United States General Accounting Office

GAO Report to the Secretary of Defense

August 1995 DEFENSE

INVENTORY

Shortages Are

Recurring, but Not a

Problem

GAO/NSIAD-95-137

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-261264 

August 7, 1995

The Honorable William J. Perry

The Secretary of Defense

Dear Mr. Secretary:

As part of our ongoing evaluation of the Department of Defenses’ (DOD)

secondary inventory,1

 we reviewed issues relating to inventory shortages.

Specifically, we analyzed inventory shortages to determine (1) the size of

the shortage, (2) the actions inventory managers were taking in response

to the shortage and if funding problems caused managers not to buy

needed items, and (3) the need for revising DOD’s inventory reporting.

Background In responding to an earlier report,2 DOD indicated that it had a $26-billion

inventory shortage that should be considered when analyzing inventory

that needs to be on hand. We used this September 1991 shortage as a basis

for reviewing the shortage issue.

DOD annually summarizes its secondary inventory in its Supply System

Inventory Report, which is based on financial inventory and other

inventory reports that the military services and the Defense Logistics

Agency (DLA) prepare. DOD uses the report as a management tool to

monitor changes in the level of inventory. In the report, DOD identifies an

approved acquisition objective inventory, which it defines as items needed

to satisfy the wartime and peacetime requirements to equip and sustain

U.S. and allied forces in accordance with DOD policies and plans.

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

level—called the reorder point—inventory managers place orders for

additional inventory. Depending on the item, the reorder point may

include requirements for one or more of the following:

• war reserves that are authorized to be purchased,

• customer requisitions that have not been filled,

• a safety level to be on hand in case of minor interruptions in the resupply

process or unpredictable fluctuations in demand,

1

Secondary inventory items include spare and repair parts, fuel, construction materials, clothing and

textiles, and medical and dental supplies.

2

Defense Inventory: More Accurate Reporting Categories Are Needed (GAO/NSIAD-93-31, Aug. 12,

1993).

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B-261264 

• items to be issued during the period between when a need to buy an item

is identified and when it is received (lead time),

• items held as insurance against inventory outages, and

• items to be issued during the repair period for repairable items.

Because the reorder point provides for items to be used during the lead

time and for a safety level, inventory managers can place orders so that the

orders arrive before out-of-stock situations occur. Generally, inventory

managers order an amount of inventory called an economic order quantity,

which is the quantity of stock that will result in the lowest total costs for

ordering and holding inventory.

Results in Brief DOD’s September 1991 secondary inventory shortage was $16.4 billion

rather than the $26 billion that DOD cited. Two factors that contributed to

the difference were the inclusion in the DOD figure of Navy items that were

not secondary items and standard price surcharges that increased

acquisition costs. Between September 1991 and September 1993,3

 the

$16.4 billion shortage decreased to about $8.1 billion. The decrease was

attributable to (1) removal of Operation Desert Storm requirements,

(2) downsizing the military forces, (3) elimination of some war reserve

requirements, and (4) decreases in requirements due to reduced levels of

operations.

Our analysis found that shortages were a normal supply system condition

that often resulted in inventory purchases and that in only a relatively

small number of instances was funding an issue in deciding whether or not

to purchase needed items. We found that managers made purchases for

about $578 million of $1.1 billion in shortages that we analyzed. For the

remaining $559 million, inventory was not ordered because

(1) requirements on which the shortages were based were no longer valid,

(2) inventory managers decided that purchases were not necessary for

reasons such as the availability of substitute items in the supply system,

and (3) responsibility for items had been transferred to other

organizations or the items had been removed from the inventory. In

general, the decisions not to buy were valid and may have precluded DOD’s

acquisition of millions of dollars of inventory that probably would not have

been used.

DOD’s inventory reporting does not focus on the amount of inventory that

is needed to be on hand. By DOD’s definition, inventory needed to satisfy

3

Final data for September 1994 were not available until after we had completed our fieldwork.

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B-261264 

reorder point and economic order quantity requirements represents the

maximum amount of inventory needed to sustain operations and provide

for war reserves. Therefore, only $28.8 billion of DOD’s reported

$58.8 billion September 1993 wholesale inventory4

 had to be on hand.

