GAO

United States General Accounting Office

Report to the Chairman and Ranking 

Minority Member, Committee on Armed 

Services, U.S. Senate

June 2000 DEFENSE 

INVENTORY

Process for Canceling 

Inventory Orders 

Needs Improvement

GAO/NSIAD-00-160

Page 1 GAO/NSIAD-00-160 Defense Inventory

Contents

Letter 3

Appendixes Appendix I: Objectives, Scope, and Methodology 24

Appendix II: Military Service and Defense Logistics Agency 

Criteria for Canceling Excess Inventory on Order 27

Appendix III: Comments From the Department of Defense 32

Related GAO Products 35

Tables Table 1: Inventory on Order Inaccurately Reported as Excess 10

Table 2: Reported Value of DOD Excess Inventory on Order for

Fiscal Years 1996-99 12

Table 3: Defense Supply Center Richmond Items Identified for 

Manager Review 16

Table 4: Service and DLA Goals for Reducing Excess Inventory on

Order 20

Table 5: Reported Value of Items Reviewed 24

Figures Figure 1: DOD’s Process for Managing Inventory on Order 6

Figure 2: DOD’s Inventory Categories 7

Figure 3: Purchasing an Economic Order Quantity at the Reorder

Point 9

Figure 4: Reported Value of Excess Inventory on Order for Fiscal 

Years 1996-99 13

Figure 5: Percentage of Reported Value of Excess Inventory on

Order and Total Inventory on Order for Fiscal Years 1996-99 14

Figure 6: Army, Navy, Air Force, and DLA Criteria for Purchasing

Inventory and Canceling Excess Inventory on Order 15

Figure 7: Army, Navy, Air Force, and DLA Criteria for Purchasing

Inventory and for Canceling and Reporting Excess

Inventory on Order 21

Figure 8: Army Disks Considered for Cancellation 27

Figure 9: Navy Pilot Valve Cartridges Considered for Cancellation 29

Figure 10: Air Force Rotor Blades Considered for Cancellation 31
Contents

Page 2 GAO/NSIAD-00-160 Defense Inventory

Abbreviations

DOD Department of Defense

DLA Defense Logistics Agency
Page 3 GAO/NSIAD-00-160 Defense Inventory

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-283680 Letr

June 30, 2000

The Honorable John Warner

Chairman

The Honorable Carl Levin

Ranking Minority Member

Committee on Armed Services

United States Senate

This report is one in a series of reports on the Department of Defense’s 

management of inventory—spare and repair parts and other items that 

support the Department’s operating forces on land, at sea, and in the air.1

Over the past several years, we have prepared a number of testimonies and 

reports that cite the Department’s management of inventory as a high-risk 

area.2

 For example, we have issued several reports and testimonies related 

to the Department’s problems involving levels of inventory in excess of 

current needs, the lack of adequate systems for determining inventory 

requirements, and inaccurate records on the actual amount and value of its 

inventories. As of September 30, 1999, the Department reported that it had 

about $8.1 billion of inventory on order, $1.6 billion of which exceeded 

requirements—the amount of inventory the Department indicated as 

needed to prevent out-of-stock situations.

As mandated by Senate Report 106-50 relating to the National Defense 

Authorization Act for Fiscal Year 2000, we reviewed inventory on order that 

exceeded requirements. Specifically, we (1) determined the extent to which 

orders exceeded requirements when the orders were placed and 

(2) assessed the processes for canceling orders that exceeded 

requirements.

1

The Department of Defense refers to these items as secondary inventory. See a list of 

related GAO products at the end of this report.

2

In 1990, we began a special effort to review and report on the federal program areas that we 

had identified as high risk because of vulnerabilities to waste, fraud, abuse, and 

mismanagement. This effort, which was supported by the Senate Committee on 

Governmental Affairs and the House Committee on Government Reform, brought a much 

needed focus on problems that were costing the government billions of dollars. We 

identified inventory management as high risk in our 1992, 1995, 1997, and 1999 high-risk 

reports.
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In doing our review, we focused on the criteria that the services and the 

Defense Logistics Agency use to purchase inventory, identify inventory 

orders for cancellation, determine the economic benefits of canceling 

orders, and report the amount of inventory on order that exceeds 

requirements. We based our analysis on 490 Army, Navy, Air Force, and 

Defense Logistics Agency items that had about $375 million worth of 

inventory on order that was in excess of requirements. For the 490 items, 

we selected some items that had the highest values of inventory on order in 

excess of requirements and a cross section, based on value, of the 

remaining items. The 490 items included 360 Navy and Air Force items that 

we reviewed as part of prior audit work.3

 The scope and methodology of 

our work are described in greater detail in appendix I.

Results in Brief For the 490 items we reviewed, we found no evidence that inventory orders 

exceeded requirements when the orders were first placed. Managers had 

placed orders after ensuring that they were supported by requirements, 

consistent with the Department of Defense’s policies. However, 

requirements for the items often changed after the orders were placed, 

which caused the items to exceed requirements. For example, the demand 

for helicopter control indicators decreased from the original requirement 

for 184 indicators to 107 after the order was placed. Further, because of 

inaccurate inventory records, 182 of the 490 items (valued at $170 million) 

were reported as excess, but were not actually excess to requirements. For 

example, after orders were placed, some inventory was counted once as on 

hand and again as on order, causing the inventory on order to exceed 

requirements. Because of the large number of inaccurate records, neither 

the Defense Department nor the military components know whether 

managers are efficiently focusing their efforts to cancel excess inventory 

on order, and the Department does not have an accurate view of the total 

value of its excess inventory on order. 

Each component’s process for canceling orders that exceeded 

requirements differs and cannot be relied on to consistently identify orders 

to be considered for cancellation or to terminate orders when economical. 

