Defense Inventory: Actions Underway to Implement Improvement Plan, but Steps Needed to Enhance Efforts
Released: 2012-05-03T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: GAO has identified supply chain management as a high-risk area due in part to ineffective and inefficient inventory management practices that have caused DOD to accumulate billions of dollars worth of unneeded inventory. DOD reported that as of September 2010 it had $8.4 billion worth of on-hand excess inventory, categorized for potential reuse or disposal, and $940 million worth of on-order excess inventory, already purchased but likely to be excess due to changes in requirements. Under the National Defense Authorization Act for Fiscal Year 2010, GAO is required to assess DOD’s implementation of the Comprehensive Inventory Management Improvement Plan (Plan) DOD submitted to Congress. GAO’s objectives were to determine the extent to which DOD has (1) established and achieved targets for reducing excess inventory in the Plan, (2) made progress in implementing the overall Plan, (3) metrics to track progress in improving inventory management, and (4) identified and realized any cost savings or avoidance. GAO reviewed relevant data, assessed DOD’s actions through January 1, 2012, and interviewed officials implementing the Plan.

section_title: What GAO Found
paragraphs: The Department of Defense (DOD) set two goals—reducing on-order and on-hand excess inventory—with percentage targets for each based on the best available data in fiscal year 2009 as part of its Comprehensive Inventory Management Improvement Plan (Plan). Sustained management oversight led to reductions in on-order and on-hand excess inventory in fiscal year 2010 prior to the Plan’s implementation, and thus DOD may find the current targets are not meaningful in guiding improvement. Specifically, at the end of fiscal year 2010, DOD had reduced its percentage of on-order excess inventory to 5.5 percent, thereby achieving its 2014 target 4 years early. It also revised the definition and calculation of on-hand excess inventory, which resulted in DOD being below the fiscal year 2012 target of 10 percent. It is DOD policy to conduct periodic evaluations of its inventory management, and results-oriented management practices emphasize validating performance measures to ensure they remain appropriate. Without challenging, yet achievable targets, DOD’s Plan will not be effective in guiding further improvement.

DOD has made progress implementing its Plan since implementation began in late fiscal year 2010, but DOD is only 18 months into a 4-year implementation effort and many planned activities still remain. Most but not all of the progress to date has been in gathering and analyzing data, and reviewing guidance and practices. In addition, DOD has made progress in particular areas, such as developing tentative sub-categories to further clarify its existing inventory categories. Overall implementation is generally on schedule, but some of the Plan’s efforts have experienced delays. Moving forward, DOD faces such challenges as adjusting demand planning to changing circumstances, and enforcing consistent implementation of guidance at the military service level.

As part of the Plan, DOD is developing metrics to assess the effectiveness and efficiency of its inventory management, but it has not determined if it will incorporate these metrics into guidance. This may hamper its ability to assess inventory management performance and sustain management attention on improvement. Materiel managers should evaluate and be capable of reporting on the performance of inventory management. Based on previous reporting, GAO has found that such metrics should be reportable in a consistent fashion. DOD is currently developing a portfolio of metrics that fall under five key areas: readiness, responsiveness, reliability, cost, and planning and precision. Some metrics that have been identified—such as customer wait time—are currently reported by DOD, while others would be new metrics that would require establishing a data source and methodology. However, the Plan does not include steps to incorporate the metrics, including their methodologies, into DOD guidance. Without guidance specifying standardized definitions, methodologies, and procedures for data collection procedures, DOD’s efforts to employ metrics to monitor and evaluate inventory management performance may be hampered.

Finally, DOD achieved about $710 million in cost avoidances reducing excess inventory in fiscal year 2010, and plans to reduce funding for the purchase of items by $365 million between fiscal year 2012 and 2016. Additionally, DOD completed about $140 million in lateral redistributions and procurement offsets in fiscal years 2010 and 2011, which prevented the acquisition of additional items.

section_title: What GAO Recommends
paragraphs: GAO recommends that DOD periodically re-examine its targets for on-hand and on-order excess inventory; and develop guidance to establish a set of metrics including standardized definitions and calculations that are then employed to monitor its inventory management practices. DOD concurs with GAO’s recommendations.

section_title: Letter
paragraphs: The Department of Defense (DOD) spends billions of dollars to purchase,  manage, store, track, and deliver spare parts and other supplies needed  to keep military equipment ready and operating. DOD manages more  than 4 million secondary items and reported that as of September 2010  the value of its inventory was $95.6 billion. However, DOD reported that  $8.4 billion (8.3 percent) of its secondary inventory has been identified as  excess and categorized for potential reuse or disposal (i.e., potential  reutilization stock or on-hand excess). According to DOD, another $15.6  billion (15.8 percent) of its secondary inventory exceeds the approved  acquisition objective and is being retained because either it was  determined to be more economical to retain than to dispose of it or it  might be needed for a contingency in the future. As we have emphasized  in previous reports, the federal government is facing serious long-term  fiscal challenges, and DOD may confront increased competition over the   Strategic guidance released  next decade for federal discretionary funds.by the President of the United States and the Secretary of Defense in  January 2012 emphasized that DOD must continue to reduce the cost of  doing business, in particular finding further efficiencies in overhead,  business practices, and support activities. Inventory management, a key  support activity that affects the readiness of the force, must be conducted  effectively and efficiently to avoid expending resources and accumulating  wasteful inventory that could prevent the dedication of resources to other  defense or national priorities.

GAO, Opportunities to Reduce Potential Duplication in Government Programs, Save Tax  Dollars, and Enhance Revenue, GAO-11-318SP (Washington, D.C.: March 1, 2011);  High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011); High-Risk  Series: An Update, GAO-09-271 (Washington, D.C.: January 2009); High-Risk Series: An  Update, GAO-07-310 (Washington, D.C.: January 2007); and High Risk-Series: An  Update, GAO-05-207 (Washington, D.C.: January 2005). efficiency of inventory management. DOD concurred with 38 of the 39  recommendations. A list of related products is at the end of this report.

Section 328 of the National Defense Authorization Act (NDAA) for Fiscal  Year 2010 required the Secretary of Defense to submit to congressional  defense committees a comprehensive plan for improving the inventory  management systems of the military departments and DLA with the  objective of reducing the acquisition and storage of secondary inventory   For purposes of section 328, the NDAA  that is excess to requirements. defines inventory that is excess to requirements as inventory that is  excess to the approved acquisition objective and not needed for  economic or contingency retention. DOD submitted its Comprehensive  Inventory Management Improvement Plan (Plan) on November 8, 2010,  and as also required by Section 328, we reported our assessment of the  Plan on January 7, 2011.

Additionally, section 328 requires us to assess the extent to which the  Plan has been effectively implemented by each military department and  DLA and report to the congressional defense committees not later than  18 months after the Plan is submitted. Accordingly, our objectives for this  report were to determine the extent to which DOD has (1) established and  achieved targets for reducing excess inventory in the Plan, (2) made  progress in implementing the overall Plan, (3) established and  implemented standardized metrics to track their progress in improving  inventory management, and (4) identified and realized any cost savings  or cost avoidance from implementing the Plan.

To assess the extent to which DOD’s Plan has established and its  implementation has achieved targets for reducing excess inventory, we  reviewed the targets established by DOD, the process used to establish  the targets, and DOD’s progress achieving the targets. To determine the  extent to which DOD has made progress in implementing the Plan, we  reviewed the Plan’s actions, milestones, and implementation steps and  evaluated implementation status reports and actions from the Deputy  Assistant Secretary of Defense for Supply Chain Integration, the services,  and DLA. To determine the extent to which DOD has established and  implemented standardized metrics to track their progress in improving  inventory management across the department, we reviewed DOD’s  process for developing a comprehensive set of metrics, DOD’s progress  in identifying metrics to assess the performance of inventory  management, and DOD’s plans to incorporate the metrics into DOD  guidance for the services and DLA. To determine the extent to which  DOD has identified and realized any cost savings or cost avoidance  associated with implementation, we reviewed the Plan and associated  documentation to identify any documented cost savings or cost  avoidance, DOD’s methodology for calculating any cost savings or cost  avoidance, and DOD’s implementation of any cost savings or cost  avoidances. We also interviewed Office of the Secretary of Defense  (OSD), service, and DLA officials to discuss progress in implementing the  Plan and achieving the established targets, efforts to develop metrics to  track progress in improving inventory management, and implementation  of any cost savings or cost avoidance. We examined the reliability of data  used in this report by reviewing DOD policy and procedures for the  collection of the data used for inventory reporting and interviewing  officials about their methods for quality control and found that the data  were sufficiently reliable to address our objectives. See appendix I for a  more detailed description of our scope and methodology. In addition,  appendix II provides the implementation status of recommendations from  our most recent inventory management reports.

We conducted this performance audit between August 2011 and May  2012, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Categories of DOD’s Inventory
paragraphs: DOD guidance requires that the services and DLA report the current and  projected status of their secondary item inventories to support OSD’s  oversight responsibilities and for use in its procurement and repair budget  deliberations. To ensure the department has consistent data, the  services and DLA are required, among other things, to group their  secondary item inventories into several specific categories, according to  the purpose for which they are held (see figure 1). The reporting  categories include the approved acquisition objective and three inventory  categories that exceed the approved acquisition objective—economic  retention stock, contingency retention stock, and potential reutilization  stock (i.e., on-hand excess inventory). The approved acquisition objective  incorporates both materiel needed to meet the requirements objective  (i.e., the sum of stock represented by the economic order quantity, the  safety level, the repair-cycle level, and the authorized additive levels)  and 2 years of estimated future demand. DOD purchases inventory to  meet the approved acquisition objective, according to DOD officials.  Secondary item inventory that exceeds the approved acquisition objective  is categorized as retention stock or potential reutilization stock.  Retention stock includes economic retention stock, which is materiel that  has been deemed more economical to keep than to dispose of because it  is likely to be needed in the future, and contingency retention stock, which  is materiel retained to support specific contingencies. Potential  reutilization stock has been identified for possible disposal but has  potential for reutilization. Potential reutilization stock is also referred to as  on-hand excess inventory. Additionally, OSD, the services, and DLA track  on-order excess inventory, which are items for which a contract has been  awarded or funds have been obligated, but due to subsequent changes in  requirements would be categorized as potential reutilization stock upon  arrival. Figure 1 summarizes how DOD inventory categories are  aggregated for reporting. Appendix III provides a printer-friendly version  of figure 1. Additionally, see the glossary for key inventory management  terms.

