Defense Inventory: Trends in Services' Spare Parts Purchased from the Defense Logistics Agency
Released: 2002-04-30T00:00:00

Letter

Background

Spare parts are defined as repair parts and components, including kits, assemblies, and subassemblies required for the maintenance of all equipment. Repair parts and components can include (1) reparable items, which are returned to the supply system to be repaired when they are no longer in working condition, and (2) nonreparable items, also called consumables, which are often used in repairing the reparable items because they cannot be economically repaired themselves. For example, a screw (a consumable) may be used in repairing a landing gear component (a reparable).

The Defense Logistics Agency, headquartered at Fort Belvoir, Virginia, provides consumable supplies and spare parts to the military services, the Department of Defense, federal civilian agencies, and selected foreign governments. As part of its mission, the agency manages over 4.1 million consumable items. The vast majority of these items are considered consumable spare parts, and the remaining items include medicine, food, clothing, and fuel. Spare parts managed by the agency range from low-cost, commonly used items, such as fasteners and gaskets, to high-priced, sophisticated items, such as microswitches, miniature components, and precision valves vital to operating major weapon systems.

The agency’s supply management operations are funded through the Defense-Wide Working Capital Fund, which operates as a revolving fund. The agency buys and sells spare parts to customers, who use appropriated funds to pay the agency. Sales receipts are then used to purchase additional items to meet new customer demand. In principle, the agency should recover the acquisition cost of the spare parts it sells, as well as its own operating costs, so that over the long term the fund breaks even financially.

The Defense Supply Center in Richmond, Virginia, is designated as the Defense Logistics Agency’s lead center for air/aviation systems. The Defense Supply Center in Columbus, Ohio, is the designated lead center for land and sea/subsurface (maritime) systems. The Defense Supply Center in Philadelphia, Pennsylvania, is the lead center for troop support systems and general supply.

Quantities of Spare Parts Purchased Declined, but Dollar Value of Sales Increased

Over the past 5 years, the number of spare parts the services purchased from the Defense Logistics Agency declined by about 24 percent, from 353 million in fiscal year 1996 to about 270 million in fiscal year 2000. However, the dollar value of spare parts obtained during the same period increased from $3.9 billion in fiscal year 1996 to $4.6 billion in fiscal year 2000 (about 18 percent). Electrical and electronic equipment components accounted for the highest proportion of total dollar value. The services acquired spare parts from 70 of the 78 federal stock groups. In commenting on a draft of this report, the department attributed the increased dollar value of sales to the increased value of items managed by the Defense Logistics Agency. This is clearly a contributing factor. However, at the same time as we recently reported, the Defense Logistics Agency has a number of actions underway to control spare part prices.

Number of Spare Parts Supplied to Military Services Declined

Defense Logistics Agency data indicates that every year from 1996 to 2000, the agency supplied the services with smaller quantities of spare parts, from a total of about 353 million in fiscal year 1996 to about 270 million in fiscal year 2000, a decrease of about 24 percent (see fig. 1). The number of spare parts the services ordered also decreased about 19 percent during the period, from about 348 million to about 283 million.

Defense Logistics Agency officials cited three main reasons for the decline: increased credit card usage, increased contractor maintenance support, and—primarily—military downsizing. The downsizing, which began in the early 1990s, continued through 2000. According to defense figures, the total number of active duty Navy fighter and attack aircraft declined from 504 in fiscal year 1996 to 432 in fiscal year 2000. Similarly, the number of ships (or ship battle forces) declined from 355 to 318.

However, the number of Air Force fighter and attack aircraft remained steady at 936 during the period.

Air Force

As shown in figure 2, the number of spare parts sold by the Defense Logistics Agency to the Air Force dropped by about 23 million from about 137 million in fiscal year 1996 to about 114 million in fiscal year 2000, a 17 percent decrease. During this time, the Air Force increased the percentage of depot maintenance repair workload performed by the private sector. The other services also increased private sector depot maintenance performance, but to a lesser extent than the Air Force.

Figure 3 shows that in fiscal year 1996, the Defense Logistics Agency sold the Army about 96 million spare parts, but by fiscal year 2000, that number had dropped to about 78 million, a decline of 18 million, or 19 percent.

Figure 4 indicates that in fiscal year 1996, the Navy obtained about 110 million spare parts from the Defense Logistics Agency, but in fiscal year 2000 it bought only about 72 million spare parts, a decrease of about 38 million, or 35 percent.

As shown in figure 5, the Marine Corps purchased about 6 million spare parts from the agency in fiscal year 2000, about 45 percent less than the approximately 11 million it had purchased in fiscal year 1996.

Reported Dollar Value of Defense Logistics Agency Part Sales Increased

The reported dollar value of the Defense Logistics Agency’s annual sale of spare parts to the services rose about 18 percent over the past 5 years, increasing from about $3.9 billion in fiscal year 1996 to about $4.6 billion in fiscal year 2000. The dollar value of ordered spare parts increased from about $3.9 billion to about $5.2 billion (about 25 percent). The reasons cited for the dollar value increase were (1) Defense Logistics Agency’s shift to a mix of more expensive spare parts and (2) price increases due to inaccurate initial price estimates, long periods between procurements, and/or substantial changes in the quantity of spare parts purchased. When disaggregated by service, the agency’s data indicates some variation in this trend. The dollar value of sales to the Air Force increased every year, while the annual sale value of spare parts to the Army, the Navy, and the Marine Corps fluctuated. Table 1 shows the overall increase as well as the annual fluctuations.