3

Navy Inventory Management: Improvements Needed to Prevent Excess Purchases

(GAO/NSIAD-98-86, Apr. 30, 1998) and Defense Inventory: Improvements Needed to Prevent 

Excess Purchases by the Air Force (GAO/NSIAD-00-5, Nov. 10, 1999).
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Specifically:

• The components use different criteria for the amount of excess 

inventory on order they consider for cancellation. The Army and 

Defense Logistics Agency consider orders for cancellation when the 

inventory ordered exceeds requirements; the Navy and Air Force 

consider canceling orders when the inventory is at higher levels. Thus, 

the Army and Defense Logistics Agency consider more of their excess 

inventory on order for cancellation than the Navy and Air Force do. 

• Only the Defense Logistics Agency consistently uses its computer model 

to determine whether it is more economical to cancel orders or not. 

However, of the $696 million its model referred for consideration during 

a 3-month period in 1999, less than $11 million in orders were canceled. 

The Army and Air Force infrequently use their models, and the Navy has 

not used its model since 1993 because it overestimated contract 

termination costs, thus eliminating contracts for consideration. The lack 

of use of the models and cancellation of items referred for consideration 

raises questions about their effectiveness. 

• The military components’ frequency in reviewing orders of excess 

inventory for cancellation ranges from monthly to quarterly. The longer 

components wait to consider an item for cancellation, the less likely 

cancellation will be cost-effective because they have to pay the 

contractor for costs incurred until the order is canceled.

• The components’ goals for reducing excess inventory on order vary and 

are not comparable. Thus, the Department of Defense cannot evaluate 

the components’ progress in reducing excess inventory on order in a 

consistent way.

We are recommending that the Department of Defense review and improve 

its processes for identifying and canceling excess inventory on order. In 

written comments on a draft of this report, the Department of Defense 

agreed with our recommendations.

Background Inventory management comprises several major functions, including 

determining what is needed; buying needed items; and storing, maintaining, 

distributing, and disposing of these items. The military services and the 

Defense Logistics Agency (DLA) use automated inventory management 

models that identify the need to place orders when the total inventory falls 

below a predetermined level. The models also periodically consider 

whether orders exceed requirements and are candidates for cancellation. 

After the models identify orders that are candidates for cancellation, the 
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services and DLA use other models or analyses to determine whether 

canceling the orders is economical. The Department of Defense’s (DOD) 

general process for placing an order and subsequently evaluating the order 

to determine if it is a candidate for cancellation is shown in figure 1.

Figure 1: DOD’s Process for Managing Inventory on Order

In general, DOD categorizes inventory as follows and as illustrated in 

figure 2:

1. The requirements objective represents the amount of inventory to be 

purchased and includes

• war reserves, requisitions that have not been shipped, and a “safety 

level” of stock;4

• stock to satisfy demands during the “lead time”—the period between the 

placement of orders and their receipt; and

• an economic order quantity, or a quantity that should result in the lowest 

total costs for ordering and holding inventory.

2. The approved acquisition objective defines the amount of inventory 

DOD budgets for and includes inventory needed to satisfy 2 years of 

demand for items above the requirements objective.

4

War reserves are authorized to be purchased to ensure fast mobilization in the event of war. 

A safety level is stock kept on hand in case of minor interruptions in the resupply process or 

unpredictable fluctuations in demand.
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3. Inventory that exceeds the approved acquisition objective is 

categorized as economic retention, contingency retention, and 

potential reutilization and/or disposal materiel.5

Figure 2: DOD’s Inventory Categories

5

Economic retention inventory exceeds the approved acquisition objective and has been 

determined to be more economical to keep than to dispose of because it is likely to be 

needed in the future. Contingency retention inventory exceeds the economic retention 

inventory and would normally be processed for disposal but is retained for specific 

contingencies. Potential reutilization and/or disposal materiel exceeds contingency 

retention and has been identified for possible disposal but with potential for reutilization.
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Components Justified 

Orders Based on 

Requirements

Although the services and DLA reported $1.6 billion of inventory on order 

that exceeded requirements, we found no evidence that orders were in 

excess of requirements when they were placed for the 490 items we 

reviewed.6

 Generally, requirements for the items decreased after orders 

were placed, which resulted in the items having inventory on order that 

exceeded requirements. However, DOD inventory records showed that 

$170 million worth of excess inventory on order reviewed was still needed. 

The $170 million, or 45 percent of the amount reviewed, was erroneously 

reported as excess because of inaccurate records. As a result, neither DOD 

nor the military components know whether managers are efficiently 

focusing their efforts to cancel excess inventory on order, and the 

Department does not have an accurate view of the total value of its excess 

inventory on order.

Managers Followed 

Purchasing Models

Managers had made purchases for the 490 items we reviewed consistent 

with DOD’s model for purchasing inventory. (See fig. 3). The model 

identifies items to be purchased when inventory falls to a certain level 

called the reorder point. After managers review requirements and available 

assets to validate the need to purchase inventory, they place orders for a 

quantity of inventory that is supposed to represent the lowest total costs 

for ordering and holding inventory called an economic order quantity. The 

requirements objective comprises the reorder point and the economic 

order quantity.

6

DOD calculates requirements through several different computations and models. The 

managers rely on these models and the accuracy of inventory records to make orders. In 

prior work, we have questioned some assumptions in the models as well as the accuracy of 

the inventory records. See Navy Inventory Management: Improvements Needed to Prevent 

Excess Purchases (GAO/NSIAD-98-86, Apr. 30, 1998) and Financial Management: Better 

Controls Essential to Improve the Reliability of DOD’s Depot Inventory Records

(GAO/AIMD-99-132, June 28, 1999).
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Figure 3: Purchasing an Economic Order Quantity at the Reorder Point

Requirements Changed and 

Records Became Inaccurate

The most common reason for inventory on order being in excess of the 

requirements objective was that requirements decreased after orders were 

placed. For example, the Army manager for a control indicator used on the 

de-icing system for the UH-60A helicopter used a February 1997 

requirement computation to support the purchase of 184 indicators valued 

at $1.4 million. After the order was placed, demand for the item decreased, 

resulting in a lower requirements objective. Consequently, 107 of the 

indicators on order exceeded the lower requirements objective.

