Defense Inventory: Continuing Challenges in Managing Inventories and
Avoiding Adverse Operational Effects (Testimony, 02/25/99,
GAO/T-NSIAD-99-83).

Pursuant to a congressional request, GAO discussed inventory issues as
they related to the Department of Defense's (DOD) operations and
readiness, focusing on: (1) the status of DOD's secondary inventory; (2)
difficulties one military service continues to have in obtaining repair
parts to keep its combat aircraft mission capable; (3) the adequacy of
DOD's controls over inventory items in transit; (4) implementation of
DOD's efforts to have greater visibility over its logistical assets
through its Total Asset Visibility Program; and (5) the continuing need
to apply best private sector management practices to Defense inventory
management.

GAO noted that: (1) DOD continues to show weaknesses in inventory
management practices that are detrimental to the economy and efficiency
of operations and cause operational problems for DOD; (2) DOD continues
to maintain large inventories that may be as much as 60 percent in
excess of current needs; (3) although DOD has made progress in reducing
its inventories, further reductions are needed; (4) additionally, other
action is needed to avoid unnecessary new purchases; (5) while new
purchases may be initiated to meet justified requirements, those
requirements frequently change after items are ordered, but affected
orders are not always cancelled; (6) GAO found that 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; (7) not
cancelling these orders further exacerbates DOD's excess inventory
condition and also prohibits spending on other priority needs; (8) in
GAO's review of Air Force supply management, it found that shortages in
aircraft spare parts caused a degradation in mission capable rates for
key aircraft; (9) shortages of spare parts occurred because of
inaccurate forecasting of inventory requirements, and other management
weaknesses; (10) the vulnerability of in-transit inventory to waste,
fraud, and abuse is another area of concern; (11) in examining
in-transit issues in the Navy, GAO found that weaknesses continue to
exist in exercising control over inventory in transit; (12) over the
last 3 years, the Navy wrote off as lost over $3 billion in inventory in
transit, including some classified and sensitive items such as aircraft
guided-missile launchers, military night vision devices, and
communications equipment; (13) for many years, DOD has had difficulties
in obtaining timely and accurate information on the location, movement,
status, and identity of units, personnel, equipment, and supplies and
the capability to better manage those assets using that information;
(14) DOD must take both a short- and long-term approach to solving
inventory management problems, consistent with the requirements of the
Government Performance and Results Act; (15) in the short term, DOD
still needs to emphasize the efficient operation of existing inventory
systems; (16) in the long term, DOD must establish goals, objectives,
and milestones for changing its culture and adopting new management
tools and practices; and (17) DOD has recognized the need for
improvements in the inventory management area and addressed the issue in
implementing requirements of the Results Act.

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

 REPORTNUM:  T-NSIAD-99-83
     TITLE:  Defense Inventory: Continuing Challenges in Managing 
             Inventories and Avoiding Adverse Operational Effects
      DATE:  02/25/99
   SUBJECT:  Military inventories
             Inventory control systems
             Military cost control
             Property losses
             Internal controls
             Property and supply management
             Management information systems
             Spare parts
             Combat readiness
             Defense procurement
IDENTIFIER:  DOD Joint Defense Total Asset Visibility Program
             Navy Uniform Inventory Control Point System
             B-1B Aircraft
             C-5 Aircraft
             F-16 Aircraft
             
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NS99083T.book GAO United States General Accounting Office

Testimony Before the Subcommittee on Military Readiness, Committee
on Armed Services, House of Representatives

For Release Expected at 1: 00 p. m., EST Thursday, February 25,
1999

DEFENSE INVENTORY Continuing Challenges in Managing Inventories
and Avoiding Adverse Operational Effects

Statement by Henry L. Hinton, Jr., Assistant Comptroller General,
National Security and International Affairs Division




