United States Government Accountability Office

GAO Report to the Subcommittee on 

Readiness and Management Support, 

Committee on Armed Services, 

U.S. Senate 

DEFENSE 

INVENTORY 

Actions Needed to 

Improve Inventory 

Retention 

Management 

May 2006 

 

GAO-06-512 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 2006

DEFENSE INVENTORY

Actions Needed to Improve Inventory 

Highlights of GAO-06-512, a report to the Retention Management 

Subcommittee on Readiness and

Management Support, Committee on 

Armed Services, U.S. Senate 

Maintaining the right amount and 

types of items in its inventory–a 

key aspect of supply chain

management–has been a longstanding challenge for the

Department of Defense (DOD) and

has been on GAO’s list of high-risk 

areas since 1990. DOD retains 

inventory above its normal 

operating requirements for various

reasons including for contingency 

purposes or because it is more 

economical to keep items than

dispose and repurchase them later.

DOD’s inventory levels have grown 

in recent years to almost $80 billion 

in fiscal year 2005. GAO was asked

to assess the management of 

contingency retention inventory to

determine whether (1) the Army,

Air Force, Navy, and Defense

Logistics Agency have followed 

inventory guidance and (2) DOD is 

providing oversight of inventory

across these components. Also, 

GAO provided an update on the 

progress DOD has made in 

implementing GAO’s past 

recommendations on the 

components’ management of 

economic retention inventory. 

Some DOD inventory management centers have not followed DOD-wide and 

individual policies and procedures to ensure they are retaining the right 

amount of contingency retention inventory. While policies require the 

centers to (1) use category codes to describe why they are retaining items in

contingency inventory, (2) hold only those items needed to meet current and 

future needs, and (3) perform annual reviews of their contingency inventory 

decisions, one or more centers has not followed these policies. For 

example, the Army’s Aviation and Missile Command is not properly 

assigning category codes that describe the reasons they are holding items in 

contingency inventory because the inventory system is not programmed to 

use the codes. GAO found that items valued at $193 million did not have 

codes to identify the reasons why they were being held, and therefore GAO 

was unable to determine the items’ contingency retention category. GAO 

also found that some inventory centers have held items such as gears, 

motors, and electronic switches, even though there have been no requests 

for some of them by the services in over 10 years. Moreover, some centers 

are not annually reviewing their contingency retention decisions. Navy 

Inventory Control Point Mechanicsburg’s officials, for example, were 

unaware that program managers had not conducted the required reviews 

until GAO brought this to their attention. Since GAO’s work only focused on 

the centers it reviewed, it is unknown if these issues are occurring at other 

DOD inventory centers. By not following policies for managing contingency 

inventory, DOD’s centers may be retaining items that are needlessly

consuming warehouse space, and they are unable to know if their 

inventories most appropriately support current and future operational needs.

DOD has provided insufficient oversight of inventory retention management 

across the components. DOD’s Supply System Inventory Report, which 

DOD uses to oversee the components’ inventory management, only requires 

the components to report to DOD financial information about their 

inventories and does not capture if the components are following 

management policies. Without sufficient oversight of the components’ 

inventory retention practices, DOD cannot be certain that the components 

have the correct amount or type of items in contingency retention inventory. 

Lastly, DOD has made no progress to implement GAO’s 2001 

recommendations requiring the components to (1) establish milestones for 

reviewing their approaches for making economic retention inventory 

decisions, and (2) conduct annual reviews of these approaches, as required 

by DOD policy. At the time GAO issued its report, DOD agreed with the 

recommendations but stated that further review was necessary before it 

implemented changes. While subsequent studies reaffirmed the 

recommendations, DOD has still not taken action. GAO continues to believe 

that DOD should implement the recommendations to make meaningful 

improvements to its economic retention management practices. 

What GAO Recommends

GAO recommends that DOD direct 

the inventory centers to take the 

steps necessary to follow existing 

inventory management policies and

procedures and provide oversight 

to ensure the components’ 

compliance. In reviewing a draft of

this report, DOD generally agreed

with GAO’s recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-06-512.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William M. Solis

at (202) 512-8365 or solisw@gao.gov. 
Contents 

Letter 1

Results in Brief 4

Background 7

Some DOD Inventory Management Centers Are Not Following 

Policies and Procedures in Managing Their Contingency

Retention Inventories 12 

DOD Is Not Providing Sufficient Oversight To Ensure That 

Components are Conducting Annual Reviews of Contingency 

Retention Inventory 19 

DOD Has Made No Progress in Implementing Our 2001 

Recommendations on Economic Retention Inventory 

Management 20

Conclusions 23

Recommendations 24

Agency Comments and Our Evaluation 26 

Appendix I Scope and Methodology 29 

Appendix II Comments from the Department of Defense 32 

Appendix III GAO Contact and Staff Acknowledgments 36 

Tables 

Table 1: Primary Logistics Agency and Its Inventory Management 

Centers 12

Table 2: Examples Illustrating When DOD’s Items Were Placed into 

Inventory and the Last Reported Demand Date Through 

January 2006 16 

Table 3: Component Ceilings on Economic Retention Inventories 21 

Figure 

Figure 1: Categorization of Inventory for an Air Force Circuit Card 

Assembly 8

Page i GAO-06-512 Defense Inventory 
Abbreviations 

DLA Defense Logistics Agency

DOD Department of Defense 

LMI Logistics Management Institute 

OUSD AT&L Under Secretary of Defense for Acquisition, Technology, 

 and Logistics 

This is a work of the U.S. government and is not subject to copyright protection in the 

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permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-06-512 Defense Inventory 
United States Government Accountability Office

Washington, DC 20548 

May 25, 2006

The Honorable John Ensign 

Chairman 

The Honorable Daniel K. Akaka 

Ranking Minority Member 

Subcommittee on Readiness and 

 Management Support 

Committee on Armed Services 

United States Senate 

The Department of Defense (DOD) maintains a military force with 

unparalleled capabilities but continues to confront a pervasive, decadesold supply chain management1

 problem that relates to retaining the 

appropriate amount of inventory. At a time when our forces are expected 

to perform missions in the homeland and abroad, it is necessary for DOD 

to retain those inventory items that are needed to sustain current military 

operations and dispose of those items that will no longer support current 

and future operations. DOD reported that, as of September 2005, it owned 

about $80 billion of secondary inventory.2

 This represents a $17 billion, or 

27 percent, increase since fiscal year 2001, when the department had about

$63 billion in inventory. Because DOD is challenged to compete for 

available resources in an increasingly fiscally constrained environment 

and conduct high-level military operations, it is imperative that it has good 

stewardship over the hundreds of billions of dollars invested in its 

inventory. To ensure the sustainment of its missions, the Army, Navy, Air 

Force, and the Defense Logistics Agency (DLA)3

 each maintains separate 

 1

 DOD’s supply chain management comprises several major functions, including 

determining requirements; purchasing needed items; and storing, maintaining, distributing, 

and disposing of inventory. 

2

 Secondary inventory includes reparable components, subsystems, and assemblies,

consumable repair parts, bulk items and material, subsistence, and expendable end items,

including clothing and other personal gear. 

3

 Hereafter referred to as DOD’s components. 

Page 1 GAO-06-512 Defense Inventory
inventories of spare and repair parts above and beyond normal operating 

requirements.4

Inventory that exceeds the normal operating requirements is divided into

three categories: 

• economic retention: excess inventory determined more economical to 

keep than to dispose of because it is likely to be needed in the future; 

• contingency retention: inventory exceeding the economic retention level

but retained for specific contingencies such as military (items needed to 

meet military contingencies), potential security assistance (items held for 

foreign military sales), and general contingency (items held based on 

potential usefulness, extreme reprocurement problems, or nonmilitary 

contingencies, such as civil emergencies or natural disaster relief); and 

• potential reutilization and/or disposal materiel: inventory exceeding the 

contingency retention level but identified as either potentially reusable or 

disposable—typically through public sale. 

While DOD’s components each have their own policies and procedures for 

managing their secondary inventories, DOD has an overarching policy—

the DOD Supply Chain Materiel Management Regulation5

—that provides

the components with overall guidance. 

In 2001, we reported6

 that the components did not have sound analytical 

support for determining which items should be kept in economic retention 

inventory. We also reported that the components were not conducting 

annual reviews of the methodologies they used to make economic 

retention inventory decisions, as required by the DOD regulation.7

 At that 

time, we recommended that the components establish milestones for 

reviewing their economic retention approaches and that they conduct 

annual reviews of their approaches. 