Accurate data are necessary for the services’ and DLA’s inventory 

management models to properly identify items with excess inventory on 

order for managers to review. However, as shown in table 1, the recorded 

data on 182 of the 490 items we reviewed showed that there was excess 

inventory valued at $170 million, or 45 percent of the total reviewed, when 

other records showed there was no excess. Determining whether inventory 
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is in fact excess—even though at the time of ordering the records may have 

been correct—increases managers’ workloads.

Table 1: Inventory on Order Inaccurately Reported as Excess

Source: DOD inventory records.

Generally, excess inventory on order was misstated because the 

components’ inventory management models did not accurately reflect 

requirements or available inventory. For example, September 30, 1999, data 

on a turbine nozzle used on the engine for the H-53 helicopter showed that 

DLA had an excess of 693 nozzles on order. We found, however, that a large 

number of nozzles, costing $359 each, were erroneously recorded twice in 

inventory records—once as on hand and once as on order. After the item’s 

manager corrected the inventory records in December 1999, DLA needed to 

order an additional 33 nozzles.

Twenty of the 49 Army items reviewed had inaccuracies that caused an 

overstatement of the amount of excess inventory on order. For example, 

September 1999 inventory records show that 71 valves used on an aircraft 

engine and valued at $3,391 each were on order and exceeded 

requirements. However, after the order was placed, the valve was replaced 

with a different type. The Army had made arrangements for the contractor 

to provide the replacement valves but did not update the inventory records 

to reflect this change. Thus, there was no excess on order. Officials at the 

Army’s Aviation and Missile Command told us that in 1999 they tried to 

reduce excess inventory on order by identifying for special review the top 

30 items that had excess orders valued at over $67 million. The review 

determined that the value of excess inventory on order identified as excess 

was overstated by over $10 million. Causes for the overstated inventory 

Dollars in millions

Items reviewed Items with errors

Component Number

Reported value

of excess Number

Reported value

of excess

Army 49 $30.9 20 $16.9

Navy 200 48.3 83 14.9

Air Force 160 162.4 32 26.3

DLA 81 133.1 47 111.9

Total 490 $374.7 182 $170.0
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included inventory records that reflected inaccurate amounts of inventory 

on hand and on order and understated requirements.

In November 1999, we reported on inaccuracies in Air Force records.7

 For 

example, Air Force records for September 30, 1997, showed that 24 thermal 

insulation tiles used on the B-2 aircraft were on hand and an additional 

7 were on order. By May 1998, the Air Force was using a different type of 

insulation tile, and when the manager attempted to terminate the order for 

the seven tiles, he was informed by a contracting official that the records 

showing the quantity on order were in error. The tiles, which cost $5,400 

each, had been delivered a year earlier in May 1997. The Air Force has 

begun an initiative to improve its data accuracy by 2003.

Cancellation Processes 

Cannot Be Relied Upon 

to Make Economical 

Decisions

The DOD processes used to cancel excess inventory on order cannot be 

relied upon to consistently identify orders to be considered for 

cancellation. Our analyses of DOD inventory records showed that the 

amount of DOD’s reported excess inventory changed little during fiscal 

years 1996-99. While the Army, Navy, Air Force, and DLA purchase 

inventory to meet the requirements objective, our analyses showed that 

some processes (1) limited the extent to which orders were considered for 

cancellation, (2) resulted in few cancellations, and (3) did not identify some 

orders for cancellation in a timely manner. As a result, the components 

missed opportunities to cancel orders for excess items. In addition, 

differences in the components’ measures of excess inventory on order 

prevent DOD from evaluating the components’ progress in a consistent and 

comparable manner.

DOD’s Excess Inventory on 

Order Has Changed Little

Overall, DOD’s excess inventory on order changed little during fiscal years 

1996-99. We based our analyses on the requirements objective and the 

approved acquisition objective for those years because the requirements 

objective represents the level of inventory that managers buy, and the 

approved acquisition objective represents the level of inventory for which 

the components budget. (See table 2.)

7

Defense Inventory: Improvements Needed to Prevent Excess Purchases by the Air Force 

(GAO/NSIAD-00-5, Nov. 10, 1999).
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Table 2: Reported Value of DOD Excess Inventory on Order for Fiscal Years 1996−99

Source: DOD inventory records.

When considered individually, the amount of the services’ and DLA’s excess 

inventory on order varied, regardless of whether based on the requirements 

objective or the approved acquisition objective (see fig. 4). The Army and 

Navy had the lowest reported amounts of excess inventory on order. While 

the Air Force’s reported excess inventory on order decreased during fiscal 

years 1996-1998, the amount of Air Force excess inventory on order 

increased substantially for fiscal year 1999. According to an Air Force 

official, the excess increased in 1999 primarily because the Air Force 

Materiel Command directed managers to consider canceling excess 

inventory on order only if it was valued at $100,000 or more so that they 

could devote more time to budget preparation. While DLA’s reported excess 

on order inventory remains high relative to the Army and Navy, DLA has 

decreased its excess on order over the last 2 years.

Dollars in millions

Excess inventory on order based on 

requirements objective

Excess inventory on order based on approved 

acquisition objective

Fiscal 

year

Total reported value of

inventory on order Reported value Percent Reported value Percent

1996 $8,852.2 $1,711.6 19 $708.4 8

1997 8,002.7 1,470.6 18 608.9 8

1998 7,867.6 1,355.6 17 464.7 6

1999 8,145.6 1,572.1 19 515.4 6
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Figure 4: Reported Value of Excess Inventory on Order for Fiscal Years 1996−99

Source: DOD inventory records.

