DEFENSE 

INVENTORY

Actions Needed to 

Improve the Defense 

Logistics Agency's 

Inventory 

Management

Report to the Subcommittee

on Readiness, Committee

on Armed Services,

House of Representatives

June 2014

GAO-14-495

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-495, a report to the 

Subcommittee on Readiness, Committee on 

Armed Services, House of Representatives

June 2014

DEFENSE INVENTORY

Actions Needed to Improve the Defense Logistics 

Agency’s Inventory Management 

Why GAO Did This Study

DLA manages about one-fifth of DOD’s 

$95 billion in secondary item inventory, 

such as spare parts to keep military 

equipment ready and operating. GAO 

has identified DOD supply-chain 

management as a high-risk area due in 

part to ineffective and inefficient 

inventory-management practices and 

weaknesses in forecasting the demand 

for spare parts. These factors have 

contributed to the creation of on-order 

and on-hand excess inventory. 

GAO was asked to review DLA’s 

inventory-management practices. GAO 

reviewed, among other things, the 

extent to which DLA has (1) developed 

and met goals to reduce on-hand 

inventory and on-order excess 

inventory while reducing backorders, 

and any challenges faced in doing so, 

and (2) implemented initiatives using a 

comprehensive management approach 

to improve inventory management.

GAO analyzed inventory data from 

2009 through 2013, evaluated DLA’s 

inventory processes, and interviewed 

DLA and DOD officials.

What GAO Recommends

GAO is making multiple 

recommendations designed to 

strengthen inventory management, 

including that DLA reassess its 

inventory-reduction goals and schedule 

for achieving them based on DLA’s

economic analyses; regularly monitor 

its progress in reducing on-order 

excess inventory; establish supply

chain–specific on-order excess 

inventory goals; and take steps to 

improve its collaborative forecasting, 

such as regularly monitoring 

performance. DOD concurs with 

GAO’s recommendations.

What GAO Found

The Defense Logistics Agency (DLA) developed and met goals for reducing onhand inventory and on-order excess inventory (i.e., already purchased items that 

may be excess due to subsequent changes in the services’ requirements) and 

has made progress towards its goals for reducing backorders (shortages of spare 

parts), but challenges remain. DLA disposed of $4 billion in items for a net 

reduction of $2.5 billion to its on-hand inventory after continued replenishments 

to achieve its fiscal year 2013 goal of $11.7 billion. DLA used a risk-based 

approach to identify items to be disposed, resulting, for example, in a reduction of 

about $657 million in items with no demand in 5 years. Also, DLA has reduced 

on-order excess inventory from 6.7 percent of the total value of on-order 

inventory in 2011 to 5.6 percent in 2013, which is progress toward the 

Department of Defense’s (DOD) 4 percent goal by the end of fiscal year 2016. 

DLA has also reduced backorders by nearly 30 percent through monthly reviews.

However, some challenges remain. 

On-hand inventory: To meet its fiscal year 2013 goal, DLA disposed of $855 

million in items that DLA’s economic analyses determined should be kept due to 

the risk DLA will need to buy the same items again in the future. The DLA 

Director stated that he was willing to accept the risk of needing to rebuy some 

inventory to reduce DLA’s on-hand inventory. According to DLA’s analysis, it will 

likely need to dispose of about $1.9 billion more in economic retention stock to 

meet its $10 billion goal for fiscal year 2014, increasing the likelihood of buying 

the same items again to meet future requirements. DOD guidance states that an 

economic analysis that balances the likelihood of repurchase with the cost of 

retention and disposal should guide retention decisions. In 2012, DLA estimated 

that it would have had to buy 42 percent of the dollar value of the items again 

over a 5-year period if it had disposed of all its economic retention stock. Without 

reassessing its goals and schedule for achieving them, DLA risks unneeded 

expenditures to buy the disposed of items again. 

On-order excess inventory

DLA has implemented several improvement efforts, such as new methods for 

setting inventory levels and reducing procurement time. However, DLA data 

shows that its collaborative forecasting effort, which uses customer input to 

produce forecasts, has not improved aggregate forecast accuracy. DLA 

measures forecast accuracy, but lacks metrics for key aspects of performance, 

such as cost and return on investment, as required by DOD guidance, or regular 

performance meetings to monitor results and guide continued improvement. 

Without improved management of collaborative forecasting, DLA may not be 

using its resources efficiently and effectively to improve forecasting accuracy. 

: Results across DLA’s aviation, land, and maritime

organizations—referred to as supply chains—have varied, with increases for land 

and maritime in fiscal year 2013. Also, DLA has not established supply chain–

specific goals and does not regularly collect data or review on-order excess 

inventory performance for its supply chains, as it does with numerous other 

metrics, such as backorders. Although DLA has shown progress toward meeting 

DOD’s goal for reducing on-order excess inventory, without establishing supplychain goals and monitoring performance it may be challenged to meet its goal of 

reducing on-order excess to 4 percent by the end of fiscal year 2016. 

View GAO-14-495. For more information, 

contact Zina Merritt at (202) 512-5257 or 

merrittz@gao.gov 
Page i GAO-14-495 Defense Inventory

Letter 1 

Background 6

DLA Has Reduced Its On-Hand Inventory and Met Reduction 

Goals, but Disposed of Items That May Have to Be Bought 

Again and Lacks Oversight of Its On-Order Excess Inventory 13

DLA Is Implementing Efforts to Improve Inventory Management 

but Can Strengthen Collaborative Forecasting 34

Conclusions 40

Recommendations for Executive Action 41

Agency Comments and Our Evaluation 42

Appendix I The Department of Defense’s (DOD) Inventory Improvement Plan 44

Appendix II The Defense Logistics Agency’s Metrics Generally Balance

Availability of Spare Parts and Total Supply-Chain Costs 45

Appendix III Objectives, Scope, and Methodology 52

Appendix IV Printer-Friendly Version of Figure 1—Selected Defense Logistics

Agency (DLA) Categories of Inventory Items 57

Appendix V Overview of Typical Causes of On-hand Excess Inventory 58

Appendix VI On-Hand Inventory Levels for Aviation, Land, and Maritime Supply 

Chains 59

Appendix VII Value of the Defense Logistics Agency’s On-Order and On-Order

Excess Inventory 62

Contents
Page ii GAO-14-495 Defense Inventory

Appendix VIII Additional Defense Logistics Agency Efforts to Improve Inventory 

Management 63

Appendix IX Defense Logistics Agency’s Approaches for Planning Amounts of 

Inventory 74

Appendix X Print-Friendly Version of Figure 8—Overview of the Defense Logistics 

Agency’s (DLA) Regular Performance-Management Meetings 75

Appendix XI Comments from the Department of Defense 76

Appendix XII GAO Contact and Staff Acknowledgments 79

Related GAO Products 80

Tables

Table 1: Value of the Department of Defense’s (DOD) and the 

Defense Logistics Agency’s (DLA) Inventory, Fiscal Years 

2009-2012 8

Table 2: Value of Aviation, Land, and Maritime Supply Chains’ 

Inventory, Fiscal Years 2009-2012 8

Table 3: Timeline of Changes to Defense Logistics Agency’s 

(DLA) On-Hand Inventory Goals and Schedule 15

Table 4: Total Backorders and Aged Backorders versus 

Command Goals as of September 2013 33

Table 5: Defense Logistics Agency’s (DLA) Forecast Accuracy 

and Error Metrics 37

Table 6: The Nine Subplans and Corresponding Objectives 44

Table 7: The Defense Logistics Agency’s (DLA) Value of OnOrder and On-Order Excess Inventory, Fiscal Years 2011-

2013 62
Page iii GAO-14-495 Defense Inventory

Table 8: Value of Inventory DLA Redistributed and Procured to 

Reduce or Replace a Planned Purchase since Fiscal Year 

2011 71

Table 9: DLA’s Approaches to Determining the Amount of 

Inventory 74

Figures

Figure 1: Selected Categories of the Defense Logistics Agency’s 

(DLA) Inventory Items 11

Figure 2: Defense Logistics Agency (DLA) Inventory Levels from 

End of March 2012 to End of September 2013 17

Figure 3: Value of Inventory Items with Years of No Demand Held 

by the Defense Logistics Agency’s (DLA) Aviation, Land, 

and Maritime Supply Chains at the End of Fiscal Years 

2012 and 2013 22

Figure 4: Value of the Defense Logistics Agency’s (DLA) Aviation, 

Land, and Maritime Supply Chain Inventory beyond the 

Approved Acquisition Objective by Projected Years of 

Supply, End of Fiscal Years 2009-2013 23

Figure 5: The Defense Logistics Agency’s (DLA) On-Order Excess 

Inventory Percentages, End of Fiscal Years 2011-2013 29

Figure 6: Value of Defense Logistics Agency (DLA) Backorders, 

End of Fiscal Years 2009-2013 32

Figure 7: Overview of DLA’s Metrics in Customer Service, Cost, 

and Internal Efficiency Areas 46

Figure 8: Overview of the Defense Logistics Agency’s (DLA) 

Regular Performance-Management Meetings 50

Figure 9: Defense Logistics Agency’s (DLA) Aviation Supply Chain 

On-Hand Inventory, End of Fiscal Years 2009-2013 59

Figure 10: Defense Logistics Agency’s (DLA) Land Supply Chain 

On-Hand Inventory, End of Fiscal Years 2009-2013 60

Figure 11: Defense Logistics Agency’s (DLA) Maritime Supply 

Chain On-Hand Inventory, End of Fiscal Years 2009-

2013 61
Page iv GAO-14-495 Defense Inventory

Abbreviations

DLA Defense Logistics Agency

DOD Department of Defense

DORRA DLA Office of Operations Research and Resource Analysis

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Page 1 GAO-14-495 Defense Inventory

441 G St. N.W.

Washington, DC 20548

June 19, 2014

The Honorable Robert Wittman

Chairman

The Honorable Madeleine Z. Bordallo

Ranking Member

Subcommittee on Readiness

Committee on Armed Services

House of Representatives

The Department of Defense (DOD) manages more than 5 million 

secondary inventory items (hereafter referred to as inventory), including 

spare parts and other items,1 with a reported value of approximately $95 

billion as of September 2012.2 The Defense Logistics Agency (DLA) 

manages about one-fifth of DOD’s inventory, specifically consumable 

parts3 and other supplies needed to keep military equipment ready and 

operating. As we have previously reported, the federal government is 

facing serious long-term fiscal challenges, and DOD likely will encounter 

considerable budget pressures over the next decade.4 To address these 

pressures, DOD issued strategic guidance in January 2012 emphasizing 

the need to reduce its cost of doing business, in particular finding 

efficiencies in overhead, business practices, and support activities.5

 

1

DOD defines secondary inventory items as reparable components, subsystems, 

assemblies, consumable repair parts, bulk items and materiel, subsistence, and 

expendable end items (e.g., clothing and other personal gear). In this report, we refer to 

secondary inventory items as inventory. 

Furthermore, the Secretary of Defense’s 2013 Strategic Choices 

Management Review, which explored defense strategy and management 

options in the face of continuing budget cuts, concluded that DOD needs 

2

End of fiscal year 2012 data were the most recent available at the time of this report 

since DOD had not released its Supply System Inventory Report for the end of fiscal year 

2013. Unless otherwise stated, all dollar figures in this report are in nominal terms.

3

Consumables are those items that are normally expended or intended to be used up 

beyond recovery. 

4

GAO, The Federal Government’s Long-Term Fiscal Outlook: Spring 2013 Update, 

GAO-13-481SP (Washington, D.C.: April 2013).

5

Department of Defense, Sustaining U.S. Global Leadership: Priorities for 21st Century 

Defense (Jan. 5, 2012).
 

Page 2 GAO-14-495 Defense Inventory

to continue efforts to reduce overhead and become more efficient. In light 

of these efforts, effective and efficient inventory management—a key 

support activity that affects the readiness of the force—is critical for DOD 

to avoid spending resources on unneeded inventory that could be better 

applied to other defense and national priorities.

Since 1990, we have identified DOD supply-chain management6 as a 

high-risk area due in part to ineffective and inefficient inventorymanagement practices and procedures, weaknesses in accurately 

forecasting the demand for spare parts, and challenges in achieving 

widespread implementation of key technologies aimed at improving asset 

visibility.7 These factors have contributed to the accumulation of billions of 

dollars in spare parts that are excess to current needs.8 We reported in 

2012 and 2013 that DOD had made progress in reducing its excess 

inventory and implementing its Comprehensive Inventory Management 

Improvement Plan, which was developed and implemented in response to 

a provision of the National Defense Authorization Act for Fiscal Year 

2010.9 DOD established overarching goals in the plan to reduce the 

enterprise-wide percentages of on-order excess inventory—those items 

already purchased but that may be excess due to subsequent changes in 

requirements—and on-hand excess inventory10

 

6

DOD’s supply chain is a global network that provides materiel, services, and equipment 

to the joint force. Supply-chain management encompasses the processes and systems for 

delivering the right items to the right place at the right time, and at the right cost.

—those items categorized 

for potential reuse or disposal. Since DOD was exceeding its initial goals 

7

This high-risk area was originally identified in 1990 as DOD inventory management. In 

2005, it was expanded to DOD’s management of its entire supply chain, which includes 

three focus areas for improvement: requirements forecasting, asset visibility, and materiel 

distribution. For our most-recent update, see GAO, High-Risk Series: An Update, 

GAO-13-283 (Washington, D.C.: February 2013).

8

GAO, Opportunities to Reduce Potential Duplication in Government Programs, Save Tax 

Dollars, and Enhance Revenue, GAO-11-318SP (Washington, D.C.: Mar. 1, 2011); HighRisk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011); High-Risk 

Series: An Update, GAO-09-271 (Washington, D.C.: January 2009); High-Risk Series: An 

Update, GAO-07-310 (Washington, D.C.: January 2007); and High Risk-Series: An 

Update, GAO-05-207 (Washington, D.C.: January 2005). 

9

GAO, Defense Inventory: Actions Underway to Implement Improvement Plan, but Steps 

Needed to Enhance Efforts, GAO-12-493 (Washington, D.C.: May 2012); and 

GAO-13-283. 

10On-hand excess inventory is distinct from on-hand inventory. On-hand inventory is the 

amount of inventory in DLA’s possession. 
 

Page 3 GAO-14-495 Defense Inventory

for reducing excess inventory, we recommended that DOD’s efforts would 

benefit from establishing more-challenging, but achievable, goals for 

reducing excess inventory and that the department periodically reexamine 

and update its goals. In response, DOD revised its on-hand excess 

inventory goal from 10 percent of the total value of inventory to 8 percent 

by fiscal year 2016. However, DOD did not make any changes to its onorder excess inventory goals and maintains that its current goals of 6 

percent of the total value of on-order inventory by 2014 and 4 percent by 

2016 are sufficient. We provide further information about DOD’s 

Comprehensive Inventory Management Improvement Plan in appendix I.

In response to your request that we evaluate DLA’s inventory 

management, this report assesses the extent to which DLA has (1) 

developed and met goals to reduce on-hand inventory and on-order 

excess inventory while reducing backorders (i.e., parts shortages) and 

faced any implementation challenges, and (2) implemented initiatives 

using a comprehensive management approach to improve inventory 

management. We also examined the extent to which DLA’s metrics 

balance the timely availability of spare parts with total supply-chain costs, 

and report on this issue in appendix II. This is the first in a series of our

reviews examining DOD’s inventory management. Three additional 

reviews on Army, Navy, and Air Force inventory management are 

underway, pursuant to a congressional request, and we plan to report the 

results in early 2015.

To assess the extent to which DLA developed and met goals to reduce 

on-hand inventory and on-order excess inventory while reducing 

shortages and faced any implementation challenges, we analyzed DLA’s 

November 2009 through September 2013 inventory data, which stratify 

inventory into categories to assess the ability of the inventory to meet 

military services’ requirements and ensure that surplus inventories are 

kept only if warranted.11

 

11Per DOD guidance, DLA and the military services are required to stratify and report 

inventory data biannually as of March 31 and September 30 and use the stratification data 

to assess the ability of the inventory to meet the stated requirement and ensure that 

surplus inventories are kept only if warranted. DOD Manual 4140.01, Volume 10, DOD 

Supply Chain Materiel Management Procedures: Metrics and Inventory Stratification 

Reporting, and Volume 6, DOD Supply Chain Materiel Management Procedures: Materiel 

Returns, Retention, and Disposition (Feb. 10, 2014). DLA made changes to the structure 

of its inventory data in October 2009, which meant the earliest data we could use to 

conduct our analysis were from November 2009. 

To assess the reliability of the data, we reviewed 
 

Page 4 GAO-14-495 Defense Inventory

DOD requirements for secondary spare parts inventory reporting, 

comparing the data we generated from DLA-provided electronic files to its 

summary tables, searching for and reconciling inconsistent information, 

and discussing DLA’s data and our findings with database managers. We 

determined the inventory data were sufficiently reliable for the purposes 

of this report in determining DLA’s amount of inventory and reasons for 

holding that inventory. We focused our analysis on data from DLA’s 

aviation, land, and maritime supply chains since they constituted $9.8 

billion of DLA’s $13.1 billion in nonenergy inventory12 at the end of fiscal 

year 2012. With respect to on-order excess inventory, we analyzed DLA’s 

inventory data to determine the amount of on-order excess inventory and 

reviewed DLA’s processes for managing and overseeing on-order excess 

inventory and compared these processes against leading practices for 

results-oriented management.13 With respect to backorders for spare 

parts, we reviewed DLA-generated reports to assess the status and 

extent of its efforts to reduce the number of backorders, and reviewed 

DLA’s aviation, land, and maritime goals for reducing backorders and 

evaluated DLA’s progress in meeting those goals. We also examined 

DLA performance-management briefings; documentation related to DLA’s 

effort to reduce its on-hand inventory, on-order excess inventory, and 

backorders; DOD and DLA inventory-management policies and 

procedures; and other reports and analyses related to the potential for 

buying inventory again after it is disposed of.14

 

12We did not include energy in our analysis because DOD’s Comprehensive Inventory 

Management Improvement Plan does not focus on energy inventory.

We interviewed DLA 

headquarters and aviation, land, and maritime supply-chain officials to 

discuss DLA’s efforts to reduce on-hand inventory, on-order excess 

inventory, and backorders. Additionally, we met with Office of the Deputy 

Assistant Secretary of Defense for Supply Chain Integration officials to 

discuss DLA’s efforts.

13GAO, Managing For Results: Data-Driven Performance Reviews Show Promise But 

Agencies Should Explore How to Involve Other Relevant Agencies, GAO-13-228

(Washington, D.C.: Feb. 27, 2013); Managing For Results: Enhancing Agency Use of 

Performance Information for Management Decision Making, GAO-05-927 (Washington, 

D.C.: Sept. 9, 2005); and Agency Performance Plans: Examples of Practices That Can 

Improve Usefulness to Decisionmakers, GAO/GGD/AIMD-99-69 (Washington, D.C.: Feb. 

26, 1999).

14DOD Manual 4140.01, Volume 6, DOD Supply Chain Materiel Management Procedures: 

Materiel Returns, Retention, and Disposition (Feb. 10, 2014).
 

