less inventory was
bought with smaller budgets. A DOD official also told us that much
of the reductions prior to fiscal year 1996 were based on reduced
demands from a smaller force structure. However, starting in
fiscal year 1996, the reductions must be made by changing the
criteria for buying or retaining stock or through reduced budgets.

About 60 percent of DOD's inventory value exceeds current
requirements (requirements objective) using the latest acquisition
cost. About 50 percent exceeds current requirements, assuming the
reduced costs shown in the SSIR.

The following table shows the change in inventory value by service
for September 1996 and September 1997 in fiscal year 1995 constant
dollars.

Table III. 1: DOD Reduces Secondary Inventory Fiscal Year 1995
Constant Dollars

According to the accomplishments section of the DOD 1998 Logistics
Strategic Plan, the Navy reduced its inventory by $1. 7 billion by
decreasing safety levels and retention levels, transferring some
consumable items to Values in billions

Component Sept. 1996 Sept. 1997 Change

Army $10. 6 $10. 1 ($. 5) Navy 18. 0 16. 3 (1.7) Air Force 28. 8
26. 3 (2.5) DLA 9. 4 9. 5 0. 1 Marine Corps 0. 5 0.4 (0. 1)

Total $67. 3 $62. 6 ($ 4.7)

Appendix III DOD Secondary Inventory Reports

Page 27 GAO/NSIAD-99-60 Defense Inventory

DLA for management, implementing management improvements such as
direct vendor deliveries, and taking other budget reductions. The
Air Force made a significant reduction of $2.5 billion by changing
its inventory retention criteria in calculating the amount of
inventory it considers more economic to retain than surplus from
13 years to 8 years and by reducing war reserves and other
changes. The other services did not make

significant reductions. DLA officials said they made $1.2 billion
in reductions that were offset by $1.3 billion in transfers from
the military services. The SSIR is published with values in
current- year dollars. The following table, as shown in the
September 30, 1997, report, shows a $3. 7- billion reduction in
current- year dollars.

Table III. 2: DOD Reduces Secondary Inventory Current- Year
Dollars

a Numbers do not add due to rounding. Values in billions

Component Sept. 1996 Sept. 1997 Change

Army $10. 8 $10. 5 ($. 3) Navy 18. 3 16. 8 (1.5) Air Force 29. 3
27. 2 (2.1) DLA 9. 5 9. 8 0. 3 Marine Corps 0. 5 0.4 (0. 1)

Total $68. 5 a $64. 8 a ($ 3.7)

Page 28 GAO/NSIAD-99-60 Defense Inventory

Appendix IV Comments From the Department of Defense Appendi x I V

Appendix IV Comments From the Department of Defense

Page 29 GAO/NSIAD-99-60 Defense Inventory

Page 30 GAO/NSIAD-99-60 Defense Inventory

Appendix V Major Contributors to This Report Appendi x V

National Security and International Affairs Division, Washington,
D. C.

Charles Patton James Murphy

Kansas City Field Office

Gary Billen Leonard Hill Robert Sommer Michael Buell

Page 31 GAO/NSIAD-99-60 Defense Inventory

Page 32 GAO/NSIAD-99-60 Defense Inventory

Related GAO Products High- Risk Series: An Update (GAO/HR-99-1,
Jan. 1999). Major Management Challenges and Program Risks:
Department of Defense (GAO/OGC-99-4, Jan. 1999).

Inventory Management: More Information Needed to Assess DLA's Best
Practices Initiatives (GAO/NSIAD-98-218, Sept. 2, 1998). Defense
Inventory: Action Needed to Avoid Inappropriate Sales of Surplus
Parts (GAO/NSIAD-98-182, Aug. 3, 1998). Navy Inventory Management:
Improvements Needed to Prevent Excess Purchases (GAO/NSIAD-98-86,
Apr. 30, 1998). Inventory Management: DOD Can Build on Progress by
Using Best Practices for Reparable Parts (GAO/NSIAD-98-97, Feb.
27, 1998). Department of Defense In- Transit Inventory (GAO/NSIAD-
98-80R, Feb. 27, 1998).

Defense Inventory Management: Expanding Use of Best Practices for
Hardware Items Can Reduce Logistics Costs (GAO/NSIAD-98-47, Jan.
20. 1998). Defense Inventory: Inadequate Controls Over Air Force
Suspended Stocks (GAO/NSIAD-98-29, Dec. 22, 1997).

Defense Inventory: Management of Surplus Usable Aircraft Parts Can
Be Improved (GAO/NSIAD-98-7, Oct. 2, 1997). 1998 DOD Budget:
Operation and Maintenance Program (GAO/NSIAD-97-239R, Aug. 21,
1997). Inventory Management: The Army Could Reduce Logistics Costs
for Aviation Parts by Adopting Best Practices (GAO/NSIAD-97-82,
Apr. 15, 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).

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