Background

The Air Force and the Navy budget and spend billions annually to procure and repair aviation spare parts. For example, for fiscal year 1997, the Navy budgeted $1.4 billion for this purpose. For fiscal year 1996, the Air Force budgeted $3.9 billion to procure and repair aviation spare parts. The Air Force’s F-100 engines used on F-15 and F-16 aircraft and the Navy’s F-404 engines used on F/A-18 aircraft account for a sizable portion of the procurement and repair budgets and expenditures for aviation spare parts.
Both services use automated systems to compute requirements and to prepare their annual budgets for aviation spare parts. The systems base the computations on past usage, acquisition lead times, flying hour programs, maintenance replacement factors, and additional special needs. Requirements are then offset by the assets on hand and on order to arrive at the amounts needed.

	Air Force and Navy Policies Result in Overstated Requirements

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

		Air Force

Since 1984, Air Force policy has been to reserve on-hand consumable parts for depot maintenance needs and not to use these assets to offset computed requirements when deciding to buy or projecting annual budgeted buys. This Air Force policy is unlike the Navy’s, which does require that assets held for depot level maintenance needs be applied to computed requirements.
The Congress has made several attempts to change the Air Force’s policy. In response to our 1989 report, the House Committee on Armed Services directed the Air Force to consider depot supply level assets in its requirements and budget computations. In 1992, we reported that the Air Force continued to exclude depot supply level assets from its requirements and budget computations. As a result, the Congress reduced the Air Force’s operation and maintenance budget for fiscal year 1994.
Despite these efforts, the Air Force continues its policy of not considering depot supply level assets in requirements and budget computations. Our analysis of overall inventory data for fiscal year 1995 showed that the Air Force overstated fiscal year 1996 budgeted requirements by $72 million because assets reserved for depot maintenance were not applied to budgeted buy requirements.
Our sampling test of 22 F-100 engine parts for which there were actual and budgeted buys also showed that the Air Force continues to exclude depot supply level assets from its periodic requirement and annual budget computations. Of 22 sample items, 10 had depot supply level assets valued at about $1.8 million that the Air Force did not apply to offset recurring depot level maintenance requirements in the periodic requirements and annual budget computations. Of the 10 items, 3 had current buys costing about $2.7 million, which could have been reduced by about $366,000 if depot supply level assets had been applied to offset requirements.
For example, in September 1994, the San Antonio Air Logistics Center computed an initial buy quantity of 31,420 F-100 engine duct segments  (NSN 2840-01-270-7659PT) costing about $2.8 million. In finalizing the buy computation, the Center made changes, lowering the buy to 2,868 items costing about $307,000. However, the computation did not consider  3,680 depot supply assets that were available to offset requirements. If these assets had been applied to offset requirements, this procurement would not have been necessary. Similarly, the Center overstated budget requirements by not applying these depot supply level assets.
According to Department of Defense (DOD) Materiel Management Regulation 4140.1-R, dated January 1993, the inventory managers, for the purpose of limiting buys and repairs, shall apply all retail and wholesale assets against wholesale requirements. Nevertheless, DOD’s and the Air Force’s position is that depot supply level assets are set aside for depot maintenance and, therefore, are not considered to offset wholesale requirements. We do not agree with this position because depot supply level assets are a part of the wholesale inventory. They have not been issued from wholesale storage and transferred to the depot maintenance activities. Further, because wholesale requirements are based on past recurring demands, it is reasonable to expect that assets procured to meet these demands should be considered when making future procurement decisions.

		Navy

The Navy’s policies and procedures related to assets reserved for depot maintenance needs, unlike the Air Force’s policies and procedures, require the Navy to apply these assets to computed requirements. However, we found that some Navy requirements are duplicated, resulting in overstated requirements. On the basis of our review of overall fiscal year 1995 budget data for aviation parts and our sampling test of 12 F-404 engine parts, we found that the Navy overstated fiscal year 1997 stock fund budgets by at least $60 million. This occurred because the Navy included reserve level depot maintenance requirements in periodic requirements and annual budget computations twice. These reserve levels are included once as recurring demands based on past depot maintenance usage and again in a planned program requirements category that is not based on recurring demands.
For example, in May 1995, the Aviation Supply Office budgeted a fiscal year 1997 buy for 4,734 F-404 nozzle segments (NSN 2840-01-166-4886TN) costing about $7.8 million. We found that the budgeted buy requirement was overstated by 1,008 units, valued at about $1.7 million, because this requirement was included twice. It was included as a separate, identifiable nondemand-based requirement and again as part of the recurring demand-based requirements.
Aviation Supply Office officials told us that the apparent duplication of requirements in the fiscal year 1997 aviation parts budget was offset by the application of assets reserved for depot maintenance to the recurring demand requirements. We disagree that the duplication of requirements is entirely offset by the application of these assets because the requirements are still incorrectly included as both recurring and nonrecurring demand requirements, but the assets are only applied once.

