Inventory management and oversight for the Air Force is a shared responsibility between the Offices of the Secretary of Defense and the Secretary of the Air Force. The Under Secretary of Defense for Acquisition, Technology, and Logistics is responsible for developing and ensuring the uniform implementation of DOD inventory management policies throughout the department, monitoring the overall effectiveness and efficiency of the DOD logistics system, and continually developing improvements. The Secretary of the Air Force is responsible for implementing DOD inventory policies and procedures. The Air Force Materiel Command has issued a manual to its air logistics centers—Ogden Air Logistics Center, Oklahoma City Air Logistics Center, and Warner Robins Air Logistics Center—that prescribes guidance and procedural instructions for computing requirements for its secondary inventory. To assist in the management of its inventory, DOD summarizes its secondary inventory in its annual Supply System Inventory Report. This report is based on financial inventory and other inventory reports prepared by the military services and DLA. The report summarizes inventories by DOD component and inventory category. Over the past 4 years, DOD has reported a continuous increase in the value of its secondary item inventory in its Supply System Inventory Report. As of September 30, 2002, DOD reported that its secondary inventory was valued at about $67.0 billion; however, as of September 30, 2005, the value of this inventory had increased to about $79.6 billion—a $12.6 billion increase between 2002 and 2005. Table 1 shows the value of DOD’s on-hand inventory from fiscal year 2002 through fiscal year 2005 and the value and percentage of the inventory held by the Air Force. From fiscal year 2002 through fiscal year 2005, the Air Force’s total on- hand inventory increased by $1.2 billion, representing about 10 percent of the total $12.6 billion increase in DOD inventory during this period. This increase was primarily due to the addition of new items to the Air Force’s inventory in fiscal year 2005. Specifically, from September 30, 2002, through September 30, 2005, the Air Force added 2,331 new unique items with a total of about 179,425 individual parts that were valued at approximately $1.3 billion. Our analysis shows that increases in the Air Force’s inventory were also caused by changes in the value and quantity of the unique items in the inventory. We found that changes in the price of items in the Air Force’s secondary inventory resulted in a $0.8 billion increase in the value of its inventory in fiscal year 2005. Similarly, changes in the quantity of secondary inventory unique items that were on hand in fiscal year 2002 were the reason for a $0.7 billion increase in the value of DOD’s secondary inventory in fiscal year 2005. These price increases were offset by a decrease of $1.6 billion in the value of the Air Force’s inventory for items that were included in fiscal year 2002 but were not included in the inventory for fiscal year 2005. The Air Force uses a process called requirements determination to calculate the amount of inventory that is needed to be held in storage (on hand) and that should be purchased (on order). This information is used to develop the Air Force’s budget stratification report. The stratification report shows the amount of inventory needed to meet operating requirements. When the total of on-hand and on-order inventory falls to or below a certain level—called the reorder point—inventory managers place orders for additional inventory to prevent out-of-stock situations from occurring. The Air Force refers to its inventory managers as item management specialists. Generally, item management specialists order the amount of inventory needed to satisfy the reorder point requirement. Depending on the item, the reorder point may include requirements for one or more of the following: war reserves that are authorized to be purchased, customer-requisitioned materiel that has not been shipped (also known as a safety level to be on hand in case of minor interruptions in the resupply process or unpredictable fluctuations in demand, minimum quantities for essential items for which demand is not normally predicted (also referred to as numeric stockage objective or insurance items), inventory to satisfy demands while broken items are being repaired (also referred to as repair cycle stock), inventory to satisfy demands during the period between when the need to replenish an item through a purchase is identified and when a contract is awarded (also referred to as administrative lead time), and inventory to satisfy demands during the period between when a contract for inventory is awarded and when the inventory is received (also referred to as production lead time). We define the Air Force’s current year’s operating requirements as requirements for war reserves, stock due-outs (backorders), safety levels, numeric stockage objective (a form of safety stock), and repair cycle. Hereafter, these requirements will be referred to as on-hand requirements. On-hand inventory