The objective of DOD’s Plan is to achieve a prudent reduction in current  inventory excesses as well as a reduction in the potential for future  excesses without degrading materiel support to the customer. The Plan  has two overarching goals, which are to reduce (1) total on-order excess  inventory from 8.5 percent of total obligated on-order dollars in fiscal year  2009 to a target of 6 percent by the end of fiscal year 2014 and 4 percent  by the end of fiscal year 2016 and (2) on-hand excess inventory from 11.3  percent of the total value of inventory in fiscal year 2009 to a target of 10  percent by the end of fiscal year 2012. DOD developed nine sub-plans,  which are designed to assist in reducing excess inventory and improve  inventory management practices across DOD. Each of the nine sub-plans  focuses on a particular inventory management area and includes an  objective, as identified in table 1. Additionally, see appendix IV through  XII for detailed information for each sub-plan.

Each of these nine sub-plans include actions, milestones, and  implementation steps. See figure 2 for a depiction of the Plan’s  implementation structure. OSD, the services, and DLA use a plan of  action and milestones to manage the Plan’s implementation, which  includes steps for each of the nine sub-plans and tracks the status of the  implementation.

The Plan outlines the roles and responsibilities of key stakeholders,  including those of the Deputy Assistant Secretary of Defense for Supply  Chain Integration, the Supply Chain Executive Steering Committee, the  services, and DLA. The Deputy Assistant Secretary of Defense for Supply  Chain Integration oversees the Plan’s implementation through progress  review meetings held about every month. The Supply Chain Executive  Steering Committee, which is comprised of executive-level members from  the services and DLA, advises the Deputy Assistant Secretary of Defense  for Supply Chain Integration on matters related to supply chain  management, including the implementation of the Plan, and typically  receives a briefing on the Plan’s implementation every three months.  Also, the Supply Chain Executive Steering Committee is used to resolve  issues encountered in implementation that cannot be resolved at a lower  level. Any unresolved issues are discussed and resolved at the Joint  Logistics Board, which is comprised of senior-level participants from the  services, combatant commands, and DLA, and is responsible for  reviewing the status of the logistics portfolio and the effectiveness of the  defense-wide logistics chain in supporting to the warfighter.

Three groups—forecasting and demand planning, inventory and  retention, and supply chain metrics—are responsible for managing the  day-to-day actions in the Plan. Representatives from OSD, the services,  and DLA comprise the groups. Each group has responsibility for particular  sub-plans as follows:

Forecasting and demand planning group: Responsible for the sub- plans on demand forecasting and total asset visibility and multi- echelon modeling and a section of the sub-plan on other inventory  improvement actions, specifically actions associated with reducing  acquisition lead times for spare parts.

Inventory and retention group: Responsible for the sub-plans on  on-order excess inventory, economic retention, contingency retention,  storage and direct vendor delivery, no-demand items, and disposition  of potential reutilization stock and the section of the sub-plan on other  inventory improvement actions associated with inventory  segmentation, inventory systems modernization, and efficiency  metrics.

Supply chain metrics group: Responsible for leading efforts to  standardize the definitions and computation of metrics across DOD,  validating the effectiveness of measures as indicators of progress,  translating metrics to inform future decisions, and integrating the  metrics in the Plan into the DOD performance measurement  framework.

section_title: DOD Established Targets for Reducing Excess Inventory Based on the Best Data Available, but Its Targets May Not Effectively Guide Continued Improvement
paragraphs: DOD may find that the two targets for reducing on-order and on-hand  excess inventory that it established when developing the Plan in fiscal  year 2010 are ineffective in guiding future inventory management  improvement efforts. DOD set measurable targets for each of its goals  based on the best data available according to DOD officials, but since  that time more recent data revealed that the on-order excess inventory  target was met 4 years early and prior to the Plan’s implementation  efforts’ beginning. Additionally, the on-hand excess inventory target was  surpassed because DOD revised the definition and calculation of on-hand  excess inventory.

DOD’s target for the on-order excess inventory goal is to reduce,  collectively among the services and DLA, the percentage of total  obligated on-order dollars to 6 percent by end of fiscal year 2014 and 4  percent by the end of fiscal year 2016. Reducing the percentage of on- order excess inventory would result in less economic or contingency  retention stock being held by the department and/or less potential on- hand excess inventory that must be disposed of by the department since  there is not a need for the item. DOD reduced its percentage of on-order  excess inventory from 8.5 percent, or approximately $1.15 billion, in fiscal  year 2009 to 5.5 percent, or about $940 million, at the end of fiscal year  2010, thereby achieving its 2014 target 4 years early. The Air Force and  Navy (including the Marine Corps), as of fiscal year 2010, were below the  6 percent on-order excess inventory target for fiscal year 2014, whereas  the Army and DLA were above the target. (See figure 3 for the  percentage of on-order excess inventory for fiscal years 2008 to 2010  across DOD.) DOD achieved its fiscal year 2014 target for on-order  excess inventory prior to the implementation of the Plan, which began in  fiscal year 2011.

DOD’s target for the on-hand excess inventory goal is to reduce,  collectively among the services and DLA, the percentage of the total  value of secondary item inventory designated as excess to 10 percent by  the end of fiscal year 2012. Reducing the percentage of on-hand excess  inventory is an indicator of a more effective and efficient inventory  management system, according to DOD officials. In fiscal year 2011,  based on further analysis of the inventory data, DOD revised the  definition of on-hand excess inventory, which resulted in a reduction in its  percentage of on-hand excess from 9.4 percent, or $8.9 billion, in fiscal  year 2009 to 8.3 percent, or $8.4 billion, in fiscal year 2010, which is well  below its fiscal year 2012 target of 10 percent. DOD revised the definition  of on-hand excess inventory to exclude the projected number of  condemned items, which are unserviceable assets that are determined to  be beyond the point of economic repair during the repair process. OSD  officials stated they, in collaboration with the services and DLA, decided  that the projected number of condemnations would not be included in the  on-hand excess inventory calculation because the services and DLA have  no way to dispose of future condemned items, and therefore these items  should not be counted as on-hand excess inventory. In addition, they  stated inclusion of the condemned items would inflate the amount of on- hand excess inventory, thus DOD plans to report projected condemned  items as a separate inventory category in the future. The Army, Air Force,  and DLA are below the 10 percent on-hand excess inventory target for  fiscal year 2012, whereas the Navy (including the Marine Corps) is  slightly above the target. (See figure 4 for the percentage of on-hand  excess inventory for fiscal years 2008 to 2010 across DOD.)

The Standards for Internal Control in the Federal Government and  results-oriented management practices emphasize the importance of  reviewing and validating performance measures to ensure these  measures remain appropriate. Specifically, we have reported that without  sufficiently ambitious goals or targets, managers may not have incentives  to use performance information to identify opportunities for significant  improvement. A critical factor in the success of goal-setting is  developing ambitious, but realistic “stretch” goals that challenge the  organization to achieve performance improvements. DOD inventory  management guidance states that the Assistant Secretary of Defense for  Logistics and Materiel Readiness is responsible for monitoring the overall  effectiveness and efficiency of DOD’s materiel management systems and  continually developing improvements. It also notes that it is DOD policy  to periodically conduct performance evaluations of its supply chain  operations and inventory.

Officials stated that prior to developing the Plan in fiscal year 2010, DOD  had not established departmentwide targets for on-hand and on-order  excess inventory, therefore establishing these targets was a new  endeavor for DOD. According to DOD officials, establishing optimal  targets for excess inventory is challenging and must consider on-going  operational challenges, such as the potential impact of the reset of  military equipment returning from Iraq and Afghanistan as well as the  need to meet service readiness rates. DOD’s targets in the Plan were set  based on an analysis of trends in the inventory data prior to and including  fiscal year 2009. OSD officials described the process used to establish  the targets as one in which OSD, service, and DLA senior officials  reviewed inventory data trends and exercised professional judgment to  select challenging, yet achievable targets to focus the reduction of excess  inventory. When developing the Plan DOD did not know that its on-order  excess inventory target had already been met because departmentwide  inventory data is not available until approximately 6 months after the end  of the fiscal year, which meant the fiscal year 2010 data was not available  until approximately 6 months into the Plan’s implementation. Furthermore,  additional analysis of the inventory data led DOD officials to make  adjustments to the definition and calculation of on-hand excess inventory,  which made the targets for on-hand excess inventory less meaningful.

DOD officials attribute the reduction in excess inventory to increased  management oversight on the part of OSD, the services, and DLA  leadership, which was prompted by increased congressional oversight  through GAO reviews and the congressional mandate to develop a  comprehensive plan to improve inventory management. OSD officials  stated they intend to review the on-order excess inventory target for fiscal  year 2014 and the on-hand excess inventory for future years after the  fiscal year 2011 data is available. Through such a review, DOD may find  the Plan’s existing targets for its two goals—reducing on-order and on- hand excess—are no longer effective in guiding and monitoring  continuous improvement for the remainder of the Plan’s implementation  given DOD’s progress in these areas.

section_title: DOD Has Made Progress in the Early Stages of the Plan’s Implementation, but Has Experienced Delays and Challenges Remain in Implementation
paragraphs: In addition to making progress toward achieving the targets discussed  above, DOD has made progress implementing the Plan’s actions for  improving inventory management, which began in late fiscal year 2010.  However, DOD is only 18 months into a 4-year implementation effort and  has experienced some delays and faces continued challenges during the  remainder of implementation. Specifically, DOD is implementing a series  of actions focused at improving policies, procedures, and processes for  inventory management that require collaboration among OSD, the  services, and DLA and a coordinated implementation approach. DOD’s  progress included reviewing department, service, and DLA inventory  management guidance, and drafting revisions scheduled to be issued by  the end of fiscal year 2012. The Plan’s overall implementation schedule  has slipped only 1 month since the effort began; however, as of January  1, 2012, a number of the Plan’s actions and milestones were delayed  based on original estimated completion dates. Over the next 3 years of  implementation efforts, OSD, the services, and DLA will confront several  key challenges in their efforts to implement the remainder of the Plan,  such as improving demand forecasting, accelerating multi-echelon  modeling, and ensuring effective execution of DOD guidance by the  services and DLA for the management of on-order excess, retention  stocks, and potential reutilization stocks.
subsections: section_title: DOD Has Made Progress In the Early Stages of the Plan’s Implementation
paragraphs: During the initial implementation effort, OSD, the services, and DLA have  made progress in implementing the actions associated with the Plan.  Much of the progress thus far has involved OSD, the services, and DLA  gathering and analyzing data, such as reviewing DOD, service, and DLA  inventory management guidance and practices and making revisions  where appropriate. For example, in collaboration with the services and  DLA, OSD is in the process of revising DOD guidance to standardize and  strengthen inventory management practices. To inform those changes,  OSD, the services, and DLA have conducted reviews of guidance and  practices for demand forecasting, on on-order excess inventory,  economic retention stock, contingency retention stock, potential  reutilization stock, and storage and direct vendor delivery in the Plan’s  first 18 months of implementation. According to OSD officials, this  revision is scheduled to be finalized and issued by the end of fiscal year  2012. They also stated that once the revised DOD guidance is finalized  and issued the process of implementing the guidance at the service and  DLA level will require time and sustained leadership focus.

