Because of its longstanding inventory management problems, DOD’s inventory management is on GAO’s list of high-risk federal program areas especially vulnerable to waste, fraud, and mismanagement. For the last 3 fiscal years, the Naval Audit Service reported inventory management weaknesses in its audits of DBOF activities’ financial statements. In terms of Navy inventory management weaknesses, we also have reported on excess inventory at Naval aviation depots and shipyards, which are part of DBOF operations. At the consumer level, Navy supply officers store the operating materials and supplies purchased from DBOF on ships and at shore locations, such as air stations, for subsequent issuance or consumption. In addition to items stored that are needed to meet operating requirements, these sites often have excess items stored. Also, over the past 6 years, excess items have been stored at redistribution sites as ships were decommissioned or overhauled. The fleets have been redistributing these excess items free of charge from these redistribution sites. At the wholesale level, the Navy Supply Systems Command, through its inventory control points—the Ships Part Control Center and the Aviation Supply Office—is responsible for providing supply support to the Navy.The Ships Part Control Center is primarily responsible for the ship and submarine spare and repair parts, and Aviation Supply Office is primarily responsible for the aircraft spare and repair parts. The item managers at these inventory control points use DBOF funds to purchase items for resale. These items are stored at the Defense Distribution Depots which are part of DBOF operations and managed by the DLA. DLA also manages most common consumables. Navy and DLA item managers make decisions on (1) budgeting and buying items to support Navy operations and sales to foreign governments, (2) redistributing items among Navy units, and (3) disposing of excess items. Item managers use a process called stratification to forecast requirements and determine if enough inventory will be available to satisfy them as a primary basis for budgeting. Basically, stratification reports display anticipated demand, quantities on hand, and items forecasted to be purchased during the current year and the following 2 fiscal years. These stratification reports are updated quarterly to reflect changes in purchases and requirements. The Navy’s item managers do not have complete information on hundreds of millions of dollars of operating materials and supplies on ships and at redistribution sites that is needed for budget and purchase decisions. This occurs because the inventory systems on ships and at the redistribution sites do not provide the item managers complete and accurate data on operating level excess items. Out of the $5.7 billion of operating materials and supplies covered in our analysis, we identified items valued at approximately $883 million that were excess to current operating allowances or needs. Approximately $428 million worth of these excess items, as of July 1995, were stored on board 261 Navy vessels, aircraft carriers, frigates, destroyers, and some submarines. In addition, the Navy had 17 redistribution sites storing a total of $455 million worth of items, all of which were excess. Operating materials and supplies are consumed during the normal operating cycles, and Navy vessels attempt to maintain sufficient stock on hand to meet their operating allowances and anticipated demand. The allowances are developed by the inventory control points based on technical and supply support information. Excesses will occur due to changes in demand and allowances for items after the fleets have purchased and stored them on ships. The Navy’s downsizing also has resulted in items that had been stored on decommissioned ships becoming excess. Excess items need to be visible for operational and budgetary purposes, otherwise readiness and spending plans can be adversely affected. Thus, to effectively manage items and reduce the risk of buying unneeded items, item managers must have complete information on what items are in excess of requirements at the Navy’s operating unit level. DOD 4140.1-R, “DOD Materiel Management Regulation,” requires item managers to have visibility of inventories to improve utilization and to limit buys and repairs in meeting requirements. The regulation further specifies that activities are to provide the item managers asset-level data and requirements information needed to make economical and readiness-based decisions on lateral redistribution, procurement, and repair. To determine the effectiveness of the Navy’s management of operating units’ excess items, we analyzed the first half of fiscal year 1995 purchase decisions and the forecasts for the second half of fiscal year 1995 and for fiscal years 1996 and 1997 planned purchases. We used (1) the March 1995 stratification reports which supported the development of the fiscal year 1996 and 1997 forecasted requirements for the Ships Part Control Center and the Aviation Supply Office and (2) inventory data that we consolidated from 261 ships and 12 of the 17 redistribution sites. Our analysis determined that the Navy’s item managers in the first half of fiscal year 1995 had ordered or purchased items in excess at the operating level that will result in the Navy incurring unnecessary costs of