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

Letter

Background

Categories of DOD’s Inventory

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.

DOD Established Targets for Reducing Excess Inventory Based on the Best Data Available, but Its Targets May Not Effectively Guide Continued Improvement

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.

DOD Has Made Progress in the Early Stages of the Plan’s Implementation, but Has Experienced Delays and Challenges Remain in Implementation

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.

DOD Has Made Progress In the Early Stages of the Plan’s Implementation

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).

Implementation Is Generally on Schedule, but Some of the Plan’s Actions and Milestones Are Delayed

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.

DOD Faces Several Implementation Challenges Going Forward

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.

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

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.

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

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: Implementation Status of Prior GAO Recommendations for DOD Inventory Management

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.

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

Appendix IV: Demand Forecasting Sub-plan

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.

Appendix V: Total Asset Visibility and Multi- echelon Modeling Sub-plan

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.

Appendix VI: On-order Excess Inventory Sub- plan

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.

Actions and milestones Action 1: Establish an economically optimal point in the procurement cycle to terminate an order, considering the different life cycle phases.

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.

Action 2: Strengthen the approval and reporting procedures for on- order excess inventory.

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.

Appendix VII: Economic Retention Stock Sub-plan

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.

Appendix VIII: Contingency Retention Stock Sub-plan

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.

Appendix IX: Storage and Direct Vendor Delivery Sub-plan

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.

Appendix X: Items with No Demand Sub-plan

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.

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.

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.

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.

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.

Appendix XI: Disposition of Potential Reutilization Stock Sub-plan

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.

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.

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.

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

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.

Appendix XII: Other Inventory Improvement Actions Sub-plan

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.

Appendix XIII: Comments from the Department of Defense

Appendix XIV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.

Glossary

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.

Related GAO Products

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.