Defense Inventory: Inadequate Controls Over Air Force Suspended Stocks
Released: 1997-12-22T00:00:00

Letter

Background

At the end of fiscal year 1996, the Air Force reported that it was managing inventory valued at $29.3 billion. DOD uses a coding system to categorize the condition of its inventory. These codes are intended to indicate whether stored inventory is (1) issuable without qualification, (2) in need of repair, (3) usable for only a limited time, or (4) unrepairable and ready for disposal. DOD’s inventory management goal is to achieve a cost-effective system that provides the inventory needed to maintain readiness. When items in DOD’s inventory cannot be readily placed in one of these categories, DOD uses other condition codes to indicate suspended inventory. Because these codes do not indicate an item’s usability, item managers must direct that the item be inspected or tested to determine its usability. The primary suspended inventory condition codes are as follows:

J — inventory at storage warehouses that is awaiting inspection to determine its condition (hereafter referred to as material in inventory),

K — inventory returned from customers or users to storage warehouses and awaiting condition classification (hereafter referred to as customer returns),

L — inventory held at storage warehouses pending litigation or negotiation with contractors or common carriers (hereafter referred to as inventory in litigation),

Q — quality-deficient inventory returned by customers or users due to technical deficiencies (hereafter referred to as quality-deficient inventory), and

R — inventory returned by salvage activities that do not have the capability to determine the material condition (hereafter referred to as reclaimed inventory).

Appendix II contains a detailed explanation of DOD’s supply condition codes.

Inventory categorized as suspended is not available for use until it has been tested to determine whether it is usable. In some instances, inventory in this category that has been found to be usable can meet customer needs, thus contributing to overall military capability. DOD recognizes that inventory in a suspended status for long periods can adversely affect the availability of resources and the effectiveness and economy of supply operations. To minimize the amount of items in suspended inventory, DOD set standards for the amount of time inventory should remain categorized as suspended. These standards consider the reason for suspending the inventory and the difficulty of determining the usability of the items. The time standards by suspension category are shown in table 1.

A number of organizations are involved in the management and control of suspended inventory. The Air Force Materiel Command (AFMC) administers the Air Force supply system and provides suspended inventory management policies and procedures. AFMC has five Air Logistics Centers (ALC) that are located in different regions throughout the United States.Within each ALC, item managers are responsible for maintaining the records for suspended inventory, initiating efforts to determine the usability of suspended inventory, deciding whether to procure items in addition to those in suspended status, and deciding whether suspended items should be returned to inventory or disposed. Suspended inventory is stored at warehouses operated and managed by the Defense Logistics Agency (DLA). These storage activities receive, store, and issue inventory and maintain inventory records. Once the usability of suspended inventory has been determined, storage activities reclassify the inventory as ready for issue, in need of repair, or ready for disposal.

Reported Value of Suspended Inventory Is Over $3 Billion

DOD reported that about $3.3 billion of secondary items was in a suspended status between April and June 1997. Figure 1 shows the distribution of the reported value of suspended inventory among DOD components.

The Warner Robins ALC accounted for about $1.3 billion (53 percent) of the Air Force’s suspended inventory. Figure 2 summarizes the value of suspended inventory by ALC, and figure 3 shows the value of suspended inventory by condition code at Warner Robins. Appendix III contains additional details on the quantity and value of suspended inventory items.

Ineffective Management Can Increase Costs and Reduce Readiness

Significant management weaknesses exist for inventory categorized as suspended. The Air Force is not reviewing the status of these items in a timely manner and has miscategorized a significant amount of inventory. As a result, the Air Force is likely incurring unnecessary logistics costs and missing opportunities to support operational units’ needs in a timely manner.

