Defense Inventory: Opportunities Exist to Save Billions by Reducing Air Force's Unneeded Spare Parts Inventory
Published: 2007-04-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: At a time when U.S. military forces and their equipment are in high demand, effective management of the Department of Defense's (DOD) inventory is critical to ensure that the warfighter has the right items at the right time. The Air Force is the largest contributor to DOD's total on-hand inventory on the basis of inventory value. Under the statutory authority of the Comptroller General to conduct evaluations on his own initiative, GAO determined the extent to which (1) the Air Force's on-order and on-hand inventory reflect the amount of inventory needed to support required inventory levels from fiscal years 2002 through 2005, and (2) the Air Force had shortages in its inventory needed to support required levels during this period. To address these objectives GAO analyzed Air Force secondary inventory data (spare parts such as engines and guided missiles) from fiscal years 2002 through 2005.
section_title: What GAO Found
paragraphs: More than half of the Air Force's secondary inventory (spare parts), worth an average of $31.4 billion, was not needed to support required on-hand and on-order inventory levels from fiscal years 2002 through 2005, although increased demand due to ongoing military operations contributed to slight reductions in the percentage of inventory on hand and the number of years of supply it represents. DOD regulations provide guidance for developing materiel requirements based on customer expectations while minimizing inventories. However, the value of Air Force on-order inventory not needed to support required inventory levels increased by about 7.8 percent, representing an average of 52 percent ($1.3 billion) of its on-order inventory. The Air Force has continued to purchase unneeded on-order inventory because its policies do not provide incentives to reduce the amount of inventory on order that is not needed to support requirements. When the Air Force buys these items it may obligate funds unnecessarily, which could lead to not having sufficient obligation authority to purchase needed items and could negatively impact readiness. In addition, although the percentage of the Air Force on-hand inventory was reduced by 2.7 percent due to increases in demand, about 65 percent ($18.7 billion) of this inventory was not needed to support required inventory levels. GAO calculated that it costs the Air Force from $15 million to $30 million annually to store its unneeded items. Of the Air Force's inventory items not needed to support required inventory levels, 79 percent had no recurring demands (such as engines and airframe components), resulting in a potentially infinite supply of those items. The Air Force has continued to retain this unneeded inventory with no recurring demands, in part, because the Air Force has not performed a comprehensive assessment to revalidate the need to continue to retain these items. For the remaining 21 percent of items that had recurring demands, increasing demands resulted in a reduction in the number of years of supply that this inventory represents, with the largest quantity and value of items having between 2 to 10 years of supply. Inventory not needed to support required inventory levels can be attributed to many long-standing problems, such as decreasing demands, retaining items used to support aging weapon systems that have diminishing sources of supply or are being phased out of service, and not terminating contracts for on-order items. Air Force officials acknowledged that decreases in demand have resulted in having more inventory than is needed; however, the Air Force has not evaluated why it continues to experience decreases in demand or taken actions to mitigate the effect of these changes. Without taking actions to reduce its unneeded inventory, the Air Force will continue its past practices of purchasing and retaining items it does not need and then spending additional resources to handle and store these items. Although more than half of its secondary inventory was not needed to support required levels, the Air Force still had shortages of certain items. From fiscal years 2002 through 2005, the percentage and value of the Air Force's inventory shortages remained the same at about 8 percent and $1.2 billion.

section_title: Letter
paragraphs: Each of the military services and the Defense Logistics Agency (DLA)  maintain a supply of secondary inventory of spare parts to keep military  equipment operating for its missions. At a time when U.S. military forces  and their equipment are in high demand, the effectiveness and efficiency  of the Department of Defense’s (DOD) inventory management is critical to  ensure that the warfighter is supplied with the right items at the right time.  Because the services and DLA face challenges in competing for available  resources at a time when the nation faces an increasingly fiscally  constrained environment, it is imperative that they have good stewardship  over the billions of dollars invested in their inventory.
Since 1990, we have identified the department’s management of its  secondary inventory as a high-risk area due to ineffective and inefficient  inventory management systems and procedures and high levels of  inventory not needed to support required inventory levels (hereafter  referred to as requirements). These high levels of inventory include both  on-hand and on-order inventory. Inventory that is in DOD’s possession is  considered to be on hand. Inventory that is not in DOD’s possession but  for which contracts have been awarded or funds have been committed is  considered to be on order. DOD has reduced the overall value of its  secondary inventory—from more than $100 billion in 1990 to about $67  billion as of September 30, 2002. However, in recent years the trend has  been reversed due to increases in the value and quantity and changes in  the mix of items in DOD inventory, with inventory values increasing to  about $80 billion as of September 30, 2005, which is a 19 percent increase  from September 30, 2002, to September 30, 2005. Nevertheless, the  department continues to attribute readiness problems in part to shortages  of spare parts.
We have previously reported on many long-standing and systemic  problems in DOD’s inventory management, which affect all of the military  services and DLA. Given the significant resources invested in DOD’s  inventory and the long-standing problems in the management of DOD’s  spare parts, we reviewed the Air Force’s secondary inventory because the  Air Force is the largest contributor to DOD’s total on-hand inventory on  the basis of inventory value. The Air Force represents an average of about  39 percent ($28.9 billion) of the value of DOD’s total on-hand inventory. In  our previous reports, we identified the Air Force as having large amounts  of inventory on order and on hand that was not needed to support its  requirements.
Because of the broad congressional interest in DOD’s high-risk areas, we  prepared this report under the Comptroller General’s authority to conduct  evaluations on his own initiative. We are providing it to you because of  your oversight responsibilities for defense issues. Our objectives for this  report were to determine the extent to which (1) the Air Force’s on-order  and on-hand secondary inventory reflects the amount of inventory needed  to support requirements from fiscal years 2002 through 2005, and (2) the  Air Force had shortages in its inventory needed to support requirements  from fiscal years 2002 through 2005. We plan to report on the management  of the Army, Navy, and DLA secondary inventory separately. In addition, in  March 2007, we reported that inaccurate forecasting of DOD’s acquisition  lead times for spare parts has led to early delivery of items, resulting in  additional inventory on hand that is not needed to support requirements.
To determine the extent to which the Air Force’s on-order and on-hand  secondary inventory reflects the amount of inventory needed to support  requirements or was not enough to support requirements, we analyzed  summary and item-specific inventory data from fiscal years 2002 through  2005 to determine the total value of items that had more than or less than  enough inventory to satisfy their respective requirements. To determine  the reasons for having inventory not needed to support requirements or  inventory shortages, we conducted a survey of some inventory items  selected from the 18,676 unique Air Force items that met our selection  criteria—10,810 unique items with inventory not needed to support  requirements and 7,866 unique items with inventory shortages. We  selected a probability sample of 335 unique Air Force inventory items— 230 unique items with inventory not needed to support requirements and  105 unique items with inventory shortages. Because this was a random  probability sample, the results of our analysis can be projected to all Air  Force items that met our selection criteria. We sent surveys to Air Force  item management specialists who had responsibility for the selected  unique inventory items to identify the frequency of reasons for items not  needed to support requirements or not meeting inventory requirements.  We received survey responses for 295 of the 335 unique items in our  sample.
