Under DOD’s supply chain materiel management policy, the secondary item inventory is to be sized to minimize DOD’s investment while providing the inventory needed to support both peacetime and wartime requirements. Management and oversight of Army inventory is a responsibility shared between the Offices of the Secretary of Defense and the Secretary of the Army. The Under Secretary of Defense for Acquisition, Technology, and Logistics is responsible for the uniform implementation of DOD inventory management policies throughout the department, while the Secretary of the Army is responsible for implementing DOD inventory policies and procedures. Army inventory management is primarily the responsibility of the Army Materiel Command, and inventory management functions are performed at subordinate commands, namely TACOM, AMCOM, and CECOM. The Army prescribes guidance and procedural instructions for computing requirements for its secondary inventory. Army managers are responsible for developing inventory management plans for their assigned items, to include coordinating all purchase and repair decisions. DOD annual stratification reports show that for the 4 years covered in our review, the value of the Army’s secondary inventory increased both in total dollars and as a percentage of DOD’s overall secondary inventory (see table 1). While the total reported value of DOD’s secondary inventory decreased by almost $2 billion from fiscal year 2004 to fiscal year 2007, the reported value of the Army’s inventory increased by more than $5 billion. Based on our analysis of AMCOM and TACOM inventories from fiscal year 2004 through fiscal year 2007, the Army’s on-hand inventory increased by about $4 billion, while the Army’s on-order inventory decreased by $1 billion (see table 2). The number of unique items managed by AMCOM and TACOM also increased over that time period, from 59,443 unique items in fiscal year 2004 to 63,504 items in fiscal year 2007. The Army uses a process called requirements determination to calculate the amount of inventory that is needed to be held in storage (on hand) and the amount that should be purchased (on order). This information is used to develop the Army’s budget stratification report showing the amount of inventory allocated to meet specific requirements, including operating and acquisition lead time requirements. Operating requirements include the war reserves authorized for purchase; customer-requisitioned materiel that has not yet been shipped (also known as due-outs); a safety level of reserve to be kept on hand in case of minor interruptions in the resupply process or unpredictable fluctuations in demand; minimum quantities of essential items for which demand cannot normally be predicted (also referred to as numeric stockage objective or insurance items); and inventory reserve sufficient to satisfy demand while broken items are being repaired (also referred to as repair cycle stock). Acquisition lead time requirements include administrative lead time requirements, which refer to inventory reserves sufficient to satisfy demand from the time that the need for replenishment of an item is identified to the time when a contract is awarded for its purchase or an order is placed; and production lead time requirements, which refer to inventory reserves sufficient to satisfy demand from the time when a contract is let or an order is placed for inventory to the time when the item is received. When the combined total of on-hand and on-order inventory for an item drops to a threshold level—called the reorder point—the item manager may place an order for additional inventory of that item, to avoid the risk of the item going out of stock in the Army’s inventory. The reorder point includes both operating requirements and acquisition lead time requirements. An economic order quantity—the amount of inventory that will result in the lowest total costs for ordering and holding inventory—is automatically calculated by a computer program and is added to the order. The reorder point factors in both the demand for inventory items during the reordering period, so that the Army managers can replace items before they go out of stock, and a safety level, to ensure a supply of stock during interruptions in production or repair. A purchase request can be terminated or modified if requirements change. These requirements collectively constitute the requirements objective, which we refer to as the Army’s current requirements in this report. An assessment of the Army’s requirements or requirements determination process falls outside the scope of our review. In accounting for its inventory, the Army uses the stratification process to allocate, or apply, inventory to each requirement category. On-hand inventory in serviceable condition is applied first, followed by on-hand inventory in unserviceable condition. On-order inventory is applied when on-hand inventory is unavailable to be applied to requirements. We refer to situations in which on-hand and on-order inventory are insufficient to satisfy current requirements as inventory deficits. Our analysis of Army secondary inventory data for the 4-year period we examined showed that about $3.6 billion (22 percent) of the