Page 5 GAO-14-495 Defense Inventory

To assess the extent to which DLA has implemented initiatives using a 

comprehensive management approach to improve inventory 

management, we interviewed officials with DLA headquarters and the 

Office of the Deputy Assistant Secretary of Defense for Supply Chain 

Integration to identify improvement initiatives. We focused on four key 

efforts DLA officials identified as significant to reducing excess inventory: 

collaborative forecasting, inventory level-setting for items with low or 

highly variable demand, improving acquisition lead-time accuracy and 

reducing acquisition lead times, and improving efficiency of DLA’s supply, 

storage, and distribution processes. We analyzed DLA’s collaborative 

forecasting, which is a process that allows DLA and the military services 

to work together to tailor forecast plans for items rather than DLA 

establishing a forecast based solely on historical demand patterns, by 

reviewing DLA’s metrics to evaluate the extent its metrics addressed 

performance and costs, as required by DOD guidance.15 Additionally, we 

reviewed and analyzed DLA’s management approach for the program to 

determine whether it followed leading practices for results-oriented 

management, such as holding regular performance-management 

meetings to guide continued improvement.16

We conducted this performance audit from June 2013 to June 2014 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

We discussed the metrics 

and the assessment methodology DLA uses for tracking and evaluating 

collaborative forecasting performance with DLA headquarters and 

aviation, land, and maritime supply-chain officials. We also discussed the 

challenges and weaknesses of the metrics for assessing collaborative 

forecasting with various DLA officials. To examine the extent to which 

DLA has implemented metrics that balance the timely availability of spare 

parts to customers with total supply-chain costs, we analyzed DLA’s use 

of metrics to manage its inventory and reviewed documentation from a 

number of different metrics meetings held at DLA headquarters and 

supply chains. Appendix III provides further information on our scope and 

methodology.

 

15DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel Management 

Procedures: Metrics and Inventory Stratification Reporting, and Volume 2, DOD Supply 

Chain Materiel Management Procedures: Demand and Supply Planning (Feb. 10, 2014).

16GAO-13-228 and GAO-05-927. 
 

Page 6 GAO-14-495 Defense Inventory

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

The DOD supply chain is a global network that provides materiel, 

services, and equipment to the joint force. DOD’s supply-chain 

responsiveness and reliability affects the readiness and capabilities of 

military forces and is critical to the overall success of joint operations. 

According to DOD joint doctrine, logisticians must manage DOD’s 

equipment and inventory, manage global distribution and supplier 

networks, and integrate all aspects of the supply chain. Inventory 

management is the process of determining requirements, and procuring, 

managing, cataloging, distributing, overhauling, and disposing of 

materiel.17 Managing inventory throughout the supply chain requires 

collaboration with supply and maintenance activities and distribution 

providers to enable the greatest effect at best value. Managing global 

distribution and supplier networks is integral to supply-chain operations to 

ensure delivery of the right items to the right place at the right time.18

Logisticians manage supplies and equipment by providing visibility over 

assets, which should result in a seamless integration of supply operations 

from acquisition to delivery.19

The military services, U.S. Transportation Command, and DLA are key 

supply-chain organizations that constitute DOD’s supply-chain network. 

The military services are responsible for supplying, organizing, training, 

and equipping the force. To carry out this responsibility, the military 

services procure and manage inventory to support the maintenance of 

their equipment and to equip the force. U.S. Transportation Command, in 

addition to its responsibilities for transporting supplies and equipment in 

support of military operations, has been designated as DOD’s Distribution 

Process Owner with responsibility for overseeing the overall 

 

17See GAO-12-493 for our most-recent work on DOD’s inventory management.

18See GAO, Defense Logistics: DOD Has Taken Actions to Improve Some Segments of 

the Materiel Distribution System, GAO-12-883R (Washington, D.C.: Aug. 3, 2012) for our 

most-recent work on DOD’s materiel distribution system.

19See GAO, Defense Logistics: A Completed Comprehensive Strategy is Needed to 

Guide DOD’s In-Transit Visibility Efforts, GAO-13-201 (Washington, D.C.: Feb. 28, 2013) 

for our most-recent work on DOD’s asset visibility.

Background
 

Page 7 GAO-14-495 Defense Inventory

effectiveness, efficiency, and alignment of DOD-wide distribution 

activities.20

Management and oversight of DLA inventory is a responsibility shared 

between the Under Secretary of Defense for Acquisition, Technology and 

Logistics and the DLA Director. The Under Secretary of Defense for 

Acquisition, Technology and Logistics is responsible for developing 

materiel-management policies and ensuring their implementation in a 

uniform manner throughout the department, while the DLA Director is 

responsible for implementing DOD policies and procedures for materiel 

management.

DLA manages, integrates, and synchronizes suppliers and 

supply chains to provide materiel to the military services, allies, and 

multinational partners. DLA provides support across nine diverse supply 

chains: aviation, clothing and textile, construction and equipment, energy, 

land, maritime, medical, industrial hardware, and subsistence. To carry 

out its responsibilities, DLA manages a global network of distribution 

depots that receive, store, and issue a wide range of commodities owned 

by the military services, General Services Administration, and DLA.

DOD reported that the total value of its inventory was about $95 billion as 

of September 30, 2012. The value of DLA’s inventory (including energy) 

at the end of fiscal year 2012 was $20.8 billion, which is approximately 

one-fifth of the value of DOD’s inventory (see table 1).21

 

20According to DOD Instruction 5158.06, Distribution Process Owner (DPO) (Sept. 11, 

2007), the process owner “has the responsibility for coordinating, sustaining, and 

improving processes; coordinating the creation of new processes, where appropriate; and 

being accountable for their outcomes. Process owners advocate improvements for and 

across all DOD components for effectiveness, efficiency, and alignment relevant to a 

particular process.” See also DOD Directive 5158.04, United States Transportation 

Command (USTRANSCOM) (Sept. 11, 2007).

21DLA is the DOD executive agent for bulk petroleum and is responsible for all bulk 

petroleum supply management from source of supply to the point of customer acceptance, 

with emphasis on improving efficiency.

DLA Currently Manages 

about One-Fifth of DOD’s 

$95 Billion of Inventory
 

Page 8 GAO-14-495 Defense Inventory

Table 1: Value of the Department of Defense’s (DOD) and the Defense Logistics 

Agency’s (DLA) Inventory, Fiscal Years 2009-2012 

Billions of nominal dollars

Fiscal

year

Value of DOD 

inventorya

Value of DOD inventory 

owned by DLA 

(including energy)

Percentage of DOD 

inventory owned by 

DLA (including energy)

2009 $89.9 $16.9 18.8%

2010 95.6 19.0 19.9

2011 98.9 21.3 21.5

2012 95.0 20.8 21.9

Source: GAO analysis of DOD data.

Notes: DOD values inventory at latest acquisition cost, with reductions for reparable inventory in need 

of repair and salvage prices for potential reutilization/disposal stock (or on-hand excess). These 

values are reported in DOD’s annual Supply System Inventory Report. Fiscal Year 2013 departmentwide inventory values were not available at the time of the issuance of this report. 

a

Total values of DOD inventory includes inventory held by the military services. 

In fiscal year 2012, the value of DLA’s aviation, land, and maritime supply 

chains comprised approximately 75 percent of the value of DLA’s nonenergy inventory, or approximately $9.8 billion of DLA’s $13.1 billion nonenergy inventory (see table 2).

Table 2: Value of Aviation, Land, and Maritime Supply Chains’ Inventory, Fiscal 

Years 2009-2012 

Billions of nominal dollars

Fiscal 

year

Value of DLA 

inventory 

(including 

energy)

Value of DLA 

inventory 

(excluding 

energy)

Value of DLA 

aviation, land, 

and maritime 

supply chains

Percentage of 

DLA inventory 

(excluding 

energy) held by 

aviation, land, 

and maritime 

supply chains

2009 $16.9 $12.4 $9.8 79.0%

2010 19.0 13.7 11.0 80.3

2011 21.3 13.7 11.1 81.0

2012 20.8 13.1 9.8 74.8

Source: GAO analysis of DOD data.

Notes: DOD values inventory at latest acquisition cost, with reductions for reparable inventory in need 

of repair and salvage prices for potential reutilization/disposal stock (or on-hand excess). These 

values are reported in DOD’s annual Supply System Inventory Report. Fiscal Year 2013 departmentwide inventory values were not available at the time of the issuance of this report. 
 

Page 9 GAO-14-495 Defense Inventory

DOD guidance requires DLA to assess the ability of the inventory to meet 

the military services’ requirements and ensure that surplus inventories are 

kept only if warranted.22 To accomplish this directive, the guidance 

requires the services and DLA to group their item inventories into several 

specific categories, according to the purpose for which they are held.23

As specified in DOD guidance, the categories include inventory needed to 

support the approved acquisition objective

The categorization is designed to provide visibility of DOD inventory 

requirements, assets (on-hand and on-order), demand, and overages or 

shortfalls.

24 and three inventory 

categories that exceed the approved acquisition objective (see fig. 1).25

As reported by DLA, the approved acquisition objective includes materiel 

needed to meet the requirements objective, 2 years of estimated future 

demand, war-reserve materiel held for the services,26 and materiel held 

because it comes from a diminishing manufacturing source.27

 

22DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel Management 

Procedures: Metrics and Inventory Stratification Reporting. 

The three 

categories that exceed the approved acquisition objective are economic 

23DOD Manual 4140.01, Volume 6, DOD Supply Chain Materiel Management Procedures: 

Materiel Returns, Retention, and Disposition. 

24DOD guidance defines the approved acquisition objective as the quantity of an item 

authorized for peacetime and wartime requirements to equip and sustain U.S. and allied 

forces. 

25The amount of inventory in each category is based on a snapshot at a particular point in 

time and fluctuates due to changes in demand rates for individual items. The changes in 

demand affect the size of each category, thereby affecting the distribution of inventory 

across the categories on an item by item basis. For example, a specific item at one 

particular point in time may have stock categorized as economic retention stock, but 

several months later that item may not have any stock categorized as economic retention 

stock due to an increase in demand for the particular item. Since there are fluctuations in 

the size of the categories on an item by item basis, there are also fluctuations in the 

aggregate as well. Moreover, $1 billion in economic retention stock at one particular point 

of time cannot be assumed to be comprised of the same items at the same quantities as 

$1 billion in economic retention stock at a later point in time.

26DLA holds materiel in this category for the military services when the services have 

unfunded war-reserve requirements. 

27DLA holds materiel with a diminishing manufacturing source in this category. DLA plans 

to hold on-hand materiel that is above the approved acquisition objective with a 

diminishing manufacturing source as contingency retention stock by the end of fiscal year 

2014.

DLA’s Process for 

Categorizing Inventory for 

Reporting Requirements
 

Page 10 GAO-14-495 Defense Inventory

retention stock, contingency retention stock, and potential reutilization 

stock (i.e., on-hand excess inventory). Figure 1 summarizes how DLA 

inventory categories are aggregated for reporting. Appendix IV provides a 

printer-friendly version of figure 1.
Page 11 GAO-14-495 Defense Inventory

Figure 1: Selected Categories of the Defense Logistics Agency’s (DLA) Inventory

Source: GAO analysis of Department of Defense (DOD) guidance and DLA inventory practices. | GAO-14-495

Interactivity instructions: Roll over an inventory term to see the definition.

 See appendix IV for the printer-friendly version. 

Potential 

Reutilization Stock

Contingency 

Retention Stock

Economic 

Retention Stock

Two Years of

Forecasted Demand

Quantities for 

Items with Low, 

Infrequent, or 

Highly Variable 

Demand 

Economic 

Order Quantity

Acquisition Lead 

Time Quantity

Backorders

Safety 

Stock Quantity

On-Hand Excess 

Inventory

Retention 

stock

Approved 

Acquisition 

Objective

Requirements 

Objective

War-Reserve 

Materiel

Quantities 

for Items with 

Diminishing 

Manufacturing 

Sources
 

Page 12 GAO-14-495 Defense Inventory

As reported by DLA, the requirements objective is the sum of stock 

represented by

• safety levels—amount of stock that is to be kept on hand in case of 

minor interruptions in the resupply process or fluctuations in demand;

• backorders—customer-requisitioned materiel that is not immediately 

available to issue, but is recorded as a commitment for future issue;

• stock needed to cover acquisition lead times;28

• the economic order quantity—quantity derived from a mathematical 

technique used to determine the lowest total variable costs to order 

and hold inventory; and

• items with low, infrequent, or highly variable demand.29

Inventory that exceeds the approved acquisition objective is categorized 

as retention stock or potential reutilization stock. Retention stock includes 

economic retention stock, which is materiel that has been calculated to be 

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

needed in the future, and contingency retention stock, which is materiel 

retained to support specific contingencies.30 Potential reutilization stock 

has been identified for possible disposal but has potential for reuse and is 

under review for transfer to DLA Disposition Services.31

 

28Acquisition lead time includes both administrative and production lead time. 

Administrative lead time is the interval between identifying a need to purchase an item and 

the award of a contract. Production lead time is the interval between the award of a 

contract and receiving the purchased materiel into the supply system. 

Potential 

reutilization stock is also referred to as on-hand excess inventory. 

Additionally, DLA tracks on-order excess inventory, which are items for 

which a contract has been awarded or funds have been obligated, but 

due to subsequent changes in requirements would be categorized upon 

29Low, infrequent, or highly variable demand items are those items that need to be 

stocked where the requirement for parts cannot be forecast. 

30The contingencies include, but are not limited to, supporting foreign military sales, future 

military operations, disaster relief or civil emergencies, or mitigating risk associated with 

diminished manufacturing sources or nonprocurable stock. 

31DLA Disposition Services supports and coordinates the disposal of excess and surplus 

property within DOD. Property not reutilized within DOD is available for transfer to other 

federal agencies or for donation to authorized nonprofit organizations, state governments, 

and local governments. Property not reused, transferred, or donated is either sold to the 

public on a competitive basis or disposed of in an environmentally safe manner. 
 

Page 13 GAO-14-495 Defense Inventory

arrival as economic retention stock, contingency retention stock, or 

potential reutilization stock. (See app. V for an overview of the typical 

causes of on-hand excess inventory.)

DLA has significantly reduced its amount of on-hand inventory by setting 

internal goals for inventory reduction and disposing of nearly $4 billion of 

on-hand inventory; however, DLA disposed of about $855 million in items 

that DLA’s analyses show were more economical to keep due to the 

likelihood of the items needing to be bought again. DLA has also made 

progress in reducing its on-order excess inventory since 2011, but results 

across DLA’s aviation, land, and maritime supply chains have varied, 

including increases in on-order excess inventory in fiscal year 2013 for 

the land and maritime supply chains. In addition, DLA does not routinely 

monitor on-order excess levels and lacks supply chain–specific goals to 

focus the supply chains’ efforts. Finally, DLA has reduced backorders—

part shortages that can affect the readiness of operational units as well as 

delay work at maintenance depots—by nearly 30 percent through 

intensive management practices, such as monthly reviews.

DLA established goals for reducing the amount of its on-hand inventory in 

February 2012 and met its fiscal year 2013 goal in part by disposing of 

more than $4 billion of on-hand inventory; however, DLA disposed of 

about $855 million in items that DLA’s analyses show were more 

economical to keep due to the likelihood of the items needing to be 

bought again. DLA used a risk-based approach to identify inventory to be 

disposed of, resulting, for example, in a reduction of about $660 million of 

inventory for which there had been no demand in over 5 years. 

Furthermore, to meet its end of fiscal year 2014 goal, DLA’s analysis 

shows that it will likely need to reduce, largely through disposals, 

approximately $1.9 billion more in inventory that DLA analyses have 

determined are more economical to keep.

DLA Has Reduced

Its On-Hand Inventory 

and Met Reduction 

Goals, but Disposed 

of Items That May 

Have to Be Bought 

Again and Lacks 

Oversight of Its

On-Order Excess 

Inventory

DLA Has Disposed of 

Significant Amounts of 

Excess Inventory to Meet 

Its Inventory-Reduction 

Goals, but Analyses Show 

That Some Stock May 

Have to Be Bought Again

in the Near Future
 

Page 14 GAO-14-495 Defense Inventory

In February 2012, DLA established a goal of achieving a $6 billion onhand inventory reduction by the end of fiscal year 2017, which meant 

reducing on-hand inventory from $14.2 billion to approximately $8.2 

billion.32 According to DLA headquarters officials, the goal was 

established to reduce warehouse costs for storing inventory and to rightsize DLA’s inventory to prevent cuts to DLA’s working capital fund 

obligation authority.33 In December 2012, DLA accelerated its target date 

for reaching $8.2 billion in on-hand inventory to the end of fiscal year 

2015. In addition, DLA established end of the fiscal year interim goals of 

$11.7 billion and $10.1 billion for 2013 and 2014, respectively. In May 

2013, DLA again accelerated its schedule for reducing on-hand inventory 

to $8.2 billion and achieving a $6 billion reduction in on-hand inventory by 

the end of fiscal year 2014. See table 3 for a timeline of changes to DLA’s 

on-hand inventory goals and schedule.

 

32One of the goals of the Comprehensive Inventory Management Improvement Plan is to 

reduce on-hand excess inventory (also referred to as potential reutilization stock) to 8 

percent of the total value of on-hand inventory by fiscal year 2016. However, DLA’s 

inventory-reduction goals are much broader than reducing on-hand excess inventory. DLA 

is focused on reducing on-hand inventory levels regardless of whether the inventory is 

categorized as on-hand excess inventory, contingency retention stock, economic retention 

stock, or part of the approved acquisition objective. See app. I for a brief overview of the 

Comprehensive Inventory Management Improvement Plan and GAO-12-493 for our 

assessment of the implementation of the plan.

33A working capital fund relies on sales revenue rather than direct appropriations to 

finance its continuing operations and is intended to (1) generate sufficient resources to 

cover the full costs of its operations and (2) operate on a break-even basis over time—that 

is, neither make a gain nor incur a loss. Customers use appropriated funds to finance 

orders placed with the working capital fund, and a working capital fund uses obligational 

authority to procure additional spare parts in advance of a customer placing an order. A 

reduction to obligational authority means that the working capital fund has reduced 

purchase authority resulting in a lower inventory-replenishment rate. 

DLA Goals and Timelines

for Reducing Its On-Hand 

Inventory by $6 Billion Have 

Evolved over Time
 

Page 15 GAO-14-495 Defense Inventory

Table 3: Timeline of Changes to Defense Logistics Agency’s (DLA) On-Hand Inventory Goals and Schedule

Date DLA’s on-hand inventory goal Action taken

February 2012 $8.2 billion by end of fiscal year 2017 DLA establishes goal of a net $6 billion reduction to on-hand inventory 

(from $14.2 billion to $8.2 billion)

December 2012 $11.7 billion by end of fiscal year 2013

$10.1 billion by end of fiscal year 2014

$8.2 billion by end of fiscal year 2015

DLA accelerates the schedule for achieving the net $6 billion reduction to 

fiscal year 2015 and identifies annual goals for fiscal years 2013 and 2014

May 2013 $11.7 billion by end of fiscal year 2013

$8.2 billion by end of fiscal year 2014

DLA accelerates the schedule for achieving the net $6 billion reduction to 

fiscal year 2014

November 2013 $10 billion by end of fiscal year 2014 DLA changes the fiscal year 2014 goal to $10 billion after aviation, land, 

and maritime supply-chain officials demonstrate potential negative effects 

of reducing on-hand inventory to $8.2 billion

Source: GAO analysis of DLA information.

From June through September 2013, aviation, land, and maritime supplychain officials presented analyses to the DLA Director demonstrating the 

potential negative effect—the need to buy inventory again after disposal 

and the decrease in the availability of spare parts to customers—of 

reducing on-hand inventory to $8.2 billion by the end of fiscal year 2014. 

As a result, in October 2013 the DLA Director revised the goal for the end 

of fiscal year 2014 to approximately $10 billion in on-hand inventory, 

thereby slowing the reduction of DLA’s on-hand inventory. According to 

DLA officials, the fiscal year 2014 goal of $10 billion may be changed 

later in fiscal year 2014 if it appears unobtainable without significant rebuy 

risk. Also, future inventory reductions beyond the fiscal year 2014 goal 

will be discussed and analyzed in late fiscal year 2014, according to DLA 

officials.
 