On the basis of information obtained from the Air Force on the reliability  of their inventory management systems’ data, the survey results, and our  follow-up analyses, we believe that the data used in this report are  sufficiently reliable for our purposes. We conducted our review from  January 2006 through February 2007 in accordance with generally  accepted government auditing standards. Details of our scope and  methodology are included in appendix I.
subsections: section_title: Background
paragraphs: Inventory management and oversight for the Air Force is a shared  responsibility between the Offices of the Secretary of Defense and the  Secretary of the Air Force. The Under Secretary of Defense for  Acquisition, Technology, and Logistics is responsible for developing and  ensuring the uniform implementation of DOD inventory management  policies throughout the department, monitoring the overall effectiveness  and efficiency of the DOD logistics system, and continually developing  improvements. The Secretary of the Air Force is responsible for  implementing DOD inventory policies and procedures. The Air Force  Materiel Command has issued a manual to its air logistics centers—Ogden  Air Logistics Center, Oklahoma City Air Logistics Center, and Warner  Robins Air Logistics Center—that prescribes guidance and procedural  instructions for computing requirements for its secondary inventory.
To assist in the management of its inventory, DOD summarizes its  secondary inventory in its annual Supply System Inventory Report. This  report is based on financial inventory and other inventory reports  prepared by the military services and DLA. The report summarizes  inventories by DOD component and inventory category. Over the past 4  years, DOD has reported a continuous increase in the value of its  secondary item inventory in its Supply System Inventory Report. As of  September 30, 2002, DOD reported that its secondary inventory was valued  at about $67.0 billion; however, as of September 30, 2005, the value of this  inventory had increased to about $79.6 billion—a $12.6 billion increase  between 2002 and 2005. Table 1 shows the value of DOD’s on-hand  inventory from fiscal year 2002 through fiscal year 2005 and the value and  percentage of the inventory held by the Air Force.
From fiscal year 2002 through fiscal year 2005, the Air Force’s total on- hand inventory increased by $1.2 billion, representing about 10 percent of  the total $12.6 billion increase in DOD inventory during this period. This  increase was primarily due to the addition of new items to the Air Force’s  inventory in fiscal year 2005. Specifically, from September 30, 2002,  through September 30, 2005, the Air Force added 2,331 new unique items  with a total of about 179,425 individual parts that were valued at  approximately $1.3 billion. Our analysis shows that increases in the Air  Force’s inventory were also caused by changes in the value and quantity of  the unique items in the inventory. We found that changes in the price of  items in the Air Force’s secondary inventory resulted in a $0.8 billion  increase in the value of its inventory in fiscal year 2005. Similarly, changes  in the quantity of secondary inventory unique items that were on hand in  fiscal year 2002 were the reason for a $0.7 billion increase in the value of  DOD’s secondary inventory in fiscal year 2005. These price increases were  offset by a decrease of $1.6 billion in the value of the Air Force’s inventory  for items that were included in fiscal year 2002 but were not included in  the inventory for fiscal year 2005.
The Air Force uses a process called requirements determination to  calculate the amount of inventory that is needed to be held in storage (on  hand) and that should be purchased (on order). This information is used to  develop the Air Force’s budget stratification report. The stratification  report shows the amount of inventory needed to meet operating  requirements. When the total of on-hand and on-order inventory falls to or  below a certain level—called the reorder point—inventory managers place  orders for additional inventory to prevent out-of-stock situations from  occurring. The Air Force refers to its inventory managers as item  management specialists. Generally, item management specialists order the  amount of inventory needed to satisfy the reorder point requirement.  Depending on the item, the reorder point may include requirements for  one or more of the following:    war reserves that are authorized to be purchased,    customer-requisitioned materiel that has not been shipped (also known as    a safety level to be on hand in case of minor interruptions in the resupply  process or unpredictable fluctuations in demand,    minimum quantities for essential items for which demand is not normally  predicted (also referred to as numeric stockage objective or insurance  items),  inventory to satisfy demands while broken items are being repaired (also  referred to as repair cycle stock),  inventory to satisfy demands during the period between when the need to  replenish an item through a purchase is identified and when a contract is  awarded (also referred to as administrative lead time), and  inventory to satisfy demands during the period between when a contract  for inventory is awarded and when the inventory is received (also referred  to as production lead time).
We define the Air Force’s current year’s operating requirements as  requirements for war reserves, stock due-outs (backorders), safety levels,  numeric stockage objective (a form of safety stock), and repair cycle.  Hereafter, these requirements will be referred to as on-hand requirements.  On-hand inventory is used to satisfy these on-hand requirements. On-order  inventory is the amount of inventory for which contracts have been  awarded or funds have been committed by the Air Force to satisfy any  shortfall to its on-hand requirements and its administrative and production  lead time requirements. Hereafter, these requirements will be referred to  as on-order requirements. When there is not enough inventory to meet on- hand and on-order requirements, this is defined as an inventory shortage.
section_title: More than Half of the Air Force’s Secondary Inventory Was Not Needed to Support Requirements, Although Demand for Some Items Increased
paragraphs: More than half of the Air Force’s on-order and on-hand secondary  inventory, worth an average of $31.4 billion, was not needed to support its  requirements from fiscal years 2002 through 2005, although increases in  demand have contributed to a slight reduction in the percentage of this on- hand inventory and a reduction in the number of years of supply this  inventory represents. Our analysis shows that the value and the  percentage of the Air Force’s inventory not needed to support its on-order  requirements increased by about $0.3 billion and 7.8 percent, respectively,  representing an average of 52 percent of its on-order inventory.  Additionally, we found that the percentage of the Air Force’s inventory not  needed to support its on-hand requirements was reduced by 2.7 percent,  due, in part, to increases in the demand for the items. However, this  inventory represents an average of about 65 percent (about $18.7 billion)  of the value of unneeded on-hand inventory. While increasing demands  have resulted in the Air Force reducing the number of years of supply this  inventory represents, 79 percent of the Air Force’s inventory items not  needed to support requirements had no recurring demands at all, resulting  in a potentially infinite supply of those items. We found that the Air  Force’s secondary inventory not needed to support on-order and on-hand  requirements can be attributed to many of the long-standing and systemic  inventory management problems that we have identified in our prior  reports in 1997 and 2000, such as decreasing demands or demands not  materializing at all, retaining items used to support aging weapon systems  that have diminishing sources of supply or are being phased out of service,  retaining items that may be used to support new weapon systems, and not  terminating eligible contracts for on-order items.