average annual total inventory value of $16.3 billion was not needed to meet current requirements. During this time period, the value of on-hand inventory exceeding current requirements increased, whereas the value of on-order inventory that exceeded requirements decreased. During this same time period, the value of Army inventory deficits decreased but remained substantial—an average value of $3.5 billion over the 4-year period. Our analysis of Army secondary inventory data showed that, on average, about $12.7 billion (78 percent) of the total annual inventory value was needed to meet current requirements, whereas $3.6 billion (22 percent) exceeded current requirements. Measured by number of parts, these percentages were similar: 81 percent of the parts applied to current requirements on average each year, and the remaining 19 percent exceeded current requirements. The value of the inventory that exceeded current requirements increased over the period of our review, from $2.9 billion in fiscal year 2004 to $4.4 billion in fiscal year 2007, as did the number of parts that exceeded current requirements, from 5.2 million parts to 10.2 million parts (see table 3). The Army’s total inventory levels increased from fiscal year 2004 to fiscal year 2007, with the greatest increase occurring from fiscal year 2004 to fiscal year 2005. Additionally, the overall proportion of inventory exceeding requirements increased when compared with inventory meeting current requirements (see fig. 1). Both the total value of the Army’s on-hand inventory and the total value of on-hand inventory exceeding current requirements increased. Over the 4-year period, the value of the Army’s on-hand inventory exceeding current requirements averaged $3.5 billion, or 31 percent of total on-hand inventory (see table 4). The Army’s forecasts for items with a recurring demand in fiscal years 2005 through 2007 showed that supplies for some of the on-hand inventory that exceeded current requirements were sufficient to meet many years and sometimes decades of demand. In addition, a substantial amount of the Army’s on-hand inventory showed no projected demand. The results of this analysis are shown in figure 2. As shown in figure 2, about $900 million (22 percent) of the on-hand inventory exceeding current requirements in fiscal year 2007 would be sufficient to satisfy 2 years of demand, $1.1 billion (26 percent) would be sufficient to meet demands for 2 to 10 years, $750 million (18 percent) would be sufficient to meet demands for 10 to 50 years, and $600 million (14 percent) would be sufficient to meet demands for 50 years or more. In addition, the Army in fiscal year 2007 had nearly $900 million (20 percent) of on-hand inventory exceeding current requirements for which there were no forecasted demands. For the 4-year period we reviewed, the value of the Army’s on-order inventory that exceeded current requirements decreased from $150 million in fiscal year 2004 to $110 million in fiscal year 2007. However, because the value of the Army’s on-order inventory also decreased from $5.3 billion in fiscal year 2004 to $4.2 billion in fiscal year 2007, the proportion of Army on-order inventory that exceeded current requirements remained relatively constant (see table 5). For all 4 years, the Army also had some on-order inventory that was designated as potential excess for disposal or reutilization. For example, according to the Army’s fiscal year 2007 stratification report, about $56 million of on-order inventory items were designated as potential excess, meaning that they could be disposed of or reutilized as soon as they were delivered (see table 6). The Army had substantial inventory deficits for some items—that is, an insufficient level of inventory on hand or on order to meet the current requirements. For the 4-year period we reviewed, the Army’s inventory deficits had an average value of $3.5 billion. However, the value of the deficits decreased by 17 percent from $4.1 billion in fiscal year 2004 to approximately $3.4 billion in fiscal year 2007 (see table 7). Although inventory deficits exist, they do not always translate directly into an operational impact. Army officials told us that, in the past, inventories have fallen below current requirements because of unforeseen demands. In those cases, managers were able to use parts that were designated for safety-level requirements in order to minimize the operational impact of the inventory deficit. However, we could not determine the criticality of the Army’s inventory deficits because this information is not available in stratification reporting. Our review of the Army’s secondary inventory identified two factors contributing to the consistent misalignment between inventory levels and current requirements. First, while the Army strives to provide effective supply support to the warfighter and uses metrics such as supply availability to measure performance, it lacks corresponding metrics and goals for assessing and tracking the cost efficiency of its inventory management practices. Inaccurate demand forecasting for spare parts also contributed to the Army having inventory that was in excess of current requirements as well as having inventory deficits.