Page 16 GAO-14-495 Defense Inventory

To meet its fiscal year 2013 goal of $11.7 billion on-hand inventory, DLA 

disposed of $4 billion in inventory over fiscal years 2012 and 2013, which 

contributed to a net inventory reduction of more than $2.5 billion.34

Disposing of inventory is the process of reutilizing, transferring, selling, or 

destroying items.35 See figure 2 below for DLA’s on-hand inventory levels 

from March 2012 until the end of fiscal year 2013. In addition, see 

appendix VI for the on-hand inventory levels at the aviation, land, and 

maritime supply chains.

 

34The disposal of $4 billion in on-hand inventory does not translate into a $4 billion 

reduction in total on-hand inventory due to inventory being procured and received to meet 

demands of customers. In other words, DLA’s inventory is not static; the levels of 

inventory for individual items and in aggregate change constantly. For example, DLA is 

simultaneously providing inventory to its military customers, ordering more stock to satisfy 

future requirements, and disposing of inventory no longer needed.

35DLA Disposition Services supports and coordinates the disposal of excess and surplus 

property within DOD. Property not reutilized within DOD is available for transfer to other 

federal agencies or for donation to authorized nonprofit organizations, state governments, 

and local governments. Property not reused, transferred, or donated is either sold to the 

public on a competitive basis or disposed of in an environmentally safe manner. In this 

review, we did not examine the disposal processes and the amount of disposed inventory 

that falls into each category. We have initiated work looking at DOD’s process for 

disposing of excess personal property, including challenges DOD faces in this area and 

DOD’s capacity to manage increases in the amount of excess personal property to be 

processed. We expect to report on this in 2015.

DLA Has Disposed of $4 Billion 

in On-Hand Inventory to Reach 

Its Fiscal Year 2013 Goal
 

Page 17 GAO-14-495 Defense Inventory

Figure 2: Defense Logistics Agency (DLA) Inventory Levels from End of March 2012 

to End of September 2013

a

The breakout of the categories for the September 2014 goal is notional. 

b

Potential reutilization stock is materiel exceeding the approved acquisition objective and not being 

retained as economic or contingency retention stock, and has been identified as excess materiel for 

possible disposal but has potential for reutilization. Potential reutilization stock is also referred to as 

on-hand excess inventory. 

c

Contingency retention stock is materiel that is retained to support specific contingencies, such as to 

support foreign military sales, future military operations, and disaster relief or civil emergencies, or to 

mitigate risk associated with diminishing manufacturing sources or nonprocurable stock. 

d

Economic retention stock is materiel that has been deemed more economical to keep than to discard 

because it is likely to be needed in the future. 

e

Approved acquisition objective includes materiel needed to meet the requirements objective, 2 years 

of estimated future demand, war-reserve materiel held for the services, and materiel held because it 

comes from a diminishing manufacturing source. 

According to DLA headquarters officials, the benefits of reducing on-hand 

inventory are (1) achieving cost-savings by reducing the warehouse 

infrastructure needed to store on-hand inventory and (2) preventing 

reductions to DLA’s working capital fund obligational authority, which 

might reduce supply availability for the military customers. First, according 

to DLA headquarters officials, the inventory reductions have helped DLA 
 

Page 18 GAO-14-495 Defense Inventory

to reduce its warehouse infrastructure and return 6.7 million gross square 

feet of warehouse space to its owner, typically a military service, since 

June 2011.36 However, DLA’s inventory-reduction effort has not focused 

on maximizing warehouse reductions and there is not a direct or 

consistent correlation between the dollar value of inventory and the 

amount of space required to store the inventory. Second, according to 

DLA headquarters officials, the inventory-reduction effort also has 

demonstrated DLA’s commitment to right-sizing its on-hand inventory 

against current operational requirements, which officials believe will 

minimize the likelihood of reductions to DLA’s working capital fund’s 

obligation authority.37

Of the $4 billion in inventory disposed of over fiscal years 2012 and 2013, 

the aviation, land, and maritime supply chains collectively disposed of 

$3.6 billion in inventory. DLA headquarters and aviation, land, and 

maritime supply-chain officials told us they used risk assessments to 

identify inventory for disposal. Generally, DLA headquarters and these 

supply chains prioritized inventory for disposal based on numerous 

A reduction to DLA’s working capital fund obligation 

authority could prevent DLA from procuring parts needed by its 

customers.

 

36According to DLA headquarters officials, approximately 4 million gross square feet of 

this reduction is closely associated with on-hand inventory reduction at two DLA 

distribution centers—San Joaquin, California, and Susquehanna, Pennsylvania, where 

about 66 percent of DLA’s on-hand inventory reduction occurred from June 2012 through 

September 2013. DLA operates 25 distribution centers around the world. Seventeen of the 

centers are in the continental United States while eight of the centers are outside of the 

continental United States. These centers are responsible for the receipt, storage, issue, 

packing, preservation, and transportation of DLA-managed items.

37According to DLA headquarters officials, they are attempting to avoid the readiness 

effects that occurred as a result of the budget reductions during the 1990s. Specifically, 

DLA headquarters officials believe that high on-hand inventory levels were used as 

justification for substantially reducing the materiel replenishment rate of defense working 

capital funds for spare parts during the 1990s. A materiel replenishment rate is the ratio at 

which a working capital fund can replace sold inventory. For example, a ratio of 1.0 would 

allow a working capital fund to replace inventory sold dollar for dollar, whereas a ratio of 

less than 1.0 means for every dollar of inventory sold the working capital fund is 

replenished at a lower rate. According to DLA headquarters officials, during the 1990s its 

authorized replenishment rate allowed DLA to replenish only 50 to 60 percent of its 

inventory sales. This low level of replenishment reduced its ability to purchase inventory 

needed by its customers (i.e., the military services) and created materiel availability and 

readiness issues, according to DLA officials. According to DLA headquarters officials, 

right-sizing on-hand inventory levels achieves the same result—reduction of on-hand 

inventory—by the targeting of unneeded inventory for disposal without the negative effect 

on materiel availability associated with reducing material replenishment rates.
 

Page 19 GAO-14-495 Defense Inventory

variables, such as potential effects on customer service and 

responsiveness, risk of needing to buy the inventory again, and years 

with no demand. For example, the aviation supply chain, in collaboration 

with a private contractor, developed a tool that assesses individual items 

based on a number of factors, such as demand frequency, the criticality 

to particular weapon systems, and procurement characteristics, such as 

long production lead times. The tool prioritizes amounts of inventory for 

each item into categories that allow the aviation supply chain to identify 

the risk level associated with disposal.

DLA headquarters officials and aviation, land, and maritime supply-chain 

officials generally prioritized inventory for disposal in the following 

manner:

• Identified potential reutilization stock and changed potential 

reutilization stock policies: Per DLA’s monthly inventorystratification process, DLA identified inventory categorized as potential 

reutilization stock, which is stock that is no longer needed and has 

been identified for disposal, but has potential for reuse. Additionally, 

DLA changed its policy to decrease the amount of time between when 

an item is procured and is eligible to be categorized as potential 

reutilization stock from 2 years to 1 year in an effort to increase the 

amount of inventory eligible for disposal. Using the standard process 

for identifying potential reutilization stock and the change in policy, the 

aviation, land, and maritime supply chains disposed of $1.4 billion of 

potential reutilization stock in fiscal years 2012 and 2013.

• Changed contingency retention stock policies for weapon 

systems: Prior to the inventory-reduction effort at DLA, the military 

services were allowed to exclude from disposal all inventory 

associated with a particular weapon system that was not needed to 

meet the approved acquisition objective or would not be retained for 

economic reasons.38

 

38The approved acquisition objective is the materiel needed to meet the requirements 

objective and 2 years of estimated future demand. The requirements objective is the 

maximum authorized quantity of stock for an item (for wholesale inventory replenishment), 

which consists of the sum of stock represented by the economic order quantity, the safety 

level, the quantity to cover acquisition lead times, quantities for items with low, infrequent, 

or highly variable demand, and backorders. Materiel retained based on economic reasons 

is referred to as economic retention stock, which is materiel that has been deemed more 

economical to keep than to dispose of because it is likely to be needed in the future.

The inventory that was excluded from disposal 

was retained as contingency retention stock. Based on our previous 
 

Page 20 GAO-14-495 Defense Inventory

work39 and actions associated with the implementation of the 

Comprehensive Inventory Management Improvement Plan,

40

• Changed categorization of inventory items associated with the 

Mine-Resistant Ambush Protected (MRAP) vehicle: Prior to the 

inventory reduction, all items supporting the MRAP were categorized 

as part of the approved acquisition objective. During the inventory 

reduction effort, DLA worked closely with the MRAP program and 

determined that DLA could reduce the amount of inventory supporting 

the program. As a result, the aviation, land, and maritime supply 

chains disposed of approximately $211 million in MRAP-related 

inventory.

DLA, in 

collaboration with the military services, reduced the number of 

excluded weapon systems from 96 in fiscal year 2010 to 17 in fiscal 

year 2013. In addition, DLA imposed constraints on the amount of 

inventory that could be retained as contingency retention stock for the 

excluded weapon systems. As a result, the aviation, land, and 

maritime supply chains were able to dispose of approximately $1.1 

billion in inventory DLA deemed it no longer needed.

• Approved disposal of economic retention stock: As a result of the 

risk assessments conducted, the aviation, land, and maritime supply 

chains disposed of about $855 million inventory categorized as 

economic retention stock—inventory that DLA, through its economic 

analyses, had deemed more economic to keep than to dispose—in 

order to meet the end of the fiscal year 2013 on-hand inventory goal.

 

39See GAO-10-469. We found that contingency retention reviews should focus on 

verifying that the reason for contingency retention still exists and the reason is properly 

recorded. However, since DLA holds contingency retention stock for the military services, 

DLA depends on the services to provide input on which contingency inventory items are 

no longer needed and should be considered for disposal or reutilization. As a result, we 

recommended the Secretary of Defense direct the Secretaries of the Army, the Navy, and 

the Air Force to certify to DLA which items and what quantities of the contingency 

retention stock should be retained, in response to DLA’s requests that they do so, and 

direct the Under Secretary of Defense for Acquisition, Logistics and Technology to provide 

guidance and oversight of this certification process. DOD concurred with the 

recommendation and, at the time of this report, was in the process of taking action to 

implement it. 

40DOD’s Comprehensive Inventory Management Improvement Plan includes a subplan 

focused on improving the management of contingency retention stock. See app. I for a 

brief overview of the Comprehensive Inventory Management Improvement Plan and 

GAO-12-493 for our assessment of the implementation of the plan.
 

Page 21 GAO-14-495 Defense Inventory

Our analysis of inventory data shows that the disposal of inventory at the 

aviation, land, and maritime supply chains considerably reduced (1) the 

value of inventory held above the approved acquisition objective that did 

not have demands in over a year (see fig. 3) and (2) the value of 

inventory held beyond the approved acquisition objective by years of 

supply (see fig. 4). As shown in figure 3, the aviation, land, and maritime 

supply chains collectively reduced from fiscal years 2012 to 2013 the 

value of on-hand inventory above the approved acquisition objective by 

about $950 million for items with 1 to 4 years of no demand, by about 

$460 million for items with 5 to 10 years of no demand, and by about 

$200 million for items with 10 years or more of no demand.41

 

41Items with no recurring demand are items that have not been needed by a customer 

over a specified period. In some cases, there may be justifiable reasons for retaining items 

that have not been needed in many years. For example, these items may be categorized 

and retained as part of the approved acquisition objective, economic retention stock, or 

contingency retention stock. The Comprehensive Inventory Management Improvement 

Plan has a subplan focused on reducing the amount of inventory that is being held with a 

history of no recurring demand across the department. The Office of the Deputy Assistant 

Secretary of Defense for Supply Chain Integration tracks the inventory value by number of 

years of no demand, the value of inventory with 5 or more years of no demand by each 

category, and the value of no demand stock retained and disposed. See app. I for a brief 

overview of the Comprehensive Inventory Management Improvement Plan and 

GAO-12-493 for our assessment of the implementation of the plan, including actions 

regarding items with no recurring demand.
 

Page 22 GAO-14-495 Defense Inventory

Figure 3: Value of Inventory Items with Years of No Demand Held by the Defense 

Logistics Agency’s (DLA) Aviation, Land, and Maritime Supply Chains at the End of 

Fiscal Years 2012 and 2013

In addition, DLA has reduced inventory with over 2 years of projected 

supply and substantially reduced inventory with over 10 years of 

projected supply. A comparison of the supply data for fiscal year 2013 

against fiscal year 2012 shows considerable progress in the reduction of 

on-hand inventory by years of supply. As shown in figure 4, about $164 

million of the inventory beyond the approved acquisition objective in fiscal 

year 2013 would supply up to 2 additional years of forecasted demand, 

about $514 million of parts would meet more than 2 and up to 10 years of 

forecasted demand, and about $564 million of parts would meet 

forecasted demand for over 10 years.
 

Page 23 GAO-14-495 Defense Inventory

Figure 4: Value of the Defense Logistics Agency’s (DLA) Aviation, Land, and 

Maritime Supply Chain Inventory beyond the Approved Acquisition Objective by 

Projected Years of Supply, End of Fiscal Years 2009-2013

a

End of fiscal year 2009 inventory data were not available, so we used November 2009 data. 

To meet DLA’s goal of having $11.7 billion in on-hand inventory at the 

end of fiscal year 2013, the aviation, land, and maritime supply chains 

disposed of $855 million of inventory in fiscal year 2013 that was 

categorized as economic retention stock—items that were determined to 

be more economical to keep than to dispose of according to DLA’s 

economic analyses. Further, in order to meet its goal of $10 billion in onhand inventory by the end of fiscal year 2014, DLA’s analysis shows that 

it will likely have to reduce, largely through disposals, all its inventory 

categorized as retention stock, worth about $3.3 billion, which will include 

all of its economic retention stock, contingency retention stock, and 

DLA Has Disposed of 

Inventory That May Have to

Be Bought Again and Projects 

It Will Likely Dispose of Similar 

Stock to Meet Future Goals
 

Page 24 GAO-14-495 Defense Inventory

potential reutilization stock. 42

DOD guidance states that inventory items for which there is no 

requirement should be disposed of unless economic or contingency 

reasons support their retention.

Of this $3.3 billion in inventory, DLA 

projects, based on January 2014 inventory data, that it would need to 

reduce, largely through disposals, approximately $1.9 billion in economic 

retention stock across all of its supply chains. Specifically, the aviation 

supply chain would need to reduce about $757 million, the land supply 

chain about $452 million, the maritime supply chain about $186 million, 

and DLA’s other supply chains about $476 million.

43 Furthermore, DOD guidance states that 

the decision to retain economic retention stock must be based on an 

economic analysis that balances the likelihood the item will need to be 

bought again with the cost of retention and disposal of the item.44 Lastly, 

Standards for Internal Control in the Federal Government45 and leading 

practices for results-oriented management emphasize the importance of 

reviewing and validating performance measures to ensure these 

measures remain appropriate.46

 

42As of January 2014, DLA held about $12.0 billion of non-energy inventory and 

approximately $3.3 billion of this inventory was being retained as retention stock—

economic and contingency—or was categorized as potential reutilization stock. DLA also 

projects that it will receive about $1.3 billion in new inventory over the remainder of fiscal 

year 2014. Thus, DLA will need to reduce, largely through disposal, all $3.3 billion of 

retention stock to achieve its end of the fiscal year 2014 on-hand inventory goal of $10.0 

billion. 

43DOD Instruction 4140.01, Supply Chain Materiel Management Policy (December 2011). 

The contingencies include, but are not limited to, supporting foreign military sales, future 

military operations, disaster relief or civil emergencies, or mitigating risk associated with 

diminished manufacturing sources or nonprocurable stock.

44DOD Manual 4140.01, Volume 6, DOD Supply Chain Materiel Management Procedures: 

Materiel Returns, Retention, and Disposition. 

45GAO, Auditing and Financial Management: Standards for Internal Control in the Federal 

Government, GAO/AIMD-00-21.3.1 (November 1999).

46See GAO, Results-Oriented Management: Strengthening Key Practices at FEMA and 

Interior Could Promote Greater Use of Performance Information, GAO-09-676

(Washington, D.C.: Aug. 17, 2009); International Food Assistance: USAID Is Taking 

Actions to Improve Monitoring and Evaluation of Nonemergency Food Aid, but 

Weaknesses in Planning Could Impede Efforts, GAO-09-980 (Washington, D.C.: Sept. 28, 

2009); and GAO-05-927. 
 

Page 25 GAO-14-495 Defense Inventory

DLA’s economic retention analyses have been extensively researched 

and recently updated. In 2008, DLA commissioned LMI47 to develop a 

mathematical methodology to meet all of DOD’s guidance for establishing 

economic retention limits, incorporate the best techniques from prior 

economic retention studies,48 and be fully implemented within DLA’s 

enterprise resource-planning system.49 In 2009, DLA implemented LMI’s 

methodology to determine its economic retention limits for items with a 

reasonably predictable demand rate.50 Using this methodology, DLA 

determines the amount of economic retention stock that should be 

retained by establishing economic retention limits—the maximum amount 

of an item’s inventory that can be retained according to an economic 

justification.51 The economic retention limits are developed through 

analyses that consider a number of variables, such as the cost of holding 

an item, the potential long-term demand for the items, potential rebuy 

costs, and items essential to the operation of a weapon system. In 2011, 

as part of the implementation of the Comprehensive Inventory 

Management Improvement Plan, DLA reevaluated its economic retention 

methodology in collaboration with the military services and the Office of 

the Deputy Assistant Secretary of Defense for Supply Chain Integration.52

 

47LMI is a private, not-for-profit corporation that provides management consulting, 

research, and analysis to governments and other nonprofit organizations across a range 

of public policy issues.

In 2012 and 2013, DLA updated its methodology to account for changes 

in methods being used to manage its items as well as to update several 

48LMI, Economic Retention in the Department of Defense: A Risk Perspective (July 2007) 

and Economic Retention within the Department of Defense (December 2003).

49An enterprise resource-planning system is an automated information system using 

commercial off-the-shelf software and consisting of multiple, integrated functional modules 

that perform a variety of business-related tasks such as accounting; inventory forecasting, 

purchasing, management, and distribution; and scheduling work. DLA’s enterprise 

resource-planning system is called the Enterprise Business System. 

50LMI, Mathematical Methodology for Retention Levels at the Defense Logistics Agency

(April 2009). 

51DLA’s mathematical methodology computes economic retention by logical commodity 

groups while relying on characteristics of individual items. Consequently, items within the 

same group may have different quantities of economic retention, even though the same 

mathematical formula computes those quantities.

52See app. I for a brief overview of the Comprehensive Inventory Management 

Improvement Plan and GAO-12-493 for our assessment of the implementation of the plan. 
 

Page 26 GAO-14-495 Defense Inventory

cost factors, such as increasing the cost of storage, that are used in the 

analyses to determine the economic retention limits.

In 2012, DLA conducted a simulation that identified a large potential risk 

of needing to buy inventory again in the future due to disposing of all of its 

economic retention stock. The simulation showed that if DLA had 

disposed of its economic retention stock—worth about $2 billion—in 

2006, it would have bought 42 percent—or $850 million—of the dollar 

value of the disposed items again over the next 5 years. According to a 

2007 LMI study on economic retention of inventory within DOD, the risk of 

buying inventory again after disposal is high enough that buying inventory 

again should be viewed as a probability rather than a possibility, and the 

retain-or-dispose decision should be thought of in terms of planning for 

repurchasing. Furthermore, the study concluded that the savings from 

reduced inventory levels (i.e., holding less economic retention stock) do 

not offset the costs associated with having to buy inventory again. While 

the risk of buying inventory again varies among the components as well 

as among item groups across DLA and the military services, the study 

stated that economic retention limits, in general, should be set for at least 

20 years of demand for most items.