subsections: section_title: Air Force On-Order Inventory Not Needed to Support Requirements Has Increased
paragraphs: Based on our analyses, we found that the Air Force experienced an  increase in the amount and percentage of on-order inventory not needed  to support its on-order requirements from the end of fiscal year 2002  through the end of fiscal year 2005. The value and percentage of the Air  Force’s unneeded on-order inventory increased by about $0.3 billion and  7.8 percent, respectively. Although DOD’s supply chain management  regulation provides guidance for developing materiel requirements based  on customer expectations while minimizing inventories, over the 4-year  period an average of 52 percent ($1.3 billion) of the Air Force’s on-order  inventory was not needed. Examples of unneeded on-order inventory  include jet engines, landing gear components, electrical and  communication equipment, guided missile components, aircraft hydraulic  and de-icing system components, and other aircraft components. This $1.3  billion in on-order inventory not needed to support requirements indicates  that the Air Force did not cancel orders or deobligate funds for items that  were not needed to support requirements. Furthermore, based on the Air  Force’s fiscal year 2005 stratification report, the Air Force marked for  disposal approximately $300 million of its on-order inventory that is not  needed to support requirements. This means that as soon as these on- order items are delivered, they could be disposed of. Table 2 shows the  amount of unneeded inventory the Air Force had on order at the end of  fiscal year 2002 through the end of fiscal year 2005.
At the end of fiscal year 2005, the Air Force had 2,157 unique items (with a  quantity of 788,515 individual parts) valued at $1.1 billion with inventory  on order that was not needed to support requirements. Of these 2,157  items, there were 1,192 unique items (with a quantity of 723,147 individual  parts) that had unneeded inventory both on order and on hand. These  items represented approximately 74 percent, or about $0.8 billion of the  total $1.1 billion of Air Force’s on-order items that were not needed to  support requirements. Appendix II contains a list of the top 10 types of  items, identified by the federal supply class, with the highest value of  unneeded items on order as of September 30, 2005.
The Air Force has not been effective in reducing the amount of its  unneeded inventory on order, with an average of $1.3 billion of its on- order inventory over the past 4 years not being needed to support  requirements. The Air Force has continued to purchase this unneeded on- order inventory because its policies do not provide incentives to reduce  the amount of inventory on order that is not needed to support  requirements. Instead, the Air Force has revised its policies to make it  easier to purchase inventory that is not needed to support requirements.  For example, in June 2006 the Air Force Materiel Command announced a  change in its policy for reviewing contract termination actions valued at $1  million or less to require each air logistics center to review at least 80  percent of the center’s total computed termination value, with priority  given to those terminations with the highest dollar value. Under its prior  policy, all such orders were required to be reviewed for potential contract  termination. We did not evaluate this new policy to determine the overall  impact that it would have on purchasing items not needed to support  requirements because this policy was not in effect during our review  period, but it appears that this new policy will exacerbate the problem.  Until the Air Force policy provides incentives, such as requiring contract  termination review for all unneeded on-order inventory or reducing the  amount of funds available for the Air Force Materiel Command by an  amount up to the value of the Air Force’s on-order inventory that is not  needed to support requirements, the Air Force is likely to continue to  experience its long-standing problems with having on-order inventory that  is not needed to support requirements. In our discussions with Air Force  Materiel Command officials, they disagreed with our assertion that they do  not have incentives to assist them in reducing the amount of on-order  inventory that is not needed to support requirements. According to an Air  Force Materiel Management Command official, the Air Force has a plan to  create a new data system to improve the process for identifying on-order  inventory that should be terminated. However, this official stated that  there is not yet a designated amount of funding in place to finance the  initiative; thus it is unclear when this plan would be implemented.
section_title: With Higher Demands, Still More than Half of the Air Force’s On-Hand Inventory Was Not Needed to Support Requirements
paragraphs: Although higher demands helped the Air Force slightly reduce the  percentage of its on-hand inventory not needed to support requirements  during fiscal year 2002 through fiscal year 2005, more than half of its on- hand inventory was unneeded. Our analysis shows that between  September 30, 2002, and September 30, 2005, the percentage of the Air  Force’s unneeded on-hand inventory was reduced by 2.7 percent, due, in  part, to increases in the demand for the items, although the value of this  unneeded inventory remained the same. Despite this reduction, an average  of about 65 percent ($18.7 billion) of the value of the Air Force’s on-hand  inventory was not needed to support requirements. Examples of unneeded  on-hand inventory include jet engines, electrical and communication  equipment, radar equipment, guided missile components and subsystems,  aircraft gun fire control components, and other aircraft components. Table  3 shows the amount of unneeded inventory the Air Force had on hand  from the end of fiscal year 2002 through the end of fiscal year 2005.
At the end of fiscal year 2005, the Air Force had 87,480 unique items (with  a quantity of 5,776,442 individual parts) valued at $18.7 billion with  inventory on hand that was not needed to support requirements. Of these  87,480 items, there were 1,192 unique items (with a quantity of 775,791  individual parts) that had unneeded inventory both on order and on hand.  These items represented approximately 4 percent, or about $0.8 billion of  the total $18.7 billion of Air Force’s on-hand items that were not needed to  support requirements. Appendix III contains a list of the top 10 types of  items, identified by the federal supply class, with the highest value of  unneeded items as of September 30, 2005.
Having on-hand inventory that is not needed to support requirements  increases overall storage costs for the Air Force. According to Air Force  officials, the cost to store this inventory is small compared to the cost to  dispose of and then later repurchase these items if they are needed.  However, we calculated as of September 30, 2005, that it cost the Air Force  at least $15 million annually to store its useable inventory not needed to  support on-hand requirements. In addition, depending on the location  where repairable broken items are stored, it could cost up to an additional  $15 million to store unneeded inventory items that have not been  repaired. If the Air Force did not have this unneeded inventory, it might  be in a better position to reduce its warehousing infrastructure and  associated costs. Moreover, the $18.7 billion in on-hand inventory not  needed to support requirements indicates that the Air Force may not have  canceled orders for items that were not needed or may have tied up funds  that could have been obligated for other needed items.