 4

 Operating requirements consist of the approved acquisition objective: items needed to 

meet current needs, items expected to be used within 2 years, and items to meet war 

requirements. 

5

 Office of the Deputy Under Secretary of Logistics and Materiel Readiness, Department of 

Defense Supply Chain Materiel Management Regulation, DOD 4140.1-R (May 2003). 

6

 GAO, Defense Inventory: Approach for Deciding Whether to Retain or Dispose of Items 

Needs Improvement, GAO-01-475 (Washington, D.C.: May 2001). 

7

 DOD 4140.1-R, Section C2.8.1.1.2. 

Page 2 GAO-06-512 Defense Inventory
As requested, this report focuses on DOD’s inventory retention policies 

and procedures. Our objectives were to assess the management of 

contingency retention inventory to (1) determine the extent to which DOD 

components have followed departmentwide and individual components’ 

policies and procedures to ensure they are retaining the appropriate 

amount of inventory, and (2) assess the extent to which DOD is providing 

oversight of inventory across the components. In addition, we are 

providing information on the progress that DOD has made in 

implementing our 2001 recommendations on the components’ 

management of economic retention inventory. 

To determine the extent to which DOD components have followed policies 

and procedures for retaining the appropriate amount of contingency 

retention inventory, we (1) reviewed the components’ regulations and 

interviewed officials to determine how they implement these regulations; 

(2) obtained and analyzed secondary inventory (spare parts) retention 

records; and (3) visited four components’ inventory management centers

to assess their policies, procedures, and practices for managing

contingency retention inventory. The results of our review cannot be 

generalized to the total contingency retention inventory population, due to

the use of a nonprobability sample of 205 cases (national stock numbers) 

valued at $890 million. We assessed the reliability of DOD’s automated 

inventory management system data by (1) obtaining information from the 

components’ management on their data reliability procedures and (2) 

interviewing components’ officials knowledgeable about the data. We 

determined the data were sufficiently reliable for the purposes of this 

report. Further, to assess the extent to which DOD is providing oversight

of contingency retention inventory management across the components, 

we reviewed DOD regulations and directives and interviewed officials 

from the Office of the Deputy Under Secretary of Defense for Supply 

Chain Integration on their roles and responsibilities for supply chain 

materiel management. Also, to assess the progress that DOD has made in 

implementing our 2001 recommendations on the components’ 

management of economic retention inventory, we reviewed related 

policies and procedures and interviewed officials from the Deputy Under

Secretary of Defense for Supply Chain Integration. We conducted our 

review from May 2005 through May 2006 in accordance with generally 

accepted government auditing standards. Further details on our scope and 

methodology are described in appendix I. 

Page 3 GAO-06-512 Defense Inventory
Some DOD inventory management centers have not followed 

departmentwide and individual components’ policies and procedures to 

ensure they are retaining the appropriate amount of contingency retention

inventory. To ensure DOD inventory management centers are retaining the 

appropriate amount and types of items, inventory retention policies 

require the components to (1) use category codes that describe reasons to 

retain items in contingency retention inventory,8

 (2) hold items that 

correspond to current and future force level requirements,9

 and 

(3) perform annual reviews of their contingency inventory decisions.10 It is 

also an objective of DOD’s policy that items from the inventory that no 

longer support DOD’s mission be removed. According to DOD policy, DOD 

places serious emphasis on purging from its inventory items which no 

longer support the mission and needlessly consume warehouse space.11

However, several inventory management centers are not following policy. 

For example, we identified that 

Results in Brief 

• The Army’s Aviation and Missile Command is not properly assigning 

category codes that describe the reasons they are holding items in 

contingency retention inventory. While the Army inventory retention 

policy requires the use of codes to identify the reasons to hold items in 

contingency retention inventory, we found that the Aviation and Missile 

Command does not consistently assign these codes to categorize the 

reasons for holding items in contingency retention inventory. We 

identified items valued at $193 million that did not have codes to identify 

the reasons why they were being held, and therefore we were unable to 

determine the contingency retention category for the items. Furthermore, 

according to Command officials, the Army’s current inventory

management system is not programmed to categorize some contingency

retention inventory items. However, we identified that the system does 

have codes that designate the reasons items are held in contingency

retention inventory, but the Army is not currently using these codes. 

• Some inventory management centers are retaining items in contingency

retention inventory that have experienced little or no recent demands. For 

example, the Aviation and Missile Command is retaining items in 

 8

 DOD 4140.1-R, Section C2.8.1.2.4. and C2.8.1.2.6. 

9

 DOD 4140.1-R, Section C2.8.1.1.2. 

10 DOD 4140.1-R, Section C2.8.1.2.6. 

11 DLA, Department of Defense, Defense Inactive Item Program, DOD 4140.32-M, 

Foreword (Aug. 13, 1992). 

Page 4 GAO-06-512 Defense Inventory
contingency retention inventory that (1) have experienced no demands 

since the mid 1990s and (2) no longer meet operational needs. For 

example, we found that the Command continued to retain items to support 

an early warning sensor that was phased out by the Army in June 2003. 

Command officials told us that they retained these items in contingency

retention because they did not receive direction from the Army to remove 

them from the inventory. 

• Some inventory management centers are not conducting annual reviews as 

required to verify reasons for retaining contingency retention inventory. 

For example, the Defense Supply Center Richmond had not conducted 

annual reviews since 2000 to verify the reasons for retaining some items in 

contingency retention inventory. We identified from the Center’s entire 

population of contingency retention items that approximately 2,200 items 

had not been reviewed since 2000. According to Center officials, the 

reviews were not conducted because the items had no stock on hand or 

had experienced no recent demands or requests from customers. As a 

result of our review, the Defense Supply Center Richmond initiated 

disposal actions to potentially remove 40 stock numbers—a total quantity

of about 26,000 items valued at over $742,500. 

Since some DOD inventory management centers are not following policies 

and procedures for managing their contingency inventories, they may be

retaining unnecessary inventory, which results in the needless 

consumption of warehouse space. Moreover, while our work only focused 

on a limited number of inventory management centers, it is unknown 

whether these issues are occurring at other DOD inventory management 

centers. However, every inventory management center where we 

conducted audit work was not following policies. Furthermore, by not 

conducting annual reviews of their inventory retention decisions, the 

inventory management centers cannot be certain that they are retaining

the appropriate spare parts to support military operations and readiness. 

Also, without complying with inventory retention policies and procedures, 

the DOD inventory management centers can accumulate high levels of 

inventory without knowing whether they meet warfighter requirements in 

the most efficient manner. 

DOD is not providing sufficient oversight to ensure that components are 

conducting annual reviews of their contingency retention inventory. 

According to the DOD Supply Chain Materiel Management Regulation 

issued by the Office of the Deputy Under Secretary of Defense for 

Logistics and Materiel Readiness, components are required to annually 

review the contingency retention decisions. The regulation does not state, 

Page 5 GAO-06-512 Defense Inventory
however, who is responsible for ensuring the components conduct these 

reviews. Another policy, the DOD’s Supply Chain Materiel Management 

Policy12 requires that the Under Secretary of Defense for Acquisition, 

Technology, and Logistics (OUSD AT&L) ensure that DOD materiel 

management policies are implemented in a uniform manner throughout 

the department. OUSD AT&L officials said they rely on DOD’s Supply 

System Inventory Report13 as their oversight mechanism to review DOD 

components’ reported inventory retention levels and ensure the 

components are conducting the annual reviews. However, while the 

annual Supply System Inventory Report provides DOD with financial 

inventory information, it does not provide the department with the 

information it needs to ensure that all of the components are conducting 

annual reviews of contingency retention inventory decisions. For example, 

DOD’s failure to recognize the inventory management centers’ 

noncompliance with DOD’s regulation requiring them to conduct annual

reviews of their contingency retention decisions illustrates DOD’s 

insufficient oversight. By not ensuring that the components are conducting 

annual reviews of their contingency retention decisions, DOD cannot be 

certain that all components are retaining the right amount of contingency 

retention inventory to meet the military’s operating requirements in the 

most effective and efficient manner. 

DOD had made no progress in implementing our 2001 recommendations 

concerning the components’ management of economic retention 

inventory.14 We reported then that (1) components were not properly 

documenting their approaches in making economic retention decisions, 

(2) they lacked sound analytical support for the maximum levels of 

economic inventory they used in calculating how much inventory should 

be retained, and (3) they had not annually reviewed their approaches as 

required by DOD policy.15 After we issued our report, DOD determined that 

further review was necessary to determine appropriate approaches to 

economic retention inventory decisions and subsequently tasked the 

 12 Department of Defense Directive 4140.1, Supply Chain Materiel Management Policy

(April 22, 2004). 