At Warner Robins, a substantial number of items failed to meet time standards for inspection. As a result, items that may have been needed for use in the supply system were not being considered for use. We reviewed 1,971 judgmentally selected suspended inventory items, valued at about $67 million, to determine the length of time the inventory remained in a suspended status. Of the 1,820 sample items with standards, valued at $65.8 million, 1,757 items failed to meet the applicable DOD time standards. The remaining 151 sample items without time standards remained in suspension, with times ranging from 22 days to over 8 years. Figure 4 summarizes the number of sample items that met or failed to meet DOD time standards, and figure 5 shows the time items remained in a suspended status by suspension category. Appendix III contains specific details of our analysis.

Timely Reviews of Suspended Inventory May Preclude Unnecessary Repairs

The Air Force may unnecessarily invest millions of dollars to send some inventory for repair when the need may have been met from inventory in suspension. Since Warner Robins was not making timely reviews of its inventory in suspension, usable items may have existed in that category that could have been used to meet supply system demands. Our review indicated that Warner Robins officials had improperly identified 3,418 customer return items, worth $115 million, as inventory in need of repair. Because these items were improperly identified as needing repair, Warner Robins officials did not inspect them to determine their usability, which in turn meant that the Air Force may have incurred costs to repair other items when usable items were actually in suspension. We were not able to determine the value of these unnecessary repair costs.

Suspended Inventory Is Often Not Considered as a Way to Satisfy Critical Operational Unit Demands

Inventory managers have missed opportunities to fill orders with usable items because of the untimely handling of suspended inventory. As a result, suspended inventory is not available for use when needed by customers. When demands are made on the supply system and assets are not available to fill those demands, backorders result. For the suspended items in our sample, Warner Robins had over 2,000 concurrent backorders, worth about $53 million. About 65 percent of these backorders were essential to a weapon system’s operation and thus adversely affected the system’s ability to carry out all or portions of its assigned operational missions. If the duration of suspensions had been monitored and usability had been determined within a reasonable amount of time, over 500 of our sample items, worth about $7 million, could have been used to fill some of the backorders, as shown in table 2.

The following examples show how weaknesses in the management of suspended inventory can affect access to potentially usable inventory:

Warner Robins had four data entry keyboards on backorder—two of which were classified as mission critical. The keyboards, valued at $16,000 each, are used on B-52H aircraft. Warner Robins inventory records showed two keyboards (see fig. 6) had been suspended in reclaimed inventory for over 2 years. In August 1997, two B-52H aircraft were not fully operational (i.e., unable to fly portions of their missions) due to the unavailability of these keyboards. One aircraft had been unable to fly portions of its mission for 175 days and the other for 24 days. At the time of our visit, the item manager had not taken action to resolve the status of the keyboards.

Warner Robins had 11 signal converters on backorder—all of which were classified as mission critical. The converters, valued at $36,000 each, are used on the B-52H aircraft. Warner Robins inventory records showed three converters (see fig. 7) had been in reclaimed inventory for 2 years, from June 1995 to June 1997. In June 1997, two B-52H aircraft were not operational (i.e., grounded and unable to fly any portion of their missions) due to the unavailability of these converters. One aircraft had been grounded for 33 days and the other for 6 days. After we brought this matter to the attention of Warner Robins officials, they informed us that testing would be performed on the three converters in reclaimed inventory to determine their potential use in satisfying backorders.

Maintaining Unneeded Inventory Increases Storage Costs

Inventory that cannot be applied to any foreseeable need is declared excess and subject to disposal action. Warner Robins reported over 5,300 items on hand, worth over $184 million, as excess for the sample items we reviewed. Prompt disposal of such unneeded items can reduce suspended inventory and reduce inventory holding costs. Maintaining inventory that is not needed is expensive and does not contribute to an effective, efficient, and responsive supply system. DLA and private industry organizations have previously estimated that holding costs ranged from less than 1 to 15 percent or higher of an item’s inventory value. Although it is difficult to determine the precise costs to manage and maintain excess stocks, our review indicates that these costs would be millions of dollars each year.

