United States General Accounting Office

GAO Report to Congressional Committees

May 1995 DEFENSE

INVENTORY

Opportunities to

Reduce Warehouse

Space

GAO/NSIAD-95-64

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-259493 

May 24, 1995

The Honorable Herbert H. Bateman

Chairman

The Honorable Norman Sisisky

Ranking Minority Member

The Honorable John R. Kasich

Subcommittee on Military Readiness

Committee on National Security

House of Representatives

The Department of Defense (DOD) is the largest inventory manager in the

world, maintaining about 600 million cubic feet of warehouse space. About

two-thirds of the space is occupied by secondary inventory—spare and

repair parts, clothing, medical supplies, and other items that DOD uses to

support its operating forces.

Concerned that some secondary inventory was being stored longer than

was reasonable,1

 the former Chairman and Ranking Minority Member

requested that we review DOD’s management of it. Our objectives were to

determine (1) the size of DOD’s secondary inventory, (2) the amount of

space occupied by secondary inventory that DOD does not need to satisfy

current war reserve and operating requirements, (3) the cost of storing this

inventory, and (4) the time it will take to use it. In addition, we reviewed

DOD’s efforts to reduce secondary inventory.

Background The Defense Logistics Agency (DLA), service headquarters, and inventory

control points are responsible for managing secondary inventory. Through

their respective item managers, DLA and service inventory control points

ensure that needed items are available to the operating forces when and

where needed. An item manager’s tasks include determining when to

repair or purchase items, positioning them at depots to meet demands, and

disposing of unneeded items. The items managed by DLA and service item

managers are stored at depots operated and managed by DLA. Depot

managers have no authority over what items are stored or whether they

should be disposed of. These decisions are made by the item managers.

The current DLA distribution depot system consists of two distribution

region headquarters. They are located at New Cumberland, Pennsylvania,

1

A list of related GAO products appears as the last page of this report.

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and Stockton, California. Each of the 272 distribution depots report to one

of these regions. For fiscal year 1994, total DOD distribution costs

amounted to about $1.5 billion. Figure 1 shows the locations of these

depots.

Figure 1: Locations of DLA Distribution Depots

Oakland Hill

Memphis

Red River

San Antonio

Corpus Christi

Pensacola

Warner Robins

Albany

Charleston

Cherry Point

Norfolk

Richmond

Letterkenny

New Cumberland

Jacksonville

Columbus

Tobyhanna

Mechanicsburg

Anniston

Oklahoma City

Tooele

Ogden

Sharpe

Tracy

San Diego

Barstow

McClellan

Puget Sound

When inventory is managed efficiently, enough is stored to meet wartime

and peacetime requirements and unnecessary storage costs are avoided.

When the total on-hand and due-in inventory falls to or below a certain

level—called the reorder point—inventory control points place an order

for additional inventory. The reorder point includes items needed to

satisfy war reserve requirements and items to be issued during the lead

time (the time between when an order is placed and when it is received).

2

Four depots—Charleston, Pensacola, Oakland, and Tooele—have been designated for closure under

the Base Closure and Realignment Act. An additional four depots have been recommended for closure

by the Secretary of Defense. These include Letterkenny, Memphis, Ogden, and Red River. The 27 depot

total counts Tracy and Sharpe as one depot (San Juaquin), and New Cumberland and Mechanicsburg

as one depot (Susquehanna).

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In addition, a safety level of inventory is kept on hand in case of minor

interruptions in the resupply process or unpredictable fluctuations in

demand. By placing orders when the reorder point is reached, item

managers ensure that inventory arrives before stock runs out. Generally,

the amount of inventory ordered is based on a formula that DOD calls an

economic order quantity (also known as a replenishment formula).

Results in Brief Over the past several years, DOD has made sizable reductions to the

number of storage depots and to the amount of inventory stored in them.

DOD has initiatives to make further reductions and we believe

opportunities exist to build on these initiatives. There is substantial

inventory that may never be used and a careful review of items most likely

not to be used may reduce the number of items stored as well as storage

space. Doing so is particularly important as DOD considers ways to make

its infrastructure more efficient. Also, previous pricing policies did not

create an incentive for inventory managers to dispose of unneeded items.