According to DOD officials, in some areas, the services and DLA already  have service or agency-specific guidance that addresses some of the  proposed requirements of the revised departmentwide draft guidance, but  in other areas work remains for the services and DLA to ensure that the  draft DOD guidance is reflected, as needed, in organizational guidance  and implemented consistently. Furthermore, according to service and  DLA officials, the services and DLA have been proactively updating or  revising their procedures and practices based on the proposed revisions  to DOD inventory management guidance in some cases. For example,  the U.S. Army Materiel Command has implemented changes to its  automated business system for managing inventory, commonly referred  to as an enterprise resource planning system, to be able to categorize  contingency retention stock according to the categories agreed upon by  OSD, the services, and DLA as part of the contingency retention stock  sub-plan implementation efforts. The U.S. Army Materiel Command also  required contingency retention stock to be justified and documented on  an annual basis. The Navy Supply System Command has developed  guidance for the management of its on-order excess inventory and DLA is  in the process of making changes to its procedures for on-order excess  management.

In addition to revising guidance and procedures, OSD, the services, and  DLA are also developing and implementing metrics associated with each  sub-plan to assist in monitoring the status of DOD’s inventory in  conjunction with the Plan’s implementation. Many of the metrics are  established, but a few of the metrics, such as forecasting error, are under  development and OSD, the services, and DLA are working to agree on  the methodology for calculating these particular metrics. See appendix  IV through XII for detailed information for each sub-plan.

OSD, the services, and DLA have demonstrated progress in other areas  of the Plan’s implementation as well. These areas include, but are not  limited to, the following:

Automated access to inventory. OSD, the services, and DLA  determined that 95 percent of DOD’s inventory is accessible by  automated means to the services and DLA, which exceeded the  Plan’s goal of achieving automated accessibility to 90 percent of its  inventory within 5 years.

DLA’s in-storage visibility program. OSD, the services, and DLA  have increased participation in the in-storage visibility program, which  allows services and DLA to obtain consumable items from another  service or DLA through established business rules. For example, the  Air Force had 145 sites participating in fiscal year 2010 and increased  the number to 190 sites. The Army and Navy increased the number of  sites also. The program conducted $73.8 million lateral redistributions  and procurement offsets in fiscal year 2010 and $68.3 million in fiscal  year 2011.

No demand items. OSD, the services, and DLA have begun  reviewing their inventories for items that have not had any orders for 5  or more years to reevaluate the justification for retaining these items,  even if the items are within the approved acquisition objective. For  example, the Army has been reviewing no demand items since 2006  and has been successful at reducing storage space and storage costs  associated with these items.

Inventory categorization. OSD, the services, and DLA have  reviewed existing categories of inventory (i.e., the approved  acquisition objective, economic retention stock, contingency retention  stock, and potential reutilization stock) and developed tentative sub- categories that provide further clarification as to the make-up of each  category. DOD’s Plan includes steps to incorporate this information  into its guidance on inventory management, specifically a revision of  DOD 4140.64-M Secondary Item Stratification Manual (August 24,  2009).

section_title: Implementation Is Generally on Schedule, but Some of the Plan’s Actions and Milestones Are Delayed
paragraphs: After 18 months, DOD’s implementation of its Plan is generally on  schedule, having slipped 1 month, although a number of actions and  milestones have experienced delays. Each of the nine sub-plans includes  actions, which are each supported by a number of milestones. OSD, the  services, and DLA have begun implementing all 29 actions in the Plan  and completed 3 of these actions, as of January 1, 2012. Our analysis  shows that about half of the remaining actions are on schedule, while half  are delayed. Our analysis also shows that of the 82 milestones that  support the actions, OSD, the services, and DLA have completed 28,  started 39, and have not yet started 15. About a third of the milestones  are delayed. Implementation of all actions and milestones are scheduled  to be complete the first month of fiscal year 2015, rather than the end  fiscal year 2014 as originally scheduled. Tables 2 and 3 provide the  status, by sub-plan, of actions and milestones, respectively. Additionally,  see appendix IV through XII, for detailed information on the status of  individual actions and milestones for each sub-plan.

OSD, the services, and DLA regularly review the status of the actions and  milestones and make adjustments as needed, and we found the reasons  for delays in completing the Plan’s actions and milestones are varied and  do not appear to involve a systemic problem. Several milestones across  several sub-plans are delayed pending the issuance of revised inventory  management guidance, which according to OSD officials is now  scheduled for the end of fiscal year 2012. Other milestones have been  delayed due to funding and contract issues. For example, one milestone  was postponed due to delays in awarding a contract to evaluate improved  demand forecasting methods and techniques for spare parts by taking  into consideration the life cycle—initial provisioning, sustainment, and  end-of-life—of a weapon system. In other cases, additional  implementation steps were added to milestones to better focus and  address an effort, lengthening the original planned time frame. For  example, a milestone in the contingency retention stock sub-plan focused  on assessing results of an independent review of contingency retention  stock, making necessary policy changes, and implementing those  changes, but after analyzing the results of the review, OSD, the services  and DLA determined additional steps were needed to guide the  implementation of the approved recommendations. Since we believe  these delays do not indicate an underlying issue and DOD is making  adjustments to the Plan based on its experience to date, we are not  making recommendations.

section_title: DOD Faces Several Implementation Challenges Going Forward
paragraphs: Over the next 3 years, OSD, the services, and DLA will confront four key  challenges in their efforts to implement the remainder of its Plan. First, the  drawdown of forces and equipment from Afghanistan over the coming  years as well as the reset of the forces and equipment returning from Iraq  and Afghanistan will make inventory management more difficult. DOD will  need to effectively adjust demand planning to reflect changes in  operational tempo associated with the drawdown as well as account for  spare part needs associated with the reset of equipment to avoid the  creation of inventory excesses. Additionally, the return of materiel from  Afghanistan will require effective planning and may result in excess  inventory. Second, the services and DLA are in varying stages of  implementing their respective automated business systems for managing  inventory, which are referred to as enterprise resource planning systems,  which may make consistent data collection difficult and pose continuing  challenges to implementing some areas of the Plan. While DLA has  completely implemented its system, the services are at varying stages of  implementing their systems. As part of the Plan, OSD, the services, and  DLA are working together to monitor potential impacts on the Plan’s  implementation. Third, several areas of the Plan moving forward present  considerable implementation challenges due to the complexity of the  issues. Some examples of complex issues in the Plan that pose  implementation challenges include:  Improving demand forecasting. Improving demand forecasting is  difficult because it involves materiel managers having the most up-to- date operational planning information to adequately plan the stocking  of materiel for the customer. The demand forecasting sub-plan  focuses on putting in place more automated methods for exchanging  information that can be used to improve forecasts between inventory  managers and customers, but these efforts are only in the initial  stages.

Accelerating the use of multi-echelon modeling. DOD set a target  to use multi-echelon modeling on 90 percent of targeted inventories  by the end of fiscal year 2015. As part of its analysis, OSD, the  services, and DLA determined that its targeted inventory is defined as  that portion of the total inventory that includes inventory levels already  set using multi-echelon modeling plus opportunities for additional  application. The targeted inventory is approximately 65 percent of  DOD’s inventory, or $61 billion of DOD’s approximately $95 billion in  inventory for fiscal year 2010. OSD, the services, and DLA are  currently working to identify criteria and business rules for the targeted  inventory that currently uses multi-echelon modeling to be able to  develop opportunities for additional application to accelerate the use  of multi-echelon modeling.

Implementing revised DOD guidance on retention management.  OSD, the services, and DLA have reviewed existing DOD and service  guidance for the management of on-order excess, economic retention  stock, contingency retention stock, and potential reutilization stock  and are in the process of finalizing revisions to the guidance to be  issued by the end of fiscal year 2012. However, the full  implementation of the revised guidance will occur largely within the  materiel and logistics commands of the services and at DLA. As  reported in our previous reports, existing policies and procedures to  justify and review retention decisions were not implemented  appropriately and consistently within the services and DLA. While  the collaborative review and revision of DOD guidance by OSD, the  services, and DLA was an important first step, the standardized and  effective implementation of these revised policies, once issued, in the  services and DLA will be key to achieving the desired outcomes of the  Plan.

Fourth, sustaining senior OSD, service, and DLA leadership and  management attention through fiscal year 2015 will be important to  effectively implement the remainder of the Plan. As we noted above,  service and DLA officials told us that sustained leadership focus has been  important thus far in DOD’s implementation efforts. As implementation  moves forward, addressing complex issues such as improving demand  forecasting, accelerating multi-echelon modeling, and ensuring consistent  implementation of DOD inventory management guidance will require  continued management attention and focus. Furthermore, since  implementation efforts are in the initial stages, sustaining leadership and  management focus will be critical to guide improvement efforts for the  remainder of the Plan’s implementation.

section_title: DOD Is Developing a Set of Metrics to Assess Inventory Management Effectiveness and Efficiency, but Has Not Determined If It Will Incorporate These Metrics into Guidance
paragraphs: As part of the Plan, DOD is developing a set of metrics to assess the  effectiveness and efficiency of its inventory management beyond the  percentage targets for on-order and on-hand excess inventory identified  in the Plan, but it has not determined if it will incorporate the set of metrics  into guidance. This may hamper its ability to assess inventory  management performance and sustain management attention on  improvement beyond the Plan’s implementation.