section_title: Much of the Air Force Inventory Not Needed to Support Requirements Had No Demands, Although Demands for Some Items Increased
paragraphs: Of the Air Force’s on-order and on-hand inventory not needed to support  requirements, 79 percent had no recurring demands at all, resulting in a  potentially infinite supply of those items. Examples of unneeded inventory  with no recurring demands include jet engines, electrical hardware, guided  missiles, fusing and firing devices, and airframe and other aircraft  components. The Air Force has continued to retain this unneeded  inventory with no recurring demands, in part, because the Air Force has  not performed a comprehensive assessment of its on-hand inventory items  that are not needed to support requirements and that have no recurring  demands and revalidated the need to continue to retain these items. In our  discussions with Air Force Materiel Command officials, they disagreed  with our assertion that they should conduct a comprehensive assessment  to determine whether to retain this unneeded inventory. According to an  Air Force Materiel Command official, the Air Force’s quarterly  requirements computation process is a valid assessment for determining  the amount of inventory needed to satisfy its requirements. However, this  process does not provide a comprehensive assessment on whether to  retain inventory items not needed to satisfy requirements. Instead, the  requirements computation process determines the amount of inventory  needed to be on hand and on order to satisfy current and future  requirements and identifies the amount of inventory that is above those  requirements. An Air Force Materiel Command official also stated that the  Air Force provides item management specialists with the necessary  guidance for retaining assets that are not needed to support requirements  and it conducts an annual assessment of the inventory items that are being  retained. The official commented that although these assets may show no  current demands, there may be future demands for the items, thus the Air  Force retains them for possible future use. However, given that we found  that 79 percent of the Air Force’s on-order and on-hand inventory not  needed to satisfy its current requirements are items that have no recurring  demands, resulting in a potentially infinite supply of those items, we  continue to believe that a comprehensive assessment is needed to  determine which and how many of these items should be retained.
For the 21 percent of Air Force inventory not needed to support  requirements that had projected recurring demands, we found that the  demand for these items slightly increased, thereby improving the  likelihood that these items will be used. For example, in fiscal year 2005,  82 percent of the unneeded items with projected recurring demands were  projected to be used within a period of 10 years or less; whereas in fiscal  year 2002, only 79 percent of the items were projected to be used. Figure 1  shows a comparison of the number of Air Force unneeded on-hand and  on-order inventory items stratified by years of supply for fiscal years 2002  and 2005.
On the basis of number of items and value, in fiscal year 2002 and fiscal  year 2005 the largest category of Air Force secondary inventory not  needed to support requirements was “2 to 10 years of supply.” At the end  of fiscal year 2005, there were 6,361 unique items valued at about $4.2  billion within this category. The value of the items was largest of all of the  years-of-supply categories, representing about 32 percent of the total value  of the supply years stratified. We also found that the amount of inventory  in the most current years of supply improved from 2002 to 2005. In fiscal  year 2005, about 31 percent of the items with projected recurring demands  had an anticipated supply of less than 1 year. This is about a 4 percent  increase from the percentage for fiscal year 2002, which was about 27  percent.
section_title: Reasons Vary for Air Force Maintaining On-Order and On-Hand Inventory Not Needed to Support Requirements
paragraphs: Responses from Air Force item management specialists and our analysis  of the Air Force’s inventory data identified a variety of reasons for  maintaining on-order and on-hand inventory not needed to support current  requirements, such as decreasing demands, retaining items used to  support aging weapon systems that have diminishing sources of supply or  are being phased out of service, retaining items to support new weapon  systems, and not terminating eligible contracts for on-order items not  needed to support requirements.
We conducted a survey of selected Air Force inventory items, which  identified a variety of reasons for having items not needed to support their  inventory requirements. Table 4 summarizes the estimated frequency of  reasons for having unneeded on-order and on-hand inventory as reported  in our survey results. Based on our sample, decreases in demands and  changes in implementation schedules for inventory replacement were the  most frequent reasons specifically cited for on-order inventory not needed  to support requirements. Decreases in demand and weapon systems being  phased out were the most frequent reasons identified for unneeded on- hand inventory. Specific examples and more detailed discussion of some  of these reasons appear in the subsections that follow. For more details on  our item selection and survey methodology, refer to appendix I.
Many of these reasons are long-standing and systemic inventory  management problems that we have identified in our prior reports. Since  early 1990, when we began reporting on this issue, decreases in demand,  obsolescence, and data input errors were some of the reasons given for  DOD’s excess inventory. Additionally, on the basis of our March 2007  report reviewing DOD’s administrative and production lead time  requirements, we found that inaccurate forecasting of these requirements  led to early delivery of items valued at approximately $2 billion—of which  the Air Force represented $0.3 billion—resulting in having additional  inventory on hand that was not needed to support requirements.
subsections: section_title: Demand Decreasing or Not Materializing
paragraphs: Based on our survey, we estimate that demand decreasing or not  materializing at all account for 29 percent of items with on-order inventory  not needed to support requirements and 37 percent of items that had on- hand inventory not needed to support requirements. We estimate that  decreases in demand were a factor in at least $0.97 billion of the unneeded  on-hand Air Force inventory. Moreover, since 1997, DOD’s data have  shown that demand decreasing or not materializing at all were the primary  reasons for having on-order and on-hand inventory not needed to support  requirements. Demand includes both recurring and nonrecurring demands.  A one-time event, such as the initial upgrading of selected parts of a  weapon system, is considered to be a nonrecurring demand. In our 1997  report, a decrease in demand or demand not materializing was also the  primary reason for DOD having unneeded on-order and on-hand inventory,  representing 24 percent and 11 percent, respectively, for the items  sampled. Similarly, in 2000, we reported that while DOD inventory  managers made inventory purchases that were supported by requirements  at the time they were contracted, subsequent requirement decreases  resulted in the purchases being in excess of requirements. During our  analysis, Air Force officials acknowledged that they are aware that  decreases in demand have resulted in having more inventory than is  needed to support requirements; however, the Air Force has not evaluated  why it continues to experience these decreases in demand or taken  actions to mitigate the effect of these changes. Until the Air Force  evaluates why it continues to have long-standing changes in demand, it  will continue to have on-order and on-hand inventory that is not needed to  support requirements, which may result in unnecessary increased storage  costs and obligation of funds earlier than necessary. In addition, until the  Air Force evaluates these decreases in demand, it will be unable to  effectively take necessary management actions to reduce unneeded on- hand and on-order inventory.
section_title: Items Used to Support Aging Weapon System That Have Diminishing Sources of Supply or Are Being Phased Out of Service
paragraphs: Many of the Air Force’s inventory items not needed to satisfy requirements  are items used to support aging weapon systems that have diminishing  sources of supply or are being phased out of service. Based on our sample,  we estimate that 18 percent of unneeded on-hand inventory items are in  this category. According to Air Force policy, items not needed to satisfy  requirements may be retained by inventory management specialists if the  items supporting older weapon systems can no longer be procured.  Additionally, DOD’s Supply Chain Materiel Management Regulation states  that the Air Force is required to review and validate, at least once  annually, the methodology used in deciding to retain these items. In  responding to our surveys, many item management specialists cited  various Air Force memoranda that contain the justification for retaining  items that support aging weapon systems, such as the B-52 and the A/OA- 10. For example, according to the retention memo for B-52 assets, the  rationale for taking a conservative approach when disposing of excess  inventory items is to counter routine difficulties in obtaining assets needed  to meet requirements due to diminishing manufacturing sources and the  increasing cost of reprocuring these items should demand arise after  disposal of on-hand assets occurs. The projected life of the B-52 is  expected to last until the year 2040. According to an Air Force  memorandum, unless an item or system supporting the B-52 is replaced,  most of these inventory items will be required at some point during the  weapon system’s projected life. Similar reasons were given for retaining  the A-10 assets. However, item management officials for the A-10 have  requested that all assets supporting this weapon system—many of which  currently have little or no usage—be retained for the projected life of the  weapon system, which is the year 2028. Based on our sample, we estimate  that there is at least $24 million worth of inventory on hand that supports  the A-10 and the B-52 weapons systems. Although the actual usage rates  may be small, given the length of time these systems will continue to be in  service, without establishing some baseline requirements for the items  supporting these systems, the Air Force will continue to have large  quantities of inventory on hand that appear not to be needed to support  requirements, even though the Air Force projects that these items may be  needed in the future to support these weapon systems.