Specifically, we analyzed DOD secondary inventory that had an estimated

volume of 218.8 million cubic feet. Secondary inventory items accounting

for 130.4 million cubic feet, or 60 percent of the 218.8 million cubic feet,

are not needed to satisfy current war reserve and operating requirements.

However, many of these items may have potential future use and should

be retained.

Further analysis shows the 130.4 million cubic feet of inventory consists of

2.2 million different types of items identified by individual stock numbers.

About 84,000 of these items, occupying 41.7 million cubic feet, had more

than a 20-year supply. Much of this inventory will likely never be used.

Some items have become obsolete as technology has advanced and the

weapon systems they support have been phased out; others have

deteriorated to the point that they are no longer usable. DOD should focus

on getting rid of unneeded items that occupy a great deal of space and

have more than 20 years of supply on hand.

DOD has begun programs to reduce the secondary inventory level;

however, its efforts have been partially offset by decreasing inventory

demands and increasing returns of material by forces being deactivated.

During the last 3 fiscal years, DOD disposed of secondary inventory costing

about $43 billion. Further, DLA is implementing a pricing procedure that

should provide increased incentives for disposing of items. Specifically,

beginning in fiscal year 1996, DLA will charge inventory managers

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B-259493 

responsible for making storage decisions $5.15 a square foot for the

covered space their items occupy.

Opportunities Exist to

Reduce Inventory and

Storage Space

According to DLA, DOD’s secondary inventory occupies about 360 million

cubic feet of storage space and has an actual volume of about 300 million

cubic feet.3

 We obtained computerized inventory data records from DLA

and each of the military services and identified secondary inventory items

with a volume of 218.8 million cubic feet.4

 Our figure differs from DLA’s

300 million cubic feet because approximately 12 percent of the items on

the DLA and service data tapes that we used did not have storage space

data.

To determine whether there are opportunities for reductions, we analyzed

DOD’s secondary inventory as it relates to war reserve and current

operational needs and in terms of the years of supply that is on hand on an

item basis. Using this data, we visited selected storage activities to

examine the condition and reasons for continuing to store items that

appeared to be no longer needed. This work showed that DOD has a

substantial number of items that (1) have over a 20-year supply beyond the

levels needed to meet war reserve and operational needs, (2) are for

weapon systems no longer in use, (3) are no longer usable, and (4) are not

needed.

Total Inventory Being

Stored

Our analysis of DOD’s September 30, 1993, Supply System Inventory Report

and inventory stratification reports indicates that $36.3 billion of the

$77.5 billion secondary inventory that DOD reported exceeded current war

reserve and operating requirements.5

On the basis of our analysis of computerized records, we determined that

about 2.2 million different items had a volume of 130.4 million cubic feet.

A typical DOD warehouse is approximately 595 feet long and 180 feet deep.

DLA officials said that it would take approximately 205 warehouses to store

3

The actual warehouse space is about 420 million cubic feet, which includes operating space not

occupied.

4

We obtained computerized records by components as they were available during the period March 31,

1993, through August 31, 1994.

5

The $77.5 billion and the $36.3 billion includes inventory that has been revalued to reflect the value of

items that need to be repaired and the scrap value of items to be disposed of. We estimate that if all the

inventory were valued at its acquisition cost, the values would be $96.8 billion and $48.4 billion,

respectively.

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B-259493 

the 130.4 million cubic feet of inventory. Figure 2 shows that inventory by

DOD component.

Figure 2: Cubic Feet of Inventory Not

Needed to Satisfy Current War Reserve

and Operating Requirements (by DOD

component)

Millions of Cubic Feet

0

4

8

12

16

20

24

28

32

36

40

Army Navy Air

Force

DLA

DOD Component

35.8

19.1

37.3 38.2

DLA estimates that the holding costs for the 130 million cubic feet are

approximately $94 million per year, which is less than 1 percent of the

inventory value. This is low when compared to industry experience, which

according to one study, ranges from 5 to 15 percent. For purchase

decisions, some inventory control points use a percentage of the item’s

value, which can be as high as 18 to 22 percent of the value. However, DOD

believes that the holding costs for items already on hand is considerably

less than the 18 to 22 percent. As discussed later, DOD has an effort

underway to benchmark its holding costs with private industry (see p. 17).