During the 1996-2000 period, the Department of Defense transferred the management of more costly, complex, and sophisticated spare parts to the Defense Logistics Agency. Department officials indicated that the dollar value of the items transferred was significantly higher than the items being managed by the Defense Logistics Agency until that time. The items transferred from the services represented a higher percentage of the total inventory held by the agency, therefore contributing to the higher dollar value of spare parts sold to the services. Table 2 shows the average prices of the spare parts transferred as compared to those for spare parts not transferred and the prices for all spare parts sold to the services. The table also indicates the percentages of the total inventory that consisted of transferred spare parts during the 1996-2000 period.

Although the price of some spare parts has increased significantly, for most spare parts it has not. In November 2000, we reported that prices of about 70 percent of spare parts requisitioned by the agency’s customers increased less than 5 percent a year during the 1989-98 period. This trend applied to all requisitioned spare parts, including those in frequent demand and aircraft-related spare parts. However, the prices of a relatively small number of spare parts did increase significantly—by 50 percent or more.

The spare part prices increased for a number of reasons. The majority of the agency’s weapon system spare parts experienced a relatively low annual price change—less than 5 percent—from fiscal years 1989 through 1998. Most of the extreme price increases were due to inaccurate price estimates, outdated prices, or changes in quantities purchased. In other cases, prices increased significantly when long time periods—sometimes decades—passed between procurements. Agency purchasing officials cited other factors that can lead to price increases, including retooling of production lines between purchases, emergency procurements, and increases in the costs of raw materials. An Air Force official said that new technology also increased the cost as older aircraft were retrofitted with a new mix of more expensive spare parts to add capability.

Types of Spare Parts the Services Acquired from Defense Logistics Agency

The services obtained spare parts from 70 of 78 federal stock groups over the past 5 years. In fiscal year 2000, electrical and electronic equipment components were the spare parts with the highest sales (in dollar value). However, different groups of spare parts led sales within each service during fiscal year 2000: Electrical and electronic equipment components led Defense Logistics Agency sales to the Navy; engine and turbine components led sales to the Air Force; and vehicular equipment components led sales to the Army and the Marine Corps.

Although the same groups of spare parts remained among the top 10 (in terms of reported dollar value) over the 5-year period, the rankings of some groups and the amounts of money spent on each one varied. For example, engines, turbines, and components ranked fifth for the Air Force in fiscal year 1996 but moved to first place in fiscal year 2000. Table 3 shows the top 10 groups for fiscal years 1996 and 2000.

Number of Aviation Spare Parts Declined, but Dollar Value Increased

The trends for aviation spare parts were consistent with those for the total spare parts supplied to the services. The Defense Logistics Agency’s lead supply center for aviation reported that the dollar value of annual sales to the services increased about 54 percent from fiscal year 1996 to fiscal year 2000, even though the center sold 28 percent fewer spare parts. Officials stated that the increases were caused in part by the Defense Logistics Agency’s shift to a mix of more expensive spare parts and increases in the price of aviation spare parts. Because our review covered only classes of spare parts, not individual items, we did not determine the extent to which the agency had changed the prices of individual spare parts. However, we recently reported on the Defense Logistics Agency’s efforts to identify and address price increases of spare parts and their causes. Tables 4 and 5, respectively, show the number of spare parts supplied and the reported dollar value of sales by the agency’s lead aviation supply center to each of the services from fiscal years 1996 through 2000.

We judgmentally selected 10 aviation-related federal stock classes and found mixed purchasing trends during the study period: The Navy purchased substantially more spare parts in 3 of the 10 classes— components for jet engines, airframes, and wheel and brake systems. Engine parts accounted for over 60 percent of total spare parts purchased in the 10 classes. The Navy purchased fewer parts in the other seven classes of which three decreased by one-third or more.

Over one-third of the spare parts the Army purchased in the 10 classes were for aircraft structural components. Overall, the quantities purchased increased for seven classes and declined for the other three. Annual purchases fluctuated in all classes.

Similarly to the Navy, the Air Force purchased over 64 percent of spare parts in the 10 selected classes for engine parts. Overall, the Air Force increased its purchases in eight classes and decreased purchases in the others. Spare parts purchased for wheel and brake systems increased by over 703 percent from fiscal year 1996 to fiscal year 2000. Spare parts for engines and fuel systems increased by about 95 percent. Yearly purchases fluctuated in all classes.

The Marine Corps purchased fewer than 1,600 spare parts a year from the 10 classes. The total number of spare parts purchased fluctuated from a low of 612 in fiscal year 1999 to a high of 1,574 in fiscal year 2000. Over half of spare parts purchased in all 10 classes were for airframe structural components.