is used to satisfy these on-hand requirements. On-order inventory is the amount of inventory for which contracts have been awarded or funds have been committed by the Air Force to satisfy any shortfall to its on-hand requirements and its administrative and production lead time requirements. Hereafter, these requirements will be referred to as on-order requirements. When there is not enough inventory to meet on- hand and on-order requirements, this is defined as an inventory shortage. More than half of the Air Force’s on-order and on-hand secondary inventory, worth an average of $31.4 billion, was not needed to support its requirements from fiscal years 2002 through 2005, although increases in demand have contributed to a slight reduction in the percentage of this on- hand inventory and a reduction in the number of years of supply this inventory represents. Our analysis shows that the value and the percentage of the Air Force’s inventory not needed to support its on-order requirements increased by about $0.3 billion and 7.8 percent, respectively, representing an average of 52 percent of its on-order inventory. Additionally, we found that the percentage of the Air Force’s inventory not needed to support its on-hand requirements was reduced by 2.7 percent, due, in part, to increases in the demand for the items. However, this inventory represents an average of about 65 percent (about $18.7 billion) of the value of unneeded on-hand inventory. While increasing demands have resulted in the Air Force reducing the number of years of supply this inventory represents, 79 percent of the Air Force’s inventory items not needed to support requirements had no recurring demands at all, resulting in a potentially infinite supply of those items. We found that the Air Force’s secondary inventory not needed to support on-order and on-hand requirements can be attributed to many of the long-standing and systemic inventory management problems that we have identified in our prior reports in 1997 and 2000, such as decreasing demands or demands not materializing at all, retaining items used to support aging weapon systems that have diminishing sources of supply or are being phased out of service, retaining items that may be used to support new weapon systems, and not terminating eligible contracts for on-order items. Based on our analyses, we found that the Air Force experienced an increase in the amount and percentage of on-order inventory not needed to support its on-order requirements from the end of fiscal year 2002 through the end of fiscal year 2005. The value and percentage of the Air Force’s unneeded on-order inventory increased by about $0.3 billion and 7.8 percent, respectively. Although DOD’s supply chain management regulation provides guidance for developing materiel requirements based on customer expectations while minimizing inventories, over the 4-year period an average of 52 percent ($1.3 billion) of the Air Force’s on-order inventory was not needed. Examples of unneeded on-order inventory include jet engines, landing gear components, electrical and communication equipment, guided missile components, aircraft hydraulic and de-icing system components, and other aircraft components. This $1.3 billion in on-order inventory not needed to support requirements indicates that the Air Force did not cancel orders or deobligate funds for items that were not needed to support requirements. Furthermore, based on the Air Force’s fiscal year 2005 stratification report, the Air Force marked for disposal approximately $300 million of its on-order inventory that is not needed to support requirements. This means that as soon as these on- order items are delivered, they could be disposed of. Table 2 shows the amount of unneeded inventory the Air Force had on order at the end of fiscal year 2002 through the end of fiscal year 2005. At the end of fiscal year 2005, the Air Force had 2,157 unique items (with a quantity of 788,515 individual parts) valued at $1.1 billion with inventory on order that was not needed to support requirements. Of these 2,157 items, there were 1,192 unique items (with a quantity of 723,147 individual parts) that had unneeded inventory both on order and on hand. These items represented approximately 74 percent, or about $0.8 billion of the total $1.1 billion of Air Force’s on-order items that were not needed to support requirements. Appendix II contains a list of the top 10 types of items, identified by the federal supply class, with the highest value of unneeded items on order as of September 30, 2005. The Air Force has not been effective in reducing the amount of its unneeded inventory on order, with an average of $1.3 billion of its on- order inventory over the past 4 years not being needed to support requirements. The Air Force has continued to purchase this unneeded on- order inventory because its policies do not provide incentives to reduce the amount of inventory on order that is not needed to support requirements. Instead, the Air Force has revised its policies to make it easier to purchase inventory that is not needed to support requirements.