DOD Overstated Its

Inventory Shortage

We analyzed DOD’s secondary inventory records and found that on

September 30, 1991, DOD’s secondary inventory shortage was $16.4 billion,

not the $26 billion5 DOD cited. Specifically, we found that the Navy

computed its portion of the shortage by including (1) about $5 billion of

principal items (e.g., ship and aircraft components not considered to be

secondary inventory) and (2) $2 billion of items supplied by contractors or

managed by other DOD components or petroleum products. Also, DOD’s

figure included $2.4 billion of standard price surcharges that increased

acquisition costs by adding charges for transportation and inventory

losses.

Of the $16.4 billion shortage, $6.1 billion was needed to satisfy economic

order quantity requirements and $10.3 billion was needed to satisfy

reorder point requirements. Because inventory managers do not place

orders until the reorder point is reached, items with economic order

quantity requirement shortages represent an acceptable and expected

condition.

Decreased

Requirements

Reduced the Shortage

Between September 1991 and September 1993, the inventory shortage

decreased by about $8.3 billion (51 percent), from $16.4 billion to about

$8.1 billion. The major contributor to the reduced shortage was decreased

requirements. The reorder point shortage deceased by $5.9 billion, while

the economic order quantity shortage decreased by $2.4 billion.

Of the $8.1 billion shortfall, $3.3 billion was for aviation parts managed by

the Army’s Aviation and Troop Support Command, the Navy’s Aviation

Supply Office, and the Air Force’s San Antonio Air Logistics Center and for

clothing and textile items managed by DLA’s Defense Personnel Support

Center. Officials at these locations attributed the reduced shortage to

• removing Desert Storm requirements,

• downsizing the military forces,

4

Inventory controlled by inventory managers at inventory control points as opposed to items

controlled by lower levels such as installations and ships.

5

The actual amount was $25.8 billion, which DOD rounded to $26 billion.

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B-261264 

• eliminating DLA war reserve requirements, and

• decreasing requirements due to reduced levels of operations.

The transfer of consumable items to DLA also contributed to reduced

shortages in the Navy and the Air Force.

Our analyses of inventory records showed that requirements were reduced

significantly between September 1991 and September 1993. Reorder point

requirements, including war reserves, safety levels, and lead times,

decreased by $19.5 billion (34 percent), from $58 billion to $38.5 billion.

The decreased requirements allowed inventory to be reduced to lower

levels before replenishment orders were placed. We also noted that

economic order quantity requirements decreased by $3.3 billion 

(28 percent), from $11.6 billion to $8.3 billion, which indicated that DOD

was buying inventory in smaller quantities.

Reorder Point

Shortages Are a

Normal Supply

System Condition

That Often Result in

Purchases

We analyzed about $1.1 billion of reorder point shortages (7,109 items) at

four inventory control points and determined that purchases were made or

planned for 3,869 items with $578 million of shortages. Our work showed

that because of continuing demand, shortages recur. For example, an

engine turbine vane had reorder point shortages in both March and

September 1993. On March 31, the item had a reorder point shortage of

1,862. The inventory manager purchased 2,309 vanes in April. Because the

inventory was subsequently drawn down and requirements increased, a

second purchase for 1,920 vanes was made in July and a third purchase of

2,070 vanes in October. The inventory manager for the vane said that the

shortages were a normal function of the supply system and resulted in

inventory purchases. The inventory manager also said that he had

purchased larger quantities of the vane, which resulted in two purchases a

year. The Navy is now purchasing smaller quantities about four times a

year, resulting in less inventory being held on hand.

Reorder Point

Shortages Did Not

Always Result in

Purchases

Inventory managers did not make purchases to satisfy reorder point

shortages of $559 million for 3,240 items because (1) requirements for the

items were not valid, had changed, or were uncertain; (2) purchases were

not necessary for a variety of nonrequirement reasons such as items being

returned to the supply system or the availability of substitute items; and

(3) responsibility for the items was transferred to other organizations or

the items were no longer in the supply system. According to inventory

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B-261264 

managers, in only a few instances did the items’ low priority for funding

result in not purchasing items to satisfy shortages.