OSD is leading the development of a supply chain enterprise metrics  strategy designed to identify key departmentwide metrics to monitor the  performance of the supply chain, along with inventory management, and  serve as a basis for making supply chain guidance and resource  decisions. However, DOD has not made final decisions and the effort is a  work in progress. DOD officials told us that a set of comprehensive,  standardized metrics will allow OSD, the services, and DLA to assess and  balance the effectiveness and efficiency of inventory management  operations within the broader construct of the supply chain. They added  that assessing the effectiveness and efficiency of inventory operations in  isolation from the rest of the supply chain would not be prudent. Rather,  the DOD officials believe an assessment of the effectiveness and  efficiency of inventory management must be conducted more broadly and  take into account additional supply chain metrics, such as the ability of  the supply chain to support the readiness of the force in a timely manner.  Thus, OSD, the services, and DLA are working collaboratively to identify  or develop the appropriate metrics, including the data source and  methodology for producing the metrics.

OSD, the services, and DLA are currently developing possible  departmentwide supply chain metrics, including inventory management  metrics, to monitor the performance of the supply chain. Specifically, the  development of the departmentwide metrics is based on one outcome— readiness—and four attributes—responsiveness, reliability, cost, and  planning and precision—of the supply chain. To support the  measurement of the outcome and attributes, the supply chain metrics  group identified potential departmentwide metrics to be collected and  assessed. The potential metrics include, but are not limited to, metrics  associated with inventory management. OSD, the services, and DLA  have not made a final decision on which metrics to monitor. The attributes  and associated examples of metrics are shown in table 4.

Some of the potential metrics are currently reported by OSD, while others  would be new metrics that would require establishing a data source and  methodology. For example, customer wait time, on-order excess  inventory, and on-hand excess inventory are metrics that are currently  reported to the DOD Deputy Chief Management Officer by the Deputy  Assistant Secretary of Defense for Supply Chain Integration. Other  potential metrics, such as the “not mission capable rate for maintenance  or supply” related to the readiness attribute, are reported within DOD by  other entities. On the other hand, there are metrics, such as the “tiered  inventory turns” metric related to the cost attribute and “demand forecast  error”, for which business rules are being established for the computation  and collection of the data for the metric.

As we recently reported, DOD has been challenged by developing  departmentwide performance measures for supply chain management,  including inventory operations. We have also noted that developing sets  of performance goals and measures could provide a balanced  perspective of the intended performance of a program’s multiple priorities,  such as timeliness, service quality, customer satisfaction, and program  cost.management performance within the broader construct of supply chain  management through a set of departmentwide, comprehensive, and  standardized metrics is appropriate and critical, but the Plan and its   Thus, the development of metrics to assess inventory  implementation actions do not include steps to incorporate the inventory  management metrics, including the methodologies, into DOD guidance.  When we spoke with DOD officials they told us they agree that the Plan  and its implementation actions do not address implementing the  comprehensive set of metrics in guidance and added that they agree it  would be a good idea to do so.

DOD inventory management policy states that performance and cost  evaluations of supply chain operations and inventory shall be conducted  periodically. The policy also states that the Assistant Secretary of  Defense for Logistics and Materiel Readiness is responsible for  monitoring the overall effectiveness and efficiency of its materiel  management systems and continually developing improvements and that  materiel managers should evaluate and be capable of reporting on the  performance of inventory management, and more broadly supply chain  operations. Based on our previous reporting, we have found that such  metrics should be reportable in a consistent fashion and used to evaluate  performance. Further, we have found establishing metrics, and  monitoring and evaluating program performance are key practices in  results-oriented-management.

A key part of metrics being reportable in a consistent fashion is ensuring  that standardized definitions, methodologies, and procedures will be  used. The services and DLA will be relied upon to generate the data for  some of the departmentwide inventory management metrics; thus, efforts  to monitor and evaluate inventory management performance may be  hampered without standardized definitions, methodologies, and  procedures for the consistent collection of data for the metrics. In the  past, DOD has institutionalized supply chain metrics through guidance.  For example, OSD issued guidance to the services and DLA that  provided a standardized definition and procedures for measuring and  reporting the “customer wait time” metric to OSD.ensure that the services and DLA collect the data needed on a  standardized basis for the departmentwide metric so that decision makers  can evaluate performance across the department. Furthermore,  incorporating the inventory management metrics into the department’s  guidance and procedures would result in the institutionalization of the  metrics and assist in sustaining a results-oriented management  framework for inventory management beyond the Plan’s implementation.  Without the institutionalization of the metrics, DOD may be hampered in  its ability to assess the performance of inventory management and  sustain management attention on continuously improving its inventory  management beyond the Plan’s implementation.

section_title: DOD Has Achieved Cost Avoidances Based on Fiscal Years 2009 and 2010 Inventory Data and Plans to Reduce Resources Available for the Purchase of Secondary Items
paragraphs: DOD officials emphasized that the reductions achieved in the amount of  on-order and on-hand excess inventory represent about $710 million in  cost avoidances on the part of the department. Additionally, as part of the  Plan’s implementation, DOD reduced the resources available to its  working capital funds to purchase secondary inventory items.Specifically, DOD reduced the departmentwide dollar value of on-order  excess inventory from fiscal years 2009 to 2010, by approximately $210  million—a reduction from $1.15 billion, or 8.5 percent of total on-order  dollars, to $940 million, or 5.5 percent. With respect to on-hand excess  inventory, DOD reduced the departmentwide dollar value of on-hand  excess inventory from fiscal years 2009 to 2010, by approximately $500  million—a reduction from $8.9 billion, or 9.4 percent of the total value of  the inventory, to $8.4 billion, or 8.3 percent. According to OSD officials,  reducing the percentage of on-order and on-hand excess inventory from  fiscal year 2009 to 2010 indicates that the department’s focused  management efforts have started to yield cost avoidances and more  effective inventory management operations. Lower levels of on-order  excess mean that DOD is purchasing items that are needed to meet the  approved acquisition objective rather than items that will be classified as  potential reutilization stock, or on-hand excess, upon arrival. Reducing  the level of on-hand excess means that DOD is purchasing items that are  needed, retaining items as economic or contingency retention stock,  and/or disposing of items more efficiently that are no longer needed by  the department. Additionally, OSD, the services, and DLA have increased  participation in the in-storage visibility program, which allows services and  DLA to obtain consumable items from another service or DLA to prevent  the procurement of additional items. The program completed $73.8 million  lateral redistributions and procurement offsets in fiscal year 2010 and  $68.3 million in fiscal year 2011, which prevented the acquisition of  additional items.

DOD also plans to reduce the resources available in its working capital  funds to purchase secondary inventory items by about $365 million over  fiscal years 2012 to 2016 as part of the Plan’s implementation. As part of  the fiscal year 2012 budget deliberations, OSD implemented a  management decision that reduced the obligation authority for the Army  and DLA working capital funds by $39 million in fiscal year 2012. DOD  has identified further reductions of obligation authority to the respective  working capital funds for fiscal years 2013 to 2016, which are displayed in  table 5. The reductions only impact the Army and DLA because neither  met the percentage targets established for on-order excess inventory in  the Plan—6 percent by fiscal year 2014 and 4 percent by fiscal year  2016. According to OSD officials, these reductions in obligation  authority are intended to heighten management attention on efforts to  reduce the Army and DLA’s on-order excess inventory. The Navy  (including the Marine Corps) and Air Force were below these targets;  thus, no reductions are currently planned for their working capital funds  as part of this effort.

Since the working capital funds generally rely on sales revenue (i.e., a  military unit purchasing a spare part from the working capital fund with  appropriated operation and maintenance funds), rather than direct annual  appropriations to finance the purchase of secondary inventory items,  these reductions to obligation authority are not directly reducing the  expenditure of appropriated funds. Rather, the reductions to obligation  authority mean that the working capital fund has reduced purchase  authority for additional secondary items for the inventory, resulting in a  lower inventory replenishment rate. While these reductions will not  directly result in savings to direct appropriation accounts, OSD, Army, and  DLA officials told us that the reduction of obligation authority will require  the Army and DLA to better manage its available resources for  purchasing new secondary items.

section_title: Conclusions
paragraphs: Effective and efficient management of DOD’s inventory is critical to  supporting the readiness of the force, and requires a balanced approach.  To be effective DOD must have the correct amount of spare parts on- hand at the correct time to support the fighting force, but DOD must also  manage its inventory efficiently to avoid the unnecessary and wasteful  accumulation of secondary inventory that could divert resources away  from defense priorities. With consistent and heightened visibility to  Congress and committed leadership on the part of OSD, the services,  and DLA, DOD has made progress improving its inventory management.  DOD is currently 18 months into a 4-year implementation process, and is  making progress towards reducing excess inventory, implementing its  Plan, and establishing a departmentwide set of standardized metrics for  inventory management. Moving forward, DOD’s inventory management  improvement efforts would benefit from challenging, but achievable  targets for reducing its on-order and on-hand excess inventory. OSD’s  stated intention to review the targets would help ensure that DOD’s  progress is not hampered because of a lack of meaningful targets to  guide its efforts. Additionally, while DOD has begun developing a  departmentwide set of standardized inventory management metrics as  part of the Plan’s implementation, formalizing the set of metrics in  guidance would allow DOD, services, and DLA to institutionalize the  metrics in a results-oriented management framework beyond the Plan’s  implementation. To continue progress, committed and sustained  leadership on the part of OSD, the services, and DLA will be key as DOD  implements the remainder of the Plan and institutionalizes a results- oriented management framework.

section_title: Recommendations for Executive Action
paragraphs: To improve implementation of the Comprehensive Inventory Management  Improvement Plan and ensure sustained management attention beyond  the Plan’s implementation consistent with results-oriented management  practices, we recommend the Secretary of Defense direct the Assistant  Secretary of Defense for Logistics and Materiel Readiness to take the  following three actions:  conduct and document periodic re-examinations of its existing on- order and on-hand excess inventory percentage targets (such as  those officials say are planned) and update the targets and associated  timelines, if necessary, to guide continued improvement in its  inventory management through the Plan’s implementation; develop and implement guidance that establishes a comprehensive,  standardized set of departmentwide inventory management metrics,  including standardized definitions and procedures for measuring and  reporting the metrics; and employ these metrics in periodically monitoring the effectiveness and  efficiency of its inventory management practices.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for comment. In written  comments, DOD concurred with our recommendations. DOD’s comments  are reprinted in their entirety in appendix XIII. DOD also provided  technical comments, which we incorporated into the report as  appropriate.

DOD concurred with our recommendation to conduct and document  periodic re-examinations of its existing on-order and on-hand excess  inventory percentage targets (such as those officials say are planned)  and update the targets and associated timelines, if necessary, to guide  continued improvement in its inventory management through the Plan’s  implementation. DOD stated that it will re-examine the on-order and on- hand excess percentage targets as part of its ongoing review of existing  inventory management metrics. Furthermore, DOD stated that the on- hand excess inventory percentage target is currently being revised, taking  into consideration current performance and anticipated operational  conditions that may affect this target.

