Defense Inventory: Analysis of Consumption of Inventory Exceeding Current Operating Requirements Since September 30, 2001
Published: 2004-08-02T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1990, GAO has identified the Department of Defense's (DOD) inventory management as a highrisk area. Ineffective management practices--such as the use of inaccurate data, lack of inventory controls and visibility, and information system weaknesses--have contributed to high levels of inventory. DOD has reduced its inventory since 1990, from about $100 billion to about $67 billion as of September 30, 2002. However, at the start of Operation Enduring Freedom, about half of the inventory exceeded current operating requirements. GAO, under its statutory authority, analyzed the extent to which inventory that exceeded current operating requirements as of September 30, 2001, was consumed through cutoff dates ranging from March through October 2003 and identified three ineffective and inefficient inventory management practices.
section_title: What GAO Found
paragraphs: GAO's analysis of 1.5 million items with $35.1 billion of inventory on hand that exceeded current operating requirements as of September 30, 2001, showed that about $4.0 billion was consumed--$2.5 billion was used, $0.5 billion was disposed of, and $1.0 billion was condemned--since the onset of Operation Enduring Freedom and through the initial phases of Operation Iraqi Freedom. GAO found that, once disposals and condemnations were accounted for, 539,000 items had inventory that was used, 18,000 had inventory gains, and 937,000 had neither inventory usage nor gains. Of the 1.5 million items, customers did not make demands for 923,000 items during the period of review. GAO also identified three ineffective and inefficient inventory management practices that may affect inventory levels, including the inventory exceeding current operating requirements. First, although Defense Logistics Agency (DLA) has begun to charge its customers for inventory storage based on the actual space occupied by items, the military components are not using the DLA storage cost data, and instead continue to use estimated storage costs in their inventory management decision-making processes. Second, the Air Force does not have a systemwide process for correcting the causes of discrepancies between the inventory for which item managers are accountable and the inventory reported by bases and repair centers. Third, Air Force item managers are not required to enter codes into the Air Force inventory system for items that are categorized as potential reutilization and/or disposal materiel, but that the Air Force wants to retain; thus, the items are not properly categorized and are at risk of disposal.

section_title: Letter
paragraphs: The Department of Defense (DOD) maintains a secondary inventory of  spare and repair parts to support its war- and peace-time missions. The  effective and efficient management of this inventory is critical to ensure  that the warfighter is supplied with the right items at the right time,  especially as the department and the services are called upon for new  missions in locations such as Afghanistan, Iraq, and the Philippines, as  well as protecting the homeland.
DOD’s inventory management comprises several major functions,  including determining what is needed; buying needed items; and storing,  maintaining, distributing, and disposing of inventory. DOD retains  inventory that exceeds items’ requirements objectives for different  reasons, including: (1) to satisfy projected demands for 2 fiscal years  beyond the current operating requirements; (2) for economic reasons,  because it would be less costly to retain rather than dispose of and  repurchase the items; and (3) for specific contingencies, such as when the  source of supply for an item—a specific parts manufacturer, for  example—is no longer available.
Since 1990, we have identified the department’s management of its  inventory as a high-risk area and have reported on and made  recommendations to address issues that contribute to ineffective and  inefficient inventory management. We have reported on such issues as  inaccurate data, not canceling orders for inventory that is no longer  needed, lack of controls and visibility over inventory, and information  system weaknesses. For example, in May 2001, we reported that the  military components did not have sound analytical support for  determining when it is economical to retain or dispose of inventory that  exceeds current operating requirements. Taken together, these and other  issues have contributed to the accumulation of high levels of inventory.
DOD maintains that, while it does not purchase inventory that exceeds  current operating requirements, much of the inventory, once purchased,  will eventually be needed. Nevertheless, in response to our work and to  congressionally mandated inventory-reduction goals, DOD reduced its  overall inventory levels throughout the 1990s—from over $100 billion in  1990 to a low of about $61 billion as of September 30, 1998. However, in  recent years the trend has been reversed, with inventory levels increasing  to about $67 billion as of September 30, 2002.
DOD further maintains that seeking inventory-reduction goals leads to  inefficient management. However, in response to our May 2001 report, and  because Congress had directed the department to examine its retention  practices, DOD is reviewing its policies and procedures for retaining  inventory that exceeds the items’ current operating requirements.