GAO/T-NSIAD-99-83

  GAO/T-NSIAD-99-83

Page 1 GAO/T-NSIAD-99-83 Defense Inventory

Mr. Chairman and Members of the Subcommittee: We appreciate the
opportunity to testify today on the Department of Defense's (DOD)
logistics capabilities and shortfalls. You asked us to look at
inventory issues as they relate to DOD's operations and readiness.
My testimony today will focus on the results of our recent work
pertaining to (1) the status of DOD's secondary inventory, 1 (2)
difficulties one military

service continues to have in obtaining repair parts to keep its
combat aircraft mission capable, (3) the adequacy of DOD's
controls over inventory items in transit, (4) implementation of
DOD's efforts to have greater visibility over its logistical
assets through its Total Asset Visibility Program, and (5) the
continuing need to apply best private sector management practices
to Defense inventory management. Results in Brief Our work
continues to show weaknesses in DOD's inventory management
practices that are detrimental to the economy and efficiency of
operations

and cause operational problems for DOD. DOD continues to maintain
large inventories that may be as much as 60 percent in excess of
current needs. Although DOD has made progress in reducing its
inventories, further

reductions are needed. Additionally, other action is needed to
avoid unnecessary new purchases. DOD spends approximately $13
billion each year on new inventory items. While new purchases may
be initiated to meet justified requirements, those requirements
frequently change after items are ordered, but affected orders are
not always canceled. We found that 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. Not canceling these
orders further exacerbates DOD's excess inventory condition and
also prohibits spending on other priority needs.

Despite having inventory items in excess of its current needs, DOD
can also be faced with situations of inventory shortages and other
related supply problems that can adversely affect operational
requirements. In our review of Air Force supply management we
found that shortages in aircraft spare parts caused a degradation
in mission capable rates for key aircraft, including the B-1B, C-
5, and F- 16. Shortages of spare parts occurred because of
inaccurate forecasting of inventory requirements, and other
management weaknesses.

1 Secondary inventory is defined as spare and repair parts,
clothing, medical supplies, and other items needed to support
operating forces.

Page 2 GAO/T-NSIAD-99-83 Defense Inventory

The vulnerability of in- transit inventory to waste, fraud, and
abuse is another area of concern. In February 1998, we reported
that DOD did not have receipts for about 60 percent of its 21
million shipments to end users in fiscal year 1997. Further, in
examining in- transit issues in the Navy, we found that weaknesses
continue to exist in exercising control over inventory in transit.
Over the last 3 years, the Navy wrote off as lost over $3 billion
in inventory in transit, including some classified and sensitive

items such as aircraft guided- missile launchers, military night
vision devices, and communications equipment.

For many years, DOD has had difficulties in obtaining timely and
accurate information on the location, movement, status, and
identity of units, personnel, equipment, and supplies and the
capability to better manage those assets using that information.
To address this problem, DOD gave renewed emphasis to its Total
Asset Visibility program for tracking equipment, supplies, and
spare parts as well as requisitions on a continuous basis.
However, DOD does not expect to fully implement this program until
2004. Program implementation problems have resulted largely from
long- standing management issues that have hindered other major
management initiatives. These issues include cultural resistance
to change, service parochialism, and the lack of outcome- oriented
goals, performance measures, and management accountability.

DOD must take both a short- and long- term approach to solving its
inventory management problems, consistent with the requirements of
the Government Performance and Results Act. 2 In the short term,
DOD still needs to emphasize the efficient operation of existing
inventory systems. In the long term, DOD must establish goals,
objectives, and milestones for changing its culture and adopting
new management tools and practices.

Since 1991 we have issued 11 reports that identified significant
opportunities, building on best private sector practices, to
improve logistics operations and lower costs. DOD has introduced
some best practice initiatives, but progress has been slow.

2 The Results Act requires federal agencies (including DOD) to
develop departmentwide strategic and performance plans and
reports. They must set strategic goals, measure performance, and
report on the degree to which goals were met. This is expected to
provide the Congress and other decision makers with objective
information on the relative effectiveness and efficiency of
federal programs. Annual performance plans are included as
appendix J to the Secretary of Defense's Annual Report to the

President and the Congress.

Page 3 GAO/T-NSIAD-99-83 Defense Inventory

In addition, DOD has recognized the need for improvements in the
inventory management area and addressed the issue in implementing
requirements of the Results Act. One performance goal included in
DOD's recently issued performance plan for fiscal year 2000 is to
streamline the DOD infrastructure by redesigning the Department's
support structure and pursuing business practice reforms. Among
the indicators the plan

indicated DOD would track were (1) logistics response time, (2)
materiel asset visibility and accessibility, and (3) reduction of
supply system inventory of repair parts and finished goods. We
encourage DOD to take more aggressive actions to correct systemic
problems so that its inventory management problems will not
continue well into the next century. And,

corrective actions must be built on the strong underpinnings of
management information systems capable of providing reliable and
timely information needed for management decision making.

