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Army Inventory: Unfilled War Reserve Requirements Could Be Met With Items
From Other Inventory (Letter Report, 08/25/94, GAO/NSIAD-94-207).

After the Defense Department (DOD) Comptroller told the Army that it
could use inventory not needed for peacetime missions to satisfy
unfilled war reserve requirements, the Army estimated that it could
reduce its unfilled war reserve requirements by nearly $187 million at
its five inventory control points.  GAO found that this estimate was
understated and that the Army could actually meet $497 million of its
unfilled war reserve requirements by using such inventory. Although GAO
tried to reconcile the difference between the Army's and GAO's
estimates, computer programming errors prevented Army officials from
reconstructing the methodology used to arrive at their estimate.  Army
officials agreed that GAO's approach was correct.  DOD officials said
that before the Army could transfer this inventory to the war reserve
category, DOD would have to change its policy to allow the Army to
exceed the $2.9 billion ceiling on protected war reserve inventory.

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

 REPORTNUM:  NSIAD-94-207
     TITLE:  Army Inventory: Unfilled War Reserve Requirements Could Be 
             Met With Items From Other Inventory
      DATE:  08/25/94
   SUBJECT:  Army procurement
             Military inventories
             Military appropriations
             Property and supply management
             Inventory control systems
             Military cost control
             Army supplies
             Procurement policies
             Combat readiness
             Ground warfare

             
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Cover
================================================================ COVER

Report to the Chairman, Subcommittee on Readiness, Committee on Armed
Services, House of Representatives

August 1994

ARMY INVENTORY - UNFILLED WAR
RESERVE REQUIREMENTS COULD BE MET
WITH ITEMS FROM OTHER INVENTORY

GAO/NSIAD-94-207

Army Inventory

Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense

Letter
=============================================================== LETTER

B-257583

August 25, 1994

The Honorable Earl Hutto
Chairman, Subcommittee on Readiness
Committee on Armed Services
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request that we determine whether the
Army has inventory items that could be used to meet unfilled war
reserve requirements.  More specifically, your concerns focused on
the Department of Defense (DOD) policy that restricted the services
to filling war reserve requirements with assets procured with funds
specifically appropriated for that purpose.  As a result of this
policy, situations could arise where assets available to fill a war
reserve requirement are not applied against the unfilled requirements
because they were not bought with funds appropriated for that
purpose. 

   BACKGROUND
------------------------------------------------------------ Letter :1

The Department of Army, in April 1992, instructed its inventory
control points that the DOD Comptroller had issued policy guidance
limiting the protectable level\1 of the war reserve requirement to
those assets acquired with direct war reserve appropriations. 

In February 1994, the DOD Comptroller changed the policy and advised
the Army that it could use inventory items not needed for peacetime
operations to satisfy unfilled war reserve requirements so long as
the total amount of protected war reserve inventory did not exceed
$2.9 billion--the cumulative amount Congress had previously
appropriated for buying war reserve inventory. 

As of May 1994, the Army had war reserve requirements valued at about
$3.6 billion.  Of that total, the Army inventory control points
reported having protected war reserve inventory valued at $1.3
billion and unfilled war reserve requirements of $2.3 billion. 
According to Army officials, the $1.3 billion of protected war
reserve inventory does not include about $1.5 billion worth of items
owned by the Army but managed by the Defense Logistics Agency and the
Surgeon General, thus making the Army's total protected war reserve
inventory about $2.8 billion.  As a result, under current DOD policy
with its $2.9 billion ceiling, the Army could only transfer an
additional $100 million of inventory to that category. 

--------------------
\1 Assets designated as protectable war reserve assets can be issued
for peacetime operating purposes.  However, in such cases, the item
has to be replaced.  If the war reserve item is not a protected
asset, it does not have to be replaced when it is issued for
peacetime operating purposes. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

After the DOD Comptroller advised the Army that it could use
inventory items not needed for peacetime operating purposes to
satisfy unfilled war reserve requirements, the Army estimated that it
could reduce its unfilled war reserve requirements by about $186.6
million at its five inventory control points.\2

Our review showed that the Army's estimate of $186.6 million was
understated and that it could meet $497 million of its unfilled war
reserve requirements by using inventory items not needed for
operating purposes.  We attempted to reconcile the difference between
the Army's estimate and our estimate.  However, according to Army
officials, computer programming errors precluded them from
reconstructing the methodology used to arrive at their estimate. 
Army officials reviewed our methodology and agreed that our approach
was correct. 