13 This annual financial report summarizes DOD secondary inventory by component and 

inventory category and is used as a management tool to monitor changes in inventory

levels. 

14 GAO, Defense Inventory: Approach for Deciding Whether to Retain or Dispose of Items 

Needs Improvement, GAO-01-475 (Washington, D.C.: May 2001). 

15 GAO-01-475. 

Page 6 GAO-06-512 Defense Inventory
Logistics Management Institute (LMI) in 2001 and again in 2003 to examine 

whether current economic retention policy requirements and procedures 

could be improved. While LMI’s review yielded similar recommendations 

to ours, DOD’s components are still not conducting annual reviews of 

economic retention decisions. According to some DOD component 

officials, they have not been conducting annual reviews of their economic 

retention decisions because of either the cost to conduct these reviews, 

manpower limitations, or other competing priorities. We continue to 

believe that DOD should implement the recommendations to make 

meaningful improvements to its economic retention management 

practices. 

We are recommending that the Secretary of Defense direct the Under 

Secretary of Defense for Acquisition, Technology, and Logistics to ensure 

the DOD inventory management centers properly categorize the reasons 

for holding items in contingency retention inventory, determine whether 

items no longer needed should be disposed, and conduct annual reviews 

of contingency retention inventory as required by DOD’s Supply Chain 

Materiel Management Regulation and the components’ policies. In 

addition, we are recommending that the Under Secretary revise DOD’s 

Supply Chain Materiel Management Regulation to make clear who is 

responsible for providing recurring oversight to ensure that the inventory 

management centers are performing annual reviews of their contingency 

retention inventory decisions. In reviewing a draft of this report, DOD 

concurred with six of our recommendations and partially concurred with 

one. The Department’s responses are reprinted in appendix II and our 

evaluation of them appears later in the report. 

DOD divides secondary inventory into two categories: active inventory 

and inactive inventory. Active inventory is materiel that DOD budgets for 

and consists of the approved acquisition objective: items needed to meet 

current operating requirements, items that are expected to be used within 

the budget period (2 years), and items purchased to meet specific war 

reserve requirements. Items that exceed the approved acquisition 

objective are referred to as inactive inventory. Inactive inventory is 

materiel that is not expected to be consumed within the budget period but 

is likely to be utilized in future years.16 These items preclude future 

Background 

 16 Office of the Deputy Under Secretary of Defense for Logistics and Materiel Readiness,

Department of Defense Materiel Supply Chain Management Regulation, DOD 4140.1-R, 

appendix 1 (May 2003). 

Page 7 GAO-06-512 Defense Inventory
procurement and repairs and do not impact components’ budgets because 

the costs were incurred when the items were initially procured. Inactive 

inventory levels are categorized as economic retention, contingency 

retention, and potential reutilization and/or disposal materiel. 

An Air Force circuit card assembly used on the 968H Air Early Warning 

System, for example, illustrates DOD’s inventory categories. On March 31, 

2005, the Air Force had 18 of these circuit card assemblies on hand, each 

valued at $2,172. As shown in figure 1, 4 of the circuit card assemblies 

satisfied the item’s approved acquisition objective. Of the remaining 14

circuit card assemblies, 3 were held as economic retention stock, 1 was 

held as contingency retention stock, and 10 were categorized as potential 

reutilization and/or disposal materiel. 

Figure 1: Categorization of Inventory for an Air Force Circuit Card Assembly 

The DOD Supply Chain Materiel Management Regulation provides the 

components with overarching guidance on how to manage contingency 

retention inventory. The DOD regulation requires that (1) components be 

able to provide the rationale for holding items in contingency inventory, 

(2) items are retained in accordance with current and future force level 

requirements, and (3) the methodology for making decisions to hold items 

in contingency retention be reviewed and validated annually.17 In addition, 

the regulation says that components should categorize the contingency 

retention items as (1) military contingency if the assets are retained to 

meet military contingencies for U.S. forces; (2) general contingency if the 

DOD Inventory 

Management Policies and 

Procedures Pertaining to 

Contingency Retention 

Inventory 

assets are retained due to their potential usefulness, for extreme 

 17 DOD 4140.1-R, Section C2.8.1.1.1.3 and C2.8.1.1.2. 

Page 8 GAO-06-512 Defense Inventory
procurement problems or for other special considerations involvi

nonmilitary contingencies, such as civil emergencies or natural disast

relief; or (3) potential security assistance (also referred to as foreign 

military sales) if the assets are held in expectation of foreign military

demand.

ng

er

how

While DOD components follow DOD’s overarching guidance that defines 

tial

n to

f

; and 

o

olicy,

el

 

18 Each component has policies and procedures that describe

their respective personnel should manage contingency retention 

inventory. 

contingency retention inventory, each of the components has its own 

policies and procedures for determining what items to retain for poten

contingencies. Most DOD components categorize contingency retention

inventory in one of these categories: military, foreign military, or general

contingency. Also, they retain contingency retention inventory for 

additional reasons. For example, DLA19 retains items with applicatio

specific weapon systems to preclude them from disposal at the request o

the military services. Military services use some of the following reasons 

for excluding items with application to specific weapons systems from

disposal: aging weapon system not planned for phase-out in the near 

future; parts that have very infrequent use, but with expected demand

out-of-production, sole source items. Additionally, the Air Force policy20

allows for retention of assets in contingency retention inventory when a 

one-time buy has been made for an explicit reason or when the decision t

retain was made by Headquarters Air Force Materiel Command. In 

addition to the three contingency categories described in the DOD p

the Army’s secondary item retention policy21 authorizes item managers to 

retain chemical, biological, nuclear, or serviceable or unserviceable

hazardous materiel based on the Department of the Army or DOD-lev

directives in contingency retention inventory. The Navy22 uses several 

18 DOD 4140.1-R, Section C2.8.1.2.4. 

entory One Book (DLAD 5025.30) (Aug. 22, 2003) 

 contingency retention activities. 

, 2006), provide 

um, Headquarters U.S.

19 The Defense Logistics Agency Inv

provides the guidance for the agency’s

20 The Air Force Materiel Command Manual 23-1, Requirements for Secondary Items, 

(Mar. 16, 2005), and the Air Force Manual 23-110, Volume 3, Part 1 (Jan. 1

the guidance for the Air Force’s contingency retention activities. 

21 Inventory Management: Centralized Inventory Management of the Army Supply

System, Army Regulation 710-1 (Sept. 6, 2005) and the Memorand

Army Materiel Command, subject: Revised Secondary Item Retention Policy (Oct. 28, 

2005), provide the guidance for the Army’s contingency retention activities. 

22 Ship Parts Control Center Instruction 4400.47D, 27 (May 1994), provides the guidance

for the Navy’s contingency retention activities. 

Page 9 GAO-06-512 Defense Inventory
categories to retain and protect inventory from disposal. A few of the 

reasons include: retention of assets for cannibalization for lower assem

retention of assets to support a weapon system throughout its expected 

life cycle (life of system buy); and retention of excess assets for nuclear 

reactor plans. In addition, the DOD components have policies and 

procedures to conduct annual reviews to ensure the decisions to ho

items in contingency retention inventory are valid. The components als

require justification for the retention decision to be maintained on file. 

bly;

ld

o

Unlike other categories of inventory such as economic retention, there are

tive

ion

ifying

the

an

Once a contingency requirement has been established for an item, the 

requirement is supposed to be reviewed at least once a year during each 

component’s contingency retention review process. When conducting 

contingency retention reviews, the item manager reevaluates the item and

 

no prescribed methodologies to determine contingency retention 

inventory levels.23 Instead, DOD component officials rely on subjec

reasoning to determine and justify retaining items in contingency retent

inventories in support of their missions. While there is no established DOD 

process for identifying and reviewing contingency requirements and 

decisions, the components follow similar processes. Typically an item

manager will make the decision to retain assets in contingency, although

in some cases, the decision may be made by a component’s headquarters 

or another component. For example, a component’s materiel commands 

or another service may request that certain assets be retained in 

contingency retention inventory to meet future needs. Upon ident

assets on hand that exceed an item’s approved acquisition objective and

economic retention requirement, the item manager determines if some or

all of the assets need to be retained in contingency retention inventory for

a specific reason. If so, the item manager will then determine the level of 

assets needed to be retained in contingency and establish a requirement. 

Some of the common criteria item managers use to determine the 

retention of items in contingency retention inventory include: the 

expected life span or age of the weapon system the asset supports;

wear-out rate of the item; the nonrecurring or unpredictable demand of

item; the potential sale or transfer of items to a foreign country; or 

diminishing manufacturing sources for an item. 