Background DOD has had inventory management problems for decades,
but with more attention drawn to the problems since the end of the
Cold War. In 1990, we identified DOD's management of secondary
inventories as a high- risk area because levels of inventory were
too high and management systems and procedures were ineffective. 3
We reported that DOD had spent billions of dollars on inventory
that was not needed to support war reserve or current operating
requirements and that it was burdened with managing and

storing this inventory. Much of the inventory that exceeds current
requirements was acquired because of outdated and inefficient
inventory management practices. We reported in 1997 that DOD had
made some progress, but significant challenges still remained. In
an effort to apply industry best practices, DOD had implemented,
in a limited manner, certain commercial practices

such as a prime vendor 4 concept that could lead to reduced
inventory requirements. However, we also reported that the concept
had been applied only to about 3 percent of the items for which
this concept could be 3 In 1990, we began a special effort to
review and report on the federal program areas that we identified
as high risk because of vulnerabilities to waste, fraud, abuse,
and mismanagement. This effort, which was supported by the Senate
Committee on Government Affairs and the House Committee on

Government Reform, brought a much needed focus on problems that
were costing the government billions of dollars. We identified
inventory management as high risk in our 1992, 1995, 1997, and
1999 high- risk reports.

4 Prime vendors are contractors that buy inventory items from a
variety of suppliers, store them in commercial warehouses, and
ship them to customers as needed.

Page 4 GAO/T-NSIAD-99-83 Defense Inventory

used. We also reported that DOD had made progress in reducing its
inventory levels, but more remained to be done. 5 From 1989
through the end of fiscal year 1995, DOD reduced its secondary
inventory levels from $92.5 billion to $69.6 billion. However,
virtually all the problems that

previously had contributed to billions of dollars of inventory
that exceeded current needs still existed. For example, DOD still
lacked adequate oversight of its inventory, financial
accountability remained weak, and requirements continued to be
overstated. Improvements were still needed

in DOD's information management systems. The results of our more
recent work involving inventory issues show that despite
additional progress in reducing inventory levels, previously
existing problems remain a concern. Also, while DOD has continued
to emphasize the need to move toward an industry best practices
approach, more

remains to be done in that area also. Excess Inventory Levels
Continue Despite Overall Reductions

Our recent work examining inventory issues shows that much of
DOD's inventory remains significantly higher than needed to meet
current requirements, even though DOD continues to make progress
in reducing its inventory levels. Inventory levels we analyzed
were reduced from $69.7 billion as of September 30, 1996, to $65.8
billion as of September 30, 1997. Yet, $39.4 billion of the $65.8
billion exceeded current requirements shown in DOD's requirements
objective. 6 In other words, based on the

requirements at September 30, 1997, DOD would not have bought
$39.4 billion of the inventory it had on hand. Further, the
percentage of inventory that exceeded current requirements
remained about 60 percent for the two periods analyzed and was
about the same as of September 30,

1995. We also found that DOD could potentially reduce inventory
that exceeded current requirements. The Department had no demand
for about $11 billion of the inventory that exceeded current
requirements as of September 30, 1997, but it did have customer
demands for $26 billion. However, assuming customer demands remain
unchanged, $3.4 billion of this inventory would last 20 or more
years and $658 million would last more

5 High- Risk Series: Defense Inventory Management (GAO/HR-97-5,
Feb. 1997). 6 The requirements objective represents the maximum
amount of inventory authorized to sustain current operations,
including the funded war reserves.

Page 5 GAO/T-NSIAD-99-83 Defense Inventory

than 100 years. Some of this inventory is more economical to
retain than to dispose of and possibly repurchase. Yet, to the
extent it is economical to dispose of the inventory, DOD's cost of
operations could be reduced.

In addition to retaining greater inventory levels than required,
inventories beyond current needs remain high because of new
purchases, which total about $13 billion annually. While new
purchases may be initiated to meet justified requirements, those
requirements frequently change after items are ordered. While some
orders may be canceled, others may not, and not all of the new
purchases may be needed. We found that 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. We reported
in April 1998 that additional opportunities to cancel purchases
had been missed because appropriate economic analyses were not
made, conflicting inventory and

contracting records were not reconciled, or item managers did not
exercise their responsibilities to direct cancellations of
contracts. 7 Inventory Shortages Can Also Be a Problem

Although historically, DOD has carried significant amounts of
inventory items in excess of current needs, it has also been faced
with inventory shortages and other related supply problems that
can adversely affect operational requirements. Our recent review
examining Air Force supply

management issues highlighted these problems. We are now
finalizing the results of our review of the supply management
activity group 8 and its impact on the ability of its customers to
obtain aircraft spare parts when needed. We found that since the
early 1990's, data from the Air Force have shown increased
instances of aircraft that were not mission capable due to spare
parts shortages. Key aircraft that were not mission capable due to
supply problems increased from an average of 6.4 percent in fiscal
year 1990 to 13.9 percent in fiscal year 1998; for some types of
aircraft the averages were much higher.