In May 2003, we reported a snapshot of DOD’s inventory as of  September 30, 2001. We reported that large imbalances in the department’s  inventory continued to exist as of that date—523,000 items needed  additional inventory to satisfy current operating requirements while  1.7 million items had inventory on hand and on order that exceeded  current operating requirements. Our work showed that about  1.6 million items had about $36.0 billion of inventory on hand that  exceeded the items’ current operating requirements, which amounted to  roughly half of DOD’s inventory at that time.
We prepared this report under our statutory authority and are providing it  to you because of your oversight responsibilities for defense issues. In this  report we (1) analyze the extent to which inventory on hand exceeding  current operating requirements as of September 30, 2001, was consumed  during subsequent operations; and (2) discuss three practices we  identified that further contribute to the ineffective and inefficient  management of inventory.
subsections: section_title: Scope and Methodology
paragraphs: To determine how much of the inventory that exceeded current operating  requirements as of September 30, 2001, was consumed (used, disposed of,  or condemned) since that date, we obtained and analyzed data from the  military components for the items that we had identified in our May 2003  report that had inventory exceeding the items’ current operating  requirements as of September 30, 2001. We interviewed DOD, Defense  Logistics Agency (DLA), and service inventory management officials to  discuss the data needed and our analytical approach. As a result of these  discussions, we requested the following consumption-related data for each  item that had inventory exceeding current operating requirements as of  September 30, 2001:  inventory demanded from the supply system (demands);  inventory returned to the supply system for repair (returns);  inventory condemned because the parts could not be repaired  (condemnations); and  inventory that was otherwise processed for disposal (disposals).
The data we obtained covers different periods, depending on the military  component providing the data. Although the period of review for all of the  military components began on October 1, 2001, the data we obtained had  different cutoff dates as follows:    For the Navy and Air Force, the cutoff date was March 31, 2003.    For the Army, the cutoff dates ranged from June 2003 through  October 2003, depending on the inventory control location that provided  the data.
For DLA, the cutoff date was September 30, 2003.
According to the officials providing the data, 119,000 items of the  1.6 million items that had on-hand inventory exceeding current operating  requirements as of September 30, 2001, were no longer in the military  components’ inventory systems as of the data cutoff dates. The  119,000 items had about $966 million of on-hand inventory that exceeded  current operating requirements as of September 30, 2001. Therefore, our  analysis only concerns the remaining 1.5 million items with $35.1 billion of  on-hand inventory exceeding current operating requirements as of  September 30, 2001.
Our analysis to determine how much of the inventory that exceeded  current operating requirements was consumed since September 30, 2001,  involved several steps. For each of the 1.5 million items:    We first subtracted the quantity that was disposed of from the quantity  that exceeded current operating requirements.
Next, we subtracted the quantity of inventory that was condemned.    For each item, we also computed net demands by subtracting the  inventory returns from inventory demands.
To determine how much of the inventory was used, we then compared the  net demands to the inventory exceeding current operating requirements  that had not been disposed of or condemned.
We limited the quantities of inventory that were disposed of, condemned,  or used to the inventory that exceeded current operating requirements as  of September 30, 2001. We considered items with more returns than  inventory disposals, condemnations, and demands to have inventory gains;  items with returns equal to disposals, condemnations, and demands were  considered to have neither inventory usage nor gains. We used the above  methodology to determine how many of the items had their entire  inventory exceeding current operating requirements consumed. We  further used the demand data provided to determine how many of  the items had and did not have demands during the period of our review.  In our analyses, unless otherwise indicated, inventory values are  expressed in billions of dollars, and items are rounded to the nearest  thousand. We did not revalue the inventory that needs to be repaired to  recognize the repair cost, and we did not value inventory that is to be  disposed of at salvage prices. Also, our analyses did not include fuel,  certain inventory held in units, and Marine Corps inventory. Fuel and  inventories held by units are not stratified by requirement, and the Marine  Corps inventory represents a small part of the universe. In addition, to  ascertain some of the reasons why inventory exceeding current operating  requirements was being retained, we selected non-representative samples  of 78 Army items and 118 Air Force items with inventory that exceeded  current operating requirements as of September 30, 2001, prepared  detailed questionnaires for item managers, and visited the Army Aviation  and Missile Command, Huntsville, Alabama, and Warner Robins Air  Logistics Center, Warner Robins, Georgia, to collect and analyze the  responses. We selected these inventory control locations based upon the  value of the inventory they managed that exceeded current operating  requirements as of September 30, 2001, when compared to other Army and  Air Force inventory control locations. Because we used non-representative  samples, we cannot project these observations to the universe. Although  our work highlights the large amount of inventory exceeding current  operating requirements that DOD retains, we neither performed detailed  analyses of DOD’s policies and procedures relating to that inventory, nor  selected samples of Navy and DLA items, because we have initiated a  separate review of DOD inventory retention policies.