section_title: Potential Support of New Weapon Systems by Current Items
paragraphs: The Air Force is retaining some inventory items because they potentially  may be used to support new weapon systems. In June 2005, the Air Force  Materiel Management Division directed that all parts for the F-16 aircraft  weapon system be retained for a period of at least 1 year until the Air  Combat Command completes an analysis of alternatives on the next  generation replacement for the QF-4 aircraft weapon system. In July  2006, this retention policy was extended until the analysis of alternatives is  completed in 2007 and a decision is made. Currently, the F-16 is a leading  candidate for replacing the QF-4 aircraft that will be phased out of service;  thus, the future requirements for assets supporting the F-16 are unknown  at this time. As a result, the Air Force is retaining all F-16 assets because  they may be used to support the new weapon system. According to Air  Force officials, they are using the lessons learned from the QF-4 program,  where they had documented cases of repurchasing previously owned Air  Force inventory from salvage contractors, usually at very high prices.  Based on our sample, we estimate that 10 percent of items on hand that  are not needed to meet current requirements are used to support the F-16  aircraft weapon system.
section_title: Contracts for On-Order Items Not Terminated
paragraphs: Some of the Air Force’s on-order items not needed to support  requirements remain on order because the contracts for these items have  not been terminated. The Air Force defines items on order that are in  excess of their requirements objective as termination quantities, which  should be considered for contract cancellation under Air Force policy. As  of September 30, 2005, the Air Force had 789 unique items (about 115,000  individual parts), valued at about $261 million, that should have been  considered for contract termination. However, based on our sample, we  estimate that only 5 percent of the contracts for items that should have  been considered for termination actually were terminated or reduced.  Item management specialists reported that contracts were not cancelled  or the quantity on contract was not reduced due to a variety of reasons  that include: items were delivered before the termination quantities were  identified, items were delivered before termination actions were taken,  contract termination model results showed that it was not economically  feasible to terminate contracts, items were purchased as government  furnished equipment to support contractor repair, data errors resulted in  inaccurately identifying contracts for termination, and manpower  constraints resulted in the issuance of an interim policy directing that no  contracts valued at $1 million or less be terminated. For these items, we  did not determine whether the Air Force ran the termination model in a  timely manner to determine the feasibility of canceling the orders or  bringing the items into inventory, nor did we determine whether the Air  Force responded to the model’s recommendations in a timely manner.
One frequent reason noted for lack of action to terminate or reduce a  contract was an interim policy instituted from March 2005 through June  2006 at the Oklahoma City Air Logistics Center, directing that no  termination actions be taken for items valued at $1 million or less. For  these items, item management specialists also were not required to  perform the contract cancellation computation to determine if it was  economically feasible to terminate these contracts. According to  Oklahoma City Air Logistics Center officials, this revised termination  policy was instituted because of a decrease in the manpower needed to  accurately and completely process these items with potential excess  inventory due to mandatory training requirements. For the total number of  items that we computed to be on-order inventory not needed to meet  requirements as of September 30, 2005, this policy resulted in the  acquisition of about 77 percent of the Oklahoma Air Logistics Center’s  inventory, valued at $123 million, which was not supported by  requirements.
section_title: Air Force Inventory Shortages Remained the Same
paragraphs: Although more than half of its secondary inventory was not needed to  support requirements, the Air Force still had shortages of certain items in  inventory. Between September 30, 2002, and September 30, 2005, the  percentage and value of the Air Force’s inventory shortages remained the  same—at about 8 percent and $1.2 billion of its inventory required—while  it maintained about $20.0 billion for items on order and on hand that were  not needed to support requirements. In fiscal year 2005, the Air Force  experienced shortages of about $1.2 billion for some 7,866 unique items  (with a quantity of 371,961 individual parts), which may negatively affect  readiness. Table 5 summarizes the value of the Air Force’s inventory  shortages during this 4-year period.
The reasons cited by the Air Force item management specialists for their  inventory shortages varied. Table 6 summarizes the estimated frequency of  reasons for why these items did not meet overall inventory requirements.  For more details on our item selection and survey methodology, see to  appendix I.
The most frequent reasons identified by item management specialists in  the sample were “other” and “no shortages reported.” The specific reasons  most frequently cited for shortages were lost or delayed repair capability,  increases in demand, and data errors. For example, lost or delayed repair  capability was a reason cited for a shortage with the fuel pump for a jet  engine and with the electronic circuit card. Additionally, shortages for a  transistor and a dual-level valve in fiscal year 2005 were attributed to  increases in demand. In our previous work, we have similarly reported  that increases in demand, the use of substitute items, and weapon systems  upgrades or modifications have been reasons for inventory shortages.
section_title: Conclusions
paragraphs: The nation faces an increasingly fiscally constrained environment where it  is imperative that the Air Force exercise good stewardship over the  billions of dollars invested in its inventory. At a time when the Air Force is  making personnel reductions due to fiscal challenges, its ineffective and  inefficient inventory management practices hinder its ability to efficiently  and effectively allocate its resources. On average, from fiscal year 2002  through fiscal year 2005, the Air Force experienced shortages for some  required items, valued at about $1.2 billion, which may have negatively  affected readiness. However, during this same period, the Air Force  maintained about $20 billion worth of items both on order and on hand  that were not needed to support requirements. When the Air Force buys  unneeded items, it is obligating funds unnecessarily, which could lead to  not having sufficient funds to purchase needed items, which also may  negatively affect readiness. Correcting these problems would make more  funds available that could then be used to purchase items needed to  reduce the Air Force’s inventory shortages or meet other Air Force  requirements. Without modifying its policies to provide incentives to  reduce the amount of inventory on order that is not needed to support  requirements or conducting a comprehensive assessment to validate the  need to retain unneeded on-hand inventory that does not have recurring  demands, the Air Force will continue its past practices of purchasing and  retaining items that it does not need and then spending additional  resources to handle and store these items. Absent establishing ongoing  requirements for items to support weapon systems that have lengthy  projected life spans, the spare parts used in these systems will appear to  be unneeded even though the Air Force plans to retain these items and  expects that these items will be needed over the life span of the system.  Moreover, although inventory requirements change as a result of changes  in the national threat levels and missions, continuing decreases in demand  have caused more inventory to be on hand than is needed to support  requirements. Until the Air Force evaluates why it continues to have long- standing decreases in demand, it will continue to maintain inventory that  is not needed to support requirements, which may result in unnecessary  increased storage costs.