DOD concurred with our recommendation to develop and implement  guidance that establishes a comprehensive, standardized set of  department-wide inventory management metrics, including standardized  definitions and procedures for measuring and reporting the metrics.  Specifically, DOD stated that it is continuing to identify and develop a set  of department-wide inventory management metrics. We acknowledge the  department’s planned actions and want to reiterate the need for  standardized definitions and procedures for measuring and reporting  them as a means for supporting a results-oriented management  framework beyond the Plan’s implementation.

Finally, DOD concurred with our recommendation to employ the metrics  in periodically monitoring the effectiveness and efficiency of its inventory  management practices. Specifically, DOD stated they will continue to  monitor existing inventory management metrics and include additional  metrics approved for its department-wide assessments of inventory  management.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretaries of the Army, Navy,  and Air Force, and the Director of DLA. In addition, the report is available  at no charge on the GAO website at http://www.gao.gov.

If you or your staff have questions about this report, please contact me at  merrittz@gao.gov or (202) 512-5257. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix XIV.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of our work were to determine the extent to which (1) the  Department of Defense (DOD) established and achieved targets for  reducing excess inventory in the Comprehensive Inventory Management  Improvement Plan (Plan), (2) DOD made progress in implementing the  Plan, (3) DOD has established and implemented standardized metrics to  track their progress in improving inventory management, and (4) DOD  has identified and realized any cost savings or cost avoidance from  implementing the Plan. To gather information for these objectives, we  reviewed documentation and interviewed officials from:

Office of the Under Secretary of Defense (Comptroller);

Office of the Deputy Assistant Secretary of Defense for Supply Chain

Office of the Deputy Chief Management Officer;

Headquarters Army, Office of the Deputy Chief of Staff of the Army,

Headquarters Navy, Deputy Assistant Secretary of the Navy,  Acquisition & Logistics Management;

Headquarters Air Force, Deputy Chief of Staff for Logistics,  Installations, and Mission Support, Directorate of Logistics Policy  Division;

Marine Corps Headquarters, Installations and Logistics Department;

U.S. Army Materiel Command;

Navy Supply Systems Command, Headquarters;

Air Force Materiel Command, Headquarters;

Marine Corps Logistics Command, Headquarters; and

Defense Logistics Agency (DLA).

To assess the extent to which DOD’s Plan has established and its  implementation has achieved targets for reducing excess inventory, we  evaluated Office of the Secretary of Defense’s (OSD), the services’, and  DLA’s progress in reaching the Plan’s two main targets for reducing on- order excess and on-hand excess inventory by comparing OSD’s, the  services’, and DLA’s reported progress in fiscal year 2009 and fiscal year  2010 when measured against the targets for these two main goals  established in the Plan. Fiscal year 2011 data was not available by the  end of our review to assess the department’s progress in fiscal year 2011,  the first year of implementing the Plan. We assessed OSD’s, the  services’, and DLA’s progress in reaching the targets of the Plan and the  process DOD used to establish the targets by obtaining and reviewing  OSD progress reports, and reviewing other supporting documentation  from the services and DLA to corroborate the DOD’s reported progress.  To provide context, we interviewed OSD, service, and DLA officials to  discuss their interpretation of the data for the two goals. Additionally, we  examined the reliability of data used for the targets by reviewing DOD  policy and procedures for the collection of the data used for inventory  reporting and interviewing officials about their methods for quality control  and found that the data were sufficiently reliable to address our  objectives.

To determine the extent to which OSD, the services, and DLA have made  progress in implementing the Plan, we evaluated DOD’s Plan and the  plan of action and milestones, which includes actions, milestones, and  implementation steps for each of the nine sub-plans and tracks the status  of the implementation. Our analysis of the implementation of the Plan  focused on actions and milestones that were started and underway by  January 1, 2012 and we rated each action and milestone as either  “completed,” “started, on schedule,” “started, completion delayed,” “not  started, on schedule,” or “Not started, completion delayed.” These  categories were defined as follows:

Completed: Action or milestone was completed, irrespective of  whether or not the task was completed on-schedule.

Started, on schedule: Action or milestone can be verified as  underway, but is not complete and scheduled completion date has not  slipped.

Started, completion delayed: Action or milestone can be verified as  underway, but is not complete and the team has determined the  scheduled completion date has slipped.

Not started, on schedule: Action or milestone planned to begin after  January 1, 2012, and the expected completion date is unchanged  from the Plan.

Not started, completion delayed: Action or milestone planned to begin  after January 1, 2012, and the expected completion date has slipped  from the Plan.

Specifically, a GAO analyst reviewed and compared the schedule and  content of the actions and milestones in the plan of actions and  milestones with the status of implementation efforts as reported in the  progress reviews conducted by OSD and briefings provided to the Supply  Chain Executive Steering Committee; assessed the status of each action  and milestone by the categories above; and recorded the assessment  and the basis for the assessment. A second analyst then reviewed the  documentation and assessment and either confirmed the assessment or  proposed a different assessment. The final assessment reflects the  analysts’ consensus. In addition we interviewed DOD officials as needed  to clarify the status of any efforts where the documentation was unclear.

To determine the extent to which DOD has established and implemented  standardized metrics to track the effectiveness and efficiency of inventory  management, we reviewed all documents related to the Plan, its plan of  actions and milestones, and the progress reviews conducted by OSD to  identify any performance metrics associated with the implementation of  the Plan. We reviewed the actions and milestones associated with  establishing metrics to evaluate the effectiveness and efficiency of  inventory management across the department. We interviewed OSD,  service, and DLA officials responsible for implementing the Plan to  understand the status and maturity of the metrics DOD is considering and  how the reporting of inventory management measures may change.

To determine the extent to which DOD has identified and realized any  cost savings or cost avoidance associated with implementation, we  reviewed the Plan and associated documentation to identify any efforts  related to cost savings or cost avoidance. We also assessed the nature of  the potential cost savings or cost avoidances associated with the  implementation of the Plan’s actions and milestones. Specifically, we  determined whether the projected cost savings and cost avoidances were  the result of a reduction in obligations of directly appropriated funds (e.g.,  an operation and maintenance appropriation), changes to the working  capital fund, or other factors, and determined whether these sources  impact the validity of attributing these savings or cost avoidances to the  Plan’s implementation. We also interviewed OSD, service, and DLA  officials to discuss the rationale, and implementation of any cost savings  or cost avoidance.

We conducted this performance audit between August 2011 and May  2012, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

section_title: Appendix II: Implementation Status of Prior GAO Recommendations for DOD Inventory Management
paragraphs: Over the past 6 years, we issued six reports on different aspects of the  Department of Defense’s (DOD) inventory management. Table 6  summarizes the status of recommendations made in these six reports,  which contained a total of 39 recommendations to improve DOD’s  inventory management. Twenty-nine of the recommendations have been  implemented by the Offices of the Secretary of Defense (OSD), the  services, and the Defense Logistics Agency (DLA), five remain open for  action, and five recommendations, related to improving acquisition lead  time, were not implemented. For each of the six reports, the specific  recommendations, implementation status, and the related sub-plan of the  Comprehensive Inventory Management Improvement Plan (Plan) are  summarized in tables 7 through 12.

In our report issued in 2010, we found that DLA can enhance its efforts to  manage spare parts more effectively primarily by focusing on the front  end of the process when decisions are being made on what and how  many items to buy in response to requirements. Our analysis of DLA data  showed the agency had more spare parts secondary inventory than was  needed to meet current requirements in fiscal years 2006 through 2008.  Although DOD policy required DLA to minimize investment in inventory  while also meeting requirements, seven factors were identified as causing  DLA to order and stock parts that did not align with requirements. These  seven factors were: unresolved problems with accurately estimating lead times needed to  inaccurate demand forecasting for parts;  acquire spare parts;  challenges in meeting the military services’ special requests to DLA  for future spare parts support for weapon systems;  closing gaps in providing accurate, timely data to inventory managers  as input into purchase decisions; modifying or canceling planned purchases that may no longer be  needed to meet currently estimated requirements;  reducing contingency retention stock that may no longer be needed;  and not tracking the overall cost efficiency of its inventory management  We made eight recommendations and as of January 1, 2012, six have  been implemented and two remain open. Table 7 summarizes our  recommendations and their implementation status.

In our report issued in 2009, we found the Army had more inventory than  was needed to support current requirements. At the same time, the Army  had substantial inventory deficits. Based on Army demand forecasts,  inventory that exceeded current requirements had enough parts on-hand  for some items to satisfy several years, or decades, of anticipated supply  needs. Also, a large proportion of items that exceeded current  requirements had no projected demand. Army inventory also did not align  with current requirements over this period because of a lack of cost- efficiency metrics and goals and inaccurate demand forecasting. We  made four recommendations and two of these recommendations have  been implemented and two remain open. Table 8 summarizes our  recommendations and their implementation status.

In our report issued in 2008, we found the Navy had more inventory than  was needed to support current requirements and also experienced some  inventory deficits, though to a far lesser extent. Based on Navy demand  forecasts, inventory that exceeded current requirements was sufficient to  satisfy several years, or even decades, of anticipated supply needs. Also,  a large proportion of the items that exceeded current requirements had no  projected demand because the Navy had not systematically evaluated the  effectiveness of its demand forecasting. Navy inventory did not align with  current requirements because (1) the Navy has not established the cost  efficiency of its inventory management, (2) its demand forecasting  effectiveness is limited and requirements for items may change frequently  after purchase decisions are made, and (3) it has not adjusted certain  inventory management practices in response to the unpredictability in  demand. We made five recommendations and the Navy has implemented  four of them and one remains open. Table 9 summarizes our  recommendations and their implementation status.

In our report issued in 2007, we found that the Air Force purchased  unneeded inventory because its policies do not provide incentives to  reduce the amount of inventory on order that is not needed to support  requirements. Additionally, the Air Force continued to retain unneeded  inventory with no recurring demands because it had not performed a  comprehensive assessment to revalidate the need to continue to retain  these items. 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. We made four  recommendations and the Air Force implemented all four of the  recommendations. Table 10 summarizes our recommendations and their  implementation status.