Weak Management Controls Exist for Inventory in Suspended Categories

AFMC and the Warner Robins ALC lack adequate internal management controls over suspended inventory. A number of factors contributed to delays in resolving the status of suspended inventory and prolonged inventory suspensions. First, AFMC guidance hampers the proper identification, timely inspection, and prompt reclassification of suspended inventory. Second, Warner Robins lacks local policies and procedures that prescribe levels of responsibility and accountability for managing suspended material. Third, AFMC and Warner Robins do not provide adequate oversight and monitoring of suspended inventory.

AFMC Guidance Results in Improper Classifications and Untimely Resolution

AFMC supplemental guidance enabled $846 million of inventory in need of repair stored at Warner Robins to be improperly assigned to the customer returns suspension code, thus overstating the magnitude of the Air Force’s and Warner Robins’ suspended inventory. Although our review was limited to Warner Robins, the remaining four ALC’s are also required to comply with the supplemental policy. Consequently, the magnitude of the suspended inventories at the other ALCs may also be overstated.

According to DOD policy, material returned in an unknown condition by a customer should be assigned to customer returns and reclassified within 10 days. AFMC supplemental guidance, on the other hand, states that two-level maintenance items returned for repair should be assigned to this same category. When we informed AFMC officials that both customer returns and repair items were commingled in the customer returns suspension code, one official acknowledged that items not in need of repair may not receive management attention. When we brought this same matter to the attention of Warner Robins officials, they told us that, in complying with the supplemental guidance, they assumed all items (including $115 million worth of items in an unknown condition that were returns from customers) were in need of repair, and thus made no attempts to inspect and reclassify them. At Warner Robins, none of the 31 customer returns we reviewed met the 10-day DOD time standard; in fact, 17 of the customer returns had been suspended for over 1 year.

Waiver Guidance Raises Questions

DOD policy for managing reclaimed inventory states that these items should be reclassified in 180 days. AFMC supplemental guidance waives the standard because of a shortage of repair funds that hindered item managers’ ability to schedule reclaimed inventory for inspection within the 180-day limit. However, waiving the standard exacerbates existing problems with lengthy suspensions. At Warner Robins, 99 percent of the 990 reclaimed inventory items we sampled remained suspended more than 180 days, and 62 percent of the inventory had been suspended over 2 years. Table 3 shows the number of reclaimed inventory items that had been suspended for more than 2 years.

Warner Robins Lacks Suspended Inventory Procedures

Warner Robins lacks specific procedures for resolving the status of items, assigning responsibility for carrying out these procedures, and prescribing related accountability. Air Force policy indicates that ALCs are responsible for preparing comprehensive, explicit instructions essential to effectively manage inventory.

Warner Robins item managers and DLA warehouse personnel did not agree as to who within their organizations is responsible for resolving suspended inventory. Item managers told us that warehouse personnel are responsible for taking the necessary actions to monitor reclassification of suspended inventory because those personnel have physical possession of the material. Warehouse personnel told us that item managers must direct disposition of suspended material. Consequently, neither level assumed responsibility. When we pointed out the need for clearly defined responsibilities to Warner Robins top management officials, they told us that item managers are responsible for resolving suspended inventory issues and indicated that Warner Robins would begin drafting suspended inventory regulations for its item managers.

Suspended Inventory Reclassification Efforts Are Not Monitored

DOD policy requires periodic reviews of suspended inventory items to ensure that their usability is determined in a timely manner. However, this requirement is not carried out. For the majority of our sample items, the item managers could not tell us why the items had been suspended or who had directed suspension and could not easily determine how long the items had been suspended. Warner Robins officials told us they do not monitor the age of suspended inventory, even though DOD policy requires that monitoring be done to keep within prescribed time limits. Warner Robins officials stated that they did not regularly compile data on the quantity, value, or length of time material is suspended or report such data to AFMC because resolving suspended items’ status was not a high priority. Further, AFMC officials told us that they have not monitored suspended inventory management since the late 1980s.