Even though DLA’s analyses have identified a significant rebuy risk from 

disposing of its economic retention stock, DLA disposed of $855 million in 

economic retention stock in fiscal year 2013 in order to meet its inventoryreduction goals. According to DLA officials, the inventory reduction goals 

were meant originally to be “stretch” goals, but the accelerated schedule 

for achieving the goals resulted in the need to dispose of inventory rather 

than allowing it to be potentially consumed or become eligible for disposal 

when there was no longer an economic justification to retain the stock. 

DLA evaluated the option of disposing of $855 million in economic 

retention stock, and the DLA Director stated that in order to reduce DLA’s 

on-hand inventory he was willing to accept the risk of potentially having to 

buy previously disposed of inventory again. Furthermore, DLA’s analysis 

shows that to meet the end of the 2014 fiscal year on-hand inventory goal 

of approximately $10 billion, DLA will likely need to reduce, largely 

through disposal, most, if not all, of its economic retention stock—valued 

at approximately $2 billion. We recognize that the DLA Director must 

balance the costs of holding and storing inventory that may not be 

needed in the short-term with the costs of potentially having to buy 

inventory again in the long term if it is disposed of. However, DLA’s own 

analyses show that the savings from disposing of economic retention 

stock do not outweigh the likely rebuy costs over the long-term. Without 

reassessing its inventory-reduction goals and timelines in light of its own 
 

Page 27 GAO-14-495 Defense Inventory

analysis of economic retention stock, DLA risks having to buy hundreds of 

millions of dollars in inventory again, and incurring higher costs to do so, 

in order to meet customer demand and continue to support the readiness 

of the military services.

Based on end of the 2011 through 2013 fiscal year data, DLA has 

reduced its organization-wide percentage of on-order excess inventory 

since 2011. However, performance in reducing on-order excess inventory 

varies across the aviation, land, and maritime supply chains. In addition, 

DLA does not routinely monitor on-order excess levels and lacks supply 

chain–specific goals to focus the supply chains’ efforts and establish 

accountability for helping to achieve DLA’s and DOD’s overall goals for 

reducing on-order excess inventory.

Since DOD began implementing the Comprehensive Inventory 

Management Improvement Plan, DLA has reduced its organization-wide 

amount of on-order excess inventory from 6.7 percent of the total value of 

on-order inventory in 2011 to 5.6 percent at the end of 2013.53 These 

percentages are calculated based on end of the fiscal year inventory 

data. The Office of the Deputy Assistant Secretary of Defense for Supply 

Chain Integration uses inventory data from September of each year to 

review DLA’s and the services’ on-order excess inventory performance 

against DOD’s goal of having less than 6 percent on-order excess 

inventory at the end of fiscal year 2014 and less than 4 percent on-order 

excess inventory at the end of fiscal year 2016. The Office of the Deputy 

Assistant Secretary of Defense for Supply Chain Integration reports the 

department-wide percentage of on-order excess inventory, as of the end 

of September each year, to the DOD Deputy Chief Management Officer 

to be included in DOD’s Annual Performance Plan as a key performance 

measure for logistics and acquisition.54

 

53See app. I for a brief overview of the Comprehensive Inventory Management 

Improvement Plan and 

Additionally, the Office of the 

Deputy Assistant Secretary of Defense for Supply Chain Integration 

GAO-12-493 for our assessment of the implementation of the plan.

54DOD also has included the department-wide percentage of on-order excess inventory as 

a key measure in the department’s Strategic Management Plan for Fiscal Years 2014-

2015. 

DLA Has Reduced

On-Order Excess 

Inventory, but SupplyChain Performance

Varies and DLA Lacks 

Management Oversight

of Its On-Order Excess 

Inventory Processes

DLA Has Reduced Its 

Aggregate On-Order Excess 

Inventory, but Supply-Chain 

Performance in Reducing 

On-Order Excess Inventory 

Has Varied
 

Page 28 GAO-14-495 Defense Inventory

reviews the percentage of on-order excess inventory as of the end of 

March each year as well.

At the end of fiscal year 2013, DLA’s reported amount of on-order excess 

inventory was below DOD’s interim goal of having 6 percent or less of onorder excess inventory at the end of fiscal year 2014.55

 

55Although end of fiscal year 2013 data show that DLA is under the goal, inventory levels 

fluctuate and it will not be clear whether DLA actually achieves the goal until end of 2014 

data are reported.

However, the 

performance of the aviation, land, and maritime supply chains varies 

considerably. For example, the aviation supply chain reduced its level of 

on-order excess from 10 percent at the end of fiscal year 2011 to 6.5 

percent at the end of fiscal year 2013. On the other hand, the land supply 

chain experienced an increase from 4.2 percent at the end of fiscal year 

2011 to 5.2 percent at the end of fiscal year 2013. Furthermore, the 

maritime supply chain experienced an increase in the percentage of onorder excess inventory from 3.7 percent at the end of fiscal year 2012 to 

4.3 percent at the end of fiscal year 2013. See figure 5 for DLA’s on-order 

excess inventory percentages for the end of fiscal years 2011-2013. See 

appendix VII for the total value of on-order inventory and on-order excess 

inventory for fiscal years 2011 through 2013.
 

Page 29 GAO-14-495 Defense Inventory

Figure 5: The Defense Logistics Agency’s (DLA) On-Order Excess Inventory 

Percentages, End of Fiscal Years 2011-2013

While DLA’s organization-wide percentage of on-order excess inventory 

has decreased since fiscal year 2011, DLA senior management’s 

oversight of its on-order excess inventory can be strengthened. 

Standards for Internal Control in the Federal Government56 and leading 

practices of federal agencies for results-oriented management57

While the supply chains managed by DLA have processes established to 

monitor and reduce on-order excess inventory, senior managers at DLA 

headquarters do not regularly monitor performance of these processes. 

For example, DLA headquarters senior management also does not 

regularly review on-order excess inventory performance at DLA’s monthly 

performance management meetings as it does with numerous other 

emphasize the importance of reviewing performance measures at the 

functional or activity level and linking the goals of component 

organizations to departmental strategic goals.

 

56 GAO/AIMD-00-21.3.1. 

57See GAO-13-228, GAO-05-927, and GAO/GGD/AIMD-99-69. 

DLA Lacks Oversight of Its 

On-Order Excess Inventory 

Processes and Supply 

Chain–Specific Goals
 

Page 30 GAO-14-495 Defense Inventory

performance metrics, such as backorders and materiel availability, even 

though reducing on-order excess inventory is a key DOD goal to measure 

inventory-management improvement efforts.58

In addition, DLA has not consistently tracked and reported data to 

thoroughly measure its efforts to reduce on-order excess inventory. While 

it tracks the percentage of on-order excess inventory by each supply 

chain, DLA has not systemically and consistently tracked the amount of 

on-order excess inventory that is reviewed by supply planners for 

cancellation or modification, the amount that is cancelled or modified, and 

the reasons for not cancelling or modifying an on-order excess contract. 

Some of these data were manually collected in the past, but DLA officials 

told us that the effort to collect this type of data was halted after mid-2011 

due to the need to refocus personnel on other inventory efforts. In late 

2013, DLA began implementing a new automated report that will allow it 

to collect extensive data on its on-order excess inventory-management 

process, such as reasons for not modifying or canceling on-order excess 

inventory. However, DLA headquarters officials told us that management 

has not yet decided how it will use the information generated by the report 

to monitor performance and make necessary improvements to reduce onorder excess inventory.

DLA officials said that in 

establishing the key metrics for senior management review in late 2011 

and early 2012, the DLA Director decided to focus on material availability, 

backorders, and the administrative workload associated with procuring 

inventory and that on-order excess inventory metrics was not included as 

a metric for regular review.

Finally, DLA senior management has not established goals for each of its 

supply chains for reducing on-order excess inventory since late 2011, 

although DLA has established supply chain–specific goals for numerous 

other areas, such as backorders, materiel availability, and the percentage 

of items procured through long-term contracts. According to DLA 

headquarters and supply-chain officials, supply chain–specific goals in 

these other areas have helped to focus improvement efforts and improve 

performance. Specifically, DLA headquarters and supply-chain officials 

 

58DLA holds several performance-management meetings to review a suite of metrics that 

address a wide spectrum of DLA’s operations and cover a number of metric areas, such 

as customer service, cost, and internal efficiency. However, DLA headquarters senior 

management does not regularly review metrics associated with on-order excess inventory. 

See app. II for an overview of DLA’s performance metrics framework.
 

Page 31 GAO-14-495 Defense Inventory

emphasized that supply chain–specific goals that are reviewed 

consistently by DLA senior management through regular performance 

briefings increase accountability throughout the chain of command. 

However, DLA management did not establish on-order excess inventory 

goals for each supply chain because this was not a management priority 

at the time, according to DLA officials. Additionally, supply chain–specific 

goals could take into account any expected variance in performance on 

reducing the percentage of on-order excess inventory, as do DLA’s 

already-established supply chain–specific goals.

Since DLA is not monitoring performance regularly, is not consistently 

tracking and reporting performance data, and has not established onorder excess inventory goals to guide improvement at the individual 

supply chains, DLA is not in the best position to maximize its reduction of 

on-order excess inventory. Focusing on preventing on-order excess 

inventory can assist in reducing on-hand excess inventory as well as 

prevent the increase in on-hand inventory levels, both of which are key 

goals at DLA. Strengthening its management of on-order excess 

inventory could better position DLA to invest only in inventory that meets 

the needs of the department at the time of its procurement.

Since fiscal year 2010, DLA has made progress reducing backorders—

part shortages that can affect the readiness of operational units as well as 

delay work at maintenance depots—through intensive management 

practices, such as monthly reviews of backorders. It is DOD policy that 

DOD supply-chain management organizations, such as DLA, be 

responsive to customer requirements.59

 

59DOD Instruction 4140.01, DOD Supply Chain Materiel Management Policy. 

DLA maintains its 

responsiveness to customer requirements in part by monitoring and 

mitigating its backorders. GAO’s analysis of DLA data shows that the 

value of backorders has decreased by about $700 million overall from 

$2.1 billion at the end of fiscal year 2010 to about $1.4 billion at the end of 

fiscal year 2013. As part of this total amount, the aviation, land, and 

maritime supply chains have collectively reduced their backorders by 

about $136 million from about $1.0 billion in fiscal years 2010 and 2011 to 

$864 million in fiscal year 2013, just over the level of 2009. The remaining 

$564 million in reductions came from other DLA supply chains. Figure 6 

DLA Has Reduced the 

Value and Number of 

Backorders since 

Fiscal Year 2010
 

Page 32 GAO-14-495 Defense Inventory

identifies the respective values of backorders for the aviation, land, and 

maritime supply chains.

Figure 6: Value of Defense Logistics Agency (DLA) Backorders, End of Fiscal Years 

2009-2013

a

End of the fiscal year 2009 inventory data were not available, so we used November 2009 data. 

DLA has established supply chain–specific goals for reducing the number 

of backorders to make improvements in the availability of materiel to its 

customers. According to DLA headquarters officials, DLA senior 

management developed the backorder goals based on an assessment 

that there were too many backorders and action needed to be taken to 

reduce them. Thus, the DLA Director issued guidance establishing the 

backorder goals. Specifically, using January 2012 figures as a baseline, 

DLA established a goal of reducing the number of backorders by 25 

percent by the end of fiscal year 2013. Furthermore, DLA established a 

goal to limit the number of aged backorders—backorders that have 

existed for longer than 180 days—by 15 percent of its total number of 

backorders in January 2012. These are overall goals for DLA, but each 

supply chain also was held accountable to achieve the same percentage 

reductions in the number of backorders and aged backorders based on 

the January 2012 baseline. For example, the aviation supply chain end of 

fiscal year 2013 goal was to have fewer than about 103,000 backorders 

and fewer than 21,000 aged backorders in any given month. As of the 
 

Page 33 GAO-14-495 Defense Inventory

end of fiscal year 2013, the aviation supply chain had reduced the total 

number of its backorders and aged backorders during the previous 6 

months, but had not yet met its goals. On the other hand, the land supply 

chain individually met the goal for the number of backorders and aged 

backorders, though the maritime supply chain has not. Table 4 shows the 

specific backorder data by supply chain through September 2013.

Table 4: Total Backorders and Aged Backorders versus Command Goals as of September 2013

Supply 

chain

Total 

backorders

Goal 

for total 

backorders

Met goal 

for total 

backorders

Aged

backorders

Goal 

for aged 

backorders

Met goal

for aged 

backorders

Aviation 112,449 102,262 No 38,222 20,452 No

Land 47,706 51,932 Yes 9,537 10,387 Yes

Maritime 53,891 53,721 No 14,761 10,744 No

Source: GAO analysis of Defense Logistics Agency (DLA) data.

While only one of the three supply chains above has met both of their 

goals, DLA has reduced the value and number of backorders through 

intensive management oversight. Senior DLA management, such as the 

DLA Director and Vice Director, and the senior management of the 

aviation, land, and maritime supply chains regularly review progress 

made in reducing backorders. The DLA Director reviews backorder 

metrics on a quarterly basis while other senior DLA managers review 

backorders monthly. Additionally, DLA’s logistics operations directorate 

holds a monthly meeting, which is focused on understanding and 

addressing key backorder drivers across the enterprise. Senior managers 

at the supply chains are also briefed monthly on the status of efforts to 

reduce backorders.

Finally, the DLA Director has challenged the supply chains to reduce the 

number of backorders by 25 percent from the backorder levels reported in 

September 2013. Additionally, the DLA Director established a new goal to 

limit the number of aged backorders by 15 percent of its total number of 

backorders in September 2013 and have no aged backorders over 3 

years old.
 

Page 34 GAO-14-495 Defense Inventory

DLA is implementing a number of efforts aimed at reducing excess 

inventory and backorders; however, DLA has not established return-oninvestment metrics and does not hold regular performance-management 

reviews to monitor and evaluate the performance of its collaborative 

forecasting effort. Collaborative forecasting allows DLA and the military 

services to work together with the intent of developing more-accurate 

demand forecasts for items. However, DLA has not used a

comprehensive approach to managing, evaluating, and improving the 

performance of collaborative forecasting. DLA’s other efforts—(1) 

implementing new methods to determine inventory levels for items with 

low or highly variable demand; (2) improving acquisition lead time 

accuracy and reducing acquisition lead times; and (3) improving the 

efficiency of supply, storage, and distribution processes—are in the early 

stages of implementation, and more time is needed to determine their 

effect. See appendix VIII for an overview of these three improvement 

efforts.

Since 2005, DLA, the Navy, and the Air Force have expanded 

collaborative forecasting to additional participating sites, and DLA and the 

Army are evaluating whether to use it to improve materiel support to the 

Army’s industrial depots.60

As of February 2014, Navy and Air Force participating locations submitted 

collaborative forecasts for about 25,000 items at an annual forecasted 

value of about $730 million.

Through collaborative forecasting, DLA works 

with customers on selected items to evaluate historical demand data and 

tailor forecast plans. Participating customers select items for the program 

that they anticipate would benefit from collaborating with DLA on the 

development of a forecast rather than DLA solely relying on historical 

demand patterns to establish a forecast. For example, an item may be 

selected because requirements are expected to fluctuate.

61

 

60When we use the term “collaborative forecasting” we are referring specifically to the 

demand data exchange program operated by DLA. There are other types of collaborative 

forecasting that are used by DLA and the services, such as special program requirements. 

Special program requirements are nonrepetitive requirements for spare parts that cannot 

be forecast based on demand data and are submitted to DLA by the military services. 

61According to DLA, using historical demand to predict the annual forecast for these items 

rather than using customer input through collaborative forecasting would have resulted in 

an annual forecast value of about $378 million versus $730 million.

DLA Is Implementing 

Efforts to Improve 

Inventory 

Management but 

Can Strengthen 

Collaborative 

Forecasting

DLA and the Military 

Services Have Expanded 

the Use of Collaborative 

Forecasting
 

Page 35 GAO-14-495 Defense Inventory

In addition, DLA and the Army are currently analyzing the potential use of 

collaborative forecasting for tens of thousands of items by evaluating the 

Army collaborative forecast submissions in late 2013. However, at the 

time of our review, DLA had not made a final decision on whether to use 

collaborative forecasting with the Army after a preliminary analysis 

showed that it would require DLA to procure hundreds of millions of 

dollars in new stock and would increase the annual demand forecast for 

the participating locations by tens of millions of dollars.

DOD’s Comprehensive Inventory Management Improvement Plan is 

focused, in part, on the improvement of demand forecast accuracy 

through expanding and refining its collaborative forecasting processes.62

According to DLA officials, collaborative forecasting should improve 

forecast accuracy by incorporating the customer’s understanding of its 

future spare-part requirements, which theoretically should be more 

accurate than a forecast generated by DLA’s enterprise resourceplanning system that is based on historical demand trends.63

The actual performance of forecasts developed using collaborative 

forecasting has fallen short of expectations. DLA measures the 

performance of collaborative forecasts by evaluating improvements to 

demand forecasting accuracy and error, and its analysis shows that 

collaborative forecasts are less accurate and increase the error of the 

demand forecast when results are aggregated across all participating 

locations. While collaborative forecasts may be more accurate for some 

particular items, the process has not improved the aggregate accuracy of 

forecasts for the selected items when compared to the forecasts that 

Improving 

demand forecasting accuracy could improve the ability of DLA to meet 

military customer requirements in a financially prudent manner without 

accumulating unnecessary excess inventory or backorders for spare 

parts.

 

62See app. I for a brief overview of the Comprehensive Inventory Management 

Improvement Plan and GAO-12-493 for our assessment of the implementation of the plan.

63If collaborative forecasting is not used to determine the amount of an item needed at a 

specified time, then DLA uses a number of other approaches to determine the amount of 

inventory needed. For items that are forecastable—items with regular and frequent 

demand patterns—DLA uses a mature enterprise resource-planning system as its 

demand forecasting solution. This approach relies on historical demand to project future 

needs. See app. IX for an overview of DLA’s approaches to planning amounts of needed 

inventory.

DLA’s Analysis Shows 

That Collaborative 

Forecasting Is Less 

Accurate than DLA’s 

Forecasts Based on 

Historical Demand
 

Page 36 GAO-14-495 Defense Inventory

would have been generated by DLA’s enterprise resource-planning 

system using historical demand.

DLA and the participating military services measure the performance of 

collaborative forecasting in two ways. First, DLA compares the 

collaborative forecast against actual demands. Using the result of this 

comparison, DLA and the customer can evaluate the collaborative 

forecast submitted by the customer and make necessary adjustments to 

improve its accuracy. Second, DLA compares the collaborative forecast 

against the forecast that would have been generated by DLA’s enterprise 

resource-planning system using historical demand.64 DLA and the 

customer can use this comparison to determine if the collaborative 

forecast is improving forecasting accuracy and error.65

To make these comparisons, DLA uses three metrics—demand plan 

accuracy, absolute percent forecast error, and net percent forecast error. 

See table 5 for a brief overview of DLA’s forecast accuracy and error 

metrics. Each metric provides a different type of information for assessing

demand forecasts.

 

64Currently, this comparison for collaborative forecasts is made based on assessing the 

forecasted demand that was projected 1 month in advance. Ideally this comparison would 

be made by assessing the forecasted demand one lead time in advance; however, DLA 

does not currently maintain the necessary data to make this assessment. DLA’s average 

lead time for an item is approximately 6 months. At the end of January 2012, DLA staff 

developed a system change request to make improvements in how these data are 

collected and managed; according to DLA officials, the change is not yet implemented in 

the DLA enterprise resource-planning system.