23 According to the DOD regulation, DOD 4140.1-R, Section C2.8.1.2.1, the methodology 

used to calculate economic retention levels should be based on an economic analysis that 

balances the cost of retention and the cost of disposal. 

Page 10 GAO-06-512 Defense Inventory
determines if there is a continued need to retain all or some of the asse

in contingency retention. If the item manager makes the decision to retain

assets in contingency retention, the item manager’s rationale for the 

current retention decision must be available upon request and is 

maintained in the item file or inventory management system. If it is 

determined there is no longer a need for an item’s contingency retention 

requirement, the assets that exceed the approved acquisition objectiv

economic retention requirement will be allocated as potential reu

and/or disposal materiel. 

According to the DOD guidance, an economic analysis used to calculate 

whether to retain an inven

ts

e and 

tilization

tory item or dispose of it should be based on an 

analysis that balances the cost of retention and the cost of disposal. In 

ddition, the regulation states that the components should consider in 

ck

y as supply chain management, to purchase, produce, and 

deliver items and services to the warfighter. The primary inventory 

gencies that provide this support to the warfighters are (1) the U.S. Army 

 

a

their economic analysis the cost of retaining items, the potential long-term 

demand for the items, potential repurchase costs, and for items essential

to the operation of a weapon system, the expected life of the weapon 

system, and the number of systems in use. As the amount of inactive sto

increases, the cost of retention increases (more items cost more to hold) 

and the cost of disposal decreases (with greater amounts of an item on 

hand, the likelihood of having to repurchase the items becomes less). 

Equilibrium is reached when the additional cost of retention equals that of

disposal. This equilibrium level of inventory is the economic retention 

level—-the largest amount of an item that can be justified by economic 

analysis.24

DOD relies on a number of individual processes and activities, known 

collectivel

a

Materiel Command, (2) the U.S. Air Force Materiel Command, (3) the 

Defense Logistics Agency, and (4) the Naval Inventory Control Point.

Table 1 shows each primary logistics agency and its inventory 

management centers. 

DOD Inventory 

Management Policies and 

Procedures Pertaining to 

tion 

DOD’s Inventory 

Management Agencies 

Economic Reten

Inventory 

24 Logistics Management Institute and Center for Naval Analysis, Independent Study of 

Secondary Inventory and Parts Shortages, LG009R1 (McLean, Va.: July 2001), and 

Logistics Management Institute: Economic Retention Within the Department of Defense, 

LG301T1 (McLean, Va.: December 2003). 

Page 11 GAO-06-512 Defense Inventory
Table 1: Primary Logistics Agency and Its Inventory Management Centers 

Primary logistics inventory management centers agency

Air Force Materiel Command 

 Oklahoma City Air Logistics Center 

 Ogden Air Logistics Center 

 Warner Robins Air Logistics Center 

Army Materiel Commanda 

 Aviation and Missile Life Cycle Management Command

cle Management Command 

e Cycle Management Command

 Communications-Electronics Life Cy

 Tank-automotive and Armaments Lif

Defense Logistics Agency

 Defense Supply Center Columbus 

 Defense Supply Center Philadelphia 

 Defense Supply Center Richmond 

Naval Inventory Control Point

b

 

nicsburg 

phia 

Naval Inventory Control Point Mecha

 Naval Inventory Control Point Philadel

Sour

ssile Command, the 

-automotive and Armaments Command. 

 a single command organization operating in two 

and procedures in managing their contingency retention 

ventories. For example, we found some inventory centers do not 

roperly categorize the reasons items are kept for contingency retention 

no

retain

eeds.

t

t

Some DOD Inventory 

ce: GAO analysis of DOD data. 

a

Sometimes these commands are referred to as the Aviation and Mi

Communications-Electronics Command, and the Tank

b

The Naval Inventory Control Point is carried out by

locations. 

Some DOD components’ inventory management centers are not following 

policies

in

p

purposes, as required by DOD policy. Also, some inventory centers are 

retaining items that have not experienced any recent demands and

longer meet operational needs. In addition, some DOD inventory 

management centers have not complied with DOD’s policy as well as their 

own policies, which require them to conduct annual reviews of 

contingency retention inventory to ensure the reasons for retaining 

inventory are valid. As a result, there is the likelihood for them to

inventory for a number of years and accumulate high levels of inventory 

that may not be needed to meet current and future operational n

Moreover, while our work only focused on the inventory managemen

centers we reviewed, it is unknown whether these issues are occurring a

other DOD inventory management centers. 

Management Centers 

tories

Are Not Following 

Policies and 

Procedures in 

Managing Their 

Contingency

Retention Inven

Page 12 GAO-06-512 Defense Inventory
The Army’s Aviation and Missile Command and Air Force’s Ogden Air 

Logistics Center are not properly assigning category codes that describ

the reasons they are holding items in contingency retention inventory. 

DOD policy requires DOD components to id

e

entify the reasons for retaining

items for contingencies purposes and if requested, provide the rationale

fy

d does

93 

million did not have a code to identify the reasons for holding the items, 

nd

e

to have

 

that identifies why contingency retention inventory should be in the 

military, foreign military sales, and general category.25 Some DOD 

components use codes in their inventory management systems to identi

the reasons to hold items in contingency retention inventory. The codes 

are reviewed to validate the contingency retention decisions. 

We found, however, that the Army’s Aviation and Missile Comman

not consistently assign codes to categorize the reasons for holding items in

contingency retention inventory. Of the 55 Army Aviation and Missile 

Command items we selected for review, 50 of the items valued at $1

and therefore we were unable to determine the contingency retention 

category for the items. Furthermore, according to Command officials, the 

Army’s current inventory management system, the Commodity Comma

Standard System, is not programmed to categorize some contingency 

retention inventory.26 However, according to Army Materiel Command 

officials, the contingency retention code was added to the Commodity

Command Standard System27 in the mid-1990s but the functionality to use 

the code in the system was not completed because of the planned 

replacement of the Commodity Command Standard System with the 

Logistics Modernization Program in 1999. Army officials stated that it is

unlikely any updates or modifications to the current system to ensure th

functionality of the coding feature will be approved to properly categorize

contingency retention inventory. While the new system is expected

contingency retention codes, the Army is not currently planning to 

complete fielding the Logistics Modernization Program until 2009, which

means that it will not be using codes at least until then. As an interim 

solution, Army Material Command officials have indicated that they will 

reemphasize that item managers use the manual contingency retention 

Army’s Aviation and 

Missile Command and Air 

Force’s Ogden Air 

Logistics Center Are Not 

Properly Categorizing the

Reasons to Hold Items in 

Contingency Retention

Inventory 

25 DOD 4140.1-R, Sections C2.8.1.1.1.3 and C2.8.1.2.6. 

26 While the inventory management system does not allow the Command to use codes to

categorize military and general contingency retention inventory, it does provide a code to

identify items designated for foreign military sales. 

27 The Commodity Command Standard System is also used at the Tank-automotive and 

Armaments Command. 

Page 13 GAO-06-512 Defense Inventory
approval forms that will include the codes. However, without the us

the codes in the inventory management system, the Army’s Aviation and 

Missile Command will not be able to (1) readily identify the reasons fo

holding items in contingency retention inventory and know whether the 

items they are retaining are useful for current and future operations and

(2) analyze trends in contingency levels that may require management 

scrutiny and attention. 

Also, at the Army’s Aviation and Missile Command, we identified 30 items

that were retained for anticipated foreign military sales. Of the 30 items 

valued at $134 million, only 5 had the proper coding. At the time of our

review, several item ma

e of

r

nagers responsible for managing foreign military 

items stated they were not aware of the Army policy which directs such 

d

ntified 3 out of 57 

items we reviewed at the Ogden Air Logistics Center that the Air Force 

ed that

n

en 

m

ed 

ion

items to be identified with a specific code. We informed Command 

inventory materiel management officials that some item managers were 

unaware of this policy. The officials identified this as a training issue an

plan to develop a training module for item managers that will address this

matter. However, at the time we completed our audit work in January 

2006, the Command had not developed the training. 