To address the inventory management practices that we identified in the  course of assessing our non-representative samples, we obtained  information and data from DLA about how it determines what to charge  the military components for storing secondary inventory, and interviewed  responsible officials from the military components to determine whether  they were using this data to make relevant management decisions. We also  reviewed Air Force policies related to, and interviewed responsible Air  Force officials about, the reconciliation of inventory discrepancies, and  the retention of inventory categorized as potential reutilization and/or  disposal materiel. Through our analysis of the DLA storage cost charges  and by examining our non-representative sample of Air Force items, we  identified specific examples of these inefficient and ineffective  management practices. We also obtained information from the 2001  Supply System Inventory Report to get a rough estimate of how the  department revalues inventory held as potential reutilization and/or  disposal materiel.
We assessed the reliability of the data used in this report by (1) performing  electronic testing of required data elements, (2) reviewing existing  information about the data and the systems that produced them, and  (3) interviewing officials knowledgeable about the data. We determined  that the data were sufficiently reliable for the purposes of this report. We  performed our review from June 2003 through May 2004 in accordance  with generally accepted government auditing standards.
section_title: Background
paragraphs: DOD defines the requirements objective (current operating requirements)  as the amount of inventory needed to be on hand or on order to support  current operations. The current operating requirements includes inventory  requirements for a reorder point and an economic order quantity. The  reorder point is the point at which inventory replenishment will normally  prevent out-of-stock situations from occurring and includes:    war reserves, requisitions that have not been filled, and a “safety level”    stock to satisfy demands while broken items are being repaired; and    stock to satisfy demands during the “lead time”—the period between the  placement of orders and their receipt.
Because the reorder point provides for inventory to be used during  the time needed to order and receive inventory and for a safety level,  item managers are able to place orders so that the orders arrive before  out-of-stock situations occur.
Generally, an item manager purchases an amount of inventory needed to  satisfy the reorder point and an economic order quantity—a quantity that,  when ordered and received, results in the lowest total cost for ordering  and holding inventory.
The approved acquisition objective defines the amount of inventory that  DOD budgets for and includes inventory needed to satisfy the current  operating requirements, 2 years of demand above the current operating  requirements, and, if applicable, additional war reserves. While DOD  budgets funds to purchase inventory to satisfy the approved acquisition  objective, item managers do not purchase inventory unless an item’s  inventory falls to or below its reorder point; therefore, item managers do  not purchase inventory to satisfy the approved acquisition objective.
Inventory that exceeds the approved acquisition objective is categorized  as economic retention, contingency retention, and potential reutilization  and/or disposal materiel:    Economic retention inventory exceeds the approved acquisition objective  and has been determined to be more economical to keep than to dispose  of because it is likely to be needed in the future.
Contingency retention inventory exceeds the economic retention  inventory and would normally be categorized as potential reutilization  and/or disposal materiel, but is instead retained for specific contingencies.
Potential reutilization and/or disposal materiel exceeds contingency  retention inventory and has been identified for possible disposal but with  potential for reutilization.
A Navy computer power supply used on the radar for the FA-18 aircraft  demonstrates the above inventory categories. On September 30, 2003,  the Navy had 147 of the $353,000 power supplies on hand. As shown in  figure 1, 52 of the power supplies satisfied the item’s current operating  requirements. Of the remaining 95 power supplies, 56 were designated to  satisfy the 2 years of additional demand, 11 were held as economic  retention stock, 2 were held as contingency retention stock, and 26 were  categorized as potential reutilization and/or disposal materiel.
Overall, the amount of DOD’s inventory exceeding current operating  requirements has decreased since 1996. On-hand inventory that exceeded  current operating requirements decreased from $41.3 billion, or  59 percent, of the $69.7 billion of on-hand inventory on September 30,  1996, to $36.0 billion, or 52 percent, of the $69.8 billion inventory on hand  on September 30, 2001.