65As part of the Comprehensive Inventory Management Improvement Plan, the Office of 

the Deputy Assistant Secretary of Defense for Supply Chain Integration commissioned a 

study on forecasting across the department that concluded in part that DLA and the 

military services should use forecast value-add metrics to establish controls around the 

proper use of collaborative forecasting. A forecast value-add metric, such as the one 

discussed here, measures the added benefit of collaborative forecasting against a 

traditionally determined forecast using historical demand. The study noted that such a 

metric would add transparency to the forecast creation cycle and provide the capability to 

identify processes that do not add value to the forecasting process. 
 

Page 37 GAO-14-495 Defense Inventory

Table 5: Defense Logistics Agency’s (DLA) Forecast Accuracy and Error Metrics 

Metric Information provided by metric Level of analysis

Demand plan accuracy Accuracy of the forecasted demand against actual demands over any 

given number of months, with a range from 0 to 100 percent, with 100 

percent reflecting perfect accuracy.

Individual items or aggregate 

across multiple items

Absolute percent 

forecast error

Magnitude of the forecasting error over any given number of months, 

with 0 percent reflecting no error. This metric is dollar weighted, thus the 

error assists in understanding effects on business outcomes.

Individual items or aggregate 

across multiple items

Net percent forecast 

error

Direction—over (+) or under (-)—and magnitude of the forecasting error 

over any given number of months, with 0 percent reflecting no error. 

This metric is dollar weighted, thus the error assists in understanding 

effects on business outcomes. 

Individual items

Source: GAO analysis of DLA information.

Aggregately for all Navy and Air Force participating sites from September 

2011 to December 2013, DLA’s analysis shows that demand plan 

accuracy for the collaborative forecasts is about 7.0 percentage points 

less accurate on average per month than the forecast that would have 

been generated by DLA’s enterprise resource-planning system. 

Additionally, the same DLA analysis shows that absolute percent forecast 

error is approximately 120 percentage points higher on average per 

month for collaborative forecasts than for the forecast that would have 

been generated by DLA’s enterprise resource-planning system.66

Implementation of a new collaborative forecasting process, referred to as 

gross demand planning, has improved demand plan accuracy and 

outperformed DLA’s enterprise resource-planning system at one Navy 

site over the last several months of 2013 and early 2014. DLA developed 

the gross demand plan process as a solution to improve customer 

Furthermore, DLA reported that during fiscal year 2012 the demand 

forecast accuracy improved for only 37 percent of the items using a 

collaborative forecast. The procurement of inventory for these 37 percent 

of items was valued at $218 million, which was slightly less than one-third 

of the total value—$702 million—of inventory procured through a 

collaborative forecasting approach. Thus, collaborative forecasting did not 

improve, or resulted in less-accurate forecasts, for 63 percent of the 

items, valued at $483 million.

 

66Absolute percent error forecast is weighted by dollar value of the forecast. 
 

Page 38 GAO-14-495 Defense Inventory

collaboration, such as improving collaborative planning approaches for 

low-demand items. According to DLA officials, as implementation moves 

forward with other Navy sites, they are evaluating the option of using 

gross demand planning with the Army and Air Force.

Outside of measuring for improvements to demand forecasting accuracy 

and error, DLA does not regularly use other performance metrics or have 

regular performance-management meetings to guide improvement. 

Specifically, DLA does not regularly use performance metrics, such as 

costs or return on investment, to evaluate the performance of 

collaborative forecasting across the enterprise. DOD guidance requires 

DLA to adopt metrics that evaluate the performance and cost of supplychain activities, including monitoring the efficient use of resources and 

assessing costs versus benefits of supply-chain operations.67

Furthermore, DOD guidance requires DLA to establish internal controls, 

such as performance measures, to ensure investment in inventory 

resulting from collaborative forecasting does not lead to excessive growth 

in inventory.68

Additionally, DLA has not used a comprehensive approach to managing, 

evaluating, and improving the performance of collaborative forecasting. In 

our prior work examining leading practices in results-oriented 

management, we found that leading organizations use performance 

information to monitor and evaluate program performance through 

frequent, regular performance-review meetings to discuss progress made 

toward the achievement of results, identify performance problems, and 

develop performance-improvement plans to achieve program goals.69

 

67DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel Management 

Procedures: Metrics and Inventory Stratification Reporting. 

DLA does not regularly evaluate the results of collaborative forecasting 

across the enterprise through its performance-management meetings. 

Prior to February 2013, DLA headquarters held performance meetings 

with the individuals responsible for collaborative forecasting programs at 

the supply chains, but these meetings were suspended to redirect 

68DOD Manual 4140.01, Volume 2, DOD Supply Chain Materiel Management Procedures: 

Demand and Supply Planning. 

69See GAO-13-228, GAO-05-927, and Government Operations: Internal Control 

Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001). 

DLA Lacks 

Comprehensive Metrics 

and Regular PerformanceManagement Meetings to 

Guide Improvement
 

Page 39 GAO-14-495 Defense Inventory

resources to implementing collaborative forecasting with the Army and 

the gross demand planning process with the Navy. DLA officials have 

noted that they intend to begin holding regular performance meetings in 

the near future on collaborative forecasting to ensure collaboration across 

supply chains as well as to monitor performance comprehensively. While 

DLA has some information available, such as the lack of improvements 

made to demand forecasting accuracy by the program, it has not 

developed efforts to improve collaborative forecasting across the 

enterprise. Officials told us that there are ongoing discussions about 

expanding gross demand planning to the Air Force and Army, but there 

are no official plans to guide and monitor this improvement effort. Also, 

officials stated that they intend to address other improvement efforts, 

such as automating and expanding across the enterprise a collaboration 

scorecard used with the Marine Corps’ depots to provide period 

performance updates on the accuracy of collaborative forecasts. 

However, without regular performance-management meetings on 

collaborative forecasting, it will be difficult for these efforts to achieve their 

potential and improve performance.

DLA currently projects that it will procure approximately $730 million in 

inventory using collaborative forecasts from March 2014 to March 2015 

and could potentially need to procure hundreds of millions of dollars of 

additional inventory as a result of collaborative forecasting with the Army, 

based on its preliminary analysis. This is a significant investment of 

resources, but DLA does not have a suite of metrics and regular 

performance-management meetings for its collaborative forecasting 

program to comprehensively evaluate results and make improvements. 

Furthermore, as noted above, DLA’s analysis indicates that collaborative 

forecasts do not improve demand forecasting accuracy and error in the 

aggregate. Improving demand forecasting accuracy and error could 

directly improve the ability of DLA to meet military customer requirements 

in a financially prudent manner without accumulating unnecessary excess 

inventory or backorders for spare parts. Without a suite of metrics to 

evaluate the program and regular performance-management meetings 

that help it to develop and implement the necessary steps to monitor and 

improve the program’s results, it will be difficult for DLA and the military 

services to know whether the program is improving supply-chain 

management performance, providing an adequate return on its 

investments, and taking the necessary corrective actions to improve 

results.
 

Page 40 GAO-14-495 Defense Inventory

Effective and efficient management of DOD’s inventory is critical to 

supporting the readiness of the force, and requires a balanced approach. 

To be effective as a key supply-chain organization that manages billions 

of dollars in inventory, DLA must have the correct amount of spare parts 

on hand at the correct time to support the fighting force, but it must also 

manage its inventory efficiently to avoid the unnecessary and wasteful 

accumulation of secondary inventory that could divert resources away 

from defense priorities. While DLA has made progress reducing on-hand 

inventory that it can no longer justify retaining, such as contingency 

retention stock, and making other improvements to its inventorymanagement efforts, DLA has a number of issues that are hindering 

progress toward achieving a balanced approach. First, without 

reassessing its goals and schedule for reducing on-hand inventory in 

accordance with its economic retention analyses, DLA’s attempt to meet 

its fiscal year 2014 goal could again result in the disposal of inventory that 

should have been retained due to its likelihood of being bought again. 

Second, maintaining progress toward goals is often aided by ongoing 

management attention to relevant performance measures and oversight 

of processes. Ensuring progress in reducing on-order excess inventory 

will require high-level attention within DLA, and without regular review at 

senior management meetings, performance monitoring through DLA’s 

new automated reporting system, and supply chain–specific goals and 

related metrics, DLA leadership will have limited insight into what areas 

are in need of further focus and effort. Third, although DLA has taken 

some steps intended to improve demand forecasting, its collaborative 

forecasting effort has not yet resulted in better performance than DLA’s 

traditional forecasting methods. Without metrics that evaluate multiple 

aspects of performance, such as costs and accuracy, and a moreintensive management approach, such as regular performancemanagement meetings, it is unclear whether DLA will be able to improve 

its collaborative forecasting effort and aggregate forecasting accuracy.

Without changes to the measurement and oversight of DLA’s efforts to 

reduce excess inventory and improve its forecasting, DOD will continue to 

face challenges in assuring that it can meet the inventory needs of the 

warfighters in an efficient and cost-effective manner. At a time when DOD 

can reasonably anticipate ongoing fiscal pressure, it is especially 

important for DLA to avoid inefficient use of taxpayer dollars or putting the 

department’s readiness at risk.

Conclusions
 

Page 41 GAO-14-495 Defense Inventory

To ensure that DLA does not dispose of inventory that is more economic 

to keep, in accordance with DOD guidance, we recommend the Secretary 

of Defense direct the Director, DLA, to reassess and, if determined 

appropriate, revise DLA’s inventory-reduction goals and schedule to 

achieve them in a way that minimizes risks and costs of having to buy 

items again in the long term.

To improve management and minimize the amount of on-order excess 

inventory, consistent with federal standards for internal control and 

leading practices for performance management, we recommend the 

Secretary of Defense direct the Director, DLA, to take the following four 

actions:

• regularly monitor progress reducing on-order excess inventory 

through DLA’s senior management performance briefings;

• track and regularly review performance data, such as the amount of 

on-order excess inventory reviewed, modified, or cancelled, and the 

reasons for not modifying or cancelling, in its on-order excess 

inventory management processes through its newly established 

automated report;

• establish supply chain–specific on-order excess goals that support 

DLA minimizing its investment in inventory that is not needed to meet 

requirements and achieving the DOD goal of 4 percent of the total 

value of on-order inventory by the end of fiscal year 2016; and

• monitor on a regular basis DLA’s progress toward achieving the 

supply chain–specific goals.

To ensure DLA is improving its collaborative forecasting effort, in 

accordance with DOD guidance that emphasizes monitoring the efficient 

use of resources and leading practices for results-oriented management, 

we recommend that the Secretary of Defense direct the Director, DLA, in 

collaboration with the Office of the Assistant Secretary of Defense for 

Logistics and Materiel Readiness and the Secretaries of the Army, Navy, 

and Air Force, to take the following three actions:

• develop metrics, in addition to currently developed demand forecast 

accuracy and error metrics, that allow DLA and the services to 

evaluate whether the program is improving supply-chain management 

performance and providing an adequate return on its investments;

Recommendations for 

Executive Action
 

Page 42 GAO-14-495 Defense Inventory

• use these metrics to monitor the performance of collaborative 

forecasting across DOD through a results-oriented management 

approach, such as regular performance management meetings; and

• develop and implement the necessary corrective actions to improve 

the results of collaborative forecasting across DOD.

We provided a draft of this report to DOD for comment. In written 

comments, DOD concurred with our eight recommendations. DOD’s 

comments are reprinted in their entirety in appendix XI. DOD also 

provided technical comments, which we incorporated into the report as 

appropriate.

DOD concurred with our recommendation for DLA to reassess its 

inventory-reduction goals and schedule to achieve them in a way that 

minimizes risks and costs of having to buy items again in the long term. 

DOD stated that it will continue to reassess the on-hand inventoryreduction goals and anticipates additional changes to these goals at 

future senior-management performance meetings.

DOD concurred with our four recommendations aimed at improving the 

management of on-order excess inventory and minimizing the amount of 

on-order excess inventory. DOD stated that DLA senior management will 

review progress reducing on-order excess inventory and other on-order 

excess-inventory metrics, such as the amount of on-order excess 

inventory reviewed, modified, and cancelled, and the reasons for not 

modifying and canceling, on a quarterly basis. Additionally, DOD stated 

that DLA will establish and monitor supply chain–specific on-order-excess 

inventory goals by August 2014.

DOD concurred with our three recommendations aimed at improving 

collaborative forecasting between DLA and the military services. DOD 

stated that DLA, in collaboration with the Office of the Assistant Secretary 

of Defense for Logistics and Materiel Readiness and the Secretaries of 

the Army, Navy, and Air Force, will evaluate the effectiveness of current 

forecasting performance metrics, modify current logic as needed, and 

develop additional metrics as appropriate. Also, DOD stated that DLA will 

monitor collaborative forecasting performance against other approaches, 

such as statistical forecasting, at regular performance-management 

meetings. Lastly, DLA, in collaboration with the Office of the Assistant 

Secretary of Defense for Logistics and Materiel Readiness and the 

Secretaries of the Army, Navy, and Air Force, will develop corrective 

Agency Comments 

and Our Evaluation
 

Page 43 GAO-14-495 Defense Inventory

actions for collaborative forecasting by November 2014, and 

implementation of these corrective actions will occur in coordination with 

the military services.

We are sending copies of this report to the appropriate congressional 

committees, the Secretary of Defense, the Director of DLA, and the 

Secretaries of the Army, Navy, and Air Force. In addition, the report is 

available at no charge on the GAO website at http://www.gao.gov

If you or your staff have questions about this report, please contact me at 

merrittz@gao.gov or (202) 512-5257. GAO staff who made key 

contributions to this report are listed in appendix XII.

Zina D. Merritt

Director

Defense Capabilities and Management
Appendix I: The Department of Defense’s 

(DOD) Inventory Improvement Plan

Page 44 GAO-14-495 Defense Inventory

See DM# 216770 (Vertical Brief Format)

Table 6: The Nine Subplans and Corresponding Objectives

Appendix I: The Department of Defense’s 

(DOD) Inventory Improvement Plan 
Appendix II: The Defense Logistics Agency’s 

Metrics Generally Balance Availability of Spare 

Parts and Total Supply-Chain Costs

Page 45 GAO-14-495 Defense Inventory

Defense Logistics Agency (DLA) metrics generally manage to balance 

availability of spare parts with total supply-chain costs, in accordance with 

Department of Defense (DOD) guidance. DLA uses a metrics framework 

to comprehensively assess the performance of its inventory-management 

activities. Furthermore, DLA reviews these metrics at regular intervals 

through a series of performance-management meetings that take place at 

the Director, headquarters, and supply-chain levels.

DLA has a metrics framework that it uses to assess its overall 

performance on a regular and consistent basis. This framework 

addresses a wide spectrum of DLA’s operations and balances a number 

of metric areas, such as customer service, cost, and internal efficiency.1

DOD guidance requires DLA, the military services, and other supply-chain 

organizations to be responsive to customer requirements while balancing 

risk and total cost, conduct periodic performance and cost evaluations, 

and adopt metrics that provide information on customer service, cost, and 

internal efficiency.

Furthermore, the framework provides flexibility to allow the DLA Director 

and senior managers to focus the agency on specific performance areas. 

For example, the current Director has focused the agency generally on 

customer service and internal efficiency metrics by holding the supply 

chains responsible for meeting certain performance goals with respect to 

those metrics.

2

 

1

Customer-service metrics measure things like the availability of parts or the number of 

backorders. Cost metrics can measure agency cash flow, sales versus purchases, or costefficiency measures such as on-order excess. Finally, internal efficiency metrics assess 

things like the number of purchase requests and the administrative lead time required to 

make an award.

DLA evaluates its supply chain by looking at multiple 

metrics in the key areas of customer service, cost, and internal efficiency. 

See figure 7 for an overview of DLA’s metrics in the key areas.

2

DOD Instruction 4140.01, Supply Chain Materiel Management Policy (December 2011), 

and DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel Management 

Procedures: Metrics and Inventory Stratification Reporting (February 2014). 

Appendix II: The Defense Logistics Agency’s 

Metrics Generally Balance Availability of 

Spare Parts and Total Supply-Chain Costs

DLA Has a Metrics 

Framework That 

Covers Key

Inventory Areas
Appendix II: The Defense Logistics Agency’s 

Metrics Generally Balance Availability of Spare 

Parts and Total Supply-Chain Costs

Page 46 GAO-14-495 Defense Inventory

Figure 7: Overview of DLA’s Metrics in Customer Service, Cost, and Internal Efficiency Areas

A balanced approach across these key areas is important because 

without it any given metric could be optimized at the expense of other 

metrics. For example, a supply chain could achieve a high availability of 

parts if it was less focused on the costs of purchasing excess materiel 

and storing it. Alternatively, a supply chain could significantly reduce its 

costs if it was less focused on the resultant effect on parts availability and 

readiness. Effects on customer service can also affect readiness. For 

example, if a customer does not have a part that is needed, then this 

could have effects on the availability of a weapon system or the efficient 

functioning of a military depot that is trying to repair a weapon system.

DLA uses a number of metrics to assess its customer service. Materiel 

availability is the primary metric it uses to measure whether customers 

are getting the right parts at the right time; the current agency-wide goal 

for this metric is 90 percent.3

 

3

One of the supply chains that we did not review, industrial hardware, has a materiel 

availability goal of 93%. 

The agency also closely tracks backorders, 

including both the number and the age of backorders. Materiel availability 

and backorders have been identified as key metrics by the DLA Director, 

who has provided supply chain–specific goals through departmental 

guidance for each of these metrics and regularly monitors progress 

against these goals. Additional metrics used by DLA to assess customer 

service include on-time delivery and order response time.
Appendix II: The Defense Logistics Agency’s 

Metrics Generally Balance Availability of Spare 

Parts and Total Supply-Chain Costs

Page 47 GAO-14-495 Defense Inventory

DLA also has several key metrics that it reviews regularly in order to 

assess its cost performance. These cost metrics measure the net 

operating result, cash plan performance, and the number of days of cash 

remaining in the working capital fund.4

In addition to customer service and cost metrics, DLA has a number of 

internal efficiency metrics that it uses to assess its internal processes and 

identify potential workload backlogs. Two of the most critical to current 

DLA management are the backlog and age of purchase requests.

DLA also looks at the amount of 

the obligation authority provided by Congress. Several of these cost 

metrics are assessed regularly through internal reviews, while others, 

such as obligation authority, are used to help inform analysis of potential 

inventory improvements. In addition, the direct costs of making changes 

to DLA’s processes are another way in which costs are considered. For 

example, at an inventory-management meeting in November 2013, a 

number of cost-related issues were discussed, such as the potential 

effect of different pricing mechanisms for storage costs and the trade-off 

of improving materiel availability at the expense of increasing the amount 

of inventory purchased. Finally, as noted earlier, DLA also has the ability 

to track on-order excess—a cost-efficiency metric—but this metric is not 

regularly reviewed except at the aviation supply chain. Further details 

about on-order excess inventory are discussed earlier in this report.

5

 

4

A working capital fund relies on sales revenue rather than direct appropriations to finance 

its continuing operations and is intended to (1) generate sufficient resources to cover the 

full costs of its operations and (2) operate on a break-even basis over time—that is, 

neither make a gain nor incur a loss. Customers use appropriated funds to finance orders 

placed with the working capital fund and a working capital fund uses obligation authority to 

procure additional spare parts in advance of a customer placing an order. The net 

operating result is the overall gains and losses to the working capital fund from sales, 

while the cash plan performance measures increases or decreases to the cash flow of the 

working capital fund. 