The concern about unnecessary secondary inventory storage is not new. In

1992, we reported that storing unneeded secondary inventory would

prevent DLA from realizing savings from depot consolidations.6

 We

6

Defense Inventory: DOD Actions Needed to Ensure Benefits From Supply Depot Consolidation

Efforts (GAO/NSIAD-92-136, May 29, 1992).

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B-259493 

recommended that DLA reduce this inventory so that fewer depots would

be required.

Substantial Amounts of

Stored Inventory Exceed

20 Years of Supply

To estimate the years of supply for each of the types of items, we divided

the on-hand inventory by past or projected demand data.7

 We had demand

data for about 488,000 of the 2.2 million items that were not needed to

satisfy current war reserves or operating requirements. Those items

occupied about 73 percent (95.7 million cubic feet) of the 130.4 million

cubic feet of space; 84,000 of the items (41.7 million cubic feet) had more

than a 20-year supply. The 1.7 million items that did not have demand data8

occupied 34.7 million cubic feet of space. In figure 3, we show the years of

supply by service. Figure 4 shows the space occupied by these items.

7

Since demand projections were not available for DLA items, we used demands during the past year.

8

We are not certain why there was no demand for these items. However, DOD does stock certain items

that do not have past or projected demands because of their essentiality to certain weapon systems.

All 1.7 million items had stock on hand in excess of those requirements needed to meet current

operating requirements and war reserves.

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B-259493 

Figure 3: Years of Supply for

Secondary Inventory Not Needed to

Satisfy Current War Reserves and

Operating Requirements

Items

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

Less

than 1

year

1 to 2

years

2 to 10

years

10 to 20

years

20 to

100

years

More

than

100

years

Years of Supply

DLA

Air Force

Navy

Army

Page 7 GAO/NSIAD-95-64 Defense Inventory
B-259493 

Figure 4: Years of Supply for

Secondary Inventory Not Needed to

Satisfy Current War Reserves and

Operating Requirements (cubic feet)

Millions of cubic feet

0

5

10

15

20

25

30

35

40

45

50

Less

than 1

year

1 to 2

years

2 to 10

years

10 to 20

years

20 to

100

years

More

than

100

years

Years of supply

DLA

Air Force

Navy

Army

To identify items that will likely never be used, we (1) used DLA and service

databases to determine the amounts of stock on hand, (2) discussed with

item managers the likelihood of these items being used and plans to

dispose of them, and (3) visited supply depots to inspect items that had

been in storage for an extensive period of time with little or no demand.

Some examples of the items we identified follow.

Items That Have Been in

Storage for Years

At the Fleet Industrial Supply Center, Norfolk, Virginia, three pump rotors

(costing about $22,000 each) for a ship water pump have remained in

storage since 1970. Recently, these items were transferred to DLA for

management under the Consumable Item Transfer Program. Under this

program, DLA assumes management responsibility for selected consumable

items used by more than one service. Because DLA now manages these

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B-259493 

items, they will not be considered for disposal for at least 2 years due to

DLA’s disposal policy.

At the same location, 10 bearings ($5,590 each) for a gear assembly on an

aircraft carrier had been in storage since 1986. After our discussions with

the item manager, the Navy disposed of all 10 of these bearings. Figure 5

shows the bearings in storage.

Figure 5: Bearings Stored at Fleet

Industrial Supply Center, Norfolk,

Virginia

At Warner Robins Air Logistics Center, Warner Robins, Georgia, 79

modular radio transmitters belonging to the Army and valued at

approximately $16,000 were in storage. Although 69 of these items are

excess, the Air Force had not taken any action to determine whether they

were needed by the Army. Air Force officials told us that they planned to

contact the Army for disposal authority. Figure 6 shows the modular radio

transmitters in storage.

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B-259493 

Figure 6: Modular Radio Transmitters

Stored at Warner Robins Air Logistics

Center, Warner Robins, Georgia

At the Defense Construction Supply Center, Columbus, Ohio, we were

informed that 65 housings for air cylinders used on a electric generating

unit have had no demand in years, and no demand is forecasted for the

coming year. The item manager indicated that it is unlikely that all the

housings will be used, but they cannot be disposed of until additional

information is available concerning possible uses for them.