7 Navy Inventory Management: Improvements Needed to Prevent Excess
Purchases (GAO/NSIAD-98-86, Apr. 30, 1998).

8 The supply management activity group supports combat readiness
by procuring materiel and making repair parts available to Air
Force military units and other customers who maintain military
weapon systems and equipment. This group is part of the Air Force
Working Capital Fund, a revolving fund that relies on sales
revenue, rather than direct appropriations, to finance its
operations. Working capital funds are expected to (1) generate
sufficient revenue to cover the full costs of their operations and

(2) operate on a break- even basis over time that is, not make a
profit nor incur a loss. Customers primarily use operations and
maintenance appropriations to pay for inventory items.

Page 6 GAO/T-NSIAD-99-83 Defense Inventory

Overall, more aircraft were not mission capable due to supply
shortage problems in fiscal year 1998, even though Air Force bases
have increased the removal of inventory items from one aircraft to
keep other aircraft mission capable. This practice necessitated
(1) personnel at individual bases intentionally grounding one or
more aircraft so they could remove

good parts from these aircraft to keep other aircraft mission
capable, (2) maintenance personnel at Air Force wings consistently
doubling their workload by removing inventory items from grounded
aircraft to replace broken items on other aircraft, and (3) some
Air Force units not always being able to perform their peacetime
missions, such as required training,

and others not being able to meet airlift requests. Financial
management, inventory management, and item repair problems
resulted in parts shortages for 155 inventory items that we
reviewed on B-1B, C- 5, and F- 16 aircraft. In fiscal year 1997,
the Air Force's inability to determine its inventory requirements
and budget for those requirements was the primary source of parts
shortages.

More specifically, the Air Force's supply management activity
group's fiscal year 1997 budget underestimated funding
requirements for the group's wholesale division by about $500
million because (1) all inventory requirements were not included
in the budget and (2) inventory requirements increased after the
Air Force had developed its budget. As a result, the supply
management activity group could finance only 82 percent of its
fiscal year 1997 inventory requirements. At the same time, supply
managers exacerbated their fiscal year 1997 support problems by
using

their limited obligation authority to buy items that were excess
to their current operating requirements. An indication of the
magnitude of this problem was that, as of September 1997, the Air
Force had reported

$1. 7 billion of inventory items on order, of which about $409
million, or about 24 percent, was excess to its current needs. We
found that many of the 155 items reviewed were problems, at least
in part, because the Air Force did not achieve the reduced
pipeline processing time goals that are the cornerstone of its
Agile Logistics program 9 and that were the basis for a $948
million reduction in the supply management activity group's
budget. This untimely processing of repairable items

9 The objectives of the Agile Logistics program are to (1) reduce
the time it takes to repair components and aircraft, (2) reduce
the amount and costs of supply inventories, (3) match the repair
of items with the demand from customers, and (4) prioritize
repairs when multiple priorities exist.

Page 7 GAO/T-NSIAD-99-83 Defense Inventory

adversely affected the supply activity group's ability to support
its customers because it caused the Air Force to have too many
items in the supply pipeline (items in transit from bases to
depots and items in the process of being repaired), and not enough
useable items available at bases. Two major causes of the problem
was (1) a lack of accurate data and effective procedures for
monitoring pipeline processing times and

taking timely and appropriate corrective action, when necessary
and (2) that depot maintenance activities ability to repair items
was limited by shortages of component parts to fix broken
repairable items, repair shop personnel, and equipment used to
test repairable items after being fixed.