	Computations Are Inaccurate

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

		Air Force

We reviewed 22 F-100 engine consumable parts and found inaccuracies in the Air Force’s computations for 12 items. The inaccuracies caused the fiscal year 1995 budget requirements to be understated by about $2 million on some items and overstated by about $10 million on others. The inaccuracies occurred because inventory managers used incorrect requirement and asset information or did not make necessary changes when updating budget requirement computations. The inaccurate information included incorrect (1) lead times, (2) due-out quantities, and (3) asset quantities on hand and on order.
For example, in September 1994 the San Antonio Air Logistics Center computed an initial buy quantity of 756 F-100 engine ring assemblies  (NSN 2840-01-327-2917PT). In finalizing the buy computation, the Center made changes to reflect updated information that decreased lead time and due-out requirements and increased on-hand and on-order assets. As a result, the computation changed from a 756 buy to a zero buy. Changes made on buy computations also affect budget requirement projections. However, in this case the Center did not make these changes in the final budget requirements computation. As a result, budget requirements were overstated by $4.3 million.
In another example, the San Antonio Air Logistics Center  (in September 1994) computed an initial buy quantity of 21,524 F-100 engine stage compressor blades (NSN 2840-00-371-2217PT). In finalizing the buy computation, the Center made changes to reflect updated information that decreased lead time and due-out requirements and increased on-hand and on-order assets. As a result, the computation changed from a 21,524 buy to a zero buy. However, the changes were not reflected in the final budget requirements computation. As a result, budget requirements were overstated by $1.1 million.
Our review identified a need to strengthen existing procedures and practices for management level review and validation of budget requirement computations. Air Force Materiel Command Regulation 57-6, dated January 29, 1993, assigns primary responsibility for the accuracy and integrity of consumable item requirements to Air Logistics Center management. However, the regulation allows management personnel at the centers to delegate authority to lower level analysts to carry out certain quality review and control functions. We found that periodic requirements and annual budget computations for the 22 sample items generally were signed off at the supervisor level. However, this level of review is not ensuring that necessary requirement changes are reflected in the budget requirement computations.

		Navy

We reviewed 12 F-404 engine parts and found inaccuracies in the Navy’s computations for 10 items. The inaccuracies caused buys and repairs to be understated by about $8 million on some items and overstated by about $15 million on others. These inaccuracies included unsupported or incorrect (1) maintenance replacement rates, (2) demand rates, (3) planned program requirements, (4) repair costs, and (5) lead times.
For example, in March 1995, the Aviation Supply Office computed a repair requirement for 328 F-404 engine compressor rotor assemblies (NSN 2840-01-288-1767) costing $26.6 million. The computation overstated repair requirements by 76, valued at about $6.1 million, because an incorrect maintenance demand rate and an erroneous parts application was used. We could find no data supporting the maintenance demand rate used. The Office provided data that showed a lower demand rate should have been used. Also the data indicated that the rotor assembly was applicable only to one type of fan and not to a second fan, which also was included in the computation.
In another case, in May 1995, the Aviation Supply Office budgeted fiscal year 1997 funds for the repair of 554 F-404 engine high-pressure rotors (NSN 2840-01-201-1357) costing $19.1 million. The budgeted repair cost was understated by $7.2 million because an outdated unit repair cost was used. The Office used a unit repair cost of $34,479, but the latest negotiated unit repair cost was $47,577.
Our review identified a need to strengthen existing procedures and practices for management level review and validation of requirement and budget computations. For example, we noted that repair computations were not receiving higher management level review and approval. These computations contained a large portion of the inaccuracies identified.

	Recommendations

We recommend that the Secretary of Defense direct the Secretary of the Air Force to revise buy and budget requirement computation policies and procedures to require that on-hand assets reserved for depot maintenance needs be considered in periodic requirement and annual budget computations and strengthen management oversight procedures and internal controls to ensure that key elements (such as on-hand and due-out quantities and lead times) of requirement and budget computations are accurate.
We also recommend that the Secretary of Defense direct the Secretary of the Navy to revise policies and procedures for buy and budget requirement computations to eliminate duplication of depot maintenance requirements and strengthen management oversight procedures and internal controls to ensure that key elements of requirement and budget computations are accurate.