Inventory Managers Did

Not Make Purchases

Because of Requirements

For 2,107 items with $330 million in shortages, inventory managers did not

make purchases because the shortages were based on requirements that

were no longer valid, had changed, or were uncertain. Table 1 shows the

number of items and shortage values and why purchases were not made.

Table 1: Requirement-Related Reasons

for Not Purchasing Inventory to Satisfy

Reorder Point Shortages

Reasons Items Shortage value

Requirements were no longer valid 10 $ 5,225,240

Requirements decreased 2,014 262,352,015

Items had low, decreasing, or no demands 38 8,982,472

Item or system on which the item is used is or will be

obsolete 15 2,642,331

Requirements were incorrect 28 50,054,352

Requirements were fluctuating 1 45,974

Requirement was for foreign military sales 1 1,009,231

Total 2,107 $330,311,615

The following are examples of items that were not purchased because of

requirement-related reasons.

• In September 1993, the Army had a reorder point shortage of three aircraft

engines used on the SH60 helicopter. The Aviation and Troop Support

Command did not buy the engine, valued at $1,284,923, because its

requirements included Navy back orders that had been incorrectly

requisitioned through the Army. The command canceled the requirements

related to the back orders.

• Decreasing requirements caused 2,000 Navy aviation items with

$233 million in shortages in March 1993 to not have shortages the

following September. For example, on March 31, 1993, the Aviation Supply

Office had a shortage of two power turbine assemblies used on the CH-46E

helicopter. Because of lower demands and field activities turning in items

for repair, the inventory manager not only did not buy the 2 assemblies but

canceled a purchase request for 17 assemblies. The item had a

replacement cost of about $135,000 each.

• In March 1993, the Navy was short eight panel assemblies used on the

H-53A helicopter. The Aviation Supply Office did not buy the assemblies

because the H-53A helicopter was obsolete and not in service. The panel

Page 5 GAO/NSIAD-95-137 Defense Inventory
B-261264 

assembly has not been purchased since 1982 and, if needed, on-hand

assemblies can be used. The shortage was valued at $89,948.

• The San Antonio Air Logistics Center did not buy for a September 1993

shortage of 1,408 speech equipment units, valued at $3,616,649, because of

an incorrect additive requirement. The Center also did not buy for a

shortage of 54,853 rivets, valued at $50,106, because of incorrect lead time

data in the file. The speech equipment was used on a variety of aircraft and

the rivets were used on the F-100 engine.

Inventory Managers Often

Decided That Purchases

Were Not Needed for

Reasons Not Related to

Requirements

For 375 items with $176 million in shortages, inventory managers did not

make purchases for a variety of reasons not related to requirements. These

reasons, including the availability of substitute items in the supply system

and increases in on-hand inventory, are summarized in table 2.

Table 2: Nonrequirement-Related

Reasons for Not Purchasing Items

With Reorder Point Shortages

Reasons Items Shortage value

Item was repaired instead of purchased 12 $ 19,423,032

Item provided by another service or contractor 3 51,218,077

Substitute item was available 8 11,831,142

On-hand inventory increased 288 20,410,250

Customers could buy the item off- the-shelf 3 23,563

Replacement item was available

in the supply system 8 10,892,947

Duplicate item could be used 1 1,523,568

Contract was amended for size redistribution 5 1,338,042

Item had a low funding priority 4 5,625,186

Purchase was deferred at headquarters direction 1 6,338,798

Buy was considered uneconomical 1 3,643

Inventory was available in the system 13 20,393,220

Item was not a secondary inventory item 3 4,528,002

Data were incorrect 12 5,068,394

Other 13 17,738,087

Total 375 $ 176,355,951

The following are examples of items for which purchases were not made

because of nonrequirement-related reasons.

Page 6 GAO/NSIAD-95-137 Defense Inventory
B-261264 

• In September 1993, the Army was short aircraft engines for the MH47E

special operation aircraft. The shortage of 39 aircraft engines, valued at

$50,255,962, was not bought by the Aviation and Troop Support Command.