In its fiscal year 2000 budget document for the supply group, the
Office of the Under Secretary of Defense (Comptroller) raised
concerns about the readiness of all military services and cited a
lack of spare parts as a major contributor to the decline in the
mission capability of aircraft. To help improve readiness, $141.4
million in obligation authority was added to the

Air Force supply group's fiscal year 2000 budget to buy and repair
inventory items. However, the budget document raised concerns
about the Air Force's ability to use this additional obligation
authority to purchase the correct inventory items. Accordingly,
the Deputy Secretary of Defense

directed the Air Force Materiel Command to review the process it
uses to review and revise the inventory requirements of its
customers. This review is now underway and is to identify the
underlying cause of the forecasting problems. A report is due to
the Office of the Under Secretary of Defense by May 15, 1999.

Continuing Weaknesses in Adhering to Procedures for Controlling
In- Transit Items

The vulnerability of in- transit inventory to waste, fraud, and
abuse is another area of concern. In February 1998, we reported
that DOD did not have receipts for about 60 percent of its 21
million shipments to end users in fiscal year 1997. 10 Among the
DOD components, the Army accounted for about one fourth and the
Navy accounted for about half of DOD's 12. 4 million
unacknowledged receipts. Later work shows that, over the last 3
years, the Navy alone wrote off as lost over $3 billion in
inventory in transit.

Recently, in examining in- transit issues in the Navy, we found
that weaknesses continue to exist in exercising control over
inventory in 10 Department of Defense: In- Transit Inventory
(GAO/NSIAD-98-80R, Feb. 27, 1998).

Page 8 GAO/T-NSIAD-99-83 Defense Inventory

transit. As a result, enormous amounts of inventory are at risk of
undetected theft or misplacement. For fiscal years 1996 through
1998, the Navy reported in- transit inventory losses totaling over
$3 billion, including some classified and sensitive items such as
aircraft guided- missile launchers, military night vision devices,
and communications equipment.

The Navy's Inventory Control Point (NAVICP) at Philadelphia, which
manages the largest portion of the Navy's inventory, reported the
largest losses, $2. 5 billion, or 84 percent of the Navy's in-
transit losses. However, our work at NAVICP Philadelphia showed
that some of the items reported

as lost had, in fact, been accounted for in inventory records. We
reviewed 94 shipments and found that 15 had been written off as
lost despite the fact that their receipts were recorded in the
inventory records in advance of the date they were written off.

Navy activities involved in issuing and receiving inventory items
have not routinely followed the Navy's control procedures to
ensure that in- transit items are accounted for. Specifically,
concerning NAVICP Philadelphia, we found that: (1) Navy units have
not always reported to the inventory control point that they
received requested items, (2) ineffective accounting systems have
been used to monitor receipts of warehoused items, (3) the NAVICP
and its shipping and receiving activities have not adequately
investigated unreported receipts of warehoused items, and (4) the
NAVICP has not monitored receipts of items it purchased from
commercial sources.

We also found that oversight of in- transit inventories exercised
by the Naval Supply Systems Command and NAVICP Philadelphia has
not been adequate. Systems Command officials acknowledged that, to
date, they

had not actively monitored in- transit inventory receipt and
follow- up efforts but had recently begun to review both systems
and processes to correct weaknesses. However, they have not
established any performance

measures, milestones, or a timetable for reducing the
vulnerability of in- transit inventory to theft or loss.

The Strom Thurmond National Defense Authorization Act for Fiscal
Year 1999 requires DOD to develop a comprehensive plan to ensure
visibility over in- transit items and to submit its plan to the
Congress by March 1, 1999. For secondary items, DOD must address
such issues as the vulnerability of in- transit items to loss
through fraud, waste, and abuse;

loss of oversight of in- transit items, including loss when items
are being transported by commercial carriers; and loss of
accountability for in- transit

Page 9 GAO/T-NSIAD-99-83 Defense Inventory

items due to either a delay of delivery of the items or a lack of
notification of the delivery.

Continuing Efforts to Achieve Total Asset Visibility

For many years, DOD has had difficulties in obtaining timely and
accurate information on the location, movement, status, and
identity of units, personnel, equipment, and supplies, and the
capability to better manage those assets using that information.
The continuing lack of adequate visibility over operating
materials and supplies substantially increases the risk that
millions of dollars will be spent unnecessarily to acquire more
items than would be needed if a clearer, more accurate picture
existed of items in inventory, in- transit, and in theater, and
asset managers had the ability to access and transfer those items.
Asset visibility began to receive

heightened attention during the Gulf War when logistics pipelines
became clogged with thousands of duplicate requisitions, and more
than half of the 40, 000 large containers of equipment shipped in
theater could not be readily identified.