Items Retained for Weapon

Systems No Longer in Use

Some items have become obsolete as technology has advanced and

weapon systems and equipment have been phased out of the inventory. At

the Fleet Industrial Supply Center in Norfolk, Virginia, we located two

electric pumps valued at approximately $90,700 (about $45,350 each).

Though these pumps were for destroyer class ships no longer in the U.S.

inventory, they remained in storage. When we questioned this retention

decision, the Navy item manager informed us that the pumps were being

retained for potential foreign military sales. Despite the absence of U.S.

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B-259493 

military users, responsibility for their management was transferred to DLA

under the Consumable Item Transfer Program. Thus, the electric pumps

will be stored for at least 2 years. Figure 7 shows them in storage.

Figure 7: Electric Pumps Stored at

Fleet Industrial Supply Center, Norfolk,

Virginia

DLA also assumed management responsibility for four large distillation

units for which there were no known users. The items (costing $72,140

each) have been in storage since 1968 and were used to distill water on

Navy ships. According to the Navy, the decision to retain the items was

predicated on their high cost. Because of this cost, the Navy chose to

research the possible uses of these items before disposing of them. Like

other items transferred to DLA, they will not be considered for disposal for

at least 2 years. Figure 8 shows the distillation units stored at the Fleet

Industrial Supply Center, Norfolk, Virginia.

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Figure 8: Distillation Units Stored at

Fleet Industrial Supply Center, Norfolk,

Virginia

At Warner Robins Air Logistics Center, Warner Robins, Georgia, 

4,044 missile control systems (a total cost of approximately $21 million)

are being phased out of the inventory. These items have been in storage

for many years with no demands. However, subsequent to our visit, the

item manager received approval to dispose of them.

Also, at Warner Robins Air Logistics Center, three equalizer assemblies

costing approximately $75,000 had been in storage for at least 3 years. The

assemblies were part of the F-4 aircraft reconnaissance system. Though

the items were obsolete to DOD, they were being retained for possible

foreign military sales. Figure 9 shows the assemblies in storage.

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B-259493 

Figure 9: Equalizer Assemblies Stored

at Warner Robins Air Logistics Center,

Warner Robins, Georgia

Items That Are No Longer

Usable

Many items have deteriorated to the point that they are no longer usable.

For example, at the Fleet Industrial Supply Center, in Norfolk, Virginia, a

hoisting antenna (which cost about $48,500) had been stored outside so

long that grass and rust covered it. The Navy item manager informed us

that the item is no longer usable and will be disposed of. Figure 10 shows

the antenna in outside storage.

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Figure 10: Hoisting Antenna Stored at

Fleet Industrial Supply Center, Norfolk,

Virginia

Also, at the Fleet Industrial Supply Center in Norfolk, Virginia, 

13 modernization kits for the P-3C aircraft have been in storage since 1978.

These kits (which cost about $4,480 each, for a total cost of approximately

$58,240) are obsolete. During subsequent discussions with Navy officials,

they indicated that these items will be disposed of.

At the Defense Supply Depot, New Cumberland, Pennsylvania, seven

obsolete Army clutch assemblies were in storage. They cost approximately

$5,334 and were previously used on the M125 10-ton Prime Mover. As a

result of our visit, the Army decided to dispose of all seven items. In

addition, at the San Antonio Air Logistics Center in San Antonio, Texas,

two maintenance antennae valued at approximately $230,000 each had

been in storage for at least 5 years. Though these items were in need of

repair, both were being retained, and the Air Force has no plans to dispose

of them. The item manager informed us that the items would have to be

researched to determine any possible users before any disposal action

could be taken, but as of November 30, 1994, the item manager had not

initiated this action. Figure 11 shows the maintenance antennae in storage.

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B-259493 

Figure 11: Maintenance Antennae

Stored at the San Antonio Air Logistics

Center, San Antonio, Texas

Navy Items That Were Not

Needed in 1990 but Are

Still Being Stored

In 1990, we reported on 57 Navy items that we identified as candidates for

disposal that had little or no potential for future use.9

 During that review,

we sampled 100 items that had unneeded inventory and identified 57 items

that had one or more of the following characteristics: (1) no active users,

(2) no demands in the previous 2 years, and (3) no demands forecasted.