Adequate management oversight could have highlighted prolonged suspensions and indicated the necessity for routine monitoring of the quantity, value, and length of time items are suspended. If Warner Robins had monitored the duration of some suspensions, their usability could have been resolved within a reasonable time. For example: In May 1986, in anticipation of a patent infringement litigation, an item manager was instructed to retain records and files involving a supplier of M-16 rifle conversion kits for 20 years. At the time of our visit, one M-16 rifle conversion kit (see fig. 8) had been suspended for almost 9 years. An additional 985 kits were being held in an issuable condition, according to the item manager. Subsequent to our visit, we were informed that the item manager misinterpreted the retention instructions. Rather than just retaining the records and files, the item manager had also been unnecessarily holding all 986 kits. The item manager informed us that all 986 kits are excess and initiated action to dispose of them.

According to warehouse records, one electron tube worth $2,400 had been suspended in litigation for 362 days. The item manager did not know why the item was suspended, who suspended the item, or when the item was placed in suspension. However, Warner Robins warehouse records showed that the tube had been returned by a customer because it was not the item requested from supply. When warehouse personnel realized that the serviceable item was being erroneously held in litigation, they reclassified the electron tube to an issuable condition.

Four digital computers for the F-4G aircraft had been suspended in reclaimed inventory for over 4 years. According to the item manager, there has been little or no demand for the computers, valued at $73,300 each, because in 1996 the F-4G aircraft was taken out of service. As a result of our findings, the item manager informed us that the digital computers would be recommended for disposal.

Suspended Inventory Management Weaknesses Have Not Been Identified in Financial Integrity Act Assessments

The Federal Managers’ Financial Integrity Act of 1982 requires agency heads to assess their internal controls annually and report their findings to the President and the Congress. The Air Force provides its assessments to DOD for inclusion in the Secretary of Defense’s report to the Congress.

We reviewed internal control assessments by Warner Robins, AFMC, and the Air Force to determine if the Air Force had reported suspended inventory management by ALCs as a material weakness and found that it had not. One criterion for determining whether an internal control weakness is material is if it significantly weakens safeguards against waste. The problems we identified demonstrate that suspended inventory management is vulnerable to waste and warrants special emphasis in future Financial Integrity Act assessments.

Conclusions

The management of DOD’s inventory of spare parts and other secondary items has been considered a high-risk area for several years. Therefore, DOD’s reported $3.3 billion suspended inventory is a problem that warrants management attention. In terms of reported dollar value of suspended inventory, the Air Force represents the biggest problem among the services; within the Air Force, the Warner Robins ALC accounts for the largest share. At Warner Robins, we found significant weaknesses in its management of suspended inventory. Since there are standard policies for managing suspended inventory items across the ALCs and the weaknesses in the process contribute to some of the problems we identified, other ALCs may have similar problems. Air Force and DOD officials have generally stated, and our review confirmed, that ineffective management and delays in determining the usability of suspended inventory can result in increased logistics and support costs and affect readiness.

At Warner Robins, (1) item managers generally were not complying with DOD standards for determining the usability of suspended inventory items, (2) about 64 percent of the items we sampled had been in the suspended category for more than 1 year and some longer than 6 years, (3) item managers were following AFMC guidance that does not comply with DOD and Air Force policy, (4) written procedures for controlling suspended inventory were lacking, and (5) management oversight of suspended inventory was limited. Further, neither Warner Robins nor the Air Force has identified suspended inventory as a material management weakness under the Federal Managers’ Financial Integrity Act.

Recommendations

To improve the management of suspended items, we recommend that the Secretary of Defense direct the Secretary of the Air Force to ensure that, at Warner Robins (1) suspended inventory is properly identified, monitored, inspected, and classified within established DOD timeframes and (2) suspended items receive adequate visibility at all management levels, up to and including the service headquarters, through targeting suspended inventory problems as an issue for review in the Federal Managers’ Financial Integrity Act assessments.

Also, we recommend that the Secretary of the Air Force direct Warner Robins ALC to establish explicit guidance on responsibility and accountability for resolving suspended inventory status, carry out necessary actions, and follow up to make sure that the actions have been promptly and correctly taken. Finally, we recommend that the Secretary conduct assessments of suspended inventory practices at the four other ALCs to determine the need for similar remedial actions and direct any affected ALC to take such actions.

