United States General Accounting Office

GAO Report to the Secretary of Defense

March 1996 DEFENSE LOGISTICS

Requirement

Determinations for

Aviation Spare Parts

Need to Be Improved

G O A

years

1921 - 1996

GAO/NSIAD-96-70

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-260432 

March 19, 1996

The Honorable William J. Perry

The Secretary of Defense

Dear Mr. Secretary:

We reviewed the Air Force’s and the Navy’s policies and procedures for

determining requirements and budgets for aviation spare parts. Our

objective was to determine whether the Air Force’s and the Navy’s

requirements and budgets reflect the actual amounts needed.

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.1

 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.

Results in Brief The Air Force and the Navy budgeted $132 million more than needed for

aviation spare parts because of questionable policies concerning the

determination of requirements and the accountability for depot

maintenance assets. The Air Force, in preparing its fiscal year 1996 budget

for aviation parts, did not consider $72 million of on-hand assets. In

preparing its fiscal year 1997 requirements for aviation parts, the Navy

counted $60 million in depot maintenance requirements twice.

Our sampling tests showed that the Air Force and the Navy made other

errors in computing their requirements because management oversight

procedures and internal controls were not adequate. The Air Force and the

Navy used unsupported or incorrect (1) maintenance replacement rates,

1

Similar fiscal year 1997 data was not available for the Air Force at the time of our review.

Page 1 GAO/NSIAD-96-70 Defense Logistics
B-260432 

(2) demand rates, (3) planned program requirements, (4) repair costs,

(5) lead times, (6) due-out quantities, and (7) asset quantities on hand and

on order. These inaccuracies totaled $35 million on the sample items alone

and resulted in some requirements’ being overstated by $25 million and

others’ being understated by $10 million.

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

parts2

 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,3

 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 reported4

 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

2

Consumable parts are not economically reparable and are discarded when worn out or broken. In

contrast, reparable items are parts that can be fixed and used again.

3

Military Logistics: Air Force’s Management of Backordered Aircraft Items Needs Improvement

(GAO/NSIAD-89-82, June 2, 1989).

4

Air Force Requirements: Cost of Buying Aircraft Consumable Items Can Be Reduced by Millions

(GAO/NSIAD-93-38, Nov. 18, 1992).

Page 2 GAO/NSIAD-96-70 Defense Logistics
B-260432 

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

Page 3 GAO/NSIAD-96-70 Defense Logistics
B-260432 

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

Page 4 GAO/NSIAD-96-70 Defense Logistics
B-260432 

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.

Page 5 GAO/NSIAD-96-70 Defense Logistics
B-260432 

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.

Page 6 GAO/NSIAD-96-70 Defense Logistics
B-260432 

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

Page 7 GAO/NSIAD-96-70 Defense Logistics
B-260432 

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.

Page 8 GAO/NSIAD-96-70 Defense Logistics
B-260432 

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.

Sincerely yours,

Mark E. Gebicke

Director, Military Operations

 and Capabilities Issues

Page 9 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 10 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Now on pp. 1-2.

See comment 1.

Page 11 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Now on pp. 2-3.

Page 12 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Now on pp. 3-4.

See comment 1.

Page 13 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Page 14 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Page 15 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Now on pp. 4-5.

Page 16 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Now on p. 6.

See comment 2.

Now on p. 6.

Page 17 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

Comments From the Department of Defense

Now on p. 6.

Now on p. 7.

Now on p. 7.

See comment 2.

Page 18 GAO/NSIAD-96-70 Defense Logistics
Appendix I 

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.

Page 19 GAO/NSIAD-96-70 Defense Logistics
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

James Murphy

Thomas Wells

Melvin Wagman

Dallas Regional Office Calvin Phillips

Enrique E. Olivares

Bonifacio Roldan-Galarza

Richard Madson

Donald McCuistion

(703094) Page 20 GAO/NSIAD-96-70 Defense Logistics
Ordering Information

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.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100