When we followed up on these items in 1994, we found that of the 57 items

that were on hand in 1990, 32 were still in the inventory. The Navy still

manages 26 of these items, which have approximately $2.7 million in stock

exceeding the reorder point and replenishment formula. The other six had

been transferred to DLA. Six of the items still under Navy management had

demand forecasted for the following year. Four of these had excessive

stock on hand, ranging from 6 to more than 20 years of supply.

9

Growth in Ship and Submarine Parts (GAO/NSIAD-90-111, Mar.6, 1990).

Page 15 GAO/NSIAD-95-64 Defense Inventory
B-259493 

DOD Has Made

Progress Reducing Its

Inventory

DOD has implemented several programs—some DOD-wide and others

service specific—to reduce secondary inventory. Over the last 3 years, DOD

disposals have amounted to about $43.4 billion.10 (See table 1.)

Table 1: Value of Secondary Inventory

Disposals, Fiscal Years 1992-94

Value of disposals

Dollars in billions

Organization 1992 1993 1994a Total

Air Force $4.3 $10.8 $5.0b $20.1

Army 1.2c 3.8 2.4 7.4

DLA 0.5 1.9 1.0d 3.4

Navy 4.4 3.2 4.9 12.5

Total $10.4 $19.7 $13.3 $43.4

aAs of June 1994.

bEstimated by Air Force.

cIncludes three of the Army’s five inventory control points.

dEstimated by DLA.

Pricing Incentives Did Not

Exist to Increase Disposals

One reason more progress has not been made is because incentive for the

disposal of secondary items was lacking. In 1992, DOD consolidated its

industrial and stock funds into the Defense Business Operations Fund. DOD

was partly motivated to consolidate the funds in order to improve the

visibility of storage costs. However, neither the inventory control points

nor the weapon system program managers have an incentive to reduce

storage costs. The service unit (customer) that requests and uses the

inventory pays for the cost of storage because cost is included in the price

charged the customer.

For fiscal year 1996, DLA plans to begin charging inventory control points

for storing the material they manage. Although rates will vary by type of

commodity and storage, the rate for covered storage (which applies to

most secondary items) will be $5.15 a square foot. This charge should be

an incentive for item managers to dispose of material that is not needed.

10The $43.4 billion represents acquisition cost. We estimate that based on DOD’s method for

determining the scrap value of material to be disposed of, this material would have been about

$914 million, or about 2 percent of its acquisition value, at the time of disposal.

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In addition, DOD has initiated a study to determine its inventory holding

costs. As part of this study, DOD will compare its holding costs with those

of private industry. In commenting on a draft of this report, DOD said that it

had no preconceptions as to what impact, if any, the project would have

on retention or disposal decisions. The project is scheduled for completion

in the spring of 1995.

Furthermore, as manager of DOD’s depot system, DOD and DLA have

developed strategic plans for reducing DOD’s storage capacity as secondary

item inventories are reduced. DLA officials told us that a number of

contributing factors, including Base Closure and Realignment Commission

actions and its own efforts, have resulted in storage facilities being

vacated and substantial reductions in storage requirements during the past

2 fiscal years. DLA projects that DOD’s secondary inventory will be reduced

to approximately $54 billion by 2001 and that its total requirement for

covered space will be reduced to approximately 400 million cubic feet.

According to DLA officials, these reductions take into account additional

requirements generated as a result of units returning secondary items from

Europe, as well as moving items currently stored outside into covered

storage.

Recommendation We believe that DOD’s efforts are a good start and that continued emphasis

should be placed on getting rid of inventory that is not needed. Therefore,

we recommend that the Secretary of Defense develop a systematic

approach for reviewing the secondary inventory currently on hand. The

Secretary could begin by instructing inventory control points and program

managers to focus their inventory reduction efforts on the material that

occupies a great deal of storage space and has more than 20 years of

supply on hand.

Agency Comments

and Our Evaluation

In commenting on a draft of this report (see app. I), DOD said that it

generally agrees that inventories should be reduced and excess storage

capacity should be eliminated. DOD partially agreed with our findings and

recommendations. While DOD agrees that it holds secondary inventory that

will probably never be used and should be disposed of, it does not agree

with the criteria we used for assessing the potential for reducing the

amount of inventory it currently holds.