We also found that the Air Force’s Ogden Air Logistics Center had some 

contingency retention inventory items that were not properly categorized 

and, as a result, the items had been inappropriately retained in 

contingency retention inventory. Specifically, we ide

Materiel Command directed the Center to retain in contingency retention

inventory that were not properly categorized. When we brought this to the

attention of the Air Force Materiel Command, officials discover

these 3 items were among a larger population of 974 items that had bee

improperly coded. Upon investigation, officials found that in 2001 the 

contingency retention codes were removed from the weapon systems that

these items supported, but not from the items themselves. According to 

the Air Force Materiel Command, the 974 items are managed at the Ogd

Air Logistics Center, as well as the Warner Robins and Oklahoma City Air

Logistics Centers. The Command officials explained that due to a syste

deficiency in the Air Force’s Application Programs, Indenture system, it 

did not remove the items’ codes when the weapon systems’ codes were 

removed and, as a result, the items continued to be categorized as 

contingency retention inventory. As a result of these items being 

inappropriately retained in contingency retention inventory, the 

contingency retention inventory level has been overstated. We estimated

in 2006 that the Air Force’s contingency retention inventory value includ

$138 million worth of items, the value of the 974 contingency retent

Page 14 GAO-06-512 Defense Inventory
items that should not have been included. As a result of our review

Force Materiel Command system programming activity corrected

deficiency in March 2006 by removing the codes from the system. 

According to Command officials, the items support some weapon system

that are still used in the Air Force, but some items support the F-111 

aircraft that the Air Force retired in the mid-1990s. When the codes are

removed for this aircraft, some of the 974 items that are no longer n

, the Air 

the 

s

eeded 

will be candidates for disposal unless the Air Force item managers decide 

that

ly 

nt

ple, we identified some items categorized as 

contingency retention inventory that had been in the inventory system for 

0 or more years—-some of which had not experienced any requests from 

ry

eviewed

Some Inventory 

Management Centers Are 

Retaining Items in 

Contingency Retention 

ve

to retain these items for foreign military sales. Air Force policy indicates 

that the failure to remove items from contingency retention inventory

are no longer needed can cause too much inactive inventory to negative

affect warehouse costs and spaces. Also, by not properly categorizing the 

reasons for holding items in contingency retention inventory, some DOD 

components are unable to determine the rationale for holding the items 

and do not readily know the potential usefulness of their contingency 

retention inventories and whether the items could meet components’ 

operational needs. 

Some DOD inventory management centers are retaining items in 

contingency retention inventory that have experienced little or no rece

demands. For exam

5

customers in over 10 years. There is the likelihood for the invento

management centers to retain items that no longer meet operational 

needs. Table 2 shows for each inventory management center we r

examples of when items were placed into the inventory and the last 

reported demand through January 2006. 

Inventory that Ha

Experienced Little or No 

Recent Demands 

Page 15 GAO-06-512 Defense Inventory
Table 2: Examples Illustrating When DOD’s Items Were Placed into Inventory and the Last Reported Demand Date Through 

January 2006

Inventory 

management 

center Name of item

Name of 

weapon system 

Year item 

entered into

inventory 

system

Number of years 

in inventory 

system

Year of last 

demand

Number of years 

from last 

demand

Air Force’s Ogden 

Air Logistics Center 

Electronic 

switch 

Missile Warning 

and Defense 

Division System 

1968 38 1984 22

Army’s Aviation and 

Missile Command 

Spur gear Target 

Acquisition 

Designation Sight 

and Pilot Night 

Vision Sensor 

1990 16 1995 11

Navy Inventory

Control Point 

Mechanicsburga

Rod assembly Battleship Guns 1953 53 1999 N/A

Defense Supply

Center Richmond 

Direct current 

motor 

Airlifter Aircraft 1971b35 2002 4

Source: GAO analysis of DOD data. 

a

The Navy’s inventory management system does not retain demand (request) information beyond 5 

years, and therefore, we were unable to determine when these items were actually last requested. 

b

Indicates the year Defense Logistics Agency assumed management of the item from a DOD 

component. 

We also reported28 in 2004 that some items had inventory categorized as 

either economic or contingency retention stock and had been in the 

inventory system for 15 or more years. Some of the items had been placed

in service prior to 1989 and some placed during the 1960s. These items 

included antennae, aircraft rudders, auxiliary power units, propeller 

blades, and circuit card assemblies that were used on versions of the Air 

Force’s C-130 and F-15 aircraft, the Army’s UH-60 helicopter, and other 

weapon systems. 

In addition, we found that the Aviation and Missile Command is retaining 

items in contingency retention inventory, which further demonstrates how 

components can retain items that have experienced (1) no recent demands 

and (2) no longer meet operational needs. DOD policies require that items 

held in contingency retention should correspond to current and future 

 28 GAO, Defense Inventory: Analysis of Consumption of Inventory Exceeding Current 

Operating Requirements Since September 30, 2001, GAO-04-689 (Washington, D.C.: Aug. 

2, 2004). 

Page 16 GAO-06-512 Defense Inventory
force levels.29 It is also an objective of DOD’s policy that items from the 

inventory system that no longer support DOD’s mission should be 

removed.30 During our review, we identified 4 out of 55 contingency

retention items that support an obsolete early warning sensor that was 

phased out by the Army in June 2003. According to Command officials 

these items were retained in contingency retention because officials did 

not receive direction from the Army to remove the obsolete items from the 

inventory. Also, Command officials stated that they are considering 

offering the weapon system and support items to the foreign military sales 

program. If the foreign military sales program does not assume 

management of the items, the Command officials said they will initiate the

disposal process. While we do not know the extent to which this is a 

predominant condition at the Command because we only identified 4 

items which the Command is retaining that do not support a current 

requirement and have not experienced any recent demands, it is possible 

that the Army may be retaining several other contingency retention items 

that no longer meet operational needs. According to DOD policy, items 

that no longer support DOD’s mission needlessly consume warehouse 

space that will impact total supply operations and DOD places serious 

emphasis on the purging of unneeded items from the inventory.31

Some DOD Inventory 

Management Centers Are 

Not Conducting Annual 

Reviews to Verify Reasons 

for Retaining Contingency 

Retention Inventory 

The Defense Supply Center Richmond, the Naval Inventory Control Point 

Mechanicsburg, and the Army’s Aviation and Missile Command are not 

conducting annual reviews to verify the reasons for retaining items in 

contingency retention inventory. DOD’s and the components’ policies 

require the components to conduct annual reviews so that the components 

can validate their reasons for retaining items in this inventory category. 

Additionally, we found that one of the Defense Logistics Agency’s centers, 

the Defense Supply Center Richmond, had not conducted reviews since 

2000 on some contingency retention items. We found that no annual 

reviews had been conducted for 35 of the 48 items we reviewed from the 

Center’s 2004 total population of contingency retention inventory. We later 

identified from the Center’s total population of contingency retention 

inventory that approximately 2,200 items had not been reviewed since 

2000. According to Center officials, the reviews were not conducted 

 29 DOD 4140.1-R, Section C2.8.1.1.2. 

30 DOD 4140.32-M, Foreword. 

31 DOD 4140.32-M, Foreword. 

Page 17 GAO-06-512 Defense Inventory
because the items had no stock on hand or they had experienced no recent 

demands from customers. Based on our review, the Defense Supply Center 

Richmond initiated actions to (1) review the stock numbers, (2) remove 

their contingency retention levels if required, and (3) establish a review 

cycle that would identify these types of items in the future. After the 

Center reviewed the items, it proposed disposal actions to remove 40 

stock numbers: a total quantity of about 26,000 items valued at over 

$742,500. 

Also, the Naval Inventory Control Point Mechanicsburg had not conducted 

annual reviews for some contingency retention inventory established by 

the weapon system program manager. Like the other components, Navy 

policy requires an annual review of the reasons for retaining an item in 

contingency inventory. However, we identified 4 out of 45 items in our 

review for which weapon system program managers had not conducted

annual reviews for the contingency retention inventory. At the time of our 

review, these items had not been reviewed since 2000. For example, one 

Navy program manager had not conducted annual reviews for 3 items in 

our review since 2000 because the date to conduct the reviews in the 

inventory management system was not set for every year. Navy inventory

management officials were unaware that some weapon system program 

managers were not conducting annual reviews of contingency retention 

inventory. As a result of our review, the Naval Inventory Control 

Mechanicsburg revised the policy for weapon system program managers 

to conduct annual reviews. 

