To determine how much of the inventory that exceeded current operating requirements as of September 30, 2001, was consumed (used, disposed of, or condemned) since that date, we obtained and analyzed data from the military components for the items that we had identified in our May 2003 report that had inventory exceeding the items’ current operating requirements as of September 30, 2001. We interviewed DOD, Defense Logistics Agency (DLA), and service inventory management officials to discuss the data needed and our analytical approach. As a result of these discussions, we requested the following consumption-related data for each item that had inventory exceeding current operating requirements as of September 30, 2001: inventory demanded from the supply system (demands); inventory returned to the supply system for repair (returns); inventory condemned because the parts could not be repaired (condemnations); and inventory that was otherwise processed for disposal (disposals). The data we obtained covers different periods, depending on the military component providing the data. Although the period of review for all of the military components began on October 1, 2001, the data we obtained had different cutoff dates as follows: For the Navy and Air Force, the cutoff date was March 31, 2003. For the Army, the cutoff dates ranged from June 2003 through October 2003, depending on the inventory control location that provided the data. For DLA, the cutoff date was September 30, 2003. According to the officials providing the data, 119,000 items of the 1.6 million items that had on-hand inventory exceeding current operating requirements as of September 30, 2001, were no longer in the military components’ inventory systems as of the data cutoff dates. The 119,000 items had about $966 million of on-hand inventory that exceeded current operating requirements as of September 30, 2001. Therefore, our analysis only concerns the remaining 1.5 million items with $35.1 billion of on-hand inventory exceeding current operating requirements as of September 30, 2001. Our analysis to determine how much of the inventory that exceeded current operating requirements was consumed since September 30, 2001, involved several steps. For each of the 1.5 million items: We first subtracted the quantity that was disposed of from the quantity that exceeded current operating requirements. Next, we subtracted the quantity of inventory that was condemned. For each item, we also computed net demands by subtracting the inventory returns from inventory demands. To determine how much of the inventory was used, we then compared the net demands to the inventory exceeding current operating requirements that had not been disposed of or condemned. We limited the quantities of inventory that were disposed of, condemned, or used to the inventory that exceeded current operating requirements as of September 30, 2001. We considered items with more returns than inventory disposals, condemnations, and demands to have inventory gains; items with returns equal to disposals, condemnations, and demands were considered to have neither inventory usage nor gains. We used the above methodology to determine how many of the items had their entire inventory exceeding current operating requirements consumed. We further used the demand data provided to determine how many of the items had and did not have demands during the period of our review. In our analyses, unless otherwise indicated, inventory values are expressed in billions of dollars, and items are rounded to the nearest thousand. We did not revalue the inventory that needs to be repaired to recognize the repair cost, and we did not value inventory that is to be disposed of at salvage prices. Also, our analyses did not include fuel, certain inventory held in units, and Marine Corps inventory. Fuel and inventories held by units are not stratified by requirement, and the Marine Corps inventory represents a small part of the universe. In addition, to ascertain some of the reasons why inventory exceeding current operating requirements was being retained, we selected non-representative samples of 78 Army items and 118 Air Force items with inventory that exceeded current operating requirements as of September 30, 2001, prepared detailed questionnaires for item managers, and visited the Army Aviation and Missile Command, Huntsville, Alabama, and Warner Robins Air Logistics Center, Warner Robins, Georgia, to collect and analyze the responses. We selected these inventory control locations based upon the value of the inventory they managed that exceeded current operating requirements as of September 30, 2001, when compared to other Army and Air Force inventory control locations. Because we used non-representative samples, we cannot project these observations to the universe. Although our work highlights the large amount of inventory exceeding current operating requirements that DOD retains, we neither performed detailed analyses of DOD’s policies and procedures relating to that inventory, nor selected samples of Navy and DLA items, because we have initiated a separate review of DOD inventory retention policies. To address the inventory management practices that we identified in the course of assessing our non-representative samples, we obtained information and data from DLA about how it determines what to charge the military components for storing secondary inventory, and