While the reported value of Army and Navy excess inventory on order 

(regardless of how computed) was generally about $100 million or less, Air 

Force and DLA excesses were much larger. This was also the case when 

the reported excesses were measured as a percentage of the total inventory 

on order, as shown in figure 5.

Exceeds requirements objective

Exceeds approved acquisition objective

1996

1997

1998

1999

1996

1997

1998

1999

1996

1997

1998

1999

1996

1997

1998

1999

900 Dollars in millions

800

700

600

500

400

300

200

100

0

Army Navy Air Force DLA
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Figure 5: Percentage of Reported Value of Excess Inventory on Order and Total Inventory on Order for Fiscal Years 1996−99

Source: DOD inventory records.

The Services’ and DLA’s 

Criteria Limit Excess 

Inventory on Order 

Considered for Cancellation

The criteria that the military services and DLA use to consider excess 

inventory on order for cancellation impose different limits on the amount 

of excess inventory on order to be analyzed for cancellation. Figure 6 

shows that while the services and DLA purchase inventory to satisfy the 

requirements objective, only the Army and DLA use that objective to 

identify inventory on order to consider for cancellation. The Navy and Air 

Exceeds requirements objective

Exceeds approved acquisition objective

40

35

30

25

20

15

10

5

0

Percent of total order

1996

1997

1998

1999

1996

19971998

1999

1996

1997

1998

1999

1996

1997

1998

1999

Army Navy Air Force DLA
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Force cancellation criteria resulted in considering for cancellation excess 

inventory on order ranging from quantities that exceeded the requirements 

objective to quantities that exceeded the approved acquisition objective. 

Thus, the Navy and Air Force would not even consider canceling orders for 

excess inventory on order that the Army and DLA would consider. The 

Navy uses the higher cancellation criteria to preclude canceling orders for 

items that may be needed as demand fluctuates. The Air Force is 

considering reducing its levels. Appendix II contains a more detailed 

discussion of the military components’ criteria for considering excess 

inventory on order for cancellation.

Figure 6: Army, Navy, Air Force, and DLA Criteria for Purchasing Inventory and Canceling Excess Inventory on Order

Quantity

Amount of inventory not subject to cancellation

Amount of inventory purchased

Army DLA Navy Air Force

Economic order

quantity

Economic retention

Contingency retention

Potential reutilization and/or disposal

Lead time

requirements

Other requirements

Two years of demand

Navy and Air Force inventory not subject to cancellation, ranging from exceeding

the requirements objective to exceeding the approved acquisition objective

Excess to

approved

acquisition

objective

Excess to

approved

acquisition

objective

Requirements

objective

Requirements

objective

Approved

acquisition

objective

Approved

acquisition

objective

Note: The Air Force does not compute an economic order quantity. However, it does

compute requirements for an operating period which it considers to be equivalent to the economic order quantity.
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DLA and the services also exclude low-value excess inventory on order 

from consideration for cancellation in order to focus managers’ efforts on 

higher-value excess inventory on order, in an effort to maximize savings 

from canceling orders and to reduce manager workloads. While this 

practice does reduce workloads, it also results in the receipt of millions of 

dollars of inventory on order in excess of their requirements objective that 

becomes part of DOD’s inventory on hand.

Depending on the item, DLA’s inventory management model requires that 

on-order quantities exceed an item’s economic order quantity by 25 to 

100 percent, and the excess must meet minimum dollar values ranging from 

$400 to $50,000 in order to be considered for cancellation. As shown in 

table 3, the DLA and Richmond Supply Center criteria precluded review of 

$147.8 million of inventory due in8

 that exceeded the requirements 

objective. The minimum dollar and percentage criteria reduced workload 

by preventing 34,826 items from being considered for cancellation. Some of 

the excess inventory on order not considered for cancellation will become 

part of DLA’s inventory, even though it is not needed.

Table 3: Defense Supply Center Richmond Items Identified for Manager Review

Source: DOD inventory records.

In addition, the Center has a budget policy that managers not routinely 

cancel or reduce contracts under $10,000. For example, DLA had a 

requirements objective for 43 dial and light assemblies used on the T-37 

aircraft. Forty assemblies, valued at $798 each, were on hand and an 

additional 15 were on order. The manager did not take action to cancel the 

8

The data that DLA provided on inventory due in did not distinguish between inventory on 

order and inventory that was in transit. Based on the audit work that we did, we believe that 

a small portion of the due-in items and values did not represent items being purchased.

Dollars in millions

Items Excess due in

Number Percent Reported value Percent

Identified for review 5,309 13 $550.3 79

Not identified for review 34,826 87 147.8 21

Total 40,135 $698.1
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12 assemblies on contract that exceeded the requirements objective 

because the $9,600 excess on order was less than the $10,000 minimum.

In contrast, the Army’s Aviation and Missile Command, Huntsville, 

Alabama, has much lower minimum dollar limits. The Command identifies 

all missile item excesses valued at $1 or more and all aviation item 

excesses valued at $55 or more for cancellation review. Managers, however, 

are expected to focus their efforts on canceling higher value excesses first.

The Navy currently identifies excesses that are valued at $1,000 or more for 

managers to review but is considering increasing the minimum dollar value 

to $5,000 due to workload concerns. The Air Force policy, on the other 

hand, is that all items with excess inventory on order will be reviewed for 

cancellation. However, as discussed earlier, for items reviewed in the 

September 1999 time frame, the Air Force required managers to review 

orders for excess inventory on order only if they were valued at $100,000 or 

more.