DOD annually summarizes its secondary inventory in its Supply System  Inventory Report. This report is based on financial inventory and other  inventory reports prepared by the military components. The report  summarizes inventories by DOD component and inventory category. DOD  officials use the report as a management tool to monitor changes in the  levels of its inventory. These officials include the Under Secretary of  Defense for Acquisition, Technology, and Logistics, who is responsible for  developing and ensuring the uniform implementation of DOD inventory  management policies throughout the department, for monitoring the  overall effectiveness and efficiency of the DOD logistics system, and for  continually developing improvements. In addition, the Secretaries of the  Army, the Navy, and the Air Force, and the Director, DLA, are responsible  for implementing DOD inventory policies and procedures.
section_title: About $4.0 Billion of the Inventory Exceeding Current Operating Requirements Was Consumed Since September 30, 2001
paragraphs: Our analysis of approximately 1.5 million items with inventory on hand  valued at $35.1 billion that exceeded current operating requirements as of  September 30, 2001, showed that about $2.5 billion of the inventory was  used, $0.5 billion was disposed of, and $1.0 billion was condemned since  the onset of Operation Enduring Freedom and through the initial phases of  Operation Iraqi Freedom. As illustrated in figure 2, the inventory  exceeding current operating requirements that was consumed since  September 30, 2001—that is, the sum of the inventory used, disposed of,  or condemned—amounted to $4.0 billion. Roughly $31.0 billion of the  on-hand inventory that exceeded current operating requirements as of  September 30, 2001, was not used, disposed of, or condemned during the  period of our review.
Our analysis also identified how many of the 1.5 million items had  inventory that was used, how many had inventory gains, and how many  had neither inventory that was used nor inventory gains. As depicted in  figure 3, our analysis showed:    About 539,000 items with $7.2 billion of on-hand inventory that exceeded  current operating requirements as of September 30, 2001, had $2.5 billion  of that inventory used since then. That is, once disposals and  condemnations were accounted for, demands exceeded returns by  $2.5 billion. For example, the Navy had seven infrared receivers, used on  FA-18 E/F aircraft, which exceeded current operating requirements as of  September 30, 2001. Through March 2003, two of the $1,610 receivers were  disposed of, four were condemned, and one was used as a result of  demands exceeding returns. The 539,000 items, or 36 percent of the  1.5 million items reviewed, had 21 percent of the $35.1 billion of on-hand  inventory that exceeded current operating requirements as of  September 30, 2001.
About 18,000 items with $3.5 billion of on-hand inventory exceeding  current operating requirements as of September 30, 2001, had $0.9 billion  in inventory gains as a result of more broken parts returned for repair than  demands, disposals, or condemnations during the period of review. For  example, the Army had two AH-64 helicopter capacitor assemblies, each  valued at $554, which exceeded current operating requirements as of  September 30, 2001. Through August 2003, one of the assemblies was  condemned and the other was demanded. However, four assemblies were  returned for repair, resulting in a gain of two assemblies to the inventory.  The 18,000 items, or 1 percent of the 1.5 million items, had 10 percent of  the $35.1 billion of on-hand inventory that exceeded current operating  requirements as of September 30, 2001.
About 937,000 items with $24.4 billion of on-hand inventory exceeding  current operating requirements as of September 30, 2001, had neither  inventory usage nor gains during the period of review—these items had an  equal amount of inventory returned for repair as was disposed of,  condemned, and demanded. For example, DLA had 294 men’s overcoats,  valued at $265 apiece, that exceeded current operating requirements as of  September 30, 2001. Through September 2003, these overcoats had no  disposals, no condemnations, and no demands. The 937,000 items, or  63 percent of the 1.5 million items, had 70 percent of the on-hand  inventory that exceeded current operating requirements as of  September 30, 2001.
Value of inventory ($35.1 billion total)
We also analyzed the 1.5 million items to determine if the entire inventory  exceeding current operating requirements was consumed for any of  the items. Our analyses showed that, for about 199,000 of the  1.5 million items, all inventory that exceeded the items’ September 30,  2001, current operating requirements was used, condemned, or disposed  of since that date. The 199,000 items had on-hand inventory valued at  about $1.8 billion that exceeded current operating requirements. For about  1.3 million items, either some or none of the inventory exceeding current  operating requirements was consumed.