DLA 

management has also used recent departmental guidance to set a goal of 

reducing the backlog and age of purchase requests by reducing the 

administrative lead times associated with these requests. Additional DLA 

5

A purchase request is a requisition for an item that has not yet been placed on order. 
Appendix II: The Defense Logistics Agency’s 

Metrics Generally Balance Availability of Spare 

Parts and Total Supply-Chain Costs

Page 48 GAO-14-495 Defense Inventory

metrics look at the percentage of automated awards and the amount of 

funds obligated through long-term contracts.6

The metrics framework at DLA can be adjusted as needed. For example, 

DLA has a web-based tool that provides managers at all levels with the 

ability to see on a daily basis how a given supply chain or individual unit 

within a supply chain is performing against key performance and cost 

metrics. This tool focuses on key metrics as identified by the Director and 

those performance metrics that DLA committed to meet through 

performance-based agreements it has made with the services.7

According to DLA officials, additional metrics could be added to the webbased tool with relatively little effort whenever necessary, thereby giving 

DLA an additional option for emphasizing specific performance metrics.

DLA’s metrics are regularly reviewed at multiple levels within the 

organization. The DLA Director, other senior managers at DLA 

headquarters, and the commanders and senior managers of the aviation, 

land, and maritime supply chains review the metrics through a number of 

regularly scheduled performance-management meetings. While there are 

no single meetings at which all of DLA’s metrics are discussed, the 

regularly recurring meetings ensure that metrics that cover key areas of 

inventory management, such as customer service, cost, and internal 

efficiency, are reviewed.

For example, one of the key metrics briefings is the Agency Performance 

Review. This review includes DLA’s key customer-service, cost, and 

internal-efficiency metrics, such as net operating result, days of cash in 

the working capital fund, materiel availability, backorders, and purchase 

request workload. The metrics in this review are briefed monthly at the 

supply-chain and DLA headquarters levels. Furthermore, the DLA 

 

6

Automated awards are those awards that do not require manual efforts on the part of 

DLA supply managers to award. A higher percentage of automated awards generally 

implies a lower administrative workload. Similarly, items on a long-term contract—here 

meaning between 3 and 5 years—generally have a lower administrative lead time and 

result in decreased administrative workload.

7

A performance-based agreement is a contract between DLA and one of the military 

services that establishes a framework for the coordination and alignment of resources to 

support that service’s mission. In addition to specifying each organization’s roles and 

responsibilities, these agreements also include the metrics and goals that DLA and the 

service have agreed to use to assess supply-chain performance.

DLA Reviews Its 

Metrics in Regular 

PerformanceManagement 

Meetings at Multiple 

Levels within the 

Organization
Appendix II: The Defense Logistics Agency’s 

Metrics Generally Balance Availability of Spare 

Parts and Total Supply-Chain Costs

Page 49 GAO-14-495 Defense Inventory

Director receives monthly updates on the metrics, in addition to 

conducting a more in-depth review of the Agency Performance Review 

metrics each quarter as part of the Executive Board meeting. These 

reviews provide the DLA Director with a consistent structure to assess 

performance according to established metrics, and also allow for special 

attention to specific issues as they arise. For example, officials told us 

that one metric was added to the Agency Performance Reviews for the 

DLA Director when there were concerns about a particular aspect of 

performance. That metric was removed once those concerns were 

addressed. However, one metric—the percentage of on-order excess 

inventory—is not included in the Agency Performance Review even 

though it is one of two metrics the Office of the Deputy Assistant 

Secretary of Defense for Supply Chain Integration is using to measure 

progress in addressing inventory management practices. Further details 

on monitoring on-order excess inventory are discussed earlier in this 

report.

In addition to the Agency Performance Reviews, the DLA Director, senior 

DLA managers, and supply-chain representatives review and analyze 

inventory-management performance-specific and cost-related issues at 

approximately monthly meetings. These inventory-management council 

meetings are flexible, and contain a mixture of recurring and onetime 

discussions that can touch on any number of inventory-management 

issues. For example, almost every council meeting since February 2013 

has included an update on the status of the inventory reduction effort. In 

contrast, only two of the meetings since February 2013 have discussed 

the on-order excess metric.

DLA headquarters elements hold additional metrics meetings to review 

DLA’s performance. For example, the DLA headquarters element focused 

on acquisition conducts a monthly review and analysis meeting where it 

reviews procurement metrics, such as the use of long-term contracts for 

procuring spare parts, contract review time, and additional metrics related 

to contract compliance. The DLA headquarters element focused on 

finance, meanwhile, regularly provides updates on financial metrics to key 

personnel. Finally, the DLA headquarters element focused on logistics 

operations conducts additional meetings focused on those metrics that 

are of interest to management—backorders, amount of on-hand 

inventory, and purchase request workload. See figure 8 for an overview of 

DLA’s regular performance-management meetings. Appendix X provides 

a printer-friendly version of figure 8.
Page 50 GAO-14-495 Defense Inventory

Figure 8: Overview of Defense Logistics Agency’s (DLA) Regular 

Performance-Management Meetings

Source: GAO analysis of DOD guidance and inventory practices. | GAO-14-495

Interactivity instructions: Roll over a meeting to read more.

 See appendix X for the printer-friendly version. 

Aviation 

Corporate Boarda

Inventory 

Management 

Council

J-8 Business 

Assessment

Land and 

Maritime Monthly 

Business Review

J-7 Review 

and Analysis

J-3 Backorder, 

Purchase Request, 

and Inventory 

Reviews

Director

DLA headquarters

Supply chain

Land and 

Maritime Agency 

Performance 

Reviewa

J-3 Agency

Performance 

Reviewa

Executive 

Boarda

a

Focus on Agency Performance Review (APR) metrics

APR: Agency Performance Review

IMCs: Inventory Management Council meetings
Appendix II: The Defense Logistics Agency’s 

Metrics Generally Balance Availability of Spare 

Parts and Total Supply-Chain Costs

Page 51 GAO-14-495 Defense Inventory

In addition to the meetings held at DLA headquarters, metrics are also 

regularly reviewed at the supply chains. For example, the aviation, land, 

and maritime supply chains use the Agency Performance Review metrics 

in their own regularly scheduled supply-chain meetings. The aviation 

supply chain supplements the agency performance metrics with additional 

supply chain–specific metrics in its monthly Corporate Board meetings. 

These additional metrics allow aviation supply-chain managers to assess 

areas of performance that might otherwise not be captured by the 

agency-wide metrics. Some of these metrics include potential backorders, 

production and administrative lead times, and on-order excess inventory. 

The land and maritime supply chains supplement their monthly command 

review of the agency performance metrics with an additional monthly 

business review, which alternates month-to-month looking at DLA’s land 

and maritime supply-chain distribution detachments. The metrics 

contained in these reviews alternate as well, and cover production and 

administrative lead times, materiel availability, as well as additional 

metrics pertaining to the service performance-based agreements.
Appendix III: Objectives, Scope, and 

Methodology

Page 52 GAO-14-495 Defense Inventory

To assess the extent to which the Defense Logistics Agency (DLA) has 

developed and met goals to reduce on-hand inventory and on-order 

excess inventory while reducing shortages and any implementation 

challenges, we analyzed DLA inventory data as of the end of November 

2009 and every subsequent September 30 for fiscal year 2010 through 

2013.1 The Department of Defense (DOD) and DLA stratify inventory into 

categories to assess the ability of the inventory to meet the stated 

requirements and ensure that surplus inventories are kept only if 

warranted. In our analysis, we focused on the data associated with DLA’s 

aviation, land, and maritime supply chains since these supply chains 

comprised $9.8 billion of DLA’s $13.1 billion nonenergy inventory at the 

end of fiscal year 2012.2

With respect to on-order excess inventory, we analyzed DLA’s inventory 

data from fiscal year 2011 through fiscal year 2013 to determine the 

amount of on-order excess inventory, and examined DLA’s efforts to 

minimize on-order excess. We compared DLA’s amounts of on-order 

excess inventory against DOD’s goals for reducing on-order excess 

inventory in its Comprehensive Inventory Management Improvement 

To assess the reliability of the data, we reviewed 

DOD requirements for secondary spare-parts inventory reporting, 

comparing the data we generated from DLA-provided electronic files to its 

summary tables, searching for and reconciling inconsistent information 

(e.g., out-of-range and missing data), and discussing DLA’s data and our 

findings with database managers. We determined the inventory data were 

sufficiently reliable for the purposes of determining DLA’s amount of 

inventory and reasons for holding that inventory. Using the inventory data, 

we determined DLA’s total amount of on-hand inventory and categorized 

this on-hand inventory by the reasons DLA was retaining it, such as 

economic or contingency reasons. It is important to note that our analysis 

reflects points in time over the approximate 5-year period we reviewed 

and that requirements and inventory levels are constantly fluctuating.

 

1

DLA and the military services are required to stratify and report inventory data biannually 

as of March 31 and September 30 and use the stratification data to assess the ability of 

the inventory to meet the stated requirement and ensure that surplus inventories are kept 

only if warranted. Secondary inventory data are stratified by item, each of which is 

assigned a unique stock number. DLA may have in its inventory multiple quantities (parts) 

of each unique item. DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel 

Management Procedures: Metrics and Inventory Stratification Reporting, and Volume 6,

DOD Supply Chain Materiel Management Procedures: Materiel Returns, Retention, and 

Disposition (Feb. 10, 2014). 

2

Unless otherwise stated, all dollar figured in this report are in nominal terms. 

Appendix III: Objectives, Scope, and 

Methodology
Appendix III: Objectives, Scope, and 

Methodology

Page 53 GAO-14-495 Defense Inventory

Plan. Additionally, we reviewed DLA’s process for managing and 

overseeing on-order excess inventory and compared these processes 

against leading practices for results-oriented management.3

To supplement our analysis of DLA’s inventory data, we examined DLA 

performance-management briefings; documentation related to DLA’s 

effort to reduce its on-hand inventory, on-order excess inventory, and 

backorders; DOD and DLA inventory-management policies and 

procedures; and other reports and analyses related to the potential for 

buying inventory again after it is disposed of. Specifically, we compared 

DOD policies on using economic analyses to determine inventory that is 

more economical to keep than dispose of with DLA’s procedures and 

processes and DLA’s decision to dispose of items that its analyses 

deemed more economical to keep.

With respect 

to shortages (i.e., backorders) of spare parts, we reviewed DLAgenerated reports on backorders to assess the status and extent of its 

efforts to reduce the number of backorders and aged backorders (i.e., 

backorders more than 6 months old) in addition to the analysis of DLA’s 

inventory data previously described above. Also, we reviewed DLA’s 

aviation, land, and maritime goals for reducing backorders and evaluated 

DLA’s progress in meeting those goals.

4

To assess the extent to which DLA has implemented initiatives using a 

comprehensive management approach to improve inventory 

management, we identified improvement efforts through interviewing DLA 

headquarters officials and Office of the Deputy Assistant Secretary of 

We interviewed DLA headquarters 

and aviation, land, and maritime supply-chain officials to discuss DLA’s 

efforts to reduce on-hand inventory, on-order excess inventory, and 

backorders. Additionally, we met with Office of the Deputy Assistant 

Secretary of Defense for Supply Chain Integration officials to discuss 

DLA’s efforts to improve its inventory management.

 

3

GAO, Managing For Results: Data-Driven Performance Reviews Show Promise But 

Agencies Should Explore How to Involve Other Relevant Agencies, GAO-13-228

(Washington, D.C.: Feb. 27, 2013); Managing For Results: Enhancing Agency Use of 

Performance Information for Management Decision Making, GAO-05-927 (Washington, 

D.C.: Sept. 9, 2005); and Agency Performance Plans: Examples of Practices That Can 

Improve Usefulness to Decisionmakers, GAO/GGD/AIMD-99-69 (Washington, D.C.: Feb. 

26, 1999). 

4

DOD Manual 4140.01, Volume 6, DOD Supply Chain Materiel Management Procedures: 

Materiel Returns, Retention, and Disposition. 
Appendix III: Objectives, Scope, and 

Methodology

Page 54 GAO-14-495 Defense Inventory

Defense for Supply Chain Integration officials. We focused on four key 

efforts DLA officials identified as significant for reducing excess inventory: 

collaborative forecasting, inventory level-setting for items with low or 

highly variable demand, improving acquisition lead-time accuracy and 

reducing acquisition lead times, and improving the efficiency of DLA’s 

supply, storage, and distribution processes. Across the four areas, we 

analyzed DLA’s efforts in the following manner:

• Collaborative forecasting: We analyzed DLA’s collaborative 

forecasting—a process that allows DLA and the military services to 

work together to tailor forecast plans for items rather than DLA 

establishing a forecast based solely on historical demand patterns—

by reviewing DLA’s collaborative forecasting metrics to evaluate the 

extent its metrics addressed performance and costs, as required by 

DOD guidance.5 Additionally, we reviewed and analyzed DLA’s 

management approach for the program to determine if it followed 

leading practices for results-oriented management, such as the need 

to have regular performance-management meetings to guide 

continued improvement.6

• Inventory level-setting for items with low or highly variable demand: 

We conducted interviews with officials at the DLA headquarters level 

and aviation, land, and maritime supply chains, to understand the 

rationale behind implementing a new method—referred to as Peak 

and Next-Gen—to set inventory levels for items with low or highly 

variable demand; the anticipated benefits of the new method; the 

implementation of the new method; and the plan for assessing the 

method’s effectiveness. Finally, we reviewed DLA’s analysis 

comparing Peak and Next-Gen against other level-setting 

methodologies, as well as data provided by DLA on the current 

We discussed the metrics and the 

assessment methodology DLA uses for tracking and evaluating 

collaborative forecasting with DLA headquarters and supply-chain 

officials. We also discussed the challenges and weaknesses of the 

metrics for assessing collaborative forecasting with various DLA 

officials.

 

5

DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel Management 

Procedures: Metrics and Inventory Stratification Reporting and Volume 2, DOD Supply 

Chain Materiel Management Procedures: Demand and Supply Planning (Feb. 10, 2014).

6

See GAO-13-228, GAO-05-927, and GAO, Government Operations: Internal Control 

Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001). 
Appendix III: Objectives, Scope, and 

Methodology

Page 55 GAO-14-495 Defense Inventory

metrics being tracked to assess the implementation of Peak and NextGen.

• Acquisition lead times: We reviewed and analyzed documents and 

guidance on the goal of efforts to improve the accuracy of acquisition 

lead times and reduce the actual acquisition lead times to improve 

inventory planning. Also, we reviewed planning documentation to 

understand the rationale and intended outcomes of the efforts; status 

update briefings to analyze progress in implementing the efforts; and 

the metrics used to assess the effectiveness of these efforts. Lastly, 

we conducted interviews with officials at DLA headquarters, as well as 

at the aviation, land, and maritime supply chains, to supplement our 

understanding of DLA’s efforts.

• The efficiency of DLA’s supply, storage, and distribution processes: 

We analyzed documents and briefings to determine the intended 

purposes of the strategic network optimization program, assess the 

current implementation status of the effort, and identify any upcoming 

challenges in implementation. Specifically, we examined the business 

plans, program status briefings, fiscal year 2013 annual report on 

strategic network optimization, and estimates of potential savings from 

implementation. We discussed the status of program implementation, 

as well as the methodologies and reasoning for proposed program 

savings with DLA and Office of the Deputy Assistant Secretary of 

Defense for Supply Chain Integration officials.

To examine the extent to which DLA has implemented a framework of 

inventory management metrics that balances the timely availability of 

spare parts to customers and total supply-chain costs (discussion is in 

app. II), we analyzed DOD and DLA policies, regulations, and guidance 

pertaining to the use of metrics for the management of inventory at DLA. 

We reviewed briefing documentation from a number of different metrics 

meetings held at the DLA headquarters and supply-chain levels to 

understand which metrics were briefed on a regular basis. We also 

conducted interviews with officials at the DLA headquarters level, as well 

as at the aviation, land, and maritime supply chains, to understand how 

the metrics were used to help inform inventory decisions.

We conducted this performance audit from June 2013 to June 2014 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 
Appendix III: Objectives, Scope, and 

Methodology

Page 56 GAO-14-495 Defense Inventory

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix IV: Printer-Friendly Version of Figure 

1—Selected Defense Logistics Agency (DLA) 

Categories of Inventory Items

Page 57 GAO-14-495 Defense Inventory

Term Definition

Potential reutilization stock Materiel exceeding the approved acquisition objective and not being retained as economic 

or contingency retention stock, and has been identified as excess materiel for possible 

disposal but has potential for reutilization. Potential reutilization stock is also referred to as 

on-hand excess inventory.

Contingency retention stock Materiel that is retained to support specific contingencies, such as to support foreign 

military sales, future military operations, and disaster relief or civil emergencies, or to 

mitigate risk associated with diminishing manufacturing sources or nonprocurable stock.

Economic retention stock Materiel that has been deemed more economical to keep than to discard because it is 

likely to be needed in the future.

Two years of forecasted demand The projected amount of consumption of an item for the next 2 years.

War-reserve materiel Items held by the Defense Logistics Agency at the request of the military services to meet 

unfunded war-reserve requirements.

Quantities for items with diminishing 

manufacturing sources

Items that are procured because they are no longer expected to be produced.

Economic order quantity Quantity derived from a mathematical technique used to determine the lowest total 

variable costs to order and hold inventory.

Acquisition lead time quantity Stock needed to cover acquisition lead times, which are made up of the administrative and 

production lead times.

Backorders Customer-requisitioned materiel that is not immediately available to issue, but is recorded 

as a commitment for future issue.

Safety stock quantity Amount of stock that is to be kept on hand in case of minor interruptions in the resupply 

process or fluctuations in demand.

Quantities for items with low, infrequent, 

or highly variable demand

Demand for items with low, infrequent, or highly variable demand cannot be forecast, but 

nevertheless need to be stocked.

Source: GAO analysis of Department of Defense (DOD) guidance and DLA inventory practices.

Appendix IV: Printer-Friendly Version of 

Figure 1—Selected Defense Logistics 

Agency (DLA) Categories of Inventory Items
Page 58 GAO-14-495 Defense Inventory 

On the basis of our1 and third-party reports2

1. Forecast Error: The forecast for an item may be inaccurate due to a 

number of factors. For example, demand planners may not have up-todate information, such as maintenance plans for a weapon system, to 

appropriately adjust forecasts. Also, forecast approaches have not always 

appropriately matched the characteristics of items, resulting in too much 

inventory being ordered and the accumulation of on-hand excess 

inventory. For example, items with low and variable demand require

different forecast approaches than items with regular and frequent 

demand. 

on inventory management 

and discussions with Department of Defense (DOD) and Defense 

Logistics Agency (DLA) officials, we have identified three typical causes of 

on-hand excess inventory. We did not quantify the extent to which these 

causes are individually responsible for on-hand excess inventory. 

2. Changes in Demand: The forecast could have been accurate based

on the most up-to-date requirement, but demand changes after the item 

has been procured. For example, an item is procured based on a 

requirement and is categorized as part of the approved acquisition 

objective initially. Over the course of time, the demand for the item may 

decrease—due to changes in the type and pace of operations or changes 

in the maintenance plan following the time in which parts needed to be 

ordered—resulting in a decrease in the amount of the item that can be 

categorized under the approved acquisition objective, which results in 

stock being recategorized as economic retention stock, contingency 

retention stock, or on-hand excess inventory. 

3. Long Lead Times: An item’s lead time is used to calculate the 

appropriate reorder point. So, for example, if an item’s recorded lead time 

is three months, then the reorder point will be set to cover an estimated 

three months worth of demands before the item breaches its safety stock. 

Long lead times, even when accurate, can potentially create excess due 

to the greater possibility for changes in demand over the course of the 

lead time period.