Agency Comments

In written comments on a draft of this report, DOD agreed with our recommendations (see app. IV). DOD stated that on November 13, 1997, Air Force Headquarters provided guidance to the Air Force Materiel Command requesting a plan to correct deficiencies in managing suspended stock and initiate aggressive corrective actions. The plan is due to the Air Force by mid-December 1997.

We are sending copies of this report to other appropriate congressional committees, the Secretaries of Defense and the Air Force, and the Director of the Office of Management and Budget.

Please contact me at (202) 512-8412 if you have any questions concerning this report. Major contributors to this report are listed in appendix V.

Scope and Methodology

To quantify the number and value of the Department of Defense’s (DOD) suspended inventory, we obtained computerized inventory records of inventory between April 1997 and June 1997 in suspended condition codes at all military services and Defense Logistics Agency (DLA) inventory control points. We removed surcharges covering the costs to operate the supply system, and we revalued the suspended inventory at the latest acquisition cost. These databases generate the records, statistics, and reports that DOD uses to manage its inventories, make decisions, and determine requirements. We did not independently verify the accuracy of the military services’ and DLA’s inventory databases from which we obtained data. Therefore, our report notes that these data are reported values.

With the use of the inventory records, we identified the Air Force and Warner Robins Air Logistics Center (ALC) as the DOD component and its inventory control activity with the highest reported dollar value of suspended items. At Warner Robins, we reviewed a judgmental sample of 1,971 suspended items (valued at $67 million and representing 101 different inventory numbers). We excluded depot-level repairables suspended in the repair cycle process (M condition) from our review because this status is a normal condition for this type of material and the items are routinely considered as assets in the requirement computations of the inventory control activities. We also excluded suspended ammunition (N condition) because this inventory is held for emergency combat use.

We reviewed policies and procedures and obtained other relevant data related to suspended inventory management from officials at the DLA Headquarters, Alexandria, Virginia; Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio; and Warner Robins ALC and Defense Distribution Depot, Georgia.

To determine the age of our sample items, we held discussions with item managers and reviewed storage activity data and inventory records. To learn whether issues associated with suspended items were promptly resolved and the reasons for delays in resolving the inventory status of suspended items, we reviewed Air Force and Warner Robins implementing guidance and assessments of internal controls. Such information provided the basis for conclusions regarding the management of suspended inventory. To determine if the Air Force had emphasized suspended inventory management as part of its assessment of internal controls, we reviewed assessments from Warner Robins for fiscal years 1993-97, Air Force Materiel Command for fiscal years 1995-96, and the Air Force Headquarters for fiscal years 1993-96.

To assess the accuracy of data maintained for our sample items, we reviewed the results of several recent Warner Robins inventory accuracy assessments. To ensure the accuracy of inventory records for our sample items, we obtained additional evidence from Warner Robins item managers and warehouse personnel. Consequently, we are confident that our findings represent material conditions for the items we reviewed.

We performed our review between April and October 1997 in accordance with generally accepted government auditing standards.

Supply Condition Codes

New, used, repaired, or reconditioned materiel that is serviceable and issuable to all customers without limitation or restriction.

Serviceable (issuable with qualification)

New, used, repaired, or reconditioned materiel that is serviceable and issuable for its intended purpose but is restricted from issue to specific units, activities, or geographical areas by reason of its limited usefulness or short service life expectancy.

Serviceable (priority issue)

Items that are serviceable and issuable to selected customers but must be issued before supply condition codes A and B materiel to avoid loss as a usable asset.

Serviceable materiel that requires test, alteration, modification, technical data marking, conversion, or disassembly, not including items that must be inspected or tested immediately before issue.

Materiel that involves only limited expense or effort to restore to serviceable condition and is accomplished in the storage activity in which the stock is located. The materiel may be issued to support ammunition requisitions coded to indicate acceptability of usable stock.