Further, 923,000 of the 1.5 million items had no customer demands.  These items represented about $14.8 billion of inventory on hand that  exceeded current operating requirements as of September 30, 2001. The  remaining 571,000 items had $26.0 billion of demands and $20.7 billion of  broken parts returned for repair. These items represented about  $20.2 billion of inventory that exceeded current operating requirements, as  of September 30, 2001.
To ascertain some of the reasons why the 1.5 million items with on-hand  inventory exceeding current operating requirements was being retained,  we selected non-representative samples of Army and Air Force items. We  found that most of these sample items had inventory categorized as either  economic or contingency retention stock and had been in the inventory  system for 15 or more years. At the Army and Air Force inventory control  locations that we visited, we observed that 121 out of 190 items, or  64 percent of the items reviewed, had been placed in service prior to 1989.  These items had about $1.6 billion of inventory that exceeded the current  operating requirements as of September 30, 2001. Seventeen of the items,  with about $107 million of inventory on hand that exceeded current  operating requirements, were placed in service during the 1960s.  These items included antennae, aircraft rudders, auxiliary power units,  propeller blades, and circuit card assemblies that were used on versions of  the Air Force’s C-130 and F-15 aircraft, the Army’s UH-60 helicopter, and  other weapon systems.
section_title: Some DOD Practices Contribute to Ineffective and Inefficient Inventory Management
paragraphs: While reviewing Air Force and Army items to determine why inventory  exceeding current operating requirements was being retained, we  identified three ineffective and inefficient inventory management practices  that may affect inventory levels, including the inventory exceeding current  operating requirements. First, although DLA has begun to charge its  customers for inventory storage based on the actual space occupied  by items, the military components are not using the DLA storage cost data,  and instead continue to use estimated storage costs in their inventory  management decision-making processes. Second, the Air Force does not  have a systemwide process for correcting the causes of discrepancies  between the inventory for which item managers are accountable and the  inventory reported by bases and repair centers. Third, Air Force item  managers are not required to enter codes into the Air Force inventory  system for items that are categorized as potential reutilization and/or  disposal materiel, but that the Air Force wants to retain; thus, the items  are not properly categorized and are at risk of disposal. The inefficiencies  we identified do not necessarily lead to the accumulation of inventory  exceeding current operating requirements; however, they can lead to  having critical items in short supply, to persistent difficulties in accurately  and reliably forecasting the availability of assets, and to inappropriately  disposing of inventory.
subsections: section_title: Military Components Are Not Using Actual Storage Cost Data in Making Inventory Management Decisions
paragraphs: Although DLA has begun to charge its customers for inventory storage  based on the actual space occupied by items, the military components are  not using the DLA data, and instead continue to use estimated storage  costs in their inventory management decision-making processes. We noted  that the estimated storage costs ranged from being over 1,000 times more  than the actual costs charged to customers, to being up to 10 times less  than the actual charges. Because using actual storage cost data would  result in more accurate computations, the military components could be  purchasing or retaining inappropriate amounts of inventory. However,  because DLA only recently began to compute the storage charges on a  per-item basis, the Army, Navy, and DLA have not determined whether it  would be beneficial to use actual data rather than estimated storage costs  in their inventory management decision-making processes.
The Defense Logistics Agency is responsible for storing inventory for the  military services and for its own defense supply centers. Beginning in  fiscal year 2003, DLA began charging for inventory stored in its  warehouses by (1) determining the cubic-feet of space occupied by an  individual item, (2) multiplying the space occupied by a single item by the  number of items stored to yield the total space occupied, and  (3) multiplying the stored items’ total occupied space by a rate charged for  the type of storage space used (open, covered, or specialized). As a result,  the DLA computes storage costs charged to its customers on a per-item  basis.
According to DLA officials, the agency provides data to the military  services and the DLA supply centers on a quarterly basis that would allow  them to take these charges into account when making inventory  management decisions. Such decisions might include:    determining how much inventory to retain for safety level requirements,  which is the amount of inventory held in case of minor interruptions in the  resupply process or fluctuations of demand;    computing economic order quantities, which are the quantities of an item  that are purchased that results in the lowest cost for ordering and holding  inventory;    determining when it is more economical to retain extra inventory, as  opposed to disposing of it and then satisfying future requirements through  new procurements and/or repairs of broken items; and    determining whether orders for inventory that is no longer needed are  economical to cancel.