The Command did not buy the engines because the engines are

contractor-supported items, and the contractor has the responsibility for

repairing and stocking the engines.

• Because of increasing inventory, 288 Navy aviation items with March 1993

shortages that totaled $20.4 million did not have shortages the following

September. For example, in March 1993, a receiver transmitter used on

various aircraft had a reorder point shortage for eight valued at $126,244.

The inventory manager at the Aviation Supply Office did not expect to buy

any receiver transmitters because the Army, the Navy, and the Air Force

were turning in large quantities of the transmitters and the demand for it

was decreasing.

• In September 1993, the Air Force was short six fiberglass containers used

for shipping the inlet fan on the F100 engine. The shortage was valued at

$39,345. The San Antonio Air Logistics Center did not buy for the shortage

because the fiberglass container had been replaced by a metal container.

The fiberglass containers were discontinued because they had higher

damage rates than the metal containers and the repair procedures for the

fiberglass containers were not environmentally acceptable.

• In May 1994, DLA was short 42,992 sweaters valued at $484,286. There are

four different sizes of a modacrylic and wool fiber sweater the Air Force,

the Army, and the Navy use. The Defense Personnel Support Center filled

the shortage with an all wool sweater because the modacrylic fiber was no

longer produced by the manufacturer. All of the services agreed to this

substitution.

Items Were Transferred or

Removed From the

Inventory

For 758 items with $53 million in reorder point shortages, inventory

managers did not make purchases because responsibility for managing the

items had been transferred to other organizations or the items had been

removed from the inventory. For example, in September 1993, the Army

was short 25 rotary wing blades used on the UH-1H helicopter. The

inventory manager at the Aviation and Troop Support Command was not

buying the 25 blades because responsibility for the blades was being

transferred to the Army National Guard and the Command planned to

remove the item from its inventory. The shortage was valued at $2,099,162.

At the Aviation Supply Office, 740 items with March 1993 shortages of

$43.3 million were no longer on the office’s records in September 1993. We

found that some of these items became obsolete and were removed from

Page 7 GAO/NSIAD-95-137 Defense Inventory
B-261264 

the system or responsibility for the items was transferred to other

organizations such as the Navy’s Ships Parts Control Center or DLA, as the

following examples show.

• The office was short six turbine exhaust ducts in March 1993. The ducts,

which cost about $147,000 each, were used on the Harrier aircraft.

According to the inventory manager, the item was obsolete and had been

replaced by a new item. The inventory manager said that five ducts due in

on a contract would be modified to satisfy requirements for the new item.

• The office was short 66 sleeve bushings in March 1993. In May 1993, the

office transferred responsibility for the item to DLA. The bushings, used on

a landing gear valve assembly, had a $825 shortage.

• In March 1993, the Navy was short one exhaust nozzle augmenter (an

afterburner) used on the GE F110 engine on the F14 aircraft. The office

did not buy for the shortage valued at $256,278 because the afterburner

had been replaced by a new afterburner.

In September 1993, the Air Force had a reorder point shortage of electrical

wire used on the C5 aircraft. The San Antonio Air Logistics Center did not

buy the wire because management of the wire was transferred to DLA. The

shortage was valued at $17,260.

Inventory Reporting

Categories Are Not

Accurate

Trends in the private sector are to hold less inventory. An intensely

competitive business environment has forced private sector firms to cut

costs by reducing and holding less inventory. DOD also recognizes the need

to hold smaller inventories. For example, DOD’s September 1993 secondary

inventory was $77.5 billion, which represented a $10.6-billion reduction

from the $88.1 billion September 1991 inventory. DOD’s 1994 logistics

strategic plan calls for continued efforts to reduce inventory levels and

sets a goal to reduce the value of inventory held to $56 billion by

October 2001.

DOD’s current inventory reporting categories, however, do not focus on the

amount of inventory that is needed to be on hand. In the September 1993

Supply System Inventory Report, DOD reported $55.4 billion (about 

72 percent) of its $77.5 billion inventory as active inventory satisfying

approved acquisition objective requirements. DOD defines active inventory

as items expected to be consumed within 2 years or that have been

purchased to meet specific war reserve needs.