The total amounts charged by the agency for spare parts generally increased, even in those classes where the number of spare parts purchased decreased.

Agency Comments

In written comments on a draft of this report, the Department of Defense generally concurred with its contents. The department also provided technical comments, which we have incorporated where appropriate. The department’s written comments appear in appendix II.

Scope and Methodology

To obtain information on trends in the quantity, reported dollar value, demand, and kinds of spare parts, including aviation-related spare parts, which the services bought from the Defense Logistics Agency, we asked agency officials to supply the relevant data. The officials determined which items to include in the spare part category and developed the information for us by year, service, service center, and federal stock class. The officials provided data on the aggregate numbers of spare parts. We did not attempt to independently verify the agency’s information, nor did we verify the reasons for changes in trends. Defense Logistics Agency officials told us that in compiling their data, they used how spare parts were defined in the Integrated Consumable Item Support Model and by the Army in purchasing parts. For sales data, they used the standard unit price, which includes the cost recovery rate (the Defense Logistics Agency surcharge) at the time of sale.

We performed our review from July 2001 through April 2002 in accordance with generally accepted government auditing standards.

We are sending copies of this report to the appropriate congressional committees, the secretary of defense, the secretary of the army, the secretary of the air force, the secretary of the navy, the commandant of the Marine Corps, the director of the Defense Logistics Agency, and the director of the Office of Management and Budget.

Please contact me on (202) 512-8412 if you or your staff have any questions regarding this report. Key contributors to this report were Jeanett H. Reid, George Morse, and Lawson Gist, Jr.

Appendix I: Selected Aviation-Related Federal Stock Classes

Helicopter rotor blades, drive mechanisms, and components

Appendix II: Comments from the Department of Defense

Related GAO Products

Army Inventory: Parts Shortages Are Impacting Operations and Maintenance Effectiveness. GAO-01-772. Washington, D.C.: July 31, 2001.

Navy Inventory: Parts Shortages Are Impacting Operations and Maintenance Effectiveness. GAO-01-771. Washington, D.C.: July 31, 2001.

Air Force Inventory: Parts Shortages Are Impacting Operations and Maintenance Effectiveness. GAO-01-587. Washington, D.C.: June 27, 2001.

Defense Inventory: Information on the Use of Spare Parts Funding Is Lacking. GAO-01-472. Washington, D.C.: June 11, 2001.

Defense Inventory: Army War Reserve Spare Parts Requirements Are Uncertain. GAO-01-425. Washington, D.C.: May 10, 2001.

Major Management Challenges and Program Risks: Departments of Defense, State, and Veterans Affairs. GAO-01-492T. Washington, D.C.: March 7, 2001.

Major Management Challenges and Program Risks: A Government-wide Perspective. GAO-01-241. Washington, D.C.: January 2001.

High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001.

Defense Acquisitions: Prices of Navy Aviation Spare Parts Have Increased. GAO-01-23. Washington, D.C.: November 6, 2000.

Defense Acquisitions: Price Trends for Defense Logistics Agency’s Weapon System Parts. GAO-01-22. Washington, D.C.: November 3, 2000.

Contingency Operations: Providing Critical Capabilities Poses Challenges. GAO/NSIAD-00-164. Washington, D.C.: July 6, 2000.

Defense Inventory: Process for Canceling Inventory Orders Needs Improvement. GAO/NSIAD-00-160. Washington, D.C.: June 30, 2000.

Defense Inventory: Opportunities Exist to Expand the Use of Defense Logistics Agency Best Practices. GAO/NSIAD-00-30. Washington, D.C.: January 26, 2000.

Defense Inventory: Improvements Needed to Prevent Excess Purchases by the Air Force. NSIAD-00-5. Washington, D.C.: November 10, 1999.

Defense Inventory: Management of Repair Parts Common to More Than One Military Service Can Be Improved. GAO/NSIAD-00-21. Washington, D.C.: October 20, 1999.

Military Operations: Some Funds for Fiscal Year 1999 Contingency Operations Will Be Available for Future Needs. GAO/NSIAD-99-244BR. Washington, D.C.: September 21, 1999.

Department of Defense: Status of Financial Management Weaknesses and Actions Needed to Correct Continuing Challenges. GAO/T-AIMD/NSIAD-99-171. Washington, D.C.: May 4, 1999.

Defense Inventory: DOD Could Improve Total Asset Visibility Initiative With Results Act Framework. GAO/NSIAD-99-40. Washington, D.C.: April 12, 1999.

Defense Reform Initiative: Organization, Status, and Challenges. GAO/NSIAD-99-87. Washington, D.C.: April 21, 1999.

Defense Inventory: Status of Inventory and Purchases and Their Relationship to Current Needs. GAO/NSIAD-99-60. Washington, D.C.: April 16, 1999.

Defense Inventory: Continuing Challenges in Managing Inventories and Avoiding Adverse Operational Effects. GAO/T-NSIAD-99-83. Washington, D.C.: February 25, 1999.

High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January 1999.

Major Management Challenges and Program Risks: Department of Defense. GAO/OCG-99-4. Washington, D.C.: January 1999.