The consideration of storage costs as a factor in making these kinds of  inventory management decisions varies among the components. For  example, the Army, Navy, and DLA factor in storage costs when  computing economic order quantities. The Air Force’s requirements  computation system does not compute an economic order quantity. The  Army and Navy models for determining economic retention levels factor in  storage costs, whereas the Air Force and DLA set economic retention  levels based on years of supply. And, the Army, Air Force, and DLA factor  in storage costs when determining whether it is economical to cancel or  cut back orders for inventory that is no longer needed to satisfy  requirements.
When the military components factor in storage costs to make inventory  management decisions, they use estimated storage costs—as they have  done historically—rather than the actual, per-item costs now charged by  DLA. For example, the Army, Navy, and DLA estimate storage costs to be  equal to 1 percent of the inventory value. According to an Air Force  Materiel Command official, the Air Force uses estimated charges from the  DLA Storage Occupancy Report. However, according to a DLA official, the  report, which is no longer issued, identifies the space occupied by items,  but not the cost of storing a specific item.
Generally, storage costs charged to customers are lower than the  estimated costs (1 percent of inventory value) currently used by the Army,  Navy, and DLA. In order to ascertain the significance of using estimated  costs in lieu of actual charges, we compared the actual storage costs  charged by DLA to the Army, Navy, and DLA with 1-percent cost estimates  for about 1.5 million inventory items. We found that for about half of  the items, the estimated storage costs were at least 10 times greater than  the costs charged by DLA for storing the inventory. For over 242,000 items,  about 16 percent of the items in our analysis, the estimated storage costs  were at least 100 times greater than the costs charged for storing the items  (see table 1).
A change in the storage cost factor used by the components could affect  inventory management decisions. For example, depending on the item, the  actual storage cost charged by DLA could be either less than or greater  than the item’s estimated storage cost, which would make it more or less  economical to retain the same amount of inventory. Therefore, by not  using the actual storage costs charged by DLA, the military components  that take storage costs into account when making inventory management  decisions may be recommending the acquisition or retention of an  inappropriate amount of inventory.
According to Army and Navy officials, it may not be cost effective to use  the storage cost data provided by DLA, even if using the data resulted in  more accurate calculations. Several factors besides storage costs are  considered in making inventory decisions. Depending on the calculation,  these other factors can include: the cost of an item; the demand for an  item; the cost to reduce an order; and other holding cost factors, such as  obsolescence and storage loss rates. According to one Navy official, some  of these factors have more of an impact on such calculations than do  storage costs. Although the Navy and Army have recently concluded that  their 1-percent estimates are sufficiently accurate for some of their  inventory management decisions, neither service nor DLA has determined  if it would be beneficial to use the newly available storage cost data  instead of estimated costs in their inventory management decision-making  processes.
section_title: Air Force Does Not Systematically Correct the Causes of Inventory Discrepancies
paragraphs: The Air Force does not have a systemwide process for correcting the  causes of discrepancies between the inventory for which item managers  are accountable and the inventory reported by bases and repair centers.  Because accurate data is necessary to make accurate decisions, item  managers—who are responsible for purchasing inventory—must  persistently deal with inventory discrepancies, cannot accurately  determine the number of available assets, and cannot reliably forecast the  availability of assets. Consequently, in some instances the Air Force is at  risk of buying inventory that it does not need and, in other instances, of  not buying enough inventory.
Air Force policy provides for asset reconciliation on a quarterly basis. The  reconciliation process compares the quantity of inventory for which the  item manager is responsible to the quantity that bases and repair centers  report as being on hand, in order to identify any variances between the  quantities. If there are three consecutive plus or three consecutive minus  variances, the policy allows item managers to adjust the inventory quantity  by the smallest of the three variances. According to an Air Force Materiel  Command official, in instances where an item manager’s records account  for more inventory than was being reported on hand by bases and repair  centers, the variance is recorded on requirement computations and  inventory stratification reports as “due in other” inventory.