In our report issued in 2007, we found that the military components’  estimated lead times to acquire spare parts varied considerably from the  actual lead times experienced. The effect of the lead time underestimates  was almost $12 billion in spare parts arriving more than 90 days later than  anticipated, which could negatively affect readiness rates because units  may not have needed inventory. DOD and the components strive to meet  customer based materiel requirements while minimizing the investment in  inventories, and accurate lead time estimates are critically important in  enabling the military components to have the proper amount of inventory  on-hand. DOD’s acquisition lead time estimates varied greatly from the  actual lead times and contributed to inefficient use of funds and inventory  shortages and excesses. To improve the accuracy in setting acquisition  lead time values, we made 11 recommendations. Six of the  recommendations have been implemented and five were not  implemented. Table 11 summarizes our recommendations and their  implementation status.

In our report issued in 2006, we found some DOD inventory management  centers had not followed DOD-wide policies and procedures for making  contingency retention decisions. Some centers were not annually  reviewing their contingency retention decisions potentially resulting in the  retention of unneeded items. DOD had provided insufficient oversight of  inventory retention management across the components and could not be  certain that the components had the correct amount or type of items in  contingency retention inventory. At the time of this 2006 report, DOD had  also not made progress implementing our 2001 recommendations  requiring the components to (1) establish milestones for reviewing their  approaches for making economic retention inventory decisions, and (2)  conduct annual reviews of these approaches, as required by DOD policy.  We made seven recommendations and all of the recommendations were  implemented. Table 12 summarizes our recommendations and their  implementation status.

section_title: Appendix III: Printer-Friendly Version of Figure 1 - Select DOD Categories of Secondary Inventory Items

section_title: Appendix IV: Demand Forecasting Sub-plan
paragraphs: Objective: Improve the prediction of future demand so that inventory  requirements more accurately reflect actual needs.

Actions and milestones: The sub-plan includes 5 actions, which are  supported by 12 milestones. See table 13 below for a description of the  actions and milestones, the original expected completion date, the actual  or planned completion date, and our assessment and comments.

Metrics: As part of the sub-plan, the Department of Defense (DOD) is in  the process developing two metrics to measure forecasting bias accuracy  and bias. The metrics are scheduled to be complete by the end of fiscal  year 2012.

Progress to date: The Office of the Secretary of Defense (OSD), the  services, and the Defense Logistics Agency (DLA) have made progress  by (1) completing a review of demand forecasting methods for one of  three life cycle phases—the initial provisioning—of a weapon system, and  (2) developing metrics for forecasting error and bias, and are on-schedule  to implement the metrics by September 2012. Additionally, OSD, the  services, and DLA determined through an analysis of several years of  supply data that supply support requests forecasts were not causing DLA  to procure excess inventory, which demonstrated that risk-sharing  between a service and DLA would not be effective. However, the analysis  did identify issues with the supply support request process, which OSD,  the services, and DLA are reviewing to identify improvements.

Key work remaining: Over the remaining years of implementation, DOD  has a considerable amount of work remaining to improve demand  forecasting. First, OSD, the services, and DLA need to review and  analyze improved demand forecasting methods and techniques for the  other two life cycle phases—sustainment and end-of-life—of a weapon  system. Once improved demand forecasting methods and techniques are  identified for all three life cycle phases, changes may need to be made to  inventory management policy and practices. Second, work remains for  DOD to implement the forecasting error and bias metrics. Third, OSD, the  services, and DLA are working to establish a departmentwide structure  for collaborative forecasting. As part of this effort, the services and DLA  are in the process of validating their sales and operations planning  processes and then will have to identify gaps and current constraints in  existing processes, which may require changes in inventory management  guidance and practices. Fourth, DOD is in the early stages of completing  its plan to develop new approaches for setting inventory levels for low- demand consumable items and will also need to address forecasting  methods for low-demand. Lastly, OSD, the services, and DLA plan to  work on improving the supply support request process to prevent  unnecessary accumulation of excess inventory.

section_title: Appendix V: Total Asset Visibility and Multi- echelon Modeling Sub-plan
paragraphs: Objective: Minimize the size of purchases by considering all accessible  inventories.

Actions and milestones: The sub-plan includes three actions, which are  supported by 12 milestones. See table 14 for a description of the actions  and milestones, the original expected completion date, the actual or  planned completion date, and our assessment and comments.

Metrics: As part of the sub-plan, the Department of Defense (DOD) is  tracking (1) the percentage of inventory dollars visible and accessible in  an automated manner and (2) the total percentage of inventory dollars  associated with items using multi-echelon modeling. With respect to the  first metric, DOD set a target of 90 percent of the total value of its  secondary inventory being visible and accessible in an automated  manner. With respect to the second metric, DOD set a target for using  multi-echelon modeling on 90 percent of targeted inventories by the end  of fiscal year 2015, up from 47 percent in fiscal year 2009.

Progress to date: The Office of the Secretary of Defense (OSD), the  services, and the Defense Logistics Agency (DLA) have made progress  by (1) determining that 95 percent of DOD’s inventory is accessible by  automated means to the services and DLA, which exceeded the Plan’s  goal of achieving automated accessibility to 90 percent of its inventory  within 5 years and (2) increasing the in-storage visibility program, which  allows services and DLA to obtain consumable items from another  service or DLA. With respect to the in-storage visibility program, the Air  Force for example had 145 sites participating in fiscal year 2010 and  increased the number to 190 sites.

Key work remaining: DOD set a target to use multi-echelon modeling on  90 percent of targeted inventories by the end of fiscal year 2015, which  may be challenging to achieve. OSD, the services, and DLA have  identified that approximately 65 percent of DOD’s inventory, or $61 billion  of DOD’s approximately $95 billion in inventory for fiscal year 2010,  should be targeted for multi-echelon modeling. OSD, the services, and  DLA are currently working to identify the portion of the targeted inventory  that currently uses multi-echelon modeling in order to be able to develop  efforts to accelerate its use within the department.

section_title: Appendix VI: On-order Excess Inventory Sub- plan
paragraphs: Objective: Reduce or terminate purchases that result in inventory  excesses due to a decrease in requirements.

Actions and milestones: The sub-plan includes two actions, which are  supported by four milestones. See table 15 for a description of the actions  and milestones, the original expected completion date, the actual or  planned completion date, and our assessment and comments.

Metrics: As part of the sub-plan, the Department of Defense (DOD) is  tracking (1) the percentage of on-order dollars above the approved  acquisition objective, and (2) the total on-order dollars above the  approved acquisition objective.

Progress to date: The Office of Secretary of Defense (OSD), the services,  and the Defense Logistics Agency (DLA) have made progress by  reviewing existing on-order excess inventory guidance and working to  make revisions to ensure consistency among the services and DLA.  Additionally, the services and DLA are making improvements to their on-  For example, the Navy  order excess inventory guidance and practices. Supply System Command has developed guidance for the management  of its on-order excess inventory and DLA is in the process of making  changes to its procedures for on-order excess management.

Key work remaining: The actions and milestones in the sub-plan will be  complete with the issuance of the inventory management guidance  scheduled for September 2012. To achieve continued reductions in on- order excess inventory, the services, and DLA will need to continue  monitoring their progress.

On-order excess inventory are items for which a contract has been awarded or funds  have been obligated, but due to subsequent changes in requirements would be classified  as potential reutilization stock upon arrival.
subsections: section_title: Actions and milestones Action 1: Establish an economically optimal point in the procurement cycle to terminate an order, considering the different life cycle phases.
paragraphs: completion date  GAO assessment and comments  September 2012

Assessment: Started, completion delayed.

Comments: This action is complete, except for  publishing the guidance revisions, which is  estimated to occur in September 2012 with the  issuance of the new guidance.

Assessment: Started, completion delayed.

Comments: OSD, the services, and DLA reviewed  existing review methodologies for termination and  recommended revisions to current DOD guidance.  Specifically, OSD, the services, and DLA  established the factors that must be considered  when reviewing a contract for termination. DOD is  in the process of incorporating the revisions into  guidance, which is expected to be published in  September 2012, according to DOD officials.

Assessment: Completed.

Comments: The services and DLA have been  working to update their respective policies and  procedures based on the draft guidance revisions.  OSD determined that the Air Force did not need to  update its policies and procedures, while others,  such as DLA, are making improvements to their  on-order excess inventory processes.

section_title: Action 2: Strengthen the approval and reporting procedures for on- order excess inventory.
paragraphs: Assessment: Started, completion delayed.

Comments: This action is complete, except for  publishing the guidance revision, which is  estimated to occur in September 2012 with the  issuance of the new guidance.

Assessment: Started, completion delayed.

Comments: OSD, the services, and DLA reviewed  existing levels of authority to retain materiel on- order in excess of the approved acquisition  objective and recommended some revisions to  current DOD guidance. Specifically, OSD, the  services, and DLA have agreed on a consistent  approach for reviewing on-order excess and  termination decisions. DOD is in the process of  incorporating the revisions into guidance, which is  expected to be published in September 2012,  according to DOD officials. completion date  GAO assessment and comments

Assessment: Completed.

Comments: OSD, the services, and DLA reviewed  current metrics used in assessing performance and  decided that the most appropriate metrics are the  percentage of on-order dollars above the approved  acquisition objective and the total on-order dollars  above the approved acquisition objective.

section_title: Appendix VII: Economic Retention Stock Sub-plan
paragraphs: Objective: Ensure economic retention decisions are based on current cost  factors and economic principles.

Actions and milestones: The sub-plan includes three actions, which are  supported by seven milestones. See table 16 for a description of the  actions and milestones, the original expected completion date, the actual  or planned completion date, and our assessment and comments.

Metrics: As part of the sub-plan, the Department of Defense (DOD) is  tracking (1) the percentage of inventory dollars representing economic  retention stock and (2) the percentage of inventory dollars representing  economic retention stock by service and the Defense Logistics Agency  (DLA).

Progress to date: The Office of the Secretary of Defense (OSD), the  services, and DLA have made progress by (1) developing metrics to  assess the status of economic retention stock, (2) documenting the  services’ and DLA’s current methods for calculating economic retention  stock against current DOD inventory management policy, and (3)  conducting the first annual review of economic retention stock.

Key work remaining: OSD, the services and DLA are in the process of  identifying enhancements to the methodology used in determining the  allowable amount of economic retention stock for an item and may have  to revise DOD inventory management guidance.

section_title: Appendix VIII: Contingency Retention Stock Sub-plan
paragraphs: Objective: Ensure the services and the Defense Logistics Agency (DLA)  justify the retention of contingency stock.