	Agency Comments and Our Evaluation

DOD agreed that action should be taken to improve the accuracy of requirement determination processes and stated that the Air Force and the Navy are taking such actions (see app. I for DOD’s complete comments). The Air Force is issuing a new instruction that will establish levels of management review depending on the dollar value of the requirement actions. This instruction is expected to provide a stronger management overview that will ensure that key elements of the requirements computation are more accurately maintained. The Navy is implementing an automated system to improve data element validation. The system will provide an on-line checkoff list of key data elements for the item manager to validate when making decisions on requirements execution and budget development.
DOD did not agree that current Air Force and Navy procedures related to reserving on-hand assets for depot maintenance resulted in overstated requirements. With regard to the Air Force, DOD stated that if assets were applied to maintenance requirements, as we believe they should be, those assets would not be available to meet other requirements. DOD also stated the issue is becoming moot because wholesale management of nearly all Air Force consumable items are being transferred to the Defense Logistics Agency.
We continue to disagree with the DOD position because wholesale requirements include depot maintenance needs that are based on past recurring demands. We believe it would be reasonable inventory management and would save money to use reserved assets to offset wholesale requirements when making procurement decisions. As for the transfer of consumable item management to the Defense Logistics Agency, this transfer is not scheduled to be completed until late 1997. Once the transfer is made, the Defense Logistics Agency must ensure that the Air Force pays for assets when they are received at the depots. Otherwise, the Air Force may continue to reserve assets for depot maintenance, thereby precluding the Defense Logistics Agency from considering them when making procurement decisions.
With regard to the Navy, DOD stated that both planned program and recurring demand requirements are needed to provide sufficient supply support, but do not result in overstated requirements. However, DOD acknowledged that, in some situations, depot demands are considered twice. We believe that DOD is wrong in stating that this duplication does not result in overstated requirements. Some of the demands to satisfy depot maintenance needs are included once as recurring demands based on past usage and again as nonrecurring demands to meet planned program requirements. The Navy needs to eliminate this duplication to improve the accuracy of procurement and budget requirement computations and to save money.

	Scope and Methodology

We reviewed Air Force and Navy policies and procedures relating to periodic requirement and annual budget computations for aviation spare parts. We discussed the rationale for current policies and procedures with officials of the Air Force’s San Antonio Air Logistics Center and the Navy’s Aviation Supply Office.
At the San Antonio Air Logistics Center, we reviewed 22 consumable F-100 aircraft engine parts for which the Center projected high-dollar buys for fiscal year 1995. At the Aviation Supply Office, we reviewed  12 consumable and reparable F-404 aircraft engine parts for which the Office projected high-dollar buys or repairs for fiscal year 1995. At both locations, we evaluated periodic requirement and annual budget computations. We analyzed related supporting documentation on which these buy or repair projections were based and discussed the computations with inventory managers and their supervisors.
We obtained and reviewed fiscal years 1995 and 1996 buy and repair budgets for the Air Force’s aviation spare parts. We obtained and reviewed fiscal years 1995 and 1997 buy and repair budgets for the Navy’s aviation spare parts. We also obtained and analyzed Air Force and Navy reserve depot maintenance asset totals for fiscal year 1995.
We performed our review between March and November 1995 in accordance with generally accepted government auditing standards.
The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of the report. A written statement also must be sent to the Senate and House Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of the report.
We are sending copies of this report to the appropriate congressional committees; the Secretaries of the Navy and the Air Force; and the Director, Office of Management and Budget.
Please contact me at (202) 512-5140 if you have any questions. The major contributors to this report are listed in appendix II.

Comments From the Department of Defense

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

	GAO Comments

1. We have decreased the amount of assets reserved for depot maintenance needs from $226 million to $132 million. This reflects a reduction in the Navy’s assets from at least $154 million to at least $60 million. We made this reduction because more current information provided by the Aviation Supply Office indicates that the issuance of some reparable reserve assets does not duplicate requirements. These issues do not register as recurring demands in the wholesale supply system. 2. We deleted this recommendation from the final report. Subsequent to the completion of our fieldwork, the Aviation Supply Office furnished us an instruction outlining procedures for management review and approval of buy and repair computations. In reviewing the repair computations, we found that these procedures were not being followed in that the repair computation documents did not show evidence of management level review and approval. Implementation of our recommendation to strengthen management oversight procedures and internal controls should help eliminate this problem.

Major Contributors to This Report

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

	Dallas Regional Office

Calvin Phillips Enrique E. Olivares Bonifacio Roldan-Galarza Richard Madson Donald McCuistion The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.
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Summary:
Why GAO Did This Study

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

What GAO Found

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