interviewed responsible officials from the military components to determine whether they were using this data to make relevant management decisions. We also reviewed Air Force policies related to, and interviewed responsible Air Force officials about, the reconciliation of inventory discrepancies, and the retention of inventory categorized as potential reutilization and/or disposal materiel. Through our analysis of the DLA storage cost charges and by examining our non-representative sample of Air Force items, we identified specific examples of these inefficient and ineffective management practices. We also obtained information from the 2001 Supply System Inventory Report to get a rough estimate of how the department revalues inventory held as potential reutilization and/or disposal materiel. We assessed the reliability of the data used in this report by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the systems that produced them, and (3) interviewing officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. We performed our review from June 2003 through May 2004 in accordance with generally accepted government auditing standards. DOD defines the requirements objective (current operating requirements) as the amount of inventory needed to be on hand or on order to support current operations. The current operating requirements includes inventory requirements for a reorder point and an economic order quantity. The reorder point is the point at which inventory replenishment will normally prevent out-of-stock situations from occurring and includes: war reserves, requisitions that have not been filled, and a “safety level” stock to satisfy demands while broken items are being repaired; and stock to satisfy demands during the “lead time”—the period between the placement of orders and their receipt. Because the reorder point provides for inventory to be used during the time needed to order and receive inventory and for a safety level, item managers are able to place orders so that the orders arrive before out-of-stock situations occur. Generally, an item manager purchases an amount of inventory needed to satisfy the reorder point and an economic order quantity—a quantity that, when ordered and received, results in the lowest total cost for ordering and holding inventory. The approved acquisition objective defines the amount of inventory that DOD budgets for and includes inventory needed to satisfy the current operating requirements, 2 years of demand above the current operating requirements, and, if applicable, additional war reserves. While DOD budgets funds to purchase inventory to satisfy the approved acquisition objective, item managers do not purchase inventory unless an item’s inventory falls to or below its reorder point; therefore, item managers do not purchase inventory to satisfy the approved acquisition objective. Inventory that exceeds the approved acquisition objective is categorized as economic retention, contingency retention, and potential reutilization and/or disposal materiel: Economic retention inventory exceeds the approved acquisition objective and has been determined to be more economical to keep than to dispose of because it is likely to be needed in the future. Contingency retention inventory exceeds the economic retention inventory and would normally be categorized as potential reutilization and/or disposal materiel, but is instead retained for specific contingencies. Potential reutilization and/or disposal materiel exceeds contingency retention inventory and has been identified for possible disposal but with potential for reutilization. A Navy computer power supply used on the radar for the FA-18 aircraft demonstrates the above inventory categories. On September 30, 2003, the Navy had 147 of the $353,000 power supplies on hand. As shown in figure 1, 52 of the power supplies satisfied the item’s current operating requirements. Of the remaining 95 power supplies, 56 were designated to satisfy the 2 years of additional demand, 11 were held as economic retention stock, 2 were held as contingency retention stock, and 26 were categorized as potential reutilization and/or disposal materiel. Overall, the amount of DOD’s inventory exceeding current operating requirements has decreased since 1996. On-hand inventory that exceeded current operating requirements decreased from $41.3 billion, or 59 percent, of the $69.7 billion of on-hand inventory on September 30, 1996, to $36.0 billion, or 52 percent, of the $69.8 billion inventory on hand on September 30, 2001. DOD annually summarizes its secondary inventory in its Supply System Inventory Report. This report is based on financial inventory and other inventory reports prepared by the military components. The report summarizes inventories by DOD component and inventory category. DOD officials use the report as a management tool to monitor changes in the levels of its inventory. These officials include the Under Secretary of Defense for Acquisition, Technology, and Logistics, who is responsible for developing and ensuring the uniform implementation of DOD inventory management policies throughout the department, for monitoring the overall effectiveness and efficiency of the DOD logistics system, and for continually developing improvements. In addition, the Secretaries of the Army, the Navy, and the Air Force, and the Director, DLA, are responsible for implementing DOD inventory policies and procedures.