Infrequent Use of 

Termination Models Raises 

Questions About Their 

Effectiveness

The Army, Air Force, and DLA have models designed to determine whether 

it is more economical to cancel an order for excess inventory on order or 

receive the order and store it as part of inventory. Although we did not 

validate the models used, we found that they varied in design and the data 

used to determine the economic benefit of canceling orders. For example, 

the Army and DLA consider obsolescence cost,9

 whereas the Air Force 

does not. The Air Force, unlike the Army and DLA, considers the item’s 

cost when procuring the item in the future. DLA uses its termination model 

consistently but cancels few orders as a result, the Army and Air Force 

seldom use theirs, and the Navy quit using its model in 1993. Thus, the 

effectiveness of the models is in question.

The DLA model is integrated into its automated inventory management 

model and automatically determines whether or not it is economical to 

cancel contracts for items that have inventory in excess of the 

requirements objective and that exceed DLA’s percentage and low-dollar 

criteria. Results are automatically provided to managers at their 

computerized workstations. As a result, the termination model evaluates all 

DLA items. DLA reported that, from July through September 1999, its 

model referred $696 million of inventory in excess of the requirements 

9

The obsolescence cost is the loss of an item’s value when it is no longer needed.
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objective to managers for review. Managers recommended contract 

cancellation for $42 million of the amount, but less than $11 million of 

excess inventory on order was actually canceled. 

The Army and Air Force models are separate from the automated inventory 

management models and managers must manually enter data such as lead 

times, requirements, assets, and storage costs to determine whether or not 

it is economical to cancel or reduce contracts for excess inventory on 

order. Army headquarters officials told us that their model was not widely 

used. Of the 49 Army items with $30.9 million of excess on order we 

reviewed, we identified 5 items for which the model was used. In two of 

these cases, use of the model resulted in the cancellation of inventory 

worth $799,450. In other cases, managers decided not to cancel orders 

based on their knowledge of the items. Similarly, the Air Force termination 

model recommended the cancellation of contracts for excess inventory on 

order in 6 out of 25 cases where the model was actually used. A 1997 Air 

Force review of excess on order found that the model was generally not 

used correctly or at all. According to the Air Force, $12.4 million of 

contracts were canceled in fiscal year 1999. Army officials were unable to 

provide overall data on the number and value of excess on order inventory 

canceled. 

Even though the Navy discontinued using its termination model in 1993, the 

Navy canceled contracts for $28 million in excess inventory on order in 

fiscal year 1999. According to Navy officials, the Navy suspended the use of 

its model because it overestimated contract termination costs and thus 

eliminated contracts from being considered for cancellation. Instead, the 

Navy decided to pursue the cancellation of all contracts that met its 

criteria.

Frequency of Reviews of 

Excess on Order Limits 

Cancellations

The military components’ frequencies for reviewing excess inventory on 

order for cancellation ranges from monthly to quarterly and varies by 

component. For example, at the Army Aviation and Missile Command, 

missile parts are identified for review on a quarterly basis; aviation parts 

and other commodities are examined every 6 weeks. The Navy evaluates 

ship parts monthly but evaluates aviation parts quarterly. DLA identifies all 

items with inventory on order in excess of requirements in February, May, 

August, and November. For the intervening 2 months, only those items that 

had not been previously identified as excess are highlighted for review. The 

Air Force reviews all inventory items quarterly.
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Contractor costs are one of the factors used in the military components’ 

termination models to determine whether or not a contract is economical 

to cancel. The longer it takes to make a decision to terminate a contract, 

the more costs the contractor incurs and the less likely it will be 

economical to cancel the contract. For example, an Air Force contracting 

official said that each day cancellation was delayed on a contract for torque 

landing gear collars, the contractor incurred an additional $5,000 in costs 

that the government would have to pay to cancel the contract.

Studies of Air Force and DLA cancellation efforts show that when 

managers deferred making cancellation decisions, contractor costs 

increased and it was frequently too late to economically terminate. For 

example, a 1997 internal Air Force study determined that managers often 

deferred cancellation decisions until it was no longer economical to cancel. 

Also, the DOD Inspector General reported in 1998 that prompt action is 

critical to minimize the government’s costs. To illustrate this point, the 

report pointed out that DLA’s Columbus Supply Center had processed 69 of 

119 items identified for cancellation within 30 days, whereas DLA’s 

Richmond Center had processed 10 out of 132 within 30 days.10 The 

cancellation rate for the Columbus items was more than double the rate for 

the Richmond items because contractors’ costs increased during the 

delays.

In some instances, the need to validate assets and requirements can delay 

the timeliness of cancellation efforts. For example, in October 1996, the 

manager for a bracket and bubble assembly used on the C-135 aircraft 

ordered 346 assemblies based on requirements from Warner Robins Air 

Force Base. The item was identified for cancellation in October 1998. 

Because the requirements had to be validated, the manager attempted to 

contact the Air Force customer, who did not respond to the information 

request. As a result, the order was not canceled, and as of December 1999, 

DLA had 97 assemblies, valued at $1,441 each, on hand that exceeded the 

requirements objective.

10Contract Terminations at Defense Supply Center Columbus and Defense Supply Center 

Richmond, DOD Inspector General, Report Number 98-172, July 2, 1998.
B-283680

Page 20 GAO/NSIAD-00-160 Defense Inventory

Services and DLA Goals for 

Reducing Excess Inventory 

on Order Vary and Are Not 

Comparable

The services and DLA have made efforts to reduce excess inventory on 

order and have established goals to measure their progress. The goals, 

shown in table 4, range from 2 percent of total inventory on order to 

10 percent.11 However the goals are not comparable because, as discussed 

earlier, each of the services and DLA use different criteria to identify the 

amount of excess inventory on order. For example, the Army’s goal was 

based on excess inventory on order above the requirements objective, 

while the Air Force’s goal was based on excess inventory on order above 

the approved acquisition objective. The Navy and DLA also base their goals 

on the approved acquisition objective.

Table 4: Service and DLA Goals for Reducing Excess Inventory on Order

Source: DOD data.

The services and DLA have initiated a variety of efforts to reach their goals. 