Our analysis focused on the stock that exceeded the war reserve and

current operating requirements. We believe this is a logical starting point

Page 17 GAO/NSIAD-95-64 Defense Inventory
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and our report points out that we are not suggesting that DOD dispose of all

stock that exceeds that level. Rather, we point out that DOD should focus

its reduction efforts on stock that occupies a great deal of space and has

more than 20 years of supply on hand. DOD expressed concern that the

implication of using our criteria would be that this material should be

disposed of and the related warehouse space eliminated. It also points out

that our criteria are used for ordering stock, not for making decisions

concerning whether to retain it. However, in its 1993 material management

regulation, DOD used this same criteria as the maximum quantity of

material to be maintained on hand or on order to sustain current

operations and core war reserves. DOD stated that in hindsight it would not

order much of the stock it has on hand, but wants to be careful not to

dispose of any stock that might be needed in the future.

DOD stated that it might already have disposed of much of the material we

discuss in our report. We acknowledge that some of this material might

have been disposed of while our review was on going. However, we do not

believe that DOD had the opportunity to dispose of most of this material.

We obtained the computerized records on which we based our analysis

from DLA and the services as they were available. The tapes for DLA, for

example, were not obtained until August 1994, and therefore, DLA would

have had limited opportunity to dispose of DLA material we identified.

DOD partially concurred with our recommendation that DOD develop a

systematic approach for reducing inventories. DOD emphasized that it

already has in place a systematic approach to reducing inventory and is

tracking its progress toward meeting established goals. DOD agreed that the

number of storage locations should be reduced, but stated that the depot

system is already being downsized. DOD indicated that its requirement for

covered storage space had been reduced more than 180 million cubic feet,

or 28 percent, between September 1992 and September 1994.

In the draft of this report submitted to DOD for comment, we included a

recommendation for the Secretary to consider the significant amount of

inventory that exceeds current requirements when determining the

number of depots to close or consolidate in the 1995 base closure and

realignment process. Since the Secretary’s recommendations to close and

realign bases have been made, we deleted this recommendation from our

final report. We conducted our work between January 1993 and

September 1994 in accordance with generally accepted government

auditing standards. (See description of our scope and methodology in app.

II.)

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Unless you publicly announce this report’s contents earlier, we plan no

further distribution of this report until 30 days after its issue date. At that

time, we will send copies of this report to the Chairmen, Senate

Committee on Armed Services, Senate and House Committees on

Appropriations, and House Committee on National Security; the

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

Directors of the Defense Logistics Agency and the Office of Management

and Budget. We will also make copies available to others upon request.

If you have any questions, I may be reached at (202) 512-8412. Major

contributors to this report are listed in appendix III.

David R. Warren, Director

Defense Management and NASA Issues

Page 19 GAO/NSIAD-95-64 Defense Inventory
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 20 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Page 21 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on pp. 1 and 2.

Page 22 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on p. 4.

Page 23 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on pp. 4 and 5.

See comment 2.

Page 24 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Page 25 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on pp. 6-15.

See comment 3.

See comment 4.

Page 26 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

See comment 5.

See comment 6.

Page 27 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on pp. 16 and 17.

See comment 7.

Page 28 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

See comment 8.

See comment 9.

See comment 10.

Page 29 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on p. 17.

See comment 5.

Now on p. 18.

Page 30 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

Page 31 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

The following are GAO’s comments on the Department of Defense’s (DOD)

letter dated March 23, 1995.

GAO Comments 1. The points raised in DOD’s transmittal letter are addressed in the section

of this report entitled agency comments and our evaluation.

2. By using the criteria we selected for assessing DOD’s use of warehouse

space, we do not believe that all the material we identified as exceeding

current war reserve and operating requirements needs to be disposed of.

As we stated in our report, many of these items may have potential future

use and should be retained.

3. We agree that a certain amount of uncertainty is associated with

projecting spare parts usage. DOD has insurance items to account for the

fact that accidents, abnormal equipment or system failures, or other

unexpected demands occur. The requirements for these items are included

in operating stocks that we excluded from our analyses.

4. We believe that DOD’s comment supports our position. Even after

disposing of excess stock, the supply system was able to satisfy customer

demand.