Actions and milestones: The sub-plan includes three actions, which are  supported by eight milestones. One action was canceled. See table 17 for  a description of the actions and milestones, the original expected  completion date, the actual or planned completion date, and our  assessment and comments.

Metrics: As part of the sub-plan, the Department of Defense (DOD) is  tracking (1) the percentage of inventory dollars representing contingency  retention stock, and (2) the dollar value of contingency retention stock  divided into six justification categories.

Progress to date: The Office of the Secretary of Defense (OSD), the  services, and DLA have made progress by (1) completing an independent  review of contingency retention stock, (2) assessing the results of the  independent review and making changes to existing practices, such as  the coding of contingency retention stock to more precisely and  consistently classify the stock, and (3) agreeing that all items held as  contingency retention stock will be annually reviewed and validated.

Key work remaining: OSD, the services, and DLA are incorporating  changes to inventory management guidance for contingency retention  stock, such as requiring all items held as contingency retention stock be  reviewed and validated annually. Additionally, OSD, the services and DLA  are also in the process of developing procedures for the documentation  and review and approval of contingency retention stock decisions.

section_title: Appendix IX: Storage and Direct Vendor Delivery Sub-plan
paragraphs: Objective: Use commercial vendors to store items when use of those  vendors represents the best value to the government.

Actions and milestones: The sub-plan includes four actions, which are  supported by nine milestones. See table 18 for a description of the  actions and milestones, the original expected completion date, the actual  or planned completion date, and our assessment and comments.

Metrics: As part of the sub-plan, the Office of the Secretary of Defense  (OSD), the services, and the Defense Logistics Agency (DLA) set out to  develop a standard departmentwide metric to monitor storage reduction,  but in the course of the analysis decided that a metric would not be  necessary. Additionally, the Department of Defense (DOD) tracks the  total storage footprint and total storage costs across the department at  distribution depots. Also, DOD was tracking certain reductions of storage  space related to the 2005 Base Realignment and Closure Act round. As  part of its implementation of the Base Realignment and Closure Act  round, DOD planned to reduce storage space by 15.1 million gross  square feet and exceeded the planned amount by 0.3 million gross  square feet.

Progress to date: OSD, the services, and DLA have made progress by (1)  examining high storage items for the potential of direct vendor delivery  management resulting in few potential candidates for direct vendor  delivery and determining that future reviews were not needed and existing  guidance was sufficient, (2) reviewing existing factors used in business  case analyses for the selection of alternative sourcing strategies, such as  direct vendor delivery, and determining that storage space is used as a  factor by the Army, Navy, Air Force, and DLA, and (3) reviewing  departmentwide policies and procedures on shifting items to alternative  sourcing strategies and determining to update DOD inventory  management guidance to ensure that any inventory owned by DOD will  be used prior to procuring additional inventory through an alternative  sourcing strategy. OSD officials told us that they believe DOD’s efforts  have sufficiently addressed storage and direct vendor delivery. According  to the Deputy Assistant Secretary of Defense for Supply Chain  Management, DOD will continue to pursue storage consolidation and  optimization through a separate initiative outside the implementation of  the Plan.

Key work remaining: OSD, the services, and DLA still need to update  inventory management guidance to ensure storage cost is considered as  a factor in business case analyses for alternative sourcing strategies and  existing on-hand inventory is used prior to procuring inventory through an  alternative sourcing strategy.

section_title: Appendix X: Items with No Demand Sub-plan
paragraphs: Objective: Eliminate items with a history of no recurring demand and a  low probability of future demand, unless there is sufficient justification for  the retention of the item.

Actions and milestones: The sub-plan includes two actions, which are  each supported by seven milestones. See table 19 for a description of the  actions and milestones, the original expected completion date, the actual  or planned completion date, and our assessment and comments.

Metrics: As part of the sub-plan, the Department of Defense (DOD) is  tracking (1) inventory value by number of years of no demand, (2) value  of inventory with 5 or more years of no demand by the category of  inventory, and (3) the value of no demand stock retained and disposed.

Progress to date: The Office of the Secretary of Defense (OSD), the  services, and the Defense Logistics Agency (DLA) have made progress  by (1) identifying and tracking key metrics for items with no demand and  (2) establishing rules and procedures for managing items with no  demand.

Key work remaining: OSD, the services, and DLA are in the process of  drafting guidance for items with no demand and identifying the processes  to ensure items with no demand are reviewed each year and valid  justification is provided for the retention of the item.
subsections: section_title: Actions and milestones Action 1: Examine service and DLA definitions, methodologies, and rationale for retaining or disposing of items with no recurring demand, and the potential applicability of a life cycle approach. Milestone 1.1: Complete the development of metrics for categorizing and tracking inventory for no demand items.
paragraphs: completion date  December 2012  December 2012

Assessment: Started, on schedule.  completion date  GAO assessment and comments

Comments: OSD, the services, and DLA are  working to improve inventory management  practices for items with no recurring demand.

Assessment: Completed.

Comments: Three enterprise-level metrics were  identified: (1) inventory value by number of years  of no demand, (2) value of inventory with five or  more years of no demand by the category of  inventory, and (3) the value of no demand stock  retained and disposed.

Assessment: Completed.

Comments: A taxonomy of rules and practices  was compiled for stocking and disposing of items  with no demand.

Assessment: Started, on schedule.

Comments: None.

Assessment: Started, on schedule.

Comments: None.

section_title: Actions and milestones Action 2: Develop an annual review and reporting process for no demand items, based on dollar thresholds. Milestone 2.1: Establish plan for no demand item metrics.
paragraphs: completion date  September 2011  September 2012

Assessment: Started, completion delayed.  completion date  GAO assessment and comments

Comments: None.

Assessment: Completed.

Comments: The services and DLA have  established implementation plans for the metrics  for items with no demand.

Assessment: Completed.

Comments: OSD, the services, and DLA  established a set of rules for reviewing no  demand items and the frequency of review is  based on the inventory category.

September 2011  September 2012

Assessment: Started, completion delayed.

Comments: OSD, the services, and DLA  continue to work on developing the appropriate  review process for no demand items and plan on  incorporating it into guidance by September 2012.

section_title: Appendix XI: Disposition of Potential Reutilization Stock Sub-plan
paragraphs: Objective: Ensure timely disposition of items categorized as potential  reutilization stock.

Actions and milestones: The sub-plan includes three actions, which are  supported by seven milestones. See table 20 for a description of the  actions and milestones, the original expected completion date, the actual  or planned completion date, and our assessment and comments.

Metrics: As part of the sub-plan, the Department of Defense (DOD) has  identified three departmentwide metrics: (1) the total dollar value of  disposals for repairable and consumable items, (2) the portion of disposal  dollars that are associated with condemned or unserviceable assets, (3)  the percentage of items (and their associated dollar value) reviewed and  released to disposal by inventory managers.

Progress to date: The Office of the Secretary of Defense (OSD), the  services, and the Defense Logistics Agency (DLA) have made progress  by (1) identifying three departmentwide metrics to track potential  reutilization stock, and (2) changing time standards for reviewing potential  reutilization stock from 12 months to 3 months and disposing of potential  reutilization stock from 6 months to 1 month.

Key work remaining: OSD, the services, and DLA still need to incorporate  the time standards for the review and disposal of potential reutilization  stock into guidance, assess pre-screening procedures for items identified  for disposal, and identify a best practice for the department. In addition,  OSD, the services and DLA need to identify and develop standardized  metrics to measure the time to conduct potential reutilization stock  reviews and disposal actions.
subsections: section_title: Actions and milestones Action 1: Review and validate the service and DLA methodologies and frequency for the timely review of potential reutilization stock assets and timely execution of disposal releases.
paragraphs: December 2012  December 2012

Assessment: Started, on schedule.

Comments: OSD, the services, and DLA have  agreed on new time standards for reviewing and  disposing of potential reutilization stock and are in the  process of incorporating these standards into  guidance.

Assessment: Completed.

Comments: OSD, the services, and DLA have  decided that the time standards will change from 12  months to 3 months for reviewing potential  reutilization stock and 6 months to 1 month for  disposing of potential reutilization stock.

Assessment: Started, on schedule.

Comments: OSD is finalizing the revisions to the  guidance, which are estimated to be published in  September 2012.

December 2012  December 2012

Assessment: Not started, on schedule.

Comments: None.

Action 2: Establish a process for  the services and DLA to pre- screen retail materiel returns for  disposal prior to returns being  shipped to a distribution depot.  Milestone 2.1: Examine potential pre- screening alternatives to expedite  disposal actions on excess returns.

Assessment: Started, on schedule.

Comments: OSD, the services, and DLA are in the  process of reviewing existing pre-screening  processes.

December 2011  December 2011

Assessment: Started, completion delayed.

Comments: Some of the services and DLA have  presented disposal pre-screening procedures they  employ prior to returning material to a distribution  depot, but OSD, the services, and DLA have not yet  assessed the results. This milestone was not  complete as of December 2011, the planned  completion date.

Assessment: Not started, on schedule.

Comments: None.

section_title: Actions and milestones Action 3: Develop new reporting requirements on inventory being reviewed and disposed of as a means of evaluating the disposition process.
paragraphs: GAO assessment and comments

Assessment: Started, on schedule.

Comments: OSD, the services, and DLA have  identified three departmentwide metrics and are in  the process of identifying and developing additional  metrics to measure the time to conduct potential  reutilization stock reviews and disposal actions.

Assessment: Started, on schedule.

Comments: OSD, the services, and DLA have  identified three departmentwide metrics for potential  reutilization stock: (1) the total dollar value of  disposals for repairable and consumable items, (2)  the portion of disposal dollars that are associated with  condemned or unserviceable assets, (3) the  percentage of items (and their associated dollar  value) reviewed and released to disposal by inventory  managers. OSD, the services, and DLA continue to  work on identifying and developing metrics for the  time to conduct potential reutilization stock reviews  and time to move the materiel to disposal.

Assessment: Started, on schedule.

Comments: As noted above in milestone 3.1, OSD,  the services, and DLA have identified three  departmentwide metrics for potential reutilization and  are currently working on identifying and developing  standardized metrics to measure the time to conduct  potential reutilization stock reviews and disposal  actions.

section_title: Appendix XII: Other Inventory Improvement Actions Sub-plan
paragraphs: Objective: To accomplish several cross-functional improvements,  including revising current inventory categories to better reflect the  rationale behind retaining the inventory, improving acquisition lead times,  and establishing departmentwide metrics for inventory management.