For example, the Army Aviation and Missile Command initiated a special 

one-time project to review the 30 items in its inventory with the highest 

amount of excess on order. The Navy has long maintained a history of 

tracking excess items on order against its goals. The Air Force initiated 

processes to define the causes of excess items on order, including 

high-dollar items, data errors, and untimely cancellations. DLA initiated an 

improvement program, which included establishing an oversight 

coordinator position, reporting measurements against goals for reducing 

excess inventory on order, and increasing efforts to reduce data errors.

Figure 7 shows that the services and DLA use different criteria to purchase 

inventory, identify the amount of inventory not subject to cancellation, and 

11The Army and Air Force established goals for their total inventory. The Navy established 

goals of 7 percent for repairable items and 5.5 percent for consumable items. DLA has 

established specific goals for each of its commodity areas such as clothing, medical, and 

electronic parts.

Component

Goals, expressed as a percentage of

total inventory on order

Army 10

Navy 5.5 or 7

Air Force 4

DLA 2 to 5.8
B-283680

Page 21 GAO/NSIAD-00-160 Defense Inventory

report excess inventory on order. Only the Army makes purchases, 

identifies excess inventory on order for cancellation, and measures its 

progress based on the requirements objective. While the Navy, Air Force, 

and DLA also make purchases based on the requirements objective, they 

identify items for cancellation and report excess inventory on order at 

levels ranging from quantities that exceed the requirements objective to 

quantities that exceed the approved acquisition objective.

Figure 7: Army, Navy, Air Force, and DLA Criteria for Purchasing Inventory and for Canceling and Reporting Excess Inventory on 

Order

Quantity

Amount of inventory not subject to cancellation

Amount of inventory purchased

Amount of inventory reported as excess

Army DLA Navy Air Force

Economic order

quantity

Economic retention

Contingency retention

Lead time

requirements

Other requirements

Two years of

demand

Excess to

approved

acquisition

objective

Excess to

approved

acquisition

objective

Requirements

objective

Requirements

objective

Approved

acquisition

objective

Approved

acquisition

objective

Navy and Air Force inventory not subject to cancellation, ranging from exceeding

the requirements objective to exceeding the approved acquisition objective

Potential reutilization and/or disposal
B-283680

Page 22 GAO/NSIAD-00-160 Defense Inventory

In addition, the Air Force and DLA measures did not include all of the items 

managed. The Air Force excludes items managed by contractors, while 

DLA does not report on items that have no or low demands.

Conclusions Although the services and DLA were placing orders consistent with their 

inventory management models, the dynamics of DOD’s inventory and the 

mechanics of the management models will always result in some excess 

inventory on order. The services and DLA have recognized that excess 

inventory on order is a problem and have initiated some corrective actions. 

However, the services and DLA have set up a variety of processes that 

make efficient management of excess inventory on order difficult. The 

services’ and DLA’s inventory management models erroneously identified a 

large number of items for cancellation, and managers reviewed and 

validated information only for items that the models identified. As a result, 

neither DOD, nor the military components know whether managers are 

focusing their efforts on the proper items. Because the military 

components’ processes identified excess inventory on order for 

cancellation at different levels and excluded low-dollar excesses, millions 

of dollars of excess inventory on order were not canceled. This situation 

contributes to the accumulation of higher levels of excess inventory on 

hand. Also, some components have longer intervals between item reviews, 

causing additional contractor costs to be incurred and making the 

cancellation of contracts less likely to be economical. Termination models 

were used inconsistently and often did not recommend cancellation of 

excess inventory on order. Although the services and DLA have goals for 

reducing excess inventory on order, they report excess inventory on order 

at different levels and do not include all excess on order in their measures. 

As a result, consistent DOD-wide management oversight of excess 

inventory on order is difficult to achieve.

Recommendations Because of the difficulties the services and DLA face in identifying and 

canceling excess inventory on order, we recommend that the Secretary of 

Defense, in conjunction with the Secretaries of the Army, Navy, and Air 

Force, and the Director of the Defense Logistics Agency, review and 

improve their processes, focusing on areas such as 

• the accuracy of inventory management records;
B-283680

Page 23 GAO/NSIAD-00-160 Defense Inventory

• the level at which the services and DLA identify excess inventory on 

order that is subject to cancellation review, including low-dollar excess 

inventory on order that is excluded from cancellation review;

• the timeliness and frequency of reviews for identifying excess items 

on-order; and

• the validity and use of the military components’ termination models in 

making economic analyses.

In addition, to improve DOD’s oversight of excess inventory on order, we 

recommend that the Secretary of Defense require the services and DLA to 

report on the amount of all excess inventory on order, identifying inventory 

on order that exceeds both the requirements objective and the approved 

acquisition objective.

Agency Comments In written comments on a draft of this report, DOD agreed with our 

recommendations and cited a number of actions that it plans to take. 

DOD’s comments are reprinted in their entirety in appendix III.

We are sending copies of this report to the appropriate congressional 

committees; the Honorable William S. Cohen, Secretary of Defense; the 

Honorable Louis Caldera, Secretary of the Army; the Honorable Richard 

Danzig, Secretary of the Navy; the Honorable F. Whitten Peters, Secretary 

of the Air Force; Lieutenant General Henry T. Glisson, Director, DLA; and 

the Honorable Jacob J. Lew, Director, Office of Management and Budget.

Please contact me at (202) 512-8412 if you have any questions. Key 

contributors to this report were Charles Patton, Jr.; Gary Billen; Louis 

Modliszewski; and David Keefer.

David R. Warren, Director

Defense Management Issues
Page 24 GAO/NSIAD-00-160 Defense Inventory

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

Senate Report 106-50 relating to the National Defense Authorization Act for 

Fiscal Year 2000 mandated that we review Army, Navy, Air Force, and 

Defense Logistics Agency (DLA) inventory on order that exceeded 

requirements. Specifically, the report required GAO to (1) determine the 

extent to which orders exceeded requirements when the orders were 

placed and (2) assess the processes for canceling orders that exceeded 

requirements.