 

1

See GAO, Defense Inventory: Actions Underway to Implement Improvement Plan, but 

Steps Needed to Enhance Efforts, GAO-12-493 (Washington, D.C.: May 3, 2012); Defense 

Inventory: Defense Logistics Agency Needs to Expand on Efforts to More Effectively 

Manage Spare Parts, GAO-10-469 (Washington, D.C.: May 11, 2010); Defense Inventory: 

Army Needs to Evaluate Impact of Recent Actions to Improve Demand Forecasts for Spare 

Parts, GAO-09-199 (Washington, D.C.: Jan. 12, 2009); Defense Inventory: Management 

Actions Needed to Improve the Cost Efficiency of Navy’s Spare Parts Inventory, GAO-09-

103 (Washington, D.C.: Dec. 12, 2008); Defense Inventory: Opportunities Exist to Save 

Billons by Reducing Air Force’s Unneeded Spare Parts Inventory, GAO-07-232

(Washington, D.C.: Apr. 27, 2007); Defense Inventory: Opportunities Exist to Improve the 

Management of DOD’s Acquisition Lead Times for Spare Parts, GAO-07-281 (Washington, 

D.C.: Mar. 2, 2007).

2

LMI, Lifecycle Forecasting Improvement: Causative Research and Item Introduction 

Phase (November 2010) and RAND National Defense Research Institute, Integrating the 

Department of Defense Supply Chain (2012). 

Why On-Hand Excess 

Inventory Matters

In addition to the money spent

procuring items that are 

determined to be on-hand excess 

inventory, there are also costs 

incurred in handling, storing, 

processing, and disposing of 

excess items. Also, money used to 

purchase the excess item is not 

available to purchase other needed 

items because working capital 

funds rely on the sales of on-hand 

items to fund future purchases. 

This could negatively affect 

readiness by limiting availability of 

spare parts to military customers. 

Key Terms

Approved acquisition objective: 

The materiel needed to meet the 

requirements objective and 2 years 

of estimated future demand.

Economic retention stock: 

Materiel that has been deemed 

more economical to keep than to 

dispose of because it is likely to be 

needed in the future.

Contingency retention stock: 

Materiel that is retained to support 

specific contingencies, such as to 

support foreign military sales, 

future military operations, and 

disaster relief or civil emergencies.

On-hand excess inventory: 

Inventory that is excess to the 

approved acquisition objective and 

is not being retained as economic 

or contingency retention stock. 

Lead times: The length of time 

between the identification of a 

materiel requirement and the 

receipt of that materiel into the 

supply system.

Appendix V: Overview of Typical Causes of OnHand Excess Inventory 
Appendix VI: On-Hand Inventory Levels for 

Aviation, Land, and Maritime Supply Chains

Page 59 GAO-14-495 Defense Inventory

As part of the Defense Logistics Agency (DLA) efforts to reduce on-hand 

inventory, the aviation, land, and maritime supply chains each reduced 

their on-hand inventory from the end of fiscal year 2012 to the end of 

fiscal year 2013. See figures 9, 10, and 11 for the trends in the aviation, 

land, and maritime supply chains’ on-hand inventory, specifically the 

amount of inventory being held as part of the approved acquisition 

objective or as economic retention stock, contingency retention stock, and 

potential reutilization stock.

Figure 9: Defense Logistics Agency’s (DLA) Aviation Supply Chain On-Hand 

Inventory, End of Fiscal Years 2009-2013

a

End of the fiscal year 2009 inventory data were not available, so we used November 2009 data. 

b

Potential reutilization stock is materiel exceeding the approved acquisition objective and not being 

retained as economic or contingency retention stock, and has been identified as excess materiel for 

possible disposal but has potential for reutilization. Potential reutilization stock is also referred to as 

on-hand excess inventory. 

c

Contingency retention stock is materiel that is retained to support specific contingencies, such as to 

support foreign military sales, future military operations, and disaster relief or civil emergencies, or to 

mitigate risk associated with diminishing manufacturing sources or nonprocurable stock. 

d

Economic retention stock is materiel that has been deemed more economical to keep than to discard 

because it is likely to be needed in the future. 

e

Approved acquisition objective includes materiel needed to meet the requirements objective, 2 years 

of estimated future demand, war-reserve materiel held for the services, and materiel held because it 

comes from a diminishing manufacturing source. 

Appendix VI: On-Hand Inventory Levels for 

Aviation, Land, and Maritime Supply Chains 
Appendix VI: On-Hand Inventory Levels for 

Aviation, Land, and Maritime Supply Chains

Page 60 GAO-14-495 Defense Inventory

Figure 10: Defense Logistics Agency’s (DLA) Land Supply Chain On-Hand 

Inventory, End of Fiscal Years 2009-2013

a

End of the fiscal year 2009 inventory data were not available, so we used November 2009 data. 

b

Potential reutilization stock is materiel exceeding the approved acquisition objective and not being 

retained as economic or contingency retention stock, and has been identified as excess materiel for 

possible disposal but has potential for reutilization. Potential reutilization stock is also referred to as 

on-hand excess inventory. 

c

Contingency retention stock is materiel that is retained to support specific contingencies, such as to 

support foreign military sales, future military operations, and disaster relief or civil emergencies, or to 

mitigate risk associated with diminishing manufacturing sources or nonprocurable stock. 

d

Economic retention stock is materiel that has been deemed more economical to keep than to discard 

because it is likely to be needed in the future. 

e

Approved acquisition objective includes materiel needed to meet the requirements objective, 2 years 

of estimated future demand, war-reserve materiel held for the services, and materiel held because it 

comes from a diminishing manufacturing source. 
Appendix VI: On-Hand Inventory Levels for 

Aviation, Land, and Maritime Supply Chains

Page 61 GAO-14-495 Defense Inventory

Figure 11: Defense Logistics Agency’s (DLA) Maritime Supply Chain On-Hand 

Inventory, End of Fiscal Years 2009-2013

a

End of the fiscal year 2009 inventory data were not available, so we used November 2009 data. 

b

Potential reutilization stock is materiel exceeding the approved acquisition objective and not being 

retained as economic or contingency retention stock, and has been identified as excess materiel for 

possible disposal but has potential for reutilization. Potential reutilization stock is also referred to as 

on-hand excess inventory. 

c

Contingency retention stock is materiel that is retained to support specific contingencies, such as to 

support foreign military sales, future military operations, and disaster relief or civil emergencies, or to 

mitigate risk associated with diminishing manufacturing sources or nonprocurable stock. 

d

Economic retention stock is materiel that has been deemed more economical to keep than to discard 

because it is likely to be needed in the future. 

e

Approved acquisition objective includes materiel needed to meet the requirements objective, 2 years 

of estimated future demand, war-reserve materiel held for the services, and materiel held because it 

comes from a diminishing manufacturing source. 
Appendix VII: Value of the Defense 

Logistics Agency’s On-Order and

On-Order Excess Inventory 

Page 62 GAO-14-495 Defense Inventory

The Defense Logistics Agency (DLA) tracks the amount of on-order and 

on-order excess inventory on a monthly basis and reports its amount of 

on-order excess twice a year to the Office of the Deputy Assistant 

Secretary of Defense for Supply Chain Integration. Specifically, DLA 

tracks and reports the value of its on-order inventory, which are items that 

are not in DLA’s possession but for which a contract has been awarded or 

funds have been obligated. DLA also tracks and reports the value of its 

on-order excess inventory, which are items for which a contract has been 

awarded or funds have been obligated, but due to subsequent changes in 

requirements would be categorized upon arrival as economic retention 

stock, contingency contention stock, or potential reutilization stock. Onorder excess inventory that is not able to be modified or cancelled and is 

taken into DLA’s possession is not necessarily disposed of. Rather, the 

inventory may be categorized as economic retention stock or contingency 

retention stock and potentially used in the future. See table 7 for DLA’s 

value of on-order and on-order excess inventory for fiscal years 2011-

2013.

Table 7: The Defense Logistics Agency’s (DLA) Value of On-Order and On-Order Excess Inventory, Fiscal Years 2011-2013 

Millions of nominal dollars

Fiscal Year 2011a Fiscal Year 2012a Fiscal Year 2013a

Supply 

chain

Total value 

of on-order 

inventory

Total value 

of on-order 

excess 

inventory

Percentage 

of on-order 

excess 

inventory

Total value 

of on-order 

inventory

Total value 

of on-order 

excess 

inventory

Percentage 

of on-order 

excess 

inventory

Total value 

of on-order 

inventory

Total value 

of on-order 

excess 

inventory

Percentage 

of on-order 

excess 

inventory

Aviation 

supply 

chain

$2,157.9 $216.6 10.0% $2,228.5 $200.1 9.0% $2,120.2 $136.8 6.5%

Land 

supply 

chain

443.2 18.7 4.2 447.1 17.3 3.9 364.7 19.1 5.2

Maritime 

supply 

chain

511.4 23.5 4.6 509.0 18.6 3.7 479.7 20.7 4.3

Total 

DLAb 4,131.2 278.3 6.7 4,603.1 288.0 6.3 4,237.0 236.7 5.6

Source: GAO analysis of DLA data.

Notes: DLA tracks on-order excess inventory, which are items for which a contract has been awarded 

or funds have been obligated, but due to subsequent changes in requirements would be categorized 

upon arrival as economic retention stock, contingency retention stock, or potential reutilization stock. 

a

The value of inventory is based on DLA’s inventory data at the end of the fiscal year. 

b

The total value for DLA includes all of its supply chains. 

Appendix VII: Value of the Defense

Logistics Agency’s On-Order and

On-Order Excess Inventory
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 63 GAO-14-495 Defense Inventory

The Defense Logistics Agency (DLA) has implemented a number of 

efforts aimed at reducing excess inventory and backorders. These efforts 

are in the early stages of implementation, and more time is needed to 

determine their effect. These efforts are focused on (1) implementing new 

methods to determine inventory levels for items with low or highly variable 

demand, (2) improving acquisition lead time accuracy and reducing 

acquisition lead times, and (3) improving the efficiency of supply, storage, 

and distribution processes.

In January 2013, DLA instituted two new processes that set inventory 

levels for over 495,000 items with low or highly variable demand instead 

of using traditional forecasting methods that were ineffective for these 

items. DLA evaluates the performance of these items on a regular basis 

through reviewing a host of metrics—such as materiel availability, 

purchase request workload, and on-hand inventory levels—but it is too 

early to tell whether these processes are reducing administrative 

workload, improving availability of parts, and reducing costs, because 

sufficient data are not yet available.

The difficulty of forecasting demand for items has been a recurring 

problem within inventory management. Previous GAO reports have cited 

difficulty with demand forecasting at each of the services and DLA.1 In 

addition, we have identified the Department of Defense (DOD) supplychain management as a high-risk area since 1990 due in part to 

weaknesses in accurately forecasting the demand for spare parts.2

 

1

See GAO, Defense Inventory: Defense Logistics Agency Needs to Expand on Efforts to 

More Effectively Manage Spare Parts, 

Furthermore, DOD’s Comprehensive Inventory Management 

Improvement Plan is focused, in part, on the improvement of forecast 

GAO-10-469 (Washington, D.C.: May 11, 2010); 

Defense Inventory: Army Needs to Evaluate Impact of Recent Actions to Improve Demand 

Forecasts for Spare Parts, GAO-09-199 (Washington, D.C.: Jan. 12, 2009); Defense 

Inventory: Management Actions Needed to Improve the Cost Efficiency of Navy’s Spare 

Parts Inventory, GAO-09-103 (Washington, D.C.: Dec. 12, 2008); and Defense Inventory: 

Opportunities Exist to Save Billons by Reducing Air Force’s Unneeded Spare Parts 

Inventory, GAO-07-232 (Washington, D.C.: Apr. 27, 2007).

2

See GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: February 

2013); Opportunities to Reduce Potential Duplication in Government Programs, Save Tax 

Dollars, and Enhance Revenue, GAO-11-318SP (Washington, D.C.: Mar. 1, 2011); HighRisk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011); High-Risk 

Series: An Update, GAO-09-271 (Washington, D.C.: January 2009); High-Risk Series: An 

Update, GAO-07-310 (Washington, D.C.: January 2007).

Appendix VIII: Additional Defense

Logistics Agency Efforts to Improve 

Inventory Management

DLA Has Implemented 

New Methods to 

Determine Inventory 

Levels for Items with

Low or Highly Variable 

Demand, but More Time

Is Needed to Determine 

Their Effect
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 64 GAO-14-495 Defense Inventory

accuracy, specifically improving level-setting for low-demand items.3

Finally, the Office of the Deputy Assistant Secretary of Defense for 

Supply Chain Integration commissioned a study on forecasting across the 

department that recommended that DLA and the services should tailor 

their approach based on an item’s demand pattern.4

These level-setting methodologies, referred to as Peak and Next-Gen, do 

not attempt to generate a forecast for the item based on past demand; 

rather they employ a statistical model that uses 5 years of historical data 

and assesses the risk of backorders based on factors such as the cost of 

the item and time between demands. The Peak and Next-Gen 

methodologies have been applied to about a third of DLA’s active 

inventory items, which were selected based on their demand history 

characteristics.

For example, items 

with regular demand patterns would require traditional forecasting 

methodologies that rely on historical demand, whereas items with low or 

highly variable demand would require alternative item-management 

approaches, such as level-setting. For more information on DLA’s 

approaches for planning amounts of needed inventory, see appendix IX.

5 Items with infrequent demand are handled by the Peak 

methodology, while items with a high degree of demand variability are 

handled by the Next-Gen method. These models then generate quarterly 

minimum and maximum inventory levels for the items, instead of 

generating a new forecast each month through the traditional forecasting 

approach. The minimum and maximum levels set by Peak and Next-Gen 

are not intended to maximize the performance of each individual item; 

instead, the goal is to maximize the performance of certain key inventory 

metrics—such as materiel availability, purchase request workload, and 

on-hand inventory levels—over entire groups of items.6

 

3

See app. I for a brief overview of the Comprehensive Inventory Management 

Improvement Plan and 

As a result, the 

GAO-12-493 for our assessment of the implementation of the plan.

4

Accenture, Sustainment Lifecycle Phase Forecasting and the Impact on Business 

Outcomes (July 2013).

5

Examples of the characteristics examined include the number of quarters with no 

demand over the last 5 years and the coefficient of variation between quarters of demand. 

DLA uses the coefficient of variation to describe the amount of variation seen in an item’s 

demand history. A low coefficient of variation implies relatively steady demand, while a 

high coefficient implies a more variable demand.

6

These groups of items are segmented by supply chain and by dollar amount.
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 65 GAO-14-495 Defense Inventory

process may set the maximum level of any given item to zero, based on 

the optimization calculation for the group of items to which it belongs.

Currently, a number of items are excluded from the Peak and Next-Gen 

methods. First, items with less than 2 years of demand history are 

excluded because the calculations for Peak and Next-Gen require at least 

a 2-year history. Second, items that would have slowed implementation 

due to complexity, such as items stocked at multiple locations, retail 

sites,7

Modeling performed by the DLA Office of Operations Research and 

Resource Analysis (DORRA)

or overseas distribution centers were not included. Third, items 

that were already being managed under special efforts, such as some 

nuclear and aviation engine items or items using a collaborative 

forecasting approach, were excluded from Peak and Next-Gen. DLA 

officials noted that Peak and Next-Gen are designed for items for which 

there is very little information beyond the demand history; items with 

additional information—such as those under active collaboration—may 

perform better under those different methods.

8

 

7

Retail sites are sites that provide support to a service maintenance facility, such as an Air 

Force Air Logistics Complex or an Army industrial depot.

prior to the adoption of Peak and Next-Gen 

suggests that the Peak and Next-Gen methodologies have the potential 

to improve a number of performance metrics, while significantly reducing 

the administrative workload associated with ordering these items. In 

2011, DORRA conducted an analysis on a number of different levelsetting models, including those that had been developed by DLA and 

contractors. Using a simulated environment of 41,000 items run over a 

hypothetical 3-year scenario, DORRA reported it found that the Peak and 

Next-Gen methods, coupled with the standard DLA forecasting method 

for more traditionally forecastable items, produced the best outcomes. 

This combination of methods in the simulation led to a substantial 

decrease in administrative workload, while reducing the amount of 

inventory and obligation authority required, and keeping materiel 

availability relatively unchanged. This analysis suggested that Peak and 

Next-Gen had the potential to improve upon a number of inventory 

metrics. When finalizing its decision on its approach forward, DLA 

determined through a second study conducted in 2012 that a mixture of 

8

DORRA is a DLA organization that performs research and analysis to inform decisionand policy- making.
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 66 GAO-14-495 Defense Inventory

the Peak, Next-Gen, and traditional DLA forecasting methods produced 

the best outcomes for maximizing customer service goals, while also 

reducing inventory levels.

At this time, Peak and Next-Gen require DLA to provide inventory data to 

a contractor, which performs the computer calculations necessary to 

arrive at the item levels, which are then passed back to DLA. DLA is still 

investigating the best way to bring this model into its enterprise resourceplanning system, but officials from the DLA headquarters element 

focused on information technology and systems suggest that it could take 

2 or 3 years to develop a Peak- and Next-Gen-type capability that resides 

within DLA’s system and does not require the exporting and importing of 

data.

DLA currently evaluates Peak and Next-Gen using numerous metrics, 

such as materiel availability, purchase request workload, and on-hand 

inventory levels. In the first few months of implementation, DLA 

experienced an increase in the amount of approved acquisition objective 

stock for these items, but this has since leveled off. In addition, as of 

January 2014, officials at DLA felt that the metrics do not show any 

negative effects from using the Peak and Next-Gen methodologies. 

However, given the nature of demand for Peak and Next-Gen items—

many can have several quarters of low or no demand—it will take some 

time before DLA can determine whether Peak and Next-Gen are having 

their intended effect. DLA officials told us that they do not expect to fully 

evaluate the effect of Peak and Next-Gen until January 2015, when 2 

years of data are available. Additionally, given that there are a number of 

other concurrent inventory-management efforts—such as “Time to Award” 

and the on-hand inventory-reduction effort—it may be difficult for DLA to 

fully assess whether improved or degraded metrics are the result of any 

single policy or procedure change.

Within the last 2 years, DLA has initiated a number of efforts that are 

aimed at either ensuring recorded acquisition lead times are accurate or 

reducing lead times, though it is too early to determine the results of 

these efforts. In addition, it can be difficult to separate out the effect of a 

given inventory effort when it is taking place at the same time as a 

number of other inventory efforts. DLA has worked to correct its 

acquisition lead times on file, reduce the amount of time it takes to award 

contracts, and place more items onto long-term contracts. Acquisition 

lead time is the time interval between identifying a need to purchase an 

item and delivering that item to the customer. Acquisition lead times have 

DLA Is in the Process

of Implementing Efforts

to Improve Acquisition 

Lead Time Accuracy

and Reduce Acquisition 

Lead Times
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 67 GAO-14-495 Defense Inventory

two primary components: administrative lead time, which is the time 

between identifying the need to purchase and the award of a contract, 

and production lead time, which is the time between when the contract is 

awarded and when the item is delivered to the customer. DOD’s 

Comprehensive Inventory Management Improvement Plan is focused, in 

part, on reducing the variance between actual acquisition lead times and 

recorded acquisition lead times, the latter of which are used for planning 

purposes in procuring items.9 In addition, DLA guidance has identified 

reducing backorders as a key agency goal. Previous GAO and third-party 

reports10 have noted that incorrect and long acquisition lead times can 

create backorders or on-hand excess inventory.11

In February 2014, DLA revised the acquisition lead times—either 

administrative or production—of over 327,000 of the items that are 

recorded in its enterprise resource-planning system to decrease its 

acquisition lead time variance.12 However, officials do not expect to fully 

see the effect of this change until about January 2015, after a few 

acquisition lead times have passed. Officials said that this change was 

done, in part, because of recent internal reviews that identified problems 

with the variance between the recorded acquisition lead times in the 

system and actual acquisition lead times.13

 

9

See app. I for a brief overview of the Comprehensive Inventory Management 

Improvement Plan and 

DLA has data on its 

acquisition lead time variance going back to fiscal year 2008; these data 

GAO-12-493 for our assessment of the implementation of the plan.