Furthermore, we found that the Army Materiel Command has not 

conducted reviews of some items in contingency retention inventory 

specifically retained for foreign military sales. For example, we identified 

10 out of the 55 selected Army Aviation and Missile Command contingency 

items (valued at $10.1 million) that had not been reviewed annually by the 

component to verify the reasons for retaining the items in contingency 

retention. Army policy requires an annual review of contingency 

requirement decisions for all items including items retained for foreign 

military sales. These 10 items support the Hawk and Chaparral Missile 

Systems and are retained for the foreign military sales program. A 2003 

memorandum of agreement between the Army’s Aviation and Missile 

Command’s Missile System Directorate and the Security Assistance 

Management Directorate directs the Army to retain management of the 

items until the quantities on hand have been depleted. Once this occurs, 

the Security Assistance Management Directorate assumes inventory 

accountability for the items. According to the Army Aviation and Missile 

Command officials, these items are managed by the Army because the 

Page 18 GAO-06-512 Defense Inventory
Security Assistance Management Directorate is not authorized to procure

assets from the Command in anticipation of foreign military sales 

demands. Also, Command officials indicated that annual reviews were not 

conducted because the missile systems’ items were retained due to 

direction of the memorandum of agreement. The purpose of these annual

reviews would be to identify whether these items are still needed to 

support the weapon systems in the foreign military sales program. By not 

conducting annual reviews, the Command is not in compliance with DOD 

and Army policies and procedures. 

DOD is not providing sufficient oversight to ensure that components are 

conducting annual reviews of contingency retention inventory across the 

components. According to the DOD Supply Chain Materiel Management 

Regulation issued by the Office of the Deputy Under Secretary of Defense

for Logistics and Materiel Readiness, the DOD components are required to 

annually review and validate the contingency retention inventory. 

However, the regulation does not state who bears responsibility for 

ensuring the components conduct these annual reviews. The DOD’s 

Supply Chain Materiel Management Policy requires the Under Secretary of 

Defense for Acquisition, Technology, and Logistics (OUSD AT&L) to 

ensure that DOD materiel management policies are implemented in a 

uniform manner throughout the department. This policy applies to all 

phases of materiel management, from an item’s introduction into the 

supply system to operational requirements through the weapon system 

phase-out and retirement. Also, the OUSD AT&L is responsible for 

monitoring the overall effectiveness and efficiency of the DOD logistics 

system, and for continually developing improvements. In addition, the 

Standards for Internal Control in the Federal Government recommend 

that ongoing monitoring occur in the course of normal operations to 

ensure policies and procedures are enforced. OUSD AT&L officials said 

that they rely on the DOD’s Supply System Inventory Report as their 

oversight mechanism to ensure DOD components conduct annual reviews. 

While the annual Supply System Inventory Report provides DOD with 

financial inventory information, it does not specifically provide the 

information DOD needs to determine whether the components are 

conducting annual reviews of contingency retention inventory. OUSD 

AT&L officials said that if the report identifies noticeable changes in the 

components’ contingency retention inventory levels, they would ask the 

components to explain those changes. 

DOD Is Not Providing 

Sufficient Oversight 

to Ensure That 

Components Are 

Conducting Annual 

Reviews of 

Contingency 

Retention Inventory 

Also, OUSD AT&L officials said that several additional measures could be

taken to determine why the components’ contingency retention inventory

levels have increased. For example, DOD officials said they may request 

Page 19 GAO-06-512 Defense Inventory
assistance from the Department of Defense Inspector General’s Office, 

establish a joint process review team, or request contractor support to 

examine noticeable changes in the components’ inventory levels. We 

found that the Department of Defense Inspector General’s Office has not

conducted any recent reviews on contingency retention inventory. 

According to DOD officials, they are currently using a contractor to 

determine why DOD components’ inventory levels have increased. 

However, DOD’s failure to recognize the inventory management centers’ 

noncompliance with DOD’s regulation requiring them to conduct annual

reviews of their contingency retention decisions illustrates DOD’s 

insufficient oversight of inventory management at the departmentwide 

level. There is no requirement for the components to report the results of 

their annual reviews to DOD, and the Supply System Inventory Report 

does not address the annual reviews. Because DOD does not provide the 

oversight to ensure that components are conducting annual reviews of 

their contingency retention decisions, DOD cannot be certain that 

components are retaining the right amount of contingency retention 

inventory to meet the military’s operating requirements. 

DOD has made no progress in implementing our 2001 recommendations32

on economic retention inventory management. We recommended that

DOD (1) establish milestones for reviewing their approaches for making 

economic retention decisions, and (2) conduct annual reviews of their 

approaches, as directed by the DOD regulation,33 to ensure they have 

sound support for determining economic retention inventory levels. In 

2001, we reported that components had not properly documented the 

approaches they have taken in making economic retention decisions, 

lacked sound analytical support for the maximum levels they used, and

had not annually reviewed their approaches. We also reported that while 

DOD components, with the exception of the Air Force, developed 

individual economic models designed to place inactive inventory in 

economic status as early as 1969, they had not used the models since 1994. 

Instead, components lowered maximum levels of inventory—known as 

ceilings—to make economic retention determinations that would help 

achieve agency inventory reduction goals. We also reported that the 

components judgmentally developed their ceilings for economic retention 

DOD Has Made No 

Progress in 

Implementing 

Our 2001 

Recommendations on 

Economic Retention 

Inventory 

Management 

 32 GAO, Defense Inventory: Approach for Deciding Whether to Retain or Dispose of Items 

Needs Improvement, GAO-01-475 (Washington, D.C.: May 2001). 

33 DOD 4140.1-R, Section C2.8.1.1.2. 

Page 20 GAO-06-512 Defense Inventory
inventory, which differed and had yielded lower levels of economic 

retention inventory than the levels calculated by the economic retention 

models. In addition, we reported that while components’ ceilings varied in

the span of years of demand, they also varied in the total years of 

inventory covered. 

During 1994-96, the components established different ceilings for items in 

economic retention. A ceiling imposes an upper constraint on years of 

demand—the quantity needed on an annual basis to meet requirements—

and how much inactive inventory can be retained. For example, the Army 

ceiling is applied to inventories above active inventory requirements. The 

Air Force, Navy, and Defense Logistics Agency ceilings apply to their 

entire inventory requirements, including active inventory. The ceilings 

currently used by the components are summarized in table 3. 

Table 3: Component Ceilings on Economic Retention Inventories

Component Ceilings levels used to retain inventory 

Air Force 13 years of total maximum demand for all items 

Army (By Life Cycle 

Management Commands) 

CECOM, 7 years of demand above requirements for 

serviceable reparables, 6 years for unserviceable 

reparables, 5 years of demand above requirements for 

all other items 

AMCOM and TACOM, 83.25 years of demand above 

requirements for serviceable and unserviceable 

reparables 

Navy 12 years of total attrition demand for new weapons 

systems 

8 years of total attrition demand for “steady” weapon 

systems 

4 years of total attrition demand for weapons systems 

approaching obsolescence 

Defense Logistics Agency 6 years of total demand 

Source: GAO analysis of DOD data. 

a

Army has three major subordinate commands that manage spare parts for major weapon systems. 

They include the Aviation and Missile Life Cycle Management Command (AMCOM),

Communications-Electronics Life Cycle Management Command (CECOM), and the Tank-automotive

and Armaments Life Cycle Management Command. 

DOD partially concurred with our 2001 recommendations, agreeing that its 

components needed to annually review the appropriateness of their 

economic retention inventory levels. In response to a 2001 congressionally 

mandated study, the Logistics Management Institute (LMI) examined 

whether the current economic retention policy requirements and 

Page 21 GAO-06-512 Defense Inventory
procedures could be improved.34 Specifically, the study concluded that 

DOD could possibly achieve additional cost savings by determining 

economic retention levels using heuristics35 based on years of no demand 

when determining economic retention levels rather than using economic

retention models and years of supply. LMI attributed the problems of using 

a generalized economic retention model to the uncertainty of long-term 

demand, the negligible marginal cost of storage, and the small return from 

disposal. In addition, the LMI study suggested DOD employ a new 

standard of 7 years of inactivity to determine economic retention levels. 

DOD determined that further review was necessary to determine 

appropriate approaches to economic retention inventory decisions and 

subsequently tasked LMI to examine whether current economic retention 

policy requirements and procedures could be improved. LMI conducted a 

follow-up study on economic retention in 2003 and found that even though 

the economic retention models used by DOD components allow for 

demand variability, they assume the average demand for items is relatively 

stable from year to year. The study also stated that if the average demand 

is not stable, future demand cannot be predicted and retention limits will 

not be accurate. 

Based on its 2003 independent study, LMI recommended that DOD 

procedural guidance for setting economic retention limits should call for 

the use of minimum-retention limits as a viable means of dealing with the 

uncertainty in forecasting long-term demand. In addition, LMI 

recommended that in accordance with the DOD regulation, the DOD 

components should review their retention methodologies at least annually 

and adapt the general models and options in the study’s analysis to their 

specific items.36 DOD did not advise the components to adopt 

recommendations from the 2003 LMI study because, according to an 

official with the Office of the Assistant Deputy Under Secretary of 

Defense, they were designed to show components how best to determine 

economic retention. A program director with LMI said DOD indicated that 

they were still looking at ways to implement recommendations from the 

 34 National Defense Authorization Act for Fiscal Year 2000, Pub. L. No. 106-65, § 362 (1999)

directed the Department of Defense to sponsor an independent study on secondary 

inventory and spare parts. 