To identify the extent to which orders exceeded requirements when the 

orders were made, we reviewed 490 Army, Navy, Air Force, and DLA items 

on order that exceeded their requirements objectives (the amount of 

inventory for which there were requirements when the orders were made) 

as shown in table 5.

Table 5: Reported Value of Items Reviewed

Note: The Army data were as of September 30, 1998; the Navy data were as of September 30, 1996; 

the Air Force data were as of September 30, 1997; and the DLA data were as of October 28, 1999.

Source: Department of Defense (DOD) inventory records.

Our review covered spare and repair parts and other items that support 

DOD’s operating forces on land, at sea, and in the air. We did not include 

such items as petroleum, oil, and lubricants or items in Marine Corps and 

retail level inventories in our analysis because they represent a small part 

of DOD’s overall inventory or the reorder point and economic order 

quantity requirements were not available for these items.

Dollars in millions

Component

Number of items

reviewed

Reported value of excess

inventory on order

Army 49 $30.9

Navy 200 48.3

Air Force 160 162.4

DLA 81 133.1

Total 490 $374.7
Appendix I

Objectives, Scope, and Methodology

Page 25 GAO/NSIAD-00-160 Defense Inventory

For the Army, Navy, and Air Force we used computerized inventory 

stratification reports to identify items with excess inventory on order for 

review. Stratification reports match on-hand and due-in inventory to 

requirements and are used for budgeting and reporting purposes. For DLA, 

we used extracts of data from inventory files to identify items with excess 

inventory on order. For the four components, we selected items that had 

the highest values of inventory on order in excess of the requirements 

objective and a cross section, based on values, of the remaining items at 

each of the locations visited. For the Navy and Air Force, we used items 

reviewed as part of prior work that addressed similar objectives.1

 The items 

reviewed were managed by the Army Aviation and Missile Command, 

Huntsville, Alabama; the Naval Inventory Control Point’s Mechanicsburg 

and Philadelphia, Pennsylvania, offices; the Air Force’s Air Logistics 

Centers at Oklahoma City, Oklahoma, San Antonio, Texas, and Ogden, 

Utah; and DLA’s Defense Supply Center, Richmond, Virginia. At these 

locations, we reviewed documentation used to support the purchases and 

discussed purchase justifications with responsible managers.

We also used the 490 items to assess the processes used to cancel orders 

that exceed requirements. We reviewed documents that managers use to 

determine whether orders need to be canceled and discussed the 

documents and decisions with the managers. We did not evaluate the 

validity of the economic termination models used by the military services 

and DLA.

For overall inventory data such as the amount of excess inventory on order, 

we analyzed September 30, 1999, summary inventory stratification reports 

for items managed by the military services and DLA. We did not validate 

any of the military components’ automated inventory databases used to 

create the reports; however, we did note database discrepancies during our 

review of documents and discussions with managers relating to individual 

items. In order to present the military components’ inventory values on a 

comparable basis, we removed surcharges for operating costs to value 

inventory items at the latest acquisition cost.

We also met with Army, Navy, Air Force, and DLA headquarter-level 

officials responsible for inventory management to discuss overall efforts to 

reduce excess inventory on order, including efforts to set goals for 

1

Navy Inventory Management (GAO/NSIAD-98-86, Apr. 30, 1998) and Defense Inventory

(GAO/NSIAD-00-5, Nov. 10, 1999).
Appendix I

Objectives, Scope, and Methodology

Page 26 GAO/NSIAD-00-160 Defense Inventory

reducing excess inventory on order and to measure progress in meeting 

those goals.

We performed our review from July 1999 through May 2000 in accordance 

with generally accepted government auditing standards.
Page 27 GAO/NSIAD-00-160 Defense Inventory

Appendix II

Military Service and Defense Logistics Agency 

Criteria for Canceling Excess Inventory on 

Order ApendxiI

Army and Defense 

Logistics Agency 

Cancellation Criteria

The Army and Defense Logistics Agency consider inventory on order that 

exceeds an item’s requirements objective—the quantity they would 

normally buy—as subject to cancellation. For example, a December 1999 

Army requirement computation for a disk used on the gas generator turbine 

rotor of the T701C engine recommended a cancellation of 227 disks that 

were on order. At that time, the disks, valued at $7,107 each, had a 

requirements objective of 72 disks. The Army had 69 disks on hand and 

another 230 on order of which only 3 were needed. Figure 8 shows the 

requirements objective and quantity of disks the Army would consider for 

cancellation.

Figure 8: Army Disks Considered for Cancellation
Appendix II

Military Service and Defense Logistics 

Agency Criteria for Canceling Excess 

Inventory on Order

Page 28 GAO/NSIAD-00-160 Defense Inventory

Navy Cancellation 

Criteria

In April 1998, we reported that the Navy adds a “protection level,” 

representing as much as 2 years of projected demand, to requirements 

before considering inventory on order as excess for cancellation. The Navy 

cancels only the amount of the purchases that exceeds the protection level. 

For contracts, the Navy defines the protection level as the greater of 

2 years of forecasted usage or the item’s economic order quantity. By 

adding a protection level, the Navy prevents inventory on order above the 

requirements objective from being considered for cancellation. For 

example, in June 1996, the Navy had 183 pilot valve cartridges on hand and 

308 on order. The item’s reorder point requirement was 264, its economic 

order quantity was 43, and 2 years of forecasted usage was 168. Figure 9 

shows that because the 2 years of projected demand exceeded the item’s 

economic order quantity, 125 cartridges—costing $723 each—above the 

requirements objective were not considered for cancellation.
Appendix II

Military Service and Defense Logistics 

Agency Criteria for Canceling Excess 

Inventory on Order

Page 29 GAO/NSIAD-00-160 Defense Inventory

Figure 9: Navy Pilot Valve Cartridges Considered for Cancellation

In December 1999, Navy officials told us that the Navy is considering the 

impact and benefits of reducing the protection level from 8 quarters to 

6 quarters of forecasted usage.