over $27 million. For example, the cost to the Navy will be (1) $2,477,320 for the purchase of four new stabilized turrets and (2) $532,900 for the purchase of five new displacement gyroscopes. Further, the item managers’ forecasted spending plans for the remainder of fiscal year 1995 and fiscal years 1996 and 1997 showed that the Navy’s item managers could incur unnecessary costs of approximately $38 million for purchases earmarked for items already in excess at the operating level. Two examples of planned purchases were (1) five cryogenic coolers with a total cost of about $1,811,800 and (2) one main coolant pump with a price of $2,741,590. Until item managers have full visibility over these excess items that are available to meet demand, they will not be in a position to adjust their purchase decisions to reflect such items. Thus, the fiscal year 1995 spending pattern will be repeated. Further, the lack of visibility over excess items that are free issued has resulted in the operating unit’s Operations and Maintenance budget requests being overstated. For example, many of these excess items are redistributed among the fleets to meet demand and without any charge to the gaining operating unit. Because these redistributed items are meeting annual operating unit demand, the fleets should fully consider the availability and use of these resources in developing their annual O&M budgets. The Atlantic and Pacific Fleets, which account for about 40 percent of the Navy’s O&M appropriation, prepare annual O&M budget requests based on projected needs for operating materials and supplies and maintenance. However, in developing their O&M budgets, they have not been adequately reducing their budgets for items received free from redistribution sites. We reported in September of 1995 that the Navy’s fiscal year 1996 O&M budget could be potentially reduced by $60 million for the items redistributed as free issue during the current period. The Navy was able to demonstrate that $21.6 million of the $60 million had been taken as a budget reduction, leaving $38.4 million in potential savings. The Navy has various initiatives underway to improve management and reporting of operating materials and supplies. These initiatives can enhance the Navy’s ability to meet its CFO act consolidated financial reporting needs for operating materials and supplies and provide greater asset visibility for item managers’ decision-making. However, some of these efforts are more directed at and concerned with providing visibility for redistribution of excesses among the operating activities sponsoring the initiative than providing item managers with all the data needed to perform their responsibilities from a Navy-wide perspective. Thus, unless a more integrated and coordinated approach is taken, item managers will continue to lack the necessary information needed to make the best redistribution, budget, and purchase decisions possible and the Navy’s consolidated financial reporting needs will not benefit fully from these present efforts. The CFO Act of 1990, as amended by the GMRA of 1994, requires DOD, as one of 24 agencies, to improve its financial management and reporting operations. The CFO act specifically requires that each agency’s Chief Financial Officer develop an integrated agency accounting and financial management system that complies with applicable principles and standards and provides for complete, reliable, consistent, and timely information that is responsive to the agency’s financial information needs. The act also specifies that the CFO should direct, manage, and provide policy guidance and oversight of asset management systems, including inventory management and control. Also, new accounting standards for federal agencies and OMB’s financial reporting guidance requires agencies to report on operating materials and supplies as a major line item on their financial statements. Further, OMB’s guidance requires that agencies disclose specific information on these operating materials and supplies, such as their general composition, the balance for items held for use, and the amount of excess, obsolete and unserviceable items. As previously mentioned, the Navy has an estimated $14 billion of operating materials and supplies at air stations, Defense Distribution Depots, Trident Refit Facilities, redistribution sites, and on board all types of vessels. Of this amount, approximately 49 percent of the items are at the air stations, Defense Distribution Depots, and the Trident Refit Facilities; about 47 percent of the items are on board Navy vessels, including submarines; and about 4 percent are at redistribution sites. Numerous systems are used to account for the operating materials and supplies at these various activities. Nevertheless, most of the data on operating materials and supplies at the shore-based locations is available for financial reporting purposes and, to some limited extent, item managers have data on excess items for decision-making. However, this is not the case for those operating materials and supplies on board ships and submarines. For example, the Atlantic Fleet has developed and implemented the Force Inventory Management Analysis Reporting System to consolidate data from ships for fleetwide visibility and redistribution among the fleet. The Pacific Fleet has tested the system and is implementing it.