Unserviceable (reparable)

Economically reparable materiel that requires repair, overhaul, or reconditioning, including reparable items that are radioactively contaminated.

Unserviceable (incomplete) Materiel requiring additional parts or components to complete before issue.

Unserviceable (condemned) Materiel that has been determined to be unserviceable and does not meet repair criteria.

Materiel in stock that has been suspended from issue, pending condition classification or analysis, when the true condition is not known.

Materiel returned from customers or users and awaiting condition classification.

Materiel held pending litigation or negotiation with contractors or common carriers.

Materiel that has been identified on an inventory control record but turned over to a maintenance facility or contractor for processing.

Suspended (ammunition suitable for emergency combat use only)

Ammunition stocks suspended from issue except for emergency combat use.

Unserviceable (reclamation) Materiel that is determined to be unserviceable and uneconomically reparable, as a result of physical inspections, teardown, or engineering decision, but contains serviceable components or assemblies to be reclaimed.

Quality-deficient exhibits returned by customers or users as directed by the Integrated Materiel Manager, due to technical deficiencies reported by Quality Deficiency Reports. (This code is for intra-Air Force use only.)

Suspended (reclaimed items awaiting condition determination)

Assets turned in by reclamation activities that do not have the capability (e.g., skills, personnel, or test equipment) to determine materiel condition. Actual condition will be determined before induction into maintenance activities for repair or modification.

Materiel that has no value except for its basic materiel content.

Additional Information on Suspended Material and DOD Time Standards

Table III.1 shows the reported quantity and value of suspended inventory items by ALC, and table III.2 shows this information specifically for Warner Robins ALC. Table III.3 shows the number of items in our sample that met or failed to meet DOD time standards, and table III.4 shows the number of items that were in a suspended status at the time of our review and the amount of time that the items were suspended.

Material in inventory (J)

Customer returns (K)

Inventory in litigation (L)

Quality-deficient inventory (Q)

Reclaimed inventory (R)

Table III.3: Our Analysis of Sample Items That Met or Failed to Meet DOD Time Standards Time standard (in days)

Comments From the Department of Defense

Major Contributors to This Report

National Security and International Affairs Division, Washington, D.C.

Norfolk Field Office

Kansas City Field Office

Related GAO Products

High-Risk Series: Defense Inventory Management (GAO/HR-97-5, Feb. 1997).

Defense Logistics: Much of the Inventory Exceeds Current Needs (GAO/NSIAD-97-71, Feb. 28, 1997).

Defense Inventory: Spare and Repair Parts Inventory Costs Can Be Reduced (GAO/NSIAD-97-47, Jan. 17, 1997).

Logistics Planning: Opportunities for Enhancing DOD’s Logistics Strategic Plan (GAO/NSIAD-97-28, Dec. 18, 1996). 1997 DOD Budget: Potential Reductions to Operation and Maintenance Program (GAO/NSIAD-96-220, Sept. 18, 1996).

Defense IRM: Critical Risks Facing New Materiel Management Strategy (GAO/AIMD-96-109, Sept. 6, 1996).

Navy Financial Management: Improved Management of Operating Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94, Aug. 16, 1996).

Defense Logistics: Requirements Determinations for Aviation Spare Parts Need to Be Improved (GAO/NSIAD-96-70, Mar. 19, 1996).

Defense Inventory: Opportunities to Reduce Warehouse Space (GAO/NSIAD-95-64, May 24, 1995).

Defense Supply: Inventories Contain Nonessential and Excessive Insurance Stocks (GAO/NSIAD-95-1, Jan. 20, 1995).

Army Inventory: Unfilled War Reserve Requirements Could Be Met With Items From Other Inventory (GAO/NSIAD-94-207, Aug. 25, 1994).

Air Force Logistics: Improved Backorder Validation Procedures Will Save Millions (GAO/NSIAD-94-103, Apr. 20, 1994).

Air Force Logistics: Some Progress, but Further Efforts Needed to Terminate Excess Orders (GAO/NSIAD-94-3, Oct. 13, 1993).

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