section_title: Recommendations for Executive Action
paragraphs: To meet customer expectations while minimizing inventory and to reduce  the Air Force’s inventory not needed to support requirements, we are  recommending that the Secretary of Defense direct the Secretary of the  Air Force to take the following four actions:    modify its policies to provide incentives to reduce purchases of on-order  inventory that are not needed to support requirements, such as requiring  contract termination review for all unneeded on-order inventory or  reducing the funding available for the Air Force Materiel Command by an  amount up to the value of the Air Force’s on-order inventory that is not  needed to support requirements;    conduct a comprehensive assessment of the inventory items on hand that  are not needed to support requirements and that have no recurring  demands and revalidate the need to continue to retain these items, and, as  part of this assessment, consider establishing ongoing requirements for  items supporting weapon systems that have lengthy projected life spans;    evaluate the reasons why the Air Force continually experiences decreases  in demands which have contributed to having more than half of its  inventory on hand not needed to support requirements; and    after evaluating the reasons for the decreases in demand, determine what  actions are needed to address these decreases and then take steps to  implement these actions.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report (reprinted in app. IV), DOD  concurred with three of our recommendations and partially concurred  with one. DOD cited specific actions it plans to take to implement the four  recommendations and specified implementation timelines for each  recommendation. We do not believe that DOD’s planned actions are fully  responsive to two of our recommendations. Our evaluation of DOD’s  planned actions is discussed in detail below.
DOD partially concurred with our recommendation for the Air Force to  modify its policies to provide incentives to reduce purchases of on-order  inventory that are not needed to support requirements. While DOD agreed  that opportunities exist to reduce Air Force on-order inventory by  ensuring that on-order material above the reorder point is properly  reviewed and that measures are put in place to ensure Air Force inventory  management specialists are following excess on-order termination  procedures, it did not agree that a change or modification to the Air  Force’s policy was required to accomplish this task, as we recommended.  DOD said that the Air Force plans to address this issue by enforcing  existing policy and by placing an increased focus on excess on-order  measures. However, DOD did not explain these measures or what steps it  will take to ensure that they are effectively implemented. DOD plans to  provide a status update on the implementation of this recommendation by  the end of September 2007. While we believe the actions cited by DOD are  a step in the right direction, we do not believe that these planned actions  are fully responsive to our recommendation. In this report we found that  the Air Force has continued to not terminate contracts for unneeded on- order inventory because its policies do not provide incentives to reduce  the amount of inventory on order that is not needed to support  requirements. For example, as we stated in our report, in June 2006 the Air  Force revised its policy for reviewing contract termination actions valued  at $1 million or less, which makes it easier to purchase inventory that is  not needed to support requirements. This new policy requires each air  logistics center to review at least 80 percent of the center’s total computed  termination value, with priority given to those terminations with the  highest dollar value. Under its prior policy, all such orders were required  to be reviewed for potential contract termination. As a result, this revised  policy will require fewer on-order inventory items to be reviewed for  potential contract termination. Given that we found more than half of the  Air Force’s on-order inventory was not needed to support on-order  requirements at a time when the old policy requiring review of all orders  was in effect, we believe that this new policy will exacerbate the problem.  Thus, we continue to believe that the Air Force needs to modify its current  policy to provide incentives to reduce purchases of on-order inventory as  we recommended.
DOD concurred with our second recommendation to conduct a  comprehensive assessment of unneeded on-hand inventory, stating that it  agreed that opportunities exist to reduce Air Force on-hand inventory for  items that are not needed to support requirements and have no recurring  demands and that the need to continue to retain these items should be  validated. DOD stated that the Air Force will review its current stockage  retention policy and take actions necessary to reduce the inventory as  required. DOD also stated that the Air Force will conduct annual reviews  of all inventory items as directed by DOD’s Supply Chain Management  policy. DOD plans to provide a status update on the implementation of this  recommendation by the end of September 2007. DOD also commented that  no further guidance was needed. While we recognize that some of this  inventory should be retained for economic or contingency reasons, we  believe that added scrutiny should be applied to the Air Force’s review of  its stockage retention policy to ensure that it is not retaining assets that  are not needed to support current and future operational needs. Based on  our work, we believe that the Air Force has a tremendous potential for  reducing its inventory because much of the inventory has no projected  recurring demands, meaning that it is unlikely that this inventory will ever  be used. In other cases, inventories may not be needed because many  years of supply are on hand. DOD’s planned actions are a step in the right  direction; however, unless and until the Air Force makes appropriate  adjustments to its inventory retention levels, there are no assurances that  significant improvements will be made to reduce the Air Force’s on-hand  inventory not needed to support requirements.
In responding to our second recommendation, DOD did not address the  portion of the recommendation directing the Air Force to consider  establishing requirements for items that support weapon systems that  have lengthy projected life spans. Without establishing requirements for  items that the Air Force wants to retain for future use, it will be difficult to  determine what portion of its inventory that is in excess of its  requirements is valid to retain. For example, as stated in our report, many  of the items supporting the A-10 and B-52 weapon systems have minimal  usage rates, but they are being procured today to prevent difficulties in  obtaining these assets in the future due to diminishing manufacturing  sources. These weapon systems have projected life spans that could last  until the year 2028 and 2040, respectively. Given the length of time these  systems will continue to be in service, the Air Force needs to establish  some baseline requirements for the items supporting these systems;  otherwise, the Air Force will continue to have large quantities of inventory  on hand that appear not to be needed to support requirements, even  though these items may be needed in the future to support these weapon  systems. Thus, we continue to believe that our recommendation is valid  and DOD should consider establishing requirements for these items.
DOD concurred with our third recommendation to evaluate the reasons  why the Air Force continually experiences decreases in demands, which  have contributed to having more than half of its inventory on hand not  needed to support requirements. DOD agreed that the Air Force  experiences changes in demand levels and stated that these changes can  be attributed to changes in Air Force missions, reliability and technology  improvements, and modifications of inventory items. DOD stated that the  Air Force plans to review the computation forecasting model and make  any changes required to help ensure future requirements reflect actual  demands. DOD plans to provide a status update on the implementation of  this recommendation by the end of September 2007. We believe that these  actions are generally responsive to our recommendation.