To address this problem, DOD gave renewed emphasis to its Total
Asset Visibility (TAV) program for tracking equipment, supplies,
and spare parts as well as requisitions on a continuous basis. 11
In 1995, we reported that DOD's strategic plans for logistics
called for improving asset visibility over in- transit assets,
retail level stocks, and automated systems. 12 DOD's goal
initially was to completely implement its asset visibility plan by
1996. It later changed that date to 2001, and subsequently
extended it out to 2004.

Even so, significant issues remain to be resolved if DOD is to
achieve its goals for this program. DOD's Performance Plan for
Fiscal Year 2000, developed in response to the

Government Performance and Results Act, defines asset visibility
as the percentage of DOD's worldwide inventory in storage that is
both visible and accessible to Integrated Materiel Managers
(IMMs). It states that IMMs are the DOD organizations assigned
wholesale management responsibility for specific assets or classes
of assets Departmentwide. The plan notes that 94 percent of DOD's
worldwide inventory is to be visible to military services or
Defense agency tracking systems but only 80 percent is accessible
by the appropriate IMMs who have wholesale management
responsibilities for 11 Defense Total Asset Visibility
Implementation Plan, USD (A& T), May 23, 1996.

12 High Risk Series: Defense Inventory Management (GAO/HR-95-5,
Feb. 1995).

Page 10 GAO/T-NSIAD-99-83 Defense Inventory

specific assets or classes of assets. 13 The plan attributes the
lack of visibility to data system interoperability problems. It
states that the Department's strategy for fiscal year 2000 is to
enhance the interface among the services and Defense agencies to
achieve a TAV level of 90 percent. It notes that a potential
complication in executing the strategy is the fact that TAV
initiatives must compete with Year 2000 (Y2K) requirements for
scarce information technology resources but that sufficient
management attention would be placed on the timing of system
changes to mitigate the risks of funding shortfalls. Our recent
work found that while some component and theater- specific asset
tracking capabilities are reported to be operating, DOD- wide
information on progress in achieving TAV Program goals is minimal.
Consequently, although implementing improved asset visibility is a
high priority objective, DOD is uncertain about the extent to
which it is achieving the objectives of having timely, accurate
information on

requisitions and assets and access to DOD assets. Along with an
unclear picture of the program's status, planning for TAV has been
inadequate at the strategic and implementation levels. DOD does
not have a departmentwide TAV strategic plan to show how the
various TAV

initiatives underway within individual DOD components contribute
to DOD's goals for the Program. While lacking a strategic plan,
DOD does have an implementation plan for TAV, although it has a
number of weaknesses. The implementation plan has established some
broad program goals and areas of emphasis, but it does not
describe how TAV will be integrated into DOD work processes to
realize TAV Program goals. The plan also does not state how TAV
systems

will integrate with and/ or support other management information
systems. This is particularly important as it relates to financial
management systems and reporting.

TAV implementation problems have resulted largely from long-
standing management issues that have hindered other major
management initiatives. These issues include cultural resistance
to change, service

parochialism, and the lack of outcome- oriented goals, performance
13 Our recent work has found that the 94- percent visibility and
80- percent accessibility are against the National Performance
Review (NPR) goals. These NPR performance measures do not include
inventories in process or in transit.

Page 11 GAO/T-NSIAD-99-83 Defense Inventory

measures, and management accountability. Resistance to changing
from reliance on just- in- case inventory approaches to just- in-
time inventory approaches is a significant challenge for DOD in
its approach to inventory management. Further, this new way of
doing business requires timely and accurate information about
quantities and locations of items and a willingness by item
holders to transfer items to meet the priority needs of others.
Over time, we believe that the Results Act, with its strategic
planning and reporting requirements, and the Clinger/ Cohen Act,
which

emphasizes a performance- based approach to information technology
investments, could enhance DOD's efforts to provide an effective
framework for addressing TAV's implementation challenges, and
achieving its program goals.