At Warner Robins Air Logistics Center, we noted that item manager  inventory records for 35 of 118 items we reviewed showed $135 million of  “due in other” inventory as of March 31, 2003, that was not accounted for  by the bases and repair centers. One item, a countermeasure receiver  subassembly valued at about $58,000, demonstrates the persistent nature  of inventory variances. From December 2000 through June 2003, the  reconciliation process consistently showed that the item manager was  accountable for more assets than were being reported by repair centers  and bases. According to inventory records, the item manager reduced by  eight the quantity that the item manager was responsible for. A first  adjustment, which the item manager performed in September 2002,  reduced the quantity by six. The adjustment was made because of  erroneous data reported by the contractor. A second adjustment,  performed in September 2003, occurred because, at the time of the  adjustment, the item manager did not have access to all of the  condemnation data for the item. Another Air Force official entered this  data into a system that feeds the main Air Force inventory system. Had  this data been entered before the item manager reviewed the file, there  would have been no need for the adjustment.
Because consistent adjustments indicate that there is something wrong  with the reported information, Air Force policy instructs item managers to  research historical records whenever variances exist and make every  effort to identify and correct the underlying problems, when possible.  According to an Air Force Materiel Command official, some variances are  to be expected. But items that are continuously in variance, or for which  particularly large variances exist, are problematic. In such cases, item  managers cannot accurately determine the number of available assets and  cannot reliably forecast the availability of assets. Knowledge of the correct  number of available assets is critical when deciding whether to buy  inventory, and determining how much to buy.
According to an Air Force Materiel Command official, the Air Force has  sought to identify and correct variances that result from systemic reasons,  such as data interface problems between two inventory systems. However,  officials from Warner Robins Air Logistics Center and from Air Force  Materiel Command say that the Air Force has not systemically addressed  and corrected the causes of variances that item managers identify during  the reconciliation process.
section_title: Air Force Item Managers Are Not Required to Code Items to Prevent Their Disposal
paragraphs: Air Force item managers are not required to enter codes into the Air Force  inventory system for items that are categorized as potential reutilization  and/or disposal materiel, but that the Air Force wants to retain. As a result,  the inventory is not properly categorized, and the Air Force is at risk of  disposing of inventory that it may need to later repurchase. Additionally,  because DOD reports the value of inventory categorized as potential  reutilization and/or disposal materiel at a rate of approximately 2 percent  of its latest acquisition cost, the amount of inventory it is retaining is  significantly understated in a key inventory management report.
Inventory categorized as potential reutilization and/or disposal materiel is  subject to being sent to the Defense Reutilization and Marketing Service,  for (1) reutilization by other DOD components or by other federal, state, or  local government agencies; or (2) disposal through sale to the public.  However, Air Force policy allows potential reutilization and/or disposal  materiel to be retained if there are valid reasons for doing so. Item  managers, when justified, are authorized but are not required to enter a  deferred disposal code into the Air Force inventory system. The deferred  disposal code will result in potential reutilization and/or disposal materiel  being recategorized as contingency retention stock. Although entering  codes is not mandatory, officials from Warner Robins Air Logistics Center,  in response to our questions, said that doing so is preferred and that the  center intended to mandate that item managers use the codes.
As of March 2003, we found that item managers at the Warner Robins Air  Logistics Center had not entered deferred disposal codes for 12 of 27 items  that had potential reutilization and/or disposal materiel—valued at  $277 million based on the items’ latest acquisition cost—that the Air Force  wanted to retain. These 12 items thus remained coded as potential  reutilization and/or disposal materiel. According to letters and memoranda  justifying the retention of the items, the Air Force wanted to retain  the items for a variety of reasons, including for potential future use and for  foreign military sales. The following are examples of the items that the  center had decided to retain, but were not properly coded:    Inventory retained for Air Force use. Warner Robins Air Logistics  Center had 50 transmitter drivers used on an electronic warfare system for  the B-1B aircraft that were categorized as potential reutilization and/or  disposal materiel. The drivers were valued at $644,000 each. Even though  the fleet of B-1B aircraft is being reduced, the center was retaining the  drivers because the Oklahoma City Air Logistics Center, responsible for  management of the B-1B aircraft, had requested that the parts be retained  to support the aircraft until the year 2040 when the Air Force expects to  remove the last of the aircraft from its inventory. However, no code was  entered into the inventory system that would recategorize the inventory as  contingency retention stock.
Inventory held for foreign military sales. According to the item  manager responsible for receiver transmitters used on the E-3 aircraft,  the items were no longer used by the Air Force. The center had 87 receiver  transmitters, valued at about $410,000 each, that were categorized as  potential reutilization and/or disposal materiel and were being retained for  foreign military sales.