DOD officials said that before the Army could transfer this inventory
to the war reserve category, DOD would have to change its policy to
allow the Army to exceed the $2.9 billion ceiling on protected war
reserve inventory. 

--------------------
\2 See appendix I for a breakdown of the $186 million by inventory
control point. 

   THE ARMY CAN REDUCE ITS
   UNFILLED WAR RESERVE
   REQUIREMENTS
------------------------------------------------------------ Letter :3

Based on the change in DOD policy, which allowed the Army to use
assets not specifically acquired with appropriated war reserve funds
to satisfy its unfilled war reserve requirements, the Army estimated
that it could fill about $186.6 million of its unfilled requirements. 
However, the Army's estimate of how much it can reduce its war
reserve requirements with such assets is too low. 

Our review showed that the Army can reduce its unfilled war reserve
requirements by $497 million by using available inventory that is not
needed for operating purposes.  Table 1 shows, on an Army-wide basis,
the number of items and the value of the war reserve requirements
that could be fully or partially filled by using on-hand and due-in
assets. 

                           Table 1
           
              War Reserve Requirements Fully or
           Partially Filled By Using Assets Excess
              to the Operating Needs at the Five
                   Inventory Control Points

                    (Dollars in millions)

                  Number of             Number of
Inventory              line                  line
control point         items      Value      items      Value
----------------  ---------  ---------  ---------  ---------
Armament,             1,259      $96.8        685       $6.2
 Munitions and
 Chemical
 Command
Aviation and          1,288      169.1        162        9.5
 Troop Support
 Command
Communications-         795       39.0        455       11.8
 Electronics
 Command
Missile Command         445       32.6        248        9.4
Tank-Automotive         912      117.7        344        4.9
 Command
============================================================
Total                 4,699     $455.2      1,894      $41.8
------------------------------------------------------------
Our estimate of the war reserve requirements that can be fully or
partially satisfied with assets not needed for peacetime operations
is conservative.  We only considered inventory in a serviceable,
ready-to-issue condition and inventory due-in from contracts.  If
unserviceable inventory had been considered, the value of unfilled
war reserve requirements that could be fully or partially satisfied
would have been increased by millions, if not hundreds of millions of
dollars.  However, to achieve the increased fill rate, the Army would
have to establish repair programs for the items in an unserviceable
condition.  In view of the continued downsizing of the Army and the
uncertainties about the threat and the types of future conflicts, it
may not be a prudent use of resources to repair items just to
increase the war reserve fill rates. 

   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :4

Because there is clearly a hesitancy on DOD's part to proceed in
reclassifying any of the peacetime inventory in the absence of a
clearer statement of approval by Congress, Congress may wish to
eliminate the section of the law that concerns DOD or provide other
clarifying guidance on this matter. 

   RECOMMENDATIONS
------------------------------------------------------------ Letter :5

We recommend that the Secretary of Defense direct the DOD Comptroller
to reevaluate the policy that limits the amount of protected war
reserve inventory that the Army can maintain.  Otherwise, inventory
not needed for peacetime operations could not be transferred to the
war reserve category.  However, as pointed out in a prior report,\3
before the Army is allowed to transfer the unneeded inventory to war
reserves, it needs to assure itself that the computed war reserve
requirements represent valid requirements and that future funding
requests reflect the reduced need for war reserve appropriations. 

--------------------
\3 Army Inventory:  Current Operating and War Reserve Requirements
Can Be Reduced (GAO/NSIAD-93-119, Apr.  1993). 

   AGENCY COMMENTS AND OUR
   RESPONSE
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, DOD agreed with the
recommendations but asserted that before it could change the policy
that limits the amount of war reserve inventory that the Army
maintains, Congress would have to modify section 8007 of Public Law
103-139.  This section of the law provides that except in amounts
equal to the amounts appropriated to working capital funds in the
act, no obligations may be made against a working capital fund to
procure or increase the value of war reserve material inventory,
unless the Secretary of Defense has notified Congress prior to such
obligation. 

DOD said that its concern about section 8007 is that inventory that
was purchased with war reserve appropriations to support a war
reserve requirement may no longer be considered as war reserve
material because the item may not now have a war reserve requirement. 
Thus, if inventory not needed for peacetime operating purposes were
now reclassified to fill valid, unmet war reserve requirements, the
value of that inventory and the value of war reserve inventory
purchased with appropriated war reserve funds would exceed the total
of all funds appropriated for war reserves.  Therefore, DOD might not
be in compliance with section 8007's mandate not to obligate to
"increase the value of war reserve inventory."