In responding to this recommendation, DOD also stated that our finding  that more than half of the Air Force inventory on hand is not needed to  support requirements is inaccurate. DOD has consistently disagreed with  our definition of inventory not needed to support requirements because it  differs from the definition that DOD uses for budgeting purposes. DOD  policy identifies inventory not needed to support requirements based on  current requirements and requirements that are projected through the end  of a 2-year budget period. For our work, we only analyzed the Air Force’s  inventory that is needed to support current requirements. We do not  believe that the projected requirements for the 2-year budget period  should be considered in determining the amount of inventory needed to  support current requirements. As stated in our report, if the Air Force did  not have enough inventory on hand or on order to satisfy the projected  requirements for the 2-year budget period, the requirements determination  process would not result in additional inventory being purchased to satisfy  these requirements. As a result, based on our analysis, we found that more  than half of the Air Force’s on-hand and on-order inventory is not needed  to support requirements. We continue to believe that our characterization  of the Air Force inventory is reasonable, because it reflects the amount of  inventory needed to be on hand and on order to support current  requirements.
Finally, DOD fully concurred with our fourth recommendation to  determine what actions are needed to address the decreases in demand  and then take steps to implement these actions. DOD stated that the Air  Force incorporates requirement changes, resulting in decreased demands,  into the computation forecasting model as soon as those changes are  known. However, DOD acknowledged that the key is to define the changes  soon enough to prevent or terminate buys which may not be needed. DOD  stated that the Air Force will monitor the goals, actions, and deliverables  as a part of the Air Force computation forecasting model review. DOD  plans to provide a status update on the implementation of this  recommendation by the end of September 2007. We believe these actions  will adequately address our recommendation.
We are sending copies of this report to interested congressional  committees; the Secretary of Defense; the Secretary of the Air Force; the  Director, Defense Logistics Agency; the Under Secretary of Defense for  Acquisition, Technology, and Logistics; and the Director, Office of  Management and Budget. We will also make copies available to others  upon request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov/.
If you or your staff have any questions concerning this report, please  contact me on (202) 512-8365 or solisw@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Key contributors to this report are listed in  appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess data used in this report, we obtained the Air Force’s Central  Secondary Item Stratification Budget Summary and item-specific reports  for fiscal years 2002 through 2005. The stratification reports serve as a  budget request preparation tool and a mechanism for military officials to  review funding. Specifically, the Air Force uses this inventory stratification  process to develop inventory budgets, show why inventory is held, and  identify assets that are either on hand or on order as of the stratification  date. Our analysis was based on evaluating the Air Force’s item  stratifications within the opening position table of the Central Secondary  Item Stratification Reports.
To validate the data in the budget stratification reports, we generated  summary reports using electronic data and verified our totals against the  summary stratification reports obtained from the Air Force. The Air Force  secondary inventory data are identified by unique stock numbers for each  spare part, such as an engine for a particular aircraft, which we refer to as  unique items. The Air Force may have in its inventory multiple quantities  of each unique item, which we refer to as individual parts. We calculated  the value of each unique item by multiplying the quantity of the item’s  individual parts by the item’s unit price, which is the latest acquisition cost  for the item. We computed total values for all items collectively in the  inventory and the stratification tables were recreated. This computation  approach is consistent with the Department of Defense’s (DOD) process  for valuing assets in its annual Supply System Inventory Report. In cases  where we found discrepancies in our dataset because of one or more  items being reported in the stratification, we identified the excess item and  removed it from the dataset. After assessing the Air Force data, we  determined that the data were sufficiently reliable for the purposes of our  analysis and findings.
Upon completion of the data validation process, we revalued the Air  Force’s secondary inventory items identified in its budget stratification  summary reports because these reports value useable items and items in  need of repair at the same rate, and do not take into account the repair  cost for repairable broken items. We computed the new value for items in  need of repair by subtracting repair costs from the unit price for each item.  In cases where the repair cost was greater than the unit price, we obtained  new calculations from the Air Force for revaluing these assets. To  determine the causes for the $1.2 billion increase in the Air Force’s  secondary item inventory levels between fiscal years 2002 and 2005, we  analyzed the inventory to determine if the increase was due to changes in  the inventory’s value, changes in the quantity of items in inventory, new  items added to the inventory, or obsolete items removed from the  inventory.
We excluded requirements for administrative and production lead time  from the Air Force’s on-hand requirements. However, DOD’s practice has  always been to use administrative and production lead time requirements  to justify the amount of inventory it had on hand. We do not agree with  this practice to use lead time requirements to justify on-hand inventory  because based on DOD’s material management regulations, acquisition  lead time quantities are not required to be on hand. Acquisition lead time  is the sum of administrative and production lead times. However, we do  agree with DOD that excess on-hand inventory should be used to offset or  satisfy requirements for lead time because it would reduce the amount of  inventory that needs to be on order.
In commenting on our past reports, DOD and the Air Force have  disagreed with our definition of inventory that was not needed to satisfy  current operating requirements because it differs from the definition that  is used for the inventory budget process. We consider the Air Force to  have unneeded on-order or on-hand inventory if it has more inventory than  is needed to satisfy its requirements based on the Opening Position table  of the Air Force’s budget stratification report. However, if the Air Force  has more inventory on order or on hand than is needed to satisfy its  requirements, it does not consider the inventory beyond the requirements  to be unneeded. Instead, the Air Force uses the on-order inventory that is  beyond its on-order requirements to satisfy future demands over a 2-year  period and contingency retention requirements. Similarly, when the Air  Force has on-hand inventory that is beyond its on-hand requirements, it  uses the inventory to satisfy future demands over a 2-year period, lead  time requirements, economic retention requirements, and contingency  retention requirements. Only after applying inventory to satisfy these  additional requirements would the Air Force consider that it has more  inventory than is needed and would consider this inventory for potential  reutilization or disposal. We do not agree with the Air Force’s practice of  not identifying inventory used to satisfy these additional requirements as  excess because it overstates the amount of inventory needed to be on  hand or on order by billions of dollars. The Air Force’s requirements  determination process does not consider these additional requirements  (except for on-hand inventory needed to meet lead time requirements)  when it calculates the amount of inventory needed to be on hand or on  order. If the Air Force did not have enough inventory on hand or on order  to satisfy these additional requirements, the requirements determination  process would not result in additional inventory being purchased to satisfy  these requirements. Tables 7 and 8 show a comparison of our analysis and  the Air Force’s stratification results of how on-order and on-hand  inventory for fiscal year 2005 is applied to satisfy requirements.