Air Force Cancellation 

Criteria

In November 1999, we reported on the Air Force’s efforts to cancel orders 

that exceeded requirements. The Air Force considers inventory on order 

for cancellation only if it exceeds what the Air Force calls the “worldwide 

termination level.” This level includes requirements for (1) a buy period, 

(2) a termination period, and (3) an additional quantity. The buy period 

represents the economic order quantity and lead time (the time needed to 
Appendix II

Military Service and Defense Logistics 

Agency Criteria for Canceling Excess 

Inventory on Order

Page 30 GAO/NSIAD-00-160 Defense Inventory

purchase and receive inventory). Therefore, the buy period is similar to the 

requirements objective used by the Army, Navy, and DLA. The Air Force 

adds an additional 12 months of requirements to the buy period to 

determine what it calls the termination period. To calculate the worldwide 

termination level, the Air Force adds an additional quantity based on the 

greater of certain buy or termination period requirements.

By adding the termination period and the additional requirements to the 

buy period to identify inventory on order for cancellation, the Air Force 

also protects inventory on order above the requirements objective from 

being considered for cancellation. For example, a September 1997 

requirement computation showed that Air Force had 17,709 rotor blades 

for the T-33 aircraft engine either on hand or available from repair and an 

additional 30,249 blades on order. The worldwide termination level 

consisted of 28,990 blades: (1) buy period requirements (requirements 

objective) for 23,208 blades, (2) termination period requirements of 

5,757 blades, and (3) additional requirements for 25 blades. Based on the 

worldwide termination level, 18,968 blades were considered for 

cancellation. As shown in figure 10, the termination period and the 

additional requirements prevented 5,782 blades, valued at $124 each, above 

the requirements objective from being considered for cancellation. 
Appendix II

Military Service and Defense Logistics 

Agency Criteria for Canceling Excess 

Inventory on Order

Page 31 GAO/NSIAD-00-160 Defense Inventory

Figure 10: Air Force Rotor Blades Considered for Cancellation

In response to our report on the Air Force’s excess inventory on order, the 

Secretary of the Air Force said that he had tasked the Air Force Materiel 

Command to address our recommendations to examine the need for 

lengthy operating and termination periods and the worldwide termination 

level.

Inventory on hand

Inventory on order

50,000

Quantity

36,000

43,000

29,000

22,000

15,000

The Air Force identified

18,968 blades for cancellation.

The Air Force identified

18,968 blades for cancellation.

Inventory

5,782 blades above the

requirements objective were

excluded from cancellation.

5,782 blades above the

requirements objective were

excluded from cancellation.

0

Requirements objective of 

23,208 blades.

Requirements objective of 

23,208 blades.
Page 32 GAO/NSIAD-00-160 Defense Inventory

Appendix III

Comments From the Department of Defense ApendxiI

Note: GAO’s comment 

supplementing comments 

in the report text appear at 

the end of this appendix.

See comment 1.
Appendix III

Comments From the Department of Defense

Page 33 GAO/NSIAD-00-160 Defense Inventory
Appendix III

Comments From the Department of Defense

Page 34 GAO/NSIAD-00-160 Defense Inventory

The following is GAO’s comment on the Department of Defense’s letter 

dated June 19, 2000.

GAO Comment 1. We added a note to figure 6 to clarify that while the Air Force does not 

compute an economic order quantity, it does compute requirements for 

an operating period, which it considers to be equivalent to the 

economic order quantity.
Page 35 GAO/NSIAD-00-160 Defense Inventory

Related GAO Products

Department of Defense: Progress in Financial Management Reform

(GAO/T-AIMD/NSIAD-00-163, May 9, 2000).

Defense Inventory: Improvements Needed to Prevent Excess Purchases by 

the Air Force (GAO/NSIAD-00-5, Nov. 10, 1999).

Defense Inventory: Management of Repair Parts Common to More Than 

One Military Service Can Be Improved (GAO/NSIAD-00-21, Oct. 20, 1999).

Financial Management: Better Controls Essential to Improve the Reliability 

of DOD’s Depot Inventory Records (GAO/AIMD-99-132, June 28, 1999).

Defense Inventory: Status of Inventory and Purchases and Their 

Relationship to Current Needs (GAO/NSIAD-99-60, Apr. 16, 1999).

Defense Inventory: DOD Could Improve Total Asset Visibility Initiative 

With Results Act Framework (GAO/NSIAD-99-40, Apr. 12, 1999).

Defense Inventory: Navy’s Procedures for Controlling In-Transit Items Are 

Not Being Followed (GAO/NSIAD-99-61, Mar. 31, 1999).

Major Management Challenges and Program Risks: Department of Defense

(GAO/OCG-99-4, Jan. 1999).

High Risk Series: An Update (GAO/HR-99-1, Jan. 1999).

Inventory Management: More Information Needed to Assess DLA’s Best 

Practices Initiatives (GAO/NSIAD-98-218, Sept. 2, 1998).

Navy Inventory Management: Improvements Needed to Prevent Excess 

Purchases (GAO/NSIAD-98-86, Apr. 30, 1998).

Inventory Management: DOD Can Build on Progress by Using Best 

Practices for Reparable Parts (GAO/NSIAD-98-97, Feb. 27, 1998).

Defense Inventory Management: Expanding Use of Best Practices for 

Hardware Items Can Reduce Logistics Costs (GAO/NSIAD-98-47, Jan. 20, 

1998).

Defense Logistics: Much of the Inventory Exceeds Current Needs

(GAO/NSIAD-97-71, Feb. 28, 1997).

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