35 Heuristics is a rule of thumb, simplification, or educated guess that is offered as a 

decision-making tool. 

36 Logistics Management Institute, Economic Retention Within the Department of Defense, 

LG301T1 (McLean, Va.: December 2003). 

Page 22 GAO-06-512 Defense Inventory
2003 study, but competing demands from Operation Iraqi Freedom, the 

Base Realignment and Closure Act for 2005, the Quadrennial Defense 

Review, and other activities have taken priority. Furthermore, while DOD 

agreed with our 2001 recommendations to comply with DOD policy and 

perform annual reviews of the economic retention methodologies, we 

found that some of the components were not complying with the DOD 

regulation to review and validate their methodologies for economic 

retention decisions. For example, at the time of our review, the Army and 

Defense Logistics Agency had not reviewed and validated their 

methodologies for economic retention decisions within the last year, nor 

were they able to provide documentation illustrating when the last review

had been conducted. A Defense Logistics Agency official stated that other 

competing priorities and a focus on the agency’s new inventory 

management system have prevented them from conducting annual 

reviews. However, according to an official with the Defense Logistics 

Agency, a plan to revise their economic retention model and ceilings will

begin in late 2006. We also found that the Air Force had not conducted 

annual reviews and validated its methodologies for economic retention 

decisions since 1991. According to Air Force officials, annual reviews of 

economic retention decisions are not conducted because it is an expensive 

undertaking and because of manpower limitations. The Air Force is 

currently conducting a study of its economic retention model. In addition, 

in 2005, the Navy conducted a review of its economic retention model and 

recommended the following actions: (1) find methods to improve cost 

estimates in retention decisions, and (2) explore reductions in minimum 

retention limits. 

DOD’s inventory management centers are using subjective reasons to 

justify which items they retain in their contingency retention inventories in

support of their missions. While each center has policies and procedures 

to review and validate their inventory retention decisions, they are not 

complying with these policies and therefore cannot ensure that they are 

retaining the appropriate amount of contingency retention inventory for 

current and future operations. For example, since some inventory 

management centers do not properly assign reasons for holding the 

contingency retention inventory, they do not know whether the 

justifications to hold items are consistent with the reasons prescribed in 

their existing policies and procedures. Similarly, until some DOD 

inventory management centers determine whether retained items support 

their operational needs, they could be retaining inventory that needlessly 

consumes valuable warehouse space for many years. Without periodic 

reviews that verify the reasons for holding items in contingency retention

Conclusions 

Page 23 GAO-06-512 Defense Inventory
inventory, there is the potential for the DOD centers to use this inventory 

category to justify accumulating high levels of inventory without knowing 

whether the items they are retaining are potentially useful for current and 

future force operating requirements. The components’ inventory retention 

policies and procedures are in place to help meet the needs of the 

warfighter. Until the components comply with these policies and 

procedures, they will be unable to take meaningful steps to improve their 

inventory management processes to support the warfighter. Moreover, 

while our work only focused on the inventory management centers we 

reviewed, it is unknown whether these issues are occurring at other DOD 

inventory management centers. 

DOD’s insufficient oversight to ensure the inventory management centers

are conducting annual reviews of contingency retention inventory shows 

the lack of DOD accountability to ensure materiel management polices 

and procedures are implemented in a uniform manner throughout the 

department. The lack of DOD’s accountability stems from DOD’s Supply 

Chain Materiel Management Regulation, which does not clearly assign 

responsibility for ensuring the inventory management centers conduct the 

annual reviews. Although DOD has several measures to monitor 

contingency retention inventory levels, they do not provide assurance that

the reviews of contingency retention decisions are conducted. Without 

sufficient oversight, DOD does not have the information it needs to 

understand why components may not be following certain inventory 

retention policies or procedures. Furthermore, the department cannot be

assured that it has a complete and accurate picture of its inventory 

retention management and may be unable to identify areas that need

attention to improve the department’s supply chain management. 

We are recommending that the Secretary of Defense take the following 

seven actions: 

Recommendations 

To ensure DOD inventory management centers properly assign codes to 

categorize the reasons to retain items in contingency retention inventory, 

direct the Under Secretary of Defense for Acquisition, Technology, and 

Logistics to: 

• Direct the Secretary of the Army to instruct the Army Materiel Command

to modify the Commodity Command Standard System so it will properly 

categorize the reasons for holding items in contingency retention 

inventory. 

Page 24 GAO-06-512 Defense Inventory
• Direct the Secretary of the Air Force to instruct the Air Force Materiel 

Command to correct the Application Programs, Indenture system’s 

deficiency to ensure it properly categorizes the reasons for holding items 

in contingency retention inventory. 

To ensure that the DOD inventory management centers retain contingency 

retention inventory that will meet current and future operational 

requirements, direct the Under Secretary of Defense for Acquisition, 

Technology, and Logistics to: 

• Direct the Secretary of the Army to instruct the Army Materiel Command

to require the Aviation and Missile Command to identify items that no 

longer support operational needs and determine whether the items need to 

be removed from the inventory. The Army Materiel Command should also 

determine whether its other two inventory commands, the 

Communications-Electronics Command and Tank-automotive and 

Armaments Command, are also holding obsolete items, and if so, direct 

those commands to determine whether the disposal of those items is 

warranted. 

To ensure that DOD inventory management centers conduct annual 

reviews of contingency retention inventory as required by DOD’s Supply 

Chain Materiel Management Regulation, direct the Under Secretary of 

Defense for Acquisition, Technology, and Logistics to: 

• Direct the Director of the Defense Logistics Agency to require the Defense 

Supply Center Richmond to conduct annual reviews of contingency 

retention inventory. The Defense Logistics Agency should also determine 

whether its other two centers, the Defense Supply Center Columbus and 

the Defense Supply Center Philadelphia, are conducting annual reviews, 

and if not, direct them to conduct the reviews so they can ensure the 

reasons for retaining the contingency retention inventory are valid. 

• Direct the Secretary of the Navy to instruct the Naval Inventory Control 

Point Mechanicsburg to conduct annual reviews of contingency retention

inventory. The Naval Inventory Control Point should also determine if its 

other organization, Naval Inventory Control Point Philadelphia, is 

conducting annual reviews and if not, direct the activity to conduct the 

reviews so it can ensure the reasons for retaining the contingency 

retention inventory are valid. 

• Direct the Secretary of the Army to instruct the Army Materiel Command

to require the Aviation and Missile Command to conduct annual reviews of 

contingency retention inventory. The Army Materiel Command should also 

determine if its other two inventory commands, the CommunicationsElectronics Command and Tank-automotive and Armaments Command, 

Page 25 GAO-06-512 Defense Inventory
are conducting annual reviews and if not, direct the commands to conduct 

the reviews so they can ensure the reasons for retaining the contingency

retention inventory are valid. 

To ensure that DOD inventory management centers implement 

departmentwide policies and procedures for conducting annual reviews of 

contingency retention inventories, direct the Office of the Deputy Under 

Secretary of Defense for Logistics and Materiel Readiness to take the 

following action: 

• Revise the DOD’s Supply Chain Materiel Management Regulation to make 

clear who is responsible for providing recurring oversight to ensure the 

inventory management centers conduct the annual reviews of contingency

retention inventory. 

In written comments on a draft of this report, DOD concurred with six of 

our recommendations and partially concurred with one. Also, DOD cited 

specific actions it plans to take to implement the six recommendations. 

Specifically, DOD indicated that the Air Force has corrected the system 

deficiency in the Applications Program, Indenture, by removing all 

remaining system-deferred disposal codes from the system. Also, DOD 

stated that the Army will review contingency retention inventory for items 

that no longer support operational needs. Furthermore, DOD noted that 

the Army, the Navy, and the Defense Logistics Agency plan to conduct 

annual reviews of contingency retention inventories to ensure the reasons 

for retaining the items are valid. 

DOD partially concurred with our recommendation to instruct the Army 

Materiel Command to modify the Commodity Command Standard System 

so it will properly categorize the reasons for holding items in contingency 

retention inventory. The department said that it does not plan to modify 

the current legacy system to include the contingency retention codes. 