Page 8 GAO/NSIAD-95-137 Defense Inventory
B-261264 

In its 1993 materiel management regulation, DOD defined its inventory

requisitioning objective—equivalent to an item’s reorder point plus

economic order quantity requirements—as the “maximum quantity of

materiel to be maintained on-hand or on-order to sustain current

operations and core war reserves.” Based on our analysis of inventory

reported in DOD’s September 1993 Supply System Inventory Report and

other inventory reports, we estimate that $28.8 billion of DOD’s $58.8 billion

wholesale inventory was needed to satisfy reorder point and economic

order quantity requirements.

Recommendation To provide the Congress and DOD management with better oversight of

DOD’s inventory, we recommend that you direct the Supply System

Inventory Report be revised. Specifically, the inventory report should

identify (1) inventory that is needed to be on hand or on order to satisfy

reorder point and economic order quantity requirements and (2) reasons

for holding inventory beyond that amount.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, DOD agreed with our findings but

disagreed with our recommendation. DOD said that our recommendation

would create a second definition of “required” inventory for reporting that

would be different than the one DOD uses for budgeting purposes. DOD said

that the recommended criterion for required inventory would include only

those stocks in use as of the day of the inventory report and that the

criterion is unreasonably restrictive and impractical.

Contrary to DOD’s comment, we do not believe that our recommended

reporting approach is too restrictive. DOD regulation 4140.1R specifically

excludes items in the hands of end users, such as troop units, from

reporting, and our recommendation would not change that. In addition to

funded war reserves, on-hand inventory that satisfies reorder point and

economic order quantity requirements provides for about 1-1/2 years of

supply. Inventory beyond the 1-1/2 years of supply is not necessary to be

on hand because, if needed, it can be ordered and received in that time.

DOD’s comments are presented in their entirety in appendix I.

Scope and

Methodology

We obtained information on DOD’s secondary item inventory from the

Office of the Secretary of Defense; the Departments of the Army, the Navy,

and the Air Force; DLA; and several field locations. We interviewed officials

Page 9 GAO/NSIAD-95-137 Defense Inventory
B-261264 

responsible for inventory management policies and reviewed applicable

policies, procedures, and related documents.

We analyzed September 30, 1991, and September 30, 1993, military service

and DLA secondary inventory stratification reports to determine if the

shortage was valid. We then visited the Navy’s Aviation Supply Office,

Philadelphia, Pennsylvania; the Army’s Aviation and Troop Support

Command, St. Louis, Missouri; the Air Force’s San Antonio Air Logistics

Center, San Antonio, Texas; and DLA’s Defense Personnel Support Center,

Philadelphia, Pennsylvania. We visited these inventory control points to

review their inventory shortages, which accounted for 62 percent of the

$8.1-billion shortage as of September 30, 1993. At these locations, we

analyzed about $1.1 billion (7,109 items) of reorder point shortages to

determine if the shortages were valid and what actions were being taken

to correct the shortages.

We requested inventory stratification tapes or similar information from the

four inventory control points. For the Army and the Air Force, the tapes

were as of September 30, 1993. For the Navy, the tape was as of March 31,

1993. For DLA, we obtained similar information contained in supply control

studies for May 8, 1994. (The difference in the dates was related to the

availability of the data when the fieldwork started at the selected centers.)

Using this information, we judgmentally sampled items with shortages of

on-hand and due-in inventory at the four centers and obtained information

on what was done about the shortages.

We did not validate the inventory requirements that DOD reported. We also

did not analyze such items as petroleum, oil, and lubricants; Marine Corps

inventories; and retail-level inventories because they represented a small

part of DOD’s overall inventory or because reorder point and economic

order quantity requirements were not available for them. By removing

surcharges covering the costs to operate the supply system, we revalued

the inventory at the latest acquisition cost. We did not, however, revalue

items needing repair to reflect their repair costs.

We conducted our work between July 1993 and April 1995 in accordance

with generally accepted government auditing standards.