5. DOD commented that during hostilities, items (particularly insurance

items) with more than 100 years of supply can very quickly become

exhausted. Our analysis considered only items with demand. Insurance

items, because they had no demand, were excluded. With respect to the

noninsurance items with more than 100 years of supply, it is unlikely that

all the quantities will be used. We agree, however, that DOD should focus

not only on the number of years of supply on hand, but also on the space

that the items occupy.

6. DOD commented that the Defense Logistics Agency’s (DLA) inventory

managers are authorized to dispose of stocks transferred to DLA by other

services sooner, with approval from the losing service. However, DLA’s

item managers informed us that they do not consider disposing of such

material for 2 years.

7. We reported in August 19941

 that DOD’s reported inventory values

decreased by $31.9 billion between fiscal years 1989 and 1993, from

$109.4 billion to $77.5 billion. However, because of accounting changes,

1

Defense Inventory: Changes in DOD’s Inventory, 1989-93, (GAO/NSIAD-94-235, Aug. 17, 1994).

Page 32 GAO/NSIAD-95-64 Defense Inventory
Appendix I 

Comments From the Department of Defense

the values were not comparable. When the inventory was valued on a

comparable basis, we estimated that the total reduction was $11.2 billion,

not $31.9 billion. We believe that there are further opportunities for

inventory reductions with appropriate incentives.

8. We agree with DOD that, to date, the major incentive to reduce inventory

has been imposed externally by the Congress in the form of budget

reductions. We believe that internal incentives, such as DOD’s future plan to

charge organizations that cause inventory to be stored for storage costs,

should be effective in reducing unneeded inventory.

9. We believe that DOD is capable of further inventory reductions. The

statement that inventory disposals have been insufficient to offset

increases in material returns is from DOD officials. Since DOD took

exception with the statement, we removed it from the report.

10. DOD stated that it holds inventory that will likely never be used. In view

of the number of items with more than 20 years of supply, we believe that

it is unlikely that much of this inventory would have to be repurchased if

DOD systematically reviewed and disposed of material for which it

forecasted no need.

Page 33 GAO/NSIAD-95-64 Defense Inventory
Appendix II 

Scope and Methodology

We visited the following sites to review policies,1 procedures, and

documents related to retaining and disposing of inventory:

• Headquarters installations:

• the Office of the Deputy Under Secretary of Defense for Logistics;

• the Army, the Navy, and the Air Force headquarters, Washington, D.C.;

and

• the Defense Logisics Agency, Alexandria, Virginia.

• Inventory commands:

• the Army Material Command, Alexandria, Virginia;

• the Naval Supply Systems Command, Washington, D.C.;

• the Air Force Material Command, Wright-Patterson Air Force Base,

Ohio; and

• the Defense Logistics Services Center, Battle Creek, Michigan.

• Inventory control points:

• Army—Tank-Automotive Command, Warren, Michigan;

• Navy—Aviation Supply Office, Philadelphia, Pennsylvania and the Ships

Parts Control Center, Mechanicsburg, Pennsylvania;

• Air Force—Ogden Air Logistics Center, Ogden, Utah; Oklahoma City Air

Logistics Center, Oklahoma City, Oklahoma; San Antonio Air Logistics

Center, San Antonio, Texas; and Warner Robins Air Logistics Center,

Warner Robins, Georgia; and

• DLA—Defense Construction Supply Center, Columbus, Ohio.

• Supply depots:

• Naval Fleet Industrial Supply Center, Norfolk, Virginia;

• the Air Logistics Centers at Tinker Air Force Base, Oklahoma; Warner

Robins Air Force Base, Georgia; Kelly Air Force Base, Texas; and Hill

Air Force Base, Utah; and

• DOD Supply Depot, Columbus, Ohio.

In conducting our work, we used the same computer files, records, and

reports that DOD uses to make stocking decisions for secondary items. We

did not independently determine the reliability of these sources.

• To determine the extent of inventory not needed to satisfy current war

reserve and operating requirements, we analyzed computerized files of DLA

and service inventories between March 31, 1993, and August 31, 1994.

1

We excluded the Marine Corps from our review because of the small number of items it stores. On

September 30, 1993, the Marine Corps inventory was valued at $693 million, or 0.9 percent of the total

DOD inventory.