To determine the extent to which the Air Force’s on-order and on-hand  secondary inventory reflects the amount of inventory needed to support  requirements, we reviewed DOD and Air Force inventory management  policies, past GAO products on DOD and Air Force inventory management  practices for secondary inventory items, and other related documentation.  We also compared the Air Force’s current inventory to its current on-order  and on-hand operating requirements and computed the amount and value  of secondary inventory exceeding or not meeting current operating  requirements. To determine the amount and value of the Air Force  inventory not needed to support requirements and inventory shortages, we  reviewed the Air Force’s summary and item-specific budget stratification  reports for fiscal years 2002 through 2005. We subdivided all items into  one of four categories: (1) items that only had on-order inventory not  needed to support requirements, (2) items that only had on-hand items not  needed to support requirements, (3) items that had both on-order and on- hand items not needed to support requirements, or (4) items with  inventory shortages. In computing the number and value of on-order items  not needed to support requirements, we added the results from category  one and the results from the on-order portion of category three to  compute the total number of items and value of on-order items not needed  to support requirements. Similarly, we added the results from category  two and the results from the on-hand portion of category three to compute  the total number of items and value of on-hand items not needed to  support requirements.
Additionally, we calculated the storage costs of the inventory on hand that  was not needed to meet requirements. We obtained the storage rates for  the three different categories—covered, open, and special—of storage  from the Defense Logistic Agency (DLA), which was where the inventory  items were held. Then we sent DLA officials a list of the Air Force  inventory, and they identified the category of each item. To determine the  storage rate, we created a database that calculated the number of items  multiplied by the annual storage cost rate and multiplied by the volume  per item. To distinguish between the categories of items, the storage rates  for useable items and items in need of repair were calculated separately.
Additionally, to understand whether the inventory not needed to support  requirements had improved in relation to its years of supply, we calculated  the number of supply years a given item would have based on its present  quantity and demand. To determine the years of supply, we computed the  projected years of supply using the projected recurring demand data for  items with on-hand and on-order inventory not needed to support  requirements. In fiscal years 2002 and 2005, items with projected recurring  demands represented about 21 percent of the items with on-order and on- hand inventory not needed to support requirements. The remaining 79  percent of these items had no projected recurring demands, which means  that the potential years of supply is infinite.
We developed a survey to estimate the frequency of reasons why the Air  Force maintained items in inventory that were not needed to support  requirements or that did not meet requirements. In the survey, we referred  to those items that were not needed to support requirements as “excess”  and the items that did not meet requirements as “shortages.” The survey  asked general questions about the higher assembly (component parts)  and/or weapon systems that the items support, and whether the item is on  the Air Force’s mission-critical items list (i.e., Air Force Readiness Driver  Program). In addition, we asked survey respondents to identify the  reason(s) for the excess or shortage. We provided potential reasons as  responses from which they could select based on reasons identified in  some of our prior work. Since the list was not exhaustive, we provided a  response option of “other, please explain.” Finally, we asked that survey  respondents provide copies of any implementation plans, schedules, and  initiatives planned or in place to reduce excesses or improve shortages. In  addition to an expert technical review of the questionnaire by an  independent survey methodologist, we conducted in-depth pretests by  item management specialists at the Cryptologic Systems Group located in  San Antonio, Texas prior to deployment of the final survey instrument. We  revised the questionnaire accordingly based on findings from the pretests.
We sent this survey electronically to specific item management specialists  in charge of sampled unique items at the Air Force’s Air Logistic Centers.  To estimate the frequency of reasons for inventory not needed to meet  requirements and inventory shortages, we drew a stratified random  probability sample of 335 unique items—230 of these with excess  inventory and 105 with inventory shortages—from a study population of  18,676 items—10,810 with inventory not needed to meet requirements and  7,866 with inventory shortages. Based on our analysis of the Air Force  stratification data, for fiscal year 2005, there were 88,445 unique items with  inventory not needed to meet requirements valued at $19.8 billion. Of  these 88,445 items, 10,810 met our criteria to be included in our study  population of items not needed to meet requirements. These items were  valued at $12.4 billion and represented 12 percent of total unique items  and 63 percent of the total dollar value of items not needed to meet  requirements. Additionally, based on our analysis of the stratification data,  all of the 7,866 unique items with inventory shortages, valued at $1.2  billion, met our criteria to be included in our shortage study population.  We selected our sample of items not needed to meet requirements from six  strata defined by the criteria described in table 9. Our shortage sample was  selected from two strata defined by the criteria described in table 10. The  divisions of the population, sample, and respondents across the strata, as  well as response rate by stratum, are also shown in tables 9 and 10.
We sent 335 electronic surveys—one survey for each item in the sample— to the 230 Air Force item management specialists identified as being  responsible for these items. Ultimately, we received 295 responses for the  survey, for adjusted response rates of 82 percent for excess items and 88  percent for shortage items. Each sampled item was subsequently weighted  in the final analysis to represent all the members of the target population.
Because we followed a probability procedure based on random selections,  our sample of unique items is only one of a large number of samples that  we might have drawn. Because each sample could have provided different  estimates, we express our confidence in the precision of our particular  sample’s results in 95 percent confidence intervals. These are intervals  that would contain the actual population values for 95 percent of the  samples we could have drawn. As a result, we are 95 percent confident  that each of the confidence intervals in this report will include the true  values in the study population. All percentage estimates from our sample  have margins of error (that is, widths of confidence intervals) of plus or  minus 10 percentage points or less, at the 95 percent confidence level  unless otherwise noted.
In addition to sampling errors, the practical difficulties of conducting any  survey may introduce errors, commonly referred to as nonsampling errors.  For example, difficulties in how a particular question is interpreted, in the  sources of information that are available to respondents, or in how the  data are entered into a database or were analyzed can introduce unwanted  variability into the survey results. We took steps in the development of the  questionnaire, the data collection, and the data analysis to minimize these  nonsampling errors. For example, data were collected electronically and  exported for analyses, negating data entry error. We also reviewed each  survey to identify unusual, incomplete, or inconsistent responses and  followed up with item management specialists by telephone to clarify  those responses. In addition, we performed computer analyses to identify  inconsistencies and other indicators of errors and had a second  independent reviewer for the data analysis to further minimize such error.
On the basis of information obtained from the Air Force on the reliability  of its inventory management systems’ data, and the survey results and our  follow-up analysis, we believe that the data used in this report were  sufficiently reliable for reporting purposes.
In addition to meeting with Air Force officials at the Air Force Materiel  Command in Dayton, Ohio, we conducted telephone interviews and e- mailed correspondence to inventory management officials from the three  Air Force Air Logistics Centers located in Macon, Georgia; Ogden, Utah;  and Oklahoma City, Oklahoma; and the Cryptologic Systems Group  located in San Antonio, Texas to obtain answers to these questions. We  conducted our work between January 2006 and February 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Top 10 Types of Air Force On- Order Inventory That Were Not Needed to Support Requirements
section_title: Appendix III: Top 10 Types of Air Force On- Hand Inventory That Were Not Needed to Support Requirements
section_title: Appendix IV: Comments from the Department of Defense
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Lawson Gist, Jr., Assistant  Director; Renee Brown; Natasha Ewing; Nancy Hess; Catherine Hurley;  Jacqueline McColl; Matt Michaels; Steven Pruitt; Minnette Richardson;  Terry Richardson; and George Quinn made key contributions to this  report.