As you know, the head of a federal agency is required by 31 U.S.C. 720 to

submit a written statement on actions taken on our recommendations to

the House Committee on Government Reform and Oversight and the

Page 10 GAO/NSIAD-95-137 Defense Inventory
B-261264 

Senate Committee on Governmental Affairs not later than 60 days after the

date of this report. A written statement must also be submitted to the

House and Senate Committees on Appropriations with the agency’s first

request for appropriations made more than 60 days after the date of the

report.

Please contact me at (202) 512-8412 if you or your staff have any questions

concerning this report. Major contributors to this report are listed in

appendix II.

Sincerely yours,

David R. Warren

Director, Defense Management

 and NASA Issues

Page 11 GAO/NSIAD-95-137 Defense Inventory
Contents

Letter 1

Appendix I 

Comments From the

Department of

Defense

14

Appendix II 

Major Contributors to

This Report

16

Glossary 17

Tables Table 1: Requirement-Related Reasons for Not Purchasing

Inventory to Satisfy Reorder Point Shortages

5

Table 2: Nonrequirement-Related Reasons for Not Purchasing

Items With Reorder Point Shortages

6

Abbreviations

DLA Defense Logistics Agency

DOD Department of Defense

Page 12 GAO/NSIAD-95-137 Defense Inventory
Page 13 GAO/NSIAD-95-137 Defense Inventory
Appendix I 

Comments From the Department of Defense

Page 14 GAO/NSIAD-95-137 Defense Inventory
Appendix I 

Comments From the Department of Defense

Now on p. 9.

Page 15 GAO/NSIAD-95-137 Defense Inventory
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

John J. Klotz

Louis V. Modliszewski

George C. Surosky

Dallas Regional Office Calvin E. Phillips

Richard L. Madson

Kansas City Regional

Office

Richard E. Burrell

Leonard C. Hill

Robert C. Sommer

Thomas N. Bloom

Page 16 GAO/NSIAD-95-137 Defense Inventory
Glossary

Active Inventory Active inventory is materiel expected to be consumed within the budget

year (2 years) and purchased to meet specific war reserve requirements.

Approved Acquisition Objective This is the quantity of an item needed to satisfy peacetime and wartime

requirements to equip and sustain U.S. and allied forces in accordance

with current Department of Defense (DOD) policies and plans.

Economic Order Quantity The order quantity that results in the lowest cost to order and hold

inventory.

Lead Time Lead time is the time from when a decision to buy an item is made to when

the material is received into the system.

Principal Items Principal items are end items and replacement assemblies of such

importance that management techniques require centralized individual

item management throughout the supply system. This includes central

inventory control, centralized computation of requirements, central

direction of distribution, and central knowledge and control of all assets

owned by the military services. Principal items normally are selected for

their essentiality for combat or training, high monetary value, difficulty of

procurement or production, or criticality of basic materials or

components.

Reorder Point The reorder point is a warning point that indicates that a order must be

placed to ensure that inventory will be available to satisfy future customer

demands. The reorder point consists of the sum of the safety level, the

ordering and shipping time, the repair cycle level, and the authorized

additive levels.

Requisitioning Objective The requisitioning objective is the maximum quantity of materiel to be

maintained on-hand and on-order to sustain current operations and core

war reserves. It consists of the sum of stocks represented by the operating

level, safety level, repair cycle, and the order and shipping time. This

objective is equivalent to an item’s reorder point plus economic order

quantity requirements.

Safety Level Safety level is the quantity of materiel required to be on hand to permit

continued operation in case of a minor interruption of normal

replenishment or a fluctuation in demand occurs.

Page 17 GAO/NSIAD-95-137 Defense Inventory
Glossary

Secondary Item A secondary item is an item that is either a consumable (item that can be

used only once because it cannot be repaired) or reparable (item that can

be repaired and put back into service) other than a principal item.

Secondary items include spare and repair parts, fuel, construction

materials, clothing and textiles, and medical and dental supplies.

(709029) Page 18 GAO/NSIAD-95-137 Defense Inventory
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