10GAO, Defense Inventory: Opportunities Exist to Improve Management of DOD’s 

Acquisition Lead Times for Spare Parts, GAO-07-281 (Washington, D.C.: Mar. 2, 2007); 

and RAND National Defense Research Institute, Integrating the Department of Defense 

Supply Chain (2012).

11If the acquisition lead time is understated, then supply planners will not purchase 

enough of an item, and there will be a risk for backorders. If the acquisition lead time is 

overstated, the planners may purchase more equipment than necessary, potentially 

leading to excess.

12Acquisition Lead time variance is a measure of the difference between the acquisition 

lead time recorded in a system of record and the observed acquisition lead time, and can 

be calculated for both the administrative and production lead times. For example, if an 

item has a recorded administrative lead time of 100 days and an observed administrative 

lead time of 75 days, then the lead time variance is 25 days. The Office of the Secretary of 

Defense goal for lead time variance is +/-30 days.

13The reviews were associated with actions taken as a part of the implementation of the 

Comprehensive Inventory Management Improvement Plan. 

DLA Is Correcting File 

Acquisition Lead Times 

to Improve Its Acquisition

Lead Time Variance
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 68 GAO-14-495 Defense Inventory

show that the acquisition lead times recorded in DLA’s system were 

consistently at least two to three times larger than the actual observed 

acquisition lead times. As noted earlier, the overstating of the acquisition 

lead time means that DLA was at risk of purchasing too much inventory. 

This effort was led by headquarters DLA, with input from the supply 

chains. DLA officials anticipate that this onetime correction, combined 

with additional changes to internal business rules that determine when to 

update acquisition lead times of record, will improve the accuracy of the 

recorded acquisition lead times and allow the system to update more 

frequently. DLA officials have stated that their previous business rules 

were not always sensitive enough to correctly update the acquisition lead 

times on record, and that their recent revisions should help reduce DLA’s 

acquisition lead time variance as tracked through the Comprehensive 

Inventory Management Improvement Plan monitoring effort and improve 

its planning parameters for deciding when to order inventory. 

In January 2013, the DLA Director also began encouraging the supply 

chains to reduce their administrative lead times through an effort called 

“Time to Award”, but officials say that this effort is still in its 

implementation phase and it is too early to assess its full effect. This effort 

set aggressive goals for each of the supply chains to reduce the 

administrative lead times on its awards—in some cases by as much as 65 

percent. The effort is intended to decrease administrative lead times by 

streamlining the contract award process, in part through the elimination of 

unnecessary or duplicative steps. According to officials, DLA has made 

some progress in eliminating duplicative or unnecessary steps in its 

award processes, though the effort is still in its early stages. For example, 

DLA has made changes to its processes to allow contracting officers 

more flexibility for smaller orders, reduced paperwork requirements, and 

eliminated some additional reviews that were not considered beneficial.14

A subset of metrics are also being tracked specifically to help inform the 

progress of the “Time to Award” effort, such as the percentage of 

automated awards,15

 

14According to DLA officials, while a number of changes were considered, certain steps of 

the acquisition process could not be changed due to statutory reasons, such as complying 

with the Federal Acquisition Regulation.

age of purchase requests, and administrative lead 

15Automated awards are those awards that do not require manual efforts on the part of 

DLA supply managers to award. A higher percentage of automated awards generally 

implies a lower administrative workload. 

DLA’s “Time to Award”

Initiative Is Focused on 

Reducing Administrative

Lead Times
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 69 GAO-14-495 Defense Inventory

time. These metrics are regularly presented to the Director in a “Time to 

Award” briefing.

DLA is currently working to place more items onto long-term contracts, 

because officials say that these long-term contracts, which typically last 

between 3 and 5 years, often allow DLA to reduce administrative lead 

times, frequently to 15 days or less. While the use of long-term contracts

has been tracked for many years at DLA, the analytical efforts described 

by officials at the aviation, land, and maritime supply chains to assess 

and pursue long-term contract candidate items based on their supplychain effect are relatively recent and it is too early to assess the full effect. 

Officials said that the supply chains must constantly reassess whether a 

given contract makes sense based on current operations and demands 

from the services. In addition, officials at the DLA supply chains stated 

that they have recently taken steps to ensure that the items being placed 

onto long-term contracts are their business drivers—items that see a lot 

of sales volume, that account for a large percentage of spending, or that 

have an outsized influence on metrics such as materiel availability. DLA 

currently develops annual supply chain–specific goals for the percentage 

of obligations made through long-term contracts.16 The fiscal year 2014 

goal for the land and maritime supply chains is 49 percent of all 

obligations, while the aviation supply-chain goal is for 60 percent of all 

obligations to be made through a long-term contract. Officials at the land 

and maritime supply chains told us that they have recently begun to focus 

their long-term contract efforts on their big business drivers and report 

that roughly 80 percent of these drivers will be placed on long-term 

contract award within the next year. Similarly, the aviation supply chain 

has identified roughly 10 percent of its recently active inventory17

 

16Despite the potential advantages of long-term contracts, officials told us that they do not 

expect the supply chains to place all their items onto long-term contracts because such 

contracts do not always make financial sense, either for DLA or for the business making 

the item. 

as being 

the primary drivers of customer demands, inventory dollars spent, and 

items affecting their materiel availability metric. According to aviation 

supply-chain officials, their strategies to increase their use of long-term 

contracts have focused on these particular items. In addition to focusing 

on their business drivers, officials from the supply chains told us that they 

17“Recently active” in this case means items that have seen a demand in the last 2 years.

DLA Supply Chains Are 

Working to Place More Items 

on Long-Term Contracts to 

Help Reduce Acquisition Lead 

Times
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 70 GAO-14-495 Defense Inventory

also conduct cost-benefit analyses of large long-term contracts to ensure 

that DLA will benefit from them.

DOD’s strategic network optimization program is intended to improve the 

efficiency of its supply, storage, and distribution processes across the

globe while maintaining or enhancing responsiveness to the customer; 

however, the department has not fully implemented its efforts and its 

savings estimates are preliminary. The program, which is overseen by the 

Assistant Secretary of Defense for Logistics and Materiel Readiness and 

is being managed by DLA, has three phases. Phase 1 focuses on 

minimizing costs through effective stock positioning, phase 2 on reducing 

on-hand inventory levels, and phase 3 on eliminating unneeded 

infrastructure.

In phase 1, underway currently, DLA has begun revising its methodology 

for determining the optimal locations (i.e., distribution depots) to stock 

specific items in order to minimize transportation costs while maintaining 

responsiveness to the customer. DLA began implementing its new stockpositioning methodology in 2012 and plans to complete implementation 

by the end of fiscal year 2014. DLA is projecting it will achieve $402 

million in net savings through reduction in transportation and inventory 

costs and has officially removed $231 million from its working capital fund 

obligation authority across fiscal years 2014 to 2019. According to DLA 

officials, the remainder of the savings—$171 million—is expected to be 

“given back” to the services through reductions in transportation rates.18

For phase 2, DOD aims to reduce the aggregate levels of its inventory by 

DLA achieving total visibility of consumable items and their associated 

inventories across DOD.

However, these savings have not been finalized in a working capital fund 

budget.

19

 

18According to DLA officials, phase 1 will result in less materiel needing to be moved 

across the distribution network, which will result in reduced transportation costs for DLA. 

According to the DLA officials, these reduced transportation costs will result in lower rates 

charged to its customers—the military services.

DLA and the services have developed a 

business plan to guide implementation, which will occur during fiscal year 

2015. Officials said that the basic concept of this phase involves 

19Consumable items are normally expended or intended to be used up beyond recovery.

Efforts to Improve 

Efficiency of DOD’s 

Supply, Storage, and 

Distribution Processes

Are Underway, but Are

in the Early Stages and 

Face Challenges
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 71 GAO-14-495 Defense Inventory

enhancing the current in-storage visibility program, which provides limited 

visibility into DLA-managed consumable inventory across the department, 

regardless of location and ownership.20

Table 8: Value of Inventory DLA Redistributed and Procured to Reduce or Replace a 

Planned Purchase since Fiscal Year 2011

DLA’s current in-storage visibility 

program tracks the value of inventory that DLA was able to (1) redistribute 

from one military service to fill an order from another military service and 

(2) procure from a military service to reduce or replace a planned 

purchase of inventory. For example, the department redistributed $34.5 

million in inventory and was able to avoid the procurement of an

additional $44.7 million in inventory during fiscal year 2013 through the 

program. See table 8 for the value of inventory redistributed and procured 

by DLA from a military service to reduce or replace a planned purchase of 

inventory since fiscal year 2011. 

Nominal dollars

Year

Amount 

redistributed

Value of 

procurement 

avoided

Total 

by year

2011 $54,809,311 $13,494,340 $68,303,651

2012 41,947,694 11,735,937 53,683,631

2013 34,453,282 44,661,259 79,114,541

Source: GAO analysis of DOD data.

According to department officials, the current in-storage visibility program 

does not provide DLA the visibility into retail stocks it needs to efficiently 

and effectively plan its supply support activities. Specifically, DLA has 

limited visibility of DLA-managed inventory the services hold at the retail 

level. Consequently, it can have difficulty efficiently and effectively 

planning the procurement of needed items to meet retail demand. 

Additionally, officials said that DLA is dependent upon the services’ retail 

locations to respond to DLA requests to obtain its excess stock for 

redistribution or the reduction of planned procurement. Furthermore, sites 

participating in the current in-storage visibility program have primarily 

 

20Some of this DLA-managed inventory is held and owned by DLA, and some by the 

services. 
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 72 GAO-14-495 Defense Inventory

been limited to the Army and Air Force.21 Through enhancements to the 

current in-storage visibility program, the department is striving to improve 

DLA’s visibility into retail level demands, fill orders using service-owned 

retail stocks, and jointly set wholesale and retail inventory levels to 

achieve required performance with minimal inventory.22

DLA and Office of the Deputy Assistant Secretary of the Defense for 

Supply Chain Integration officials believe the phase 2 efforts, if 

accomplished, could enhance the efficiency and effectiveness of DOD’s 

inventory-management practices, but the department recognizes that it 

confronts two major challenges in achieving its stated objectives. First, 

the department is faced with establishing business rules—such as 

policies and processes for improving visibility and accessibility to the 

military services’ retail level inventory—to govern the department’s 

planned enhancements, which will require considerable coordination and 

collaboration among the military services and DLA. Second, the 

department is challenged to ensure that it has the information-technology 

capabilities in place to adequately automate the processes. DLA is 

focused on addressing these challenges in its implementation of phase 2.

For phase 2, DLA tentatively estimates savings of about $860 million, 

spread across fiscal years 2015 to 2019, but DLA officials have told us 

that the current projected savings are not directly attributable to the 

planned strategic network optimization phase 2 efforts, such as enhanced 

in-storage visibility. Specifically, DLA officials told us that the methodology 

used to determine these preliminary savings relies on DLA’s ongoing 

inventory-reduction effort, rather than on any efforts attributable to the 

strategic network optimization program. Further, DLA officials stated that 

these savings are likely very optimistic. Currently, DLA is reviewing and 

validating the savings through its regular budgeting processes and 

changes may occur based on this review.

 

21Officials said that the Navy’s participation has been limited due to implementation 

challenges associated with its Enterprise Resource Planning System and the Marine 

Corps has not yet started to participate, but is interested in participating.

22The wholesale level is the highest level of organized supply and, as such, procures, 

repairs, and maintains stocks to resupply the retail levels of supply. The retail level of 

inventory is at the consumer level (directly supporting customers) or at the intermediate 

level (supporting a geographical area).
Appendix VIII: Additional Defense 

Logistics Agency Efforts to Improve

Inventory Management

Page 73 GAO-14-495 Defense Inventory

Phase 3, predicated on the reduction of inventory in Phase 2, intends to 

reduce DOD’s infrastructure footprint by eliminating warehouses, thus 

reducing storage and building sustainment costs. The strategic network 

optimization program plans to begin implementing this phase in fiscal 

year 2016 and currently is projecting $175 million in savings spread 

across fiscal years 2015 to 2019. However, the details of such an 

infrastructure reduction remain unclear at this point and the savings 

estimates are not finalized.
Appendix IX: Defense Logistics 

Agency’s Approaches for Planning 

Amounts of Inventory

Page 74 GAO-14-495 Defense Inventory

See DM# 217957 (Vertical Brief Format)

Table 9: DLA’s Approaches to Determining the Amount of Inventory 

Appendix IX: Defense Logistics

Agency’s Approaches for Planning

Amounts of Inventory
Appendix X: Print-Friendly Version of

Figure 8—Overview of the Defense

Logistics Agency’s (DLA) Regular 

Performance-Management Meetings

Page 75 GAO-14-495 Defense Inventory

Meeting name Level of meeting Description

Executive Boarda DLA Director The Executive Board meets quarterly and reviews the supply-chain Agency 

Performance Review metrics, which are the key performance metrics for DLA. It 

reviews a number of metrics that describe different areas of inventory management, 

such as customer service, cost, and internal efficiency.

Inventory Management

Council

DLA Director This meeting focuses on strategic-level initiatives that have the Director’s interest.

The metrics reviewed here will vary from month to month according to the specific 

initiatives being discussed. Many of the recent Inventory Management Council 

meetings have focused on the inventory reduction effort. 

J-3 Agency Performance

Reviewa DLA Headquarters In months where the Executive Board does not meet, the Agency Performance 

Review metrics are still reviewed at the J-3 level. A summary of this meeting and the 

metrics discussed is still provided to the Director. 

J-3 Backorder, Purchase 

Request, and Inventory 

Reviews

DLA Headquarters These reviews are focused on three areas: backorders, purchase requests, and 

inventory levels. Each supply chain will speak once per quarter about certain aged 

backorders and purchase requests, and describe what’s being done to resolve 

those specific orders. They will also discuss any problems that arise from disposing 

of certain inventory items as part of the inventory-reduction effort. 

J-7 Review and Analysis DLA Headquarters This meeting is focused on a number of procurement-related metrics such as the

number of purchase requests, the use of long-term contracts, and the timeliness of 

awards. 

J-8 Business Assessment DLA Headquarters This assessment is focused on the days of cash that DLA has on hand to support 

the working capital fund as well as the net operating result of the supply chains and 

other DLA organizations. 

Aviation Corporate Boarda DLA Supply Chain This meeting is focused on many of the same metrics reviewed at the higher-level 

Agency Performance Review meetings, but also includes a number of metrics used 

just by the supply chain such as potential backorders, administrative and production 

lead times, and on-order excess. 

Land and Maritime 

Agency Performance 

Reviewa

 

DLA Supply Chain The land and maritime supply chains hold a mid-month update on the Agency 

Performance Review metrics with their commander. 

Land and Maritime 

Monthly Business Review

DLA Supply Chain This meeting rotates between looking at DLA’s land and maritime distribution 

detachments. 

Source: GAO analysis of DOD guidance and inventory practices. 

a

These meetings focus on the Agency Performance Review metrics. 

Appendix X: Print-Friendly Version of

Figure 8—Overview of the Defense 

Logistics Agency’s (DLA) Regular 

Performance-Management Meetings
Appendix XI: Comments from the Department 

of Defense

Page 76 GAO-14-495 Defense Inventory

Appendix XI: Comments from the 

Department of Defense 
Appendix XI: Comments from the Department 

of Defense

Page 77 GAO-14-495 Defense Inventory
Appendix XI: Comments from the Department 

of Defense

Page 78 GAO-14-495 Defense Inventory
Appendix XII: GAO Contact and Staff 

Acknowledgments

Page 79 GAO-14-495 Defense Inventory

Zina D. Merritt, (202) 512-5257 or merrittz@gao.gov

In addition to the individual named above, key contributors to this report 

were Suzanne Wren (Assistant Director); John Bumgarner; Richard 

Burkard; Elizabeth Curda; Dave Hubbell; James Lackey; Carol Petersen; 

Steve Pruitt; Greg Pugnetti; Terry Richardson; Amie Steele; Michael 

Willems; and Erik Wilkins-McKee.

Appendix XII: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Related GAO Products

Page 80 GAO-14-495 Defense Inventory

Defense Logistics: A Completed Comprehensive Strategy is Needed to 

Guide DOD’s In-Transit Visibility Efforts. GAO-13-201. Washington, D.C.: 

February 28, 2013.

High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 

14, 2013.

Defense Logistics: DOD Has Taken Actions to Improve Some Segments 

of the Materiel Distribution System. GAO-12-883R. Washington, D.C.: 

August 3, 2012.

Defense Inventory: Actions Underway to Implement Improvement Plan, 

but Steps Needed to Enhance Efforts. GAO-12-493. Washington, D.C.: 

May 3, 2012.

Defense Logistics: DOD Needs to Take Additional Actions to Address 

Challenges in Supply Chain Management. GAO-11-569. Washington, 

D.C.: July 28, 2011.

Opportunities to Reduce Potential Duplication in Government Programs, 

Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, 

D.C.: March 1, 2011.

High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 

2011.

DOD’s 2010 Comprehensive Inventory Management Improvement Plan 

Addressed Statutory Requirements, but Faces Implementation 

Challenges. GAO-11-240R. Washington, D.C.: January 7, 2011.

DOD’s High-Risk Areas: Observations on DOD’s Progress and 

Challenges in Strategic Planning for Supply Chain Management.

GAO-10-929T. Washington, D.C.: July 27, 2010.

Defense Inventory: Defense Logistics Agency Needs to Expand on Efforts 

to More Effectively Manage Spare Parts. GAO-10-469. Washington, D.C.: 

May 11, 2010.

High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 

2009.

Related GAO Products
Related GAO Products

Page 81 GAO-14-495 Defense Inventory

Defense Inventory: Army Needs to Evaluate Impact of Recent Actions to 

Improve Demand Forecasts for Spare Parts. GAO-09-199. Washington, 

D.C.: January 12, 2009.

Defense Logistics: Lack of Key Information May Impede DOD’s Ability to 

Improve Supply Chain Management. GAO-09-150. Washington D.C.: 

January 12, 2009.

Defense Inventory: Management Actions Needed to Improve the Cost 

Efficiency of the Navy’s Spare Parts Inventory. GAO-09-103. Washington, 

D.C.: December 12, 2008.

DOD’s High-Risk Areas: Efforts to Improve Supply Chain Can Be 

Enhanced by Linkage to Outcomes, Progress in Transforming Business 

Operations, and Reexamination of Logistics Governance and Strategy. 

GAO-07-1064T. Washington, D.C.: July 10, 2007.

High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 

2007.

Defense Inventory: Opportunities Exist to Improve the Management of 

DOD’s Acquisition Lead Times for Spare Parts. GAO-07-281. 

Washington, D.C.: March 2, 2007.

DOD’s High-Risk Areas: Progress Made Implementing Supply Chain 

Management Recommendations, but Full Extent of Improvement 

Unknown. GAO-07-234. Washington, D.C.: January 17, 2007.

Defense Inventory: Opportunities Exist to Save Billions by Reducing Air 

Force’s Unneeded Spare Parts Inventory. GAO-07-232. Washington, 

D.C.: April 27, 2007.

DOD’s High-Risk Areas: Challenges Remain to Achieving and 

Demonstrating Progress in Supply Chain Management. GAO-06-983T. 

Washington, D.C.: July 25, 2006.

Defense Inventory: Actions Needed to Improve Inventory Retention 

Management. GAO-06-512. Washington, D.C.: May 25, 2006.

High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 

2005.

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