Instead, the department prefers to devote its resources to implementing 

the Army’s Logistics Modernization Program that will include the category 

contingency retention codes. However, we reported that the department 

does not plan to implement the new system until 2009, and as an interim 

remedy, it plans to have item managers use manual contingency retention

approval forms that will include the codes. We do not believe this remedy 

will allow the Army to readily (1) identify the reasons for holding items in 

contingency retention inventory and (2) know whether they are retaining 

items that are useful for current and future operations. Therefore, we 

continue to believe that the Army should modify the current system to 

Agency Comments 

and Our Evaluation 

Page 26 GAO-06-512 Defense Inventory
properly categorize the reasons for holding items in contingency retention 

inventory. 

While DOD concurred with our recommendation to revise DOD’s Supply 

Chain Materiel Management Regulation to clarify who is responsible for 

providing recurring oversight to ensure the inventory management centers

conduct the annual reviews of contingency retention inventory, its 

response focused on updating the regulation to rely on the military 

services and Defense Logistics Agency headquarters to ensure the reviews 

are conducted. The intent of our recommendation, however, was to 

clarify who bears responsibility for ensuring the components conduct 

annual reviews. We continue to believe that DOD (Under Secretary of 

Defense for Acquisition, Technology, and Logistics) should perform this 

oversight responsibility to obtain a complete and accurate picture of 

inventory retention management in the department. 

DOD also provided a technical comment for our consideration in the final 

report and we incorporated changes as appropriate. DOD’s formal 

comments appear in appendix II. 

We are sending copies of this report to the Secretary of Defense; 

Secretaries of the Air Force, Army, and Navy; and the Director, Defense 

Logistics Agency. We will also provide copies to others upon request. In 

addition, this report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-8365 or solisw@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

Page 27 GAO-06-512 Defense Inventory
of this report. GAO staff who made major contributions to this report are 

listed in appendix III. 

William M. Solis 

Director 

Defense Capabilities and Management 

Page 28 GAO-06-512 Defense Inventory
Page 29 GAO-06-512 Defense Inventory

Appendix I: Scope and Methodology 

The objectives of our audit were to (1) determine the extent to which 

Department of Defense (DOD) inventory components have followed 

departmentwide and individual component policies and procedures to 

ensure they are retaining the appropriate amount of contingency retention

inventory, and (2) assess the extent to which DOD is providing oversight

of contingency retention inventory management across the components. 

We also provided updated information on the progress that DOD has made 

in implementing our 2001 recommendations on the components’ 

management of economic retention inventory. We obtained current DOD 

and component guidance on retaining inventory that exceed operating 

requirements. Also, we interviewed officials from Office of the Secretary

of Defense (OSD) for Acquisition, Technology, and Logistics, Arlington, 

Virginia; Air Force Materiel Command, Wright-Patterson Air Force Base, 

Ohio; Defense Logistics Agency, Ft. Belvoir, Virginia; Defense Supply 

Center Richmond, Virginia; U.S. Army Materiel Command, Ft. Belvoir, 

Virginia; Naval Inventory Control Point Mechanicsburg, Pennsylvania; and 

Ogden Air Logistics Center, Hill Air Force Base, Utah, and the U.S. Army 

Aviation and Missile Command, Huntsville, Alabama, to discuss their roles 

and responsibilities, as well as the criteria and guidance they used in 

performing their duties for managing, reviewing and validating reasons for 

retaining contingency retention inventory. 

To evaluate whether the components have followed departmentwide and 

individual component policies and procedures with respect to contingency 

retention inventory, we obtained secondary inventory (spare parts) 

retention inventory records from the following DOD components’ 

automated inventory management systems: 

• Defense Logistics Agency’s Standard Automated Materiel Management 

System; 

• Navy’s Uniform Inventory Control Point; 

• Air Force’s Central Secondary Item Requirement System; and 

• Army’s Commodity Command Standard System. 

For each of the DOD component systems used in our work, we assessed 

the reliability of the data by (1) obtaining information from the component 

management on their data reliability procedures, (2) reviewing system 

documentation, (3) reviewing related audit agency reports, and (4) 

performing electronic testing of the contingency retention inventory data

to identify obvious errors in accuracy and completeness. We verified 

database control totals, where appropriate. Based on these procedures, we 

determined that the DOD data were sufficiently reliable for purposes of 

our analysis and findings. The contingency retention inventory data we 
obtained covered different periods, depending on the DOD component 

providing the data. Although the period for the components’ data was from 

the years 2004 and 2005, the data we obtained had different cutoff dates as

follows: 

• For Defense Logistics Agency, the cutoff date was October 1, 2004. 

• For the Army, the cutoff date was November 14, 2005. 

• For the Navy, the cutoff date July 19, 2005. 

• For the Air Force, the cutoff date was March 31, 2005. 

To illustrate how inventory management centers establish and review 

contingency retention inventory, we conducted case studies of a 

nonprobability sample of inventory management centers including the 

Defense Supply Center Richmond, Virginia; Naval Inventory Control Point 

Mechanicsburg, Pennsylvania; Ogden Air Logistics Center, Hill Air Force 

Base, Utah; and U.S. Army Aviation and Missile Command, Huntsville, 

Alabama. We selected these centers for review based on the number of 

items and value of contingency retention inventory. At each center, we 

reviewed the population of inventory retention data, and developed a 

nonprobability sample of inventory retention items (spare parts) at each

center for further review, based on the number, types, and costs of 

inventory at each location. For example, we selected for review spare 

parts with (1) highest and lowest dollar value, (2) date of earliest and 

latest request date, (3) earliest and latest date items placed into inventory 

record, and (4) highest and lowest quantity. The selection resulted in a 

review of 205 cases (national stock numbers) for the centers we visited, 

and equates to 1.6 million spare parts valued at $890 million. Also, we used 

a data collection instrument to assist the team in gathering information 

and interviewing officials at the four locations. The purpose of the data 

collection instrument was to help the team ensure consistent, accurate, 

and complete recording of information at each location. Although the case 

study approach does not enable us to generalize findings to all centers, it 

does provide in-depth information about problems at selected centers, 

which may provide insight into problems with contingency retention 

inventory management in general. 

To determine DOD’s oversight responsibility for ensuring the DOD 

inventory management centers implement the contingency retention 

policies and procedures, we reviewed DOD regulations and directives and 

interviewed officials from the Office of the Deputy Under Secretary of 

Defense for Supply Chain Integration on their roles and responsibilities for 

supply chain materiel management. Also, we reviewed GAO’s Standards 

for Internal Control in the Federal Government, which provides the 

Page 30 GAO-06-512 Defense Inventory
overall framework for establishing and maintaining internal control and 

for identifying and addressing major performance and management 

challenges. 

To assess the progress that DOD has made in implementing the 

recommendations from our 2001 report on the components’ management 

of economic retention inventory, we obtained copies of DOD’s and the 

components’ policies and procedures for retaining economic retention 

inventories and discussed this with DOD officials. We also analyzed DOD’s 

and its components policies and procedures to determine their internal 

controls/oversight functions and responsibilities for validating and 

annually reviewing their methodologies for making economic retention 

decisions. Also, we reviewed reports from GAO and the Logistics 

Management Institute on economic retention inventory. In addition, we 

conducted interviews with component officials from each of the following 

offices: the Office of Secretary of Defense Acquisition, Technology, and 

Logistics, Arlington, Virginia; the Army Materiel Command, Fort Belvoir, 

Virginia; the Army’s Aviation and Missile Command, Huntsville, Alabama; 

the Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio; 

the Air Force’s Ogden Air Logistics Center, Hill Air Force Base, Utah; 

Defense Logistics Agency Headquarters, Fort Belvoir, Virginia; Defense 

Supply Center Richmond, Virginia; and, the Naval Inventory Control Point 

Mechanicsburg, Pennsylvania. 

We performed our review from May 2005 through May 2006 in accordance

with generally accepted government auditing standards. 

Page 31 GAO-06-512 Defense Inventory
Page 32 GAO-06-512 Defense Inventory

Appendix II: Comments from the Department 

of Defense 
Page 33 GAO-06-512 Defense Inventory
Page 34 GAO-06-512 Defense Inventory
Page 35 GAO-06-512 Defense Inventory
Page 36 GAO-06-512 Defense Inventory

Appendix III: GAO Contact and Staff 

Acknowledgments 

William M. Solis, (202) 512-8365 or solisw@gao.gov

In addition to the contact named above, David Schmitt, Assistant Director; 

Sarah Baker; Carleen Bennett; Alissa Czyz; Curtis Groves; K. Nicole 

Harms; Latrealle Lee; Rebecca Shea; and Darby Smith made key 

contributions to this report. 

GAO Contacts 

Acknowledgments 

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