Warner Robins officials explained that it could take up to 3 months for an  item manager to input the code after receiving the request to retain the  inventory. Nevertheless, we identified items that had letters justifying their  retention dating back to 2001 for which no code had been entered.
Because the Air Force is retaining inventory that it has categorized as  potential reutilization and/or disposal materiel, the value of this inventory  is significantly understated in the Supply System Inventory Report, a key  inventory management report prepared annually. Inventory is reported at  approximately 2 percent of its latest acquisition cost in these reports, and  the $277 million inventory that we identified for our analysis is valued in  the reports at approximately $6 million.
section_title: Conclusions
paragraphs: The large number of items with no demands during Operation Enduring  Freedom and through the initial phases of Operation Iraqi Freedom  indicates that further attention to DOD’s inventory retention policies may  be merited. However, because we have initiated a separate review of these  policies, we are not at this time making recommendations regarding the  retention of inventory exceeding current operating requirements that had  no demands.
While the ineffective and inefficient inventory management practices we  identified do not necessarily lead to the accumulation of inventory  exceeding current operating requirements, they can affect whether the  warfighter is receiving the right items at the right time. For example, the  military components are using estimated storage costs to make key  management decisions even though more accurate storage cost data are  available from DLA. While Army and Navy officials have said that their  estimates provide sufficient accuracy, we believe that using more accurate  data is a better business practice. Until the services and DLA determine  whether it would be beneficial to use the more accurate storage cost data  in their computations instead of using estimated storage costs and include  that data in their decision-making models as appropriate, they risk having  critical items in short supply when they are needed. Similarly, until the Air  Force implements a systemwide process to correct the causes of inventory  records discrepancies identified by item managers, the Air Force remains  at risk of being unable to fill critical needs, and item managers will  continue to encounter difficulties in their efforts to accurately determine  the number of available assets and reliably forecast the availability of  assets. Moreover, by not requiring item managers to code inventory so that  it is properly categorized, the Air Force is at risk of disposing of inventory  that it wants to retain.
section_title: Recommendations for Executive Action
paragraphs: To address the inventory management shortcomings that we identified, we  recommend that the Secretary of Defense take the following three actions:    direct the military services and the Defense Logistics Agency to determine  whether it would be beneficial to use the actual storage cost data provided  by DLA in their computations, instead of using estimated storage costs,  and include that data in their systems and models as appropriate;    direct the Secretary of the Air Force to establish and implement a  systemwide process for correcting causes of inventory discrepancies  between the inventory for which item managers are accountable and the  inventory reported by bases and repair centers; and    direct the Secretary of the Air Force to revise its policy to require item  managers to code inventory so that the inventory is properly categorized.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, the Acting Deputy Under  Secretary of Defense for Logistics and Materiel Readiness generally  concurred with this report and all three of our recommendations. DOD’s  comments also included compliance dates for each of our  recommendations. DOD’s comments are included in appendix I of this  report.
In concurring with our recommendation to direct the Secretary of the Air  Force to revise its policy to require item managers to code inventory so  that the inventory is properly categorized, DOD stated that this policy  already exists for the Air Force. To ensure the implementation of our  recommendation, the DOD stated that Air Force Materiel Command would  report on how the policy is being implemented. However, our review of  the policy citations provided by DOD indicates that the Air Force policy,  as stated, does not contain language that would require the use of codes  that would properly categorize the inventory. Therefore, even if the Air  Force ensures compliance with its existing policy, it will remain at risk of  disposing of inventory that it may need to later repurchase, and the value  of the improperly categorized inventory will remain significantly  understated in a key inventory management report. Thus, we continue to  believe that our recommendation to revise the Air Force policy to require  item managers to code inventory so that the inventory is properly  categorized is valid.
We are sending copies of this report to interested congressional  committees; the Secretary of Defense; the Secretaries of the Army, the  Navy, and the Air Force; the Director, Defense Logistics Agency; and the  Director, Office of Management and Budget. We will also make copies  available to others on 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, please call me at (202) 512-8365.  Key contributors to this report were Lawson Gist, Jr.; Louis Modliszewski;  Kevin O’Neill; and R.K. Wild.
section_title: Appendix I: Comments from the Department of Defense
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