Actions and milestones: The sub-plan includes 4 actions, which are  supported by a total of 16 milestones. See table 21 for a description of the  actions and milestones, the original expected completion date, the actual  or planned completion date, and our assessment and comments.

Metrics: As part of the sub-plan, the Department of Defense (DOD) is  tracking (1) the percentage of the total value of inventory that is on-hand  excess inventory, and (2) a metric to evaluate the improvement of  acquisition lead time, which is currently under development.

Progress to date: The Office of the Secretary of Defense (OSD), the  services, and the Defense Logistics Agency (DLA) have made progress  by reviewing existing categories of inventory (i.e., the approved  acquisition objective, economic retention stock, contingency retention  stock, and potential reutilization stock) and developing tentative sub- categories that provide further clarification on the make-up of each  category. Additionally, OSD, the services, and DLA have begun the  process of developing departmentwide metrics to evaluate inventory  management.

OSD, the services, and DLA will need to agree on and implement  departmentwide metrics to evaluate inventory management.

section_title: Appendix XIII: Comments from the Department of Defense

section_title: Appendix XIV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, key contributors to this report  were Suzanne Wren (Assistant Director); Edward W. Anderson, Jr.; John  Bumgarner; Elizabeth Curda; Dave Hubbell; Charlie Perdue; Greg  Pugnetti; Michael Silver; Michael Willems; and Erik Wilkins-McKee.

section_title: Glossary
paragraphs: This glossary is provided for reader convenience. It is not intended as a  definitive, comprehensive glossary of inventory management terms.

Acquisition lead time, also known as procurement lead time, measures  the length of time between the identification of a materiel requirement and  the receipt of that materiel into the supply system. Acquisition lead time is  the sum of the administrative lead time and production lead time.

The time interval between identifying a need to purchase an item and the  award of a contract.

The materiel needed to meet the requirements objective and 2 years of  estimated future demand.

Contains additional materiel, such as wartime reserve stock and inventory  for acquisition lead times, included in the requirements objective.

Unserviceable assets that are determined to be beyond the point of  economic repair during the repair process.

Materiel that is retained to support specific contingencies, such as to  support foreign military sales, future military operations, disaster relief or  civil emergencies, or to mitigate risk associated with diminished  manufacturing sources or nonprocurable stock.

Predicting future customer demands so inventory managers can develop  inventory requirements to satisfy demands when they occur. Inaccurate  forecasts lead to either excess inventory or shortfalls.

A materiel acquisition and distribution method that requires supplier  delivery directly to the customer, which can reduce the storage of items  by the services and the Defense Logistics Agency.

The quantity derived from a mathematical technique used to determine  the lowest total variable costs to order and hold inventory.

Materiel that has been deemed more economical to keep than to dispose  of because it is likely to be needed in the future.

The use of mathematical models that compute the optimal number and  type of parts needed at the wholesale and retail levels to achieve  readiness and cost goals.

Inventory that is excess to the approved acquisition objective and is not  being retained as economic or contingency retention stock. On-hand  excess inventory is also referred to as potential reutilization stock.

Inventory that is in the Department of Defense’s (DOD) possession.

Items for which a contract has been awarded or funds have been  obligated, but due to subsequent changes in requirements would be  classified as potential reutilization stock upon arrival.

Inventory that is not in DOD’s possession but for which a contract has  been awarded or funds have been obligated is considered to be on-order.

Materiel exceeding the approved acquisition objective and not being  retained as economic or contingency retention stock, that has been  identified for possible disposal but has potential for reutilization. Potential  reutilization stock is also referred to as on-hand excess inventory.

The time interval between the award of a contract and receiving the  purchased materiel into the supply system.

The quantity of reparable items required to sustain operations during the  repair cycle that commences when a maintenance replacement takes  place and ends when the unserviceable asset is returned to stock in a  serviceable condition.

The maximum authorized quantity of stock for an item (for wholesale  inventory replenishment), which consists of the sum of stock represented  by the economic order quantity, the safety level, the repair-cycle level,  and the authorized additive levels.

Economic and contingency retention stock, which DOD states is  necessary for the military mission.

The amount of stock that is to be kept on hand in case of minor  interruptions in the resupply process or fluctuations in demand.

Items that include reparable components, subsystems, and assemblies  other than major end items (e.g., ships, aircraft, and helicopters),  consumable repair parts, bulk items and materiel, subsistence, and  expendable end items (e.g., clothing and other personal gear).

The capability to provide all users with timely and accurate information  about the location, movement, status, and identity of supplies and the  capability to act on this information.

section_title: Related GAO Products
paragraphs: Defense Logistics: DOD Needs to Take Additional Actions to Address  Challenges in Supply Chain Management. GAO-11-569.   Washington, D.C.: July 28, 2011.

Opportunities to Reduce Potential Duplication in Government Programs,  Save Tax Dollars, and Enhance Revenue. GAO-11-318SP.   Washington, D.C.: March 1, 2011.

High-Risk Series: An Update. GAO-11-278. Washington, D.C.:   February 2011.

DOD’s 2010 Comprehensive Inventory Management Improvement Plan  Addressed Statutory Requirements, But Faces Implementation  Challenges. GAO-11-240R. Washington, D.C.: January 7, 2011.

DOD’s High-Risk Areas: Observations on DOD’s Progress and  Challenges in Strategic Planning for Supply Chain Management.  GAO-10-929T. Washington, D.C.: July 27, 2010.

Defense Inventory: Defense Logistics Agency Needs to Expand on Efforts  to More Effectively Manage Spare Parts. GAO-10-469. Washington, D.C.:  May 11, 2010.

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

Defense Inventory: Army Needs to Evaluate Impact of Recent Actions to  Improve Demand Forecasts for Spare Parts. GAO-09-199.   Washington, D.C.: January 12, 2009.

Defense Logistics: Lack of Key Information May Impede DOD’s Ability to  Improve Supply Chain Management. GAO-09-150. Washington D.C.:  January 12, 2009.

Defense Inventory: Management Actions Needed to Improve the Cost  Efficiency of the Navy’s Spare Parts Inventory. GAO-09-103.   Washington, D.C.: December 12, 2008.

DOD’s High-Risk Areas: Efforts to Improve Supply Chain Can Be  Enhanced by Linkage to Outcomes, Progress in Transforming Business  Operations, and Reexamination of Logistics Governance and Strategy.  GAO-07-1064T. Washington, D.C.: July 10, 2007.

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

Defense Inventory: Opportunities Exist to Improve the Management of  DOD’s Acquisition Lead Times for Spare Parts. GAO-07-281.  Washington, D.C.: March 2, 2007.

DOD’s High-Risk Areas: Progress Made Implementing Supply Chain  Management Recommendations, but Full Extent of Improvement  Unknown. GAO-07-234. Washington, D.C.: January 17, 2007.

Defense Inventory: Opportunities Exist to Save Billions by Reducing Air  Force’s Unneeded Spare Parts Inventory. GAO-07-232. Washington,  D.C.: April 27, 2007.

Defense Inventory: Actions Needed to Improve Inventory Retention  Management. GAO-06-512. Washington, D.C.: May 25, 2006.


Question-summary annotations: questions: question: What challenges might interfere with the DOD’s plan moving forward?
answer: Moving forward, DOD faces such challenges as adjusting demand planning to changing circumstances, and enforcing consistent implementation of guidance at the military service level.

question: In what categories and areas has the DOD made progress?
answer: Most but not all of the progress to date has been in gathering and analyzing data, and reviewing guidance and practices. In addition, DOD has made progress in particular areas, such as developing tentative sub-categories to further clarify its existing inventory categories.
child_questions: question: Despite this progress, why might it be too early to call the plan a success?
answer: DOD has made progress implementing its Plan since implementation began in late fiscal year 2010, but DOD is only 18 months into a 4-year implementation effort and many planned activities still remain.

questions: question: What would be the role of DOD’s metrics with relation to the Plan?
answer: As part of the Plan, DOD is developing metrics to assess the effectiveness and efficiency of its inventory management, but it has not determined if it will incorporate these metrics into guidance.
child_questions: question: If the metrics are unable to be incorporated into guidance, what may happen?
answer: This may hamper its ability to assess inventory management performance and sustain management attention on improvement.

question: What has the GAO found relating to the metrics?
answer: Based on previous reporting, GAO has found that such metrics should be reportable in a consistent fashion.

question: Under what areas does the current portfolio of metrics fall?
answer: DOD is currently developing a portfolio of metrics that fall under five key areas: readiness, responsiveness, reliability, cost, and planning and precision.

question: How does the DOD already incorporate some of the metrics?
answer: Some metrics that have been identified—such as customer wait time—are currently reported by DOD, while others would be new metrics that would require establishing a data source and methodology.

question: What weakness does the Plan have regarding metric incorporation?
answer: However, the Plan does not include steps to incorporate the metrics, including their methodologies, into DOD guidance.
child_questions: question: Why is this problematic?
answer: Without guidance specifying standardized definitions, methodologies, and procedures for data collection procedures, DOD’s efforts to employ metrics to monitor and evaluate inventory management performance may be hampered.

question: What should material managers be able to do regarding the performance of inventory management?
answer: Materiel managers should evaluate and be capable of reporting on the performance of inventory management.

questions: question: Why has the GOA been brought in to evaluate DOD supply chain management?
answer: GAO has identified supply chain management as a high-risk area due in part to ineffective and inefficient inventory management practices that have caused DOD to accumulate billions of dollars worth of unneeded inventory.
child_questions: question: What has DOD reported regarding its excess inventory?
answer: DOD reported that as of September 2010 it had $8.4 billion worth of on-hand excess inventory, categorized for potential reuse or disposal, and $940 million worth of on-order excess inventory, already purchased but likely to be excess due to changes in requirements.

question: What does the GAO hope to achieve by evaluating DOD supply chain management?
answer: GAO’s objectives were to determine the extent to which DOD has (1) established and achieved targets for reducing excess inventory in the Plan, (2) made progress in implementing the overall Plan, (3) metrics to track progress in improving inventory management, and (4) identified and realized any cost savings or avoidance.
child_questions: question: Why is the GAO assessing the DOD’s implementation of the Plan in the first place?
answer: Under the National Defense Authorization Act for Fiscal Year 2010, GAO is required to assess DOD’s implementation of the Comprehensive Inventory Management Improvement Plan (Plan) DOD submitted to Congress.
child_questions: question: How did the GAO go about assessing the DOD’s implementation of the Plan?
answer: GAO reviewed relevant data, assessed DOD’s actions through January 1, 2012, and interviewed officials implementing the Plan.