We do not believe that Congress has to modify section 8007 in order
for DOD to implement our recommendations, because the section
authorizes the Secretary of Defense to increase the value of war
reserve inventory as long as Congress is notified prior to the
increase.  Moreover, we do not believe that a reclassification of
inventory constitutes an obligation. 

DOD further stated that the section 8007 provision is also supported
by DOD Inspector General report 91-056, Final Quick Reaction Report
on Budgeting for War Reserve Stocks in the Defense Logistics Agency. 

We do not believe that the Inspector General's report cited in DOD's
comments is applicable to the issues identified in our report.  It
discusses situations at the Defense Logistics Agency where the agency
would not issue on-hand inventory because it was categorized as
"protected war reserve stock" and at the same time, there was a need
for peacetime operating stock.  As a result, the agency was
requesting additional funds to buy inventory to meet its peacetime
operating deficits. 

As discussed in our report, the inventory that we are recommending be
transferred to war reserves is inventory that is not needed to meet
operating requirements.  In other words, it is inventory that remains
after all the operating requirements have been filled.  DOD's
comments are shown in appendix II. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To determine the number of items and dollar value of the war reserve
requirements that could be filled by stock that was excess to
operating needs, we identified those items at the five Army inventory
control points that had a war reserve requirement.  Our next step was
to determine what portion of the war reserve requirement had assets
applied to it.  This is referred to as funded war reserves.  The
balance of the requirement not funded represented the potential for
which assets could be applied.  Our next step was to identify those
inventory items in a serviceable condition that are not needed to
meet peacetime operating requirements.  We then matched these
inventory items to the unfunded (unfilled) war reserve requirement. 
The extent to which there was a match between the inventory items not
needed for peacetime operating purposes and the unfunded war reserve
requirement represented the magnitude by which the Army's war reserve
requirements could be reduced. 

Our overall approach and methodology is very conservative in that we
only considered inventory items that were in a serviceable,
ready-to-issue condition and items due-in on contracts.  We did not
consider inventory that was in an unserviceable condition or
inventory that was due-in from Army field units or repair facilities. 
Therefore, our estimate of the number and dollar value of inventory
items that could be used to fully or partially satisfy an unfilled
war reserve requirement is considerably less than the true inventory
position of the item. 

Before applying our methodology to the Army's inventory data files,
we had Army officials review and comment on it.  They generally
agreed with our approach and made certain suggestions that we
incorporated into the methodology. 

We performed our review between December 1993 and May 1994 in
accordance with generally accepted government auditing standards. 

---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members, Senate and House Committees on Appropriations and
on Armed Services, Senate Committee on Governmental Affairs, and
House Committee on Government Operations; the Director, Office of
Management and Budget; and the Secretaries of Defense and the Army. 

Please contact me at (202) 512-5140 if you or your staff have any
questions concerning this report.  The major contributors to this
report are listed in appendix III. 

Sincerely yours,

Mark E.  Gebicke
Director, Military Operations
 and Capabilities Issues

BREAKDOWN OF ARMY'S ESTIMATED
REDUCED UNFILLED WAR RESERVE
REQUIREMENTS BY INVENTORY CONTROL
POINT
=========================================================== Appendix I

                              (Dollars in millions)

Inventor
y
control    Number of               Number of               Number of
point     line items       Value  line items       Value  line items       Value
--------  ----------  ----------  ----------  ----------  ----------  ----------
Armament       3,988      $616.2       1,861      $402.4       1,429       $35.6
 ,
 Munitio
 ns and
 Chemica
 l
 Command
Aviation       2,713     1,706.3         501     1,210.2         846        30.9
 and
 Troop
 Support
 Command
Communic       3,710       279.6       1,026       178.5       1,278        25.2
 ations-
 Electro
 nics
 Command
Missile        2,475       304.0         477       215.4       1,005        17.3
 Command
Tank-          2,306       715.7         950       340.6         512        78.0
 Automot
 ive
 Command
================================================================================
Total         15,192    $3,621.8       4,815    $2,347.1       5,070      $186.6
--------------------------------------------------------------------------------

(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I

(See figure in printed edition.)

Now on p.  3. 

Now on p.  4. 

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Norman J.  Rabkin
Robert J.  Lane

KANSAS CITY REGIONAL OFFICE

Leonard C.  Hill
Robert C.  Sommer
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