Page 34 GAO/NSIAD-95-64 Defense Inventory
Appendix II 

Scope and Methodology

Specifically, we compared, on an item-by-item basis, on-hand inventory

needed to satisfy war reserve and current operating requirements to the

total inventory that was on hand.

• To determine why inventory was being retained and whether retention

was justified, we selected a sample of approximately 150 line items from

computerized inventory records for the inventory control points visited. At

the inventory control points, we reviewed inventory records and

interviewed officials to identify the reasons for retaining inventory.

• To determine the extent of space required to store items beyond the

current war reserve and operating requirements, we matched DLA and

service inventory files with the cube information DOD provided by national

stock number. Approximately 12 percent of the items analyzed had no

cube data in the DLA or service computer records and were assigned a cube

size of zero. This reduced our calculation of the space occupied by

secondary inventory. When we visited the depots, we observed selected

items to determine the accuracy of the cube data in DOD’s databases and

found this data to be relatively accurate.

• To compute years of supply for the Army, the Navy, and the Air Force, we

used DOD’s computerized inventory records to determine, on an

item-by-item basis, the amount of inventory that was not needed to satisfy

war reserve and operating requirements. We divided that inventory by

projected annual demands to determine how many years it would take to

use the inventory. By excluding items that did not have projected demands

from this analysis, we were able to avoid computing years of supply for

insurance items that had no projected demand. Because projected

demands were not available for DLA items, we used historical demands in

lieu of projected demands to compute years of supply. We excluded items

that had no historical demand data from this analysis.

Page 35 GAO/NSIAD-95-64 Defense Inventory
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

John J. Klotz

Louis V. Modliszewski

Harry E. Taylor, Jr.

Tracy Banks

Sandra Epps

Jeanett Reid

Thomas Bloom

Dirk Schumacher

Page 36 GAO/NSIAD-95-64 Defense Inventory
Page 37 GAO/NSIAD-95-64 Defense Inventory
Page 38 GAO/NSIAD-95-64 Defense Inventory
Page 39 GAO/NSIAD-95-64 Defense Inventory
Related GAO Products

Organizational Culture: Use of Training to Help Change DOD Inventory

Management Culture (GAO/NSIAD-94-207, Aug. 30, 1994).

Army Inventory: Unfilled War Reserve Requirements Could Be Met With

Items From Other Inventory (GAO/NSIAD-94-207, Aug. 25, 1994).

Defense Inventory: Changes in DOD’s Inventory, 1989-93 (GAO/NSIAD-94-235,

Aug. 17, 1994).

Navy Supply: Improved Material Management Can Reduce Shipyard Costs

(GAO/NSIAD-94-181, July 27, 1994).

Commercial Practices: DOD Could Reduce Electronics Inventories by Using

Private Sector Techniques (GAO/NSIAD-94-129, June 29, 1994).

Army Inventory: Changes to Stock Funding Repairables Would Save

Operations and Maintenance Funds (GAO/NSIAD-94-131, May 31, 1994).

Defense Management Initiatives: Limited Progress in Implementing

Management Improvement Initiatives (GAO/AIMD-94-105, Apr. 14, 1994).

Commercial Practices: Leading-Edge Practices Can Help DOD Better

Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, Apr. 13, 1994).

Defense Inventory: Changes in DOD’s Inventory Reporting, 1989-92

(GAO/NSIAD-94-112, Feb. 10, 1994).

Defense Inventory: More Accurate Reporting Categories Are Needed

(GAO/NSIAD-93-31, Aug. 12, 1993).

Commercial Practices: DOD Could Save Millions by Reducing Maintenance

and Repair Inventories (GAO/NSIAD-93-110, June 4, 1993).

Army Inventory: Current Operating and War Reserve Requirements Can Be

Reduced (GAO/NSIAD-93-119, Apr. 14, 1993).

Defense Logistics Agency: Why Retention of Unneeded Supplies Persists

(GAO/NSIAD-93-29, Nov. 4, 1992).

Army Inventory: Divisions’ Authorized Levels of Demand-Based Items Can

Be Reduced (GAO/NSIAD-93-09, Oct. 20, 1992).

(398142) Page 40 GAO/NSIAD-95-64 Defense Inventory
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