Continuing Need to Expand Use of Industry Best Practices

We recently addressed Defense inventory management issues in our
Performance and Accountability Series dealing with major
management challenges and program risks. 14 We noted that since
1991, we have issued 11 reports that identify significant
opportunities for DOD to test and adopt, where feasible, best
inventory management practices used in the private sector to
improve logistics operations and lower costs. The business
practices we recommended have, for the most part, been used in the
private sector to enable customers to order supplies as they are
needed and receive them within hours. For example, some commercial
airlines have cut costs and improved

customer service by streamlining their overall logistics
operations. The most successful improvements took a supply- chain
management approach, which included using highly accurate
information systems to track and control inventory; employing
various methods to speed the flow of parts through the logistics
pipeline; shifting certain inventory tasks to suppliers; and
having third parties handle parts repair, storage, and
distribution

functions. Improved acquisition and delivery practices can reduce
overall supply system costs, eliminate large inventories, and
enable companies to reduce or eliminate the ordering of supplies
that may not be needed or become obsolete. To achieve similar
inventory reductions, infrastructure savings, and improved
customer service, we have recommended that DOD expand 14 Major
Management Challenges and Program Risks, Department of Defense
(GAO/OCG-99-4,

Jan. 1999)

Page 12 GAO/T-NSIAD-99-83 Defense Inventory

its current initiatives to their fullest extent and include tasks
such as ordering, storing, and distributing supplies to the
customer. DOD through its Defense Logistics Agency (DLA) has
continued to emphasize the use of prime vendors to manage parts,
reduce government inventories, and improve delivery times.
However, limited progress has been made in expanding use of prime
vendors for all classes of consumable items, particularly hardware
items. Hardware items represent 97 percent of the 4 million items
managed by DLA but accounted for only 1 percent of prime vendor
sales in fiscal year 1997.

Recently, the Congress enacted legislation requiring DLA and the
military services to develop and submit schedules for implementing
best commercial practices in its acquisition and distribution of
inventory items. The legislation calls for the implementation of
best practice initiatives to be completed within the next 3 years
in the case of DLA and 5 years for the services. We are currently
reviewing the implementation of these initiatives.

Conclusion DOD must take both a short- and long- term approach to
solving its inventory management problems, consistent with the
requirements of the Government Performance and Results Act. In the
short term, DOD still

needs to emphasize the efficient operation of existing inventory
systems. In the long term, DOD must establish goals, objectives,
and milestones for changing its culture and adopting new
management tools and practices. Since 1991 we have issued 11
reports that identified significant opportunities, building on
best private sector practices, to improve logistics operations and
lower costs. DOD has introduced some best practice initiatives,
but progress has been slow.

In addition, DOD has recognized the need for improvements in the
inventory management area and addressed the issue in implementing
requirements of the Results Act. One performance goal included in
DOD's recently issued performance plan for fiscal year 2000 is to
streamline the DOD infrastructure by redesigning the Department's
support structure and pursuing business practice reforms. Among
the indicators the plan

indicated DOD would track were (1) logistics response time, (2)
materiel asset visibility and accessibility, and (3) reduction of
supply system inventory of repair parts and finished goods. We
encourage DOD to take more aggressive actions to correct systemic
problems so that its inventory management problems will not
continue well into the next century. And,

Page 13 GAO/T-NSIAD-99-83 Defense Inventory

corrective actions must be built on the strong underpinnings of
management information systems capable of providing reliable and
timely information needed for management decision making.

DOD's Annual Performance Plan for fiscal year 2000 acknowledged
that the supply inventory is larger than required to support
today's smaller force structure. It reported that the goal is to
cut holdings from a fiscal year 1989 high of $107 billion to $56
billion by fiscal year 2000 and $48 billion by fiscal year 2003.
It noted, however, that improvements in total asset visibility
might cause documented inventory levels to increase. It also noted
that, selective inventory increases are being made in some areas
(notably aircraft parts) in response to operational requirements.
It stated that a new

model reflecting these factors is expected to produce revised
inventory goals in late fiscal year 1999.

DOD's conceptual framework for the future calls for the military
services to fuse information, logistics, and transportation
technologies in a manner that will allow them to (1) provide rapid
crisis response; (2) track and shift assets, even while enroute;
(3) deliver tailored logistics packages when and where needed; and
(4) ensure the availability of spare parts and other items to
sustain combat operations. The concept is based, in part, on the
premise

that supply managers will have precise visibility over assets and
will be able to make rapid and accurate logistics assessments and
analyses, when necessary. While the concept appears sound, it
requires coordination of multiple organizations, systems, and
processes to be effective. And, it requires the strong
underpinnings of management information systems

capable of providing reliable and timely information needed for
management decision making.

Mr. Chairman, this concludes my prepared remarks. I would be
pleased to answer any questions that you or Members of the
Subcommittee might have.

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