In responding to an earlier report, DOD indicated that it had a $26-billion inventory shortage that should be considered when analyzing inventory that needs to be on hand. We used this September 1991 shortage as a basis for reviewing the shortage issue. DOD annually summarizes its secondary inventory in its Supply System Inventory Report, which is based on financial inventory and other inventory reports that the military services and the Defense Logistics Agency (DLA) prepare. DOD uses the report as a management tool to monitor changes in the level of inventory. In the report, DOD identifies an approved acquisition objective inventory, which it defines as items needed to satisfy the wartime and peacetime requirements to equip and sustain U.S. and allied forces in accordance with DOD policies and plans. When the total of on-hand and due-in inventories falls to or below a certain level—called the reorder point—inventory managers place orders for additional inventory. 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 requisitions that have not been filled, a safety level to be on hand in case of minor interruptions in the resupply process or unpredictable fluctuations in demand, items to be issued during the period between when a need to buy an item is identified and when it is received (lead time), items held as insurance against inventory outages, and items to be issued during the repair period for repairable items. Because the reorder point provides for items to be used during the lead time and for a safety level, inventory managers can place orders so that the orders arrive before out-of-stock situations occur. Generally, inventory managers order an amount of inventory called an economic order quantity, which is the quantity of stock that will result in the lowest total costs for ordering and holding inventory. We analyzed DOD’s secondary inventory records and found that on September 30, 1991, DOD’s secondary inventory shortage was $16.4 billion, not the $26 billion DOD cited. Specifically, we found that the Navy computed its portion of the shortage by including (1) about $5 billion of principal items (e.g., ship and aircraft components not considered to be secondary inventory) and (2) $2 billion of items supplied by contractors or managed by other DOD components or petroleum products. Also, DOD’s figure included $2.4 billion of standard price surcharges that increased acquisition costs by adding charges for transportation and inventory losses. Of the $16.4 billion shortage, $6.1 billion was needed to satisfy economic order quantity requirements and $10.3 billion was needed to satisfy reorder point requirements. Because inventory managers do not place orders until the reorder point is reached, items with economic order quantity requirement shortages represent an acceptable and expected condition. Between September 1991 and September 1993, the inventory shortage decreased by about $8.3 billion (51 percent), from $16.4 billion to about $8.1 billion. The major contributor to the reduced shortage was decreased requirements. The reorder point shortage deceased by $5.9 billion, while the economic order quantity shortage decreased by $2.4 billion. Of the $8.1 billion shortfall, $3.3 billion was for aviation parts managed by the Army’s Aviation and Troop Support Command, the Navy’s Aviation Supply Office, and the Air Force’s San Antonio Air Logistics Center and for clothing and textile items managed by DLA’s Defense Personnel Support Center. Officials at these locations attributed the reduced shortage to removing Desert Storm requirements, downsizing the military forces, eliminating DLA war reserve requirements, and decreasing requirements due to reduced levels of operations. The transfer of consumable items to DLA also contributed to reduced shortages in the Navy and the Air Force. Our analyses of inventory records showed that requirements were reduced significantly between September 1991 and September 1993. Reorder point requirements, including war reserves, safety levels, and lead times, decreased by $19.5 billion (34 percent), from $58 billion to $38.5 billion. The decreased requirements allowed inventory to be reduced to lower levels before replenishment orders were placed. We also noted that economic order quantity requirements decreased by $3.3 billion (28 percent), from $11.6 billion to $8.3 billion, which indicated that DOD was buying inventory in smaller quantities. We analyzed about $1.1 billion of reorder point shortages (7,109 items) at four inventory control points and determined that purchases were made or planned for 3,869 items with $578 million of shortages. Our work showed that because of continuing demand, shortages recur. For example, an engine turbine vane had reorder point shortages in both March and September 1993. On March 31, the item had a reorder point shortage of 1,862. The inventory manager purchased 2,309 vanes in April. Because the inventory was subsequently drawn down and requirements increased, a second purchase for 1,920 vanes was made in July and a third purchase of 2,070 vanes in October. The inventory manager for the vane said that the shortages were a normal function of the supply system and resulted in inventory purchases. The inventory manager also said that he had purchased larger quantities of the vane, which resulted in two purchases a year. The Navy is now purchasing smaller quantities about four times a year, resulting in less inventory being held on hand. Inventory managers did not make purchases to satisfy reorder point shortages of $559 million for 3,240 items because (1) requirements for the items were not valid, had changed, or were uncertain; (2) purchases were not necessary for a variety of nonrequirement reasons such as items being returned to the supply system or the availability of substitute items; and (3) responsibility for the items was transferred to other organizations or the items were no longer in the supply system. According to inventory managers, in only a few instances did the items’ low priority for funding result in not purchasing items to satisfy shortages. For 2,107 items with $330 million in shortages, inventory managers did not make purchases because the shortages were based on requirements that were no longer valid, had changed, or were uncertain. Table 1 shows the number of items and shortage values and why purchases were not made. The following are examples of items that were not purchased because of requirement-related reasons. In September 1993, the Army had a reorder point shortage of three aircraft engines used on the SH60 helicopter. The Aviation and Troop Support Command did not buy the engine, valued at $1,284,923, because its requirements included Navy back orders that had been incorrectly requisitioned through the Army. The command canceled the requirements related to the back orders. Decreasing requirements caused 2,000 Navy aviation items with $233 million in shortages in March 1993 to not have shortages the following September. For example, on March 31, 1993, the Aviation Supply Office had a shortage of two power turbine assemblies used on the CH-46E helicopter. Because of lower demands and field activities turning in items for repair, the inventory manager not only did not buy the 2 assemblies but canceled a purchase request for 17 assemblies. The item had a replacement cost of about $135,000 each. In March 1993, the Navy was short eight panel assemblies used on the H-53A helicopter. The Aviation Supply Office did not buy the assemblies because the H-53A helicopter was obsolete and not in service. The panel assembly has not been purchased since 1982 and, if needed, on-hand assemblies can be used. The shortage was valued at $89,948. The San Antonio Air Logistics Center did not buy for a September 1993 shortage of 1,408 speech equipment units, valued at $3,616,649, because of an incorrect additive requirement. The Center also did not buy for a shortage of 54,853 rivets, valued at $50,106, because of incorrect lead time data in the file. The speech equipment was used on a variety of aircraft and the rivets were used on the F-100 engine. For 375 items with $176 million in shortages, inventory managers did not make purchases for a variety of reasons not related to requirements. These reasons, including the availability of substitute items in the supply system and increases in on-hand inventory, are summarized in table 2. The following are examples of items for which purchases were not made because of nonrequirement-related reasons. In September 1993, the Army was short aircraft engines for the MH47E special operation aircraft. The shortage of 39 aircraft engines, valued at $50,255,962, was not bought by the Aviation and Troop Support Command. The Command did not buy the engines because the engines are contractor-supported items, and the contractor has the responsibility for repairing and stocking the engines. Because of increasing inventory, 288 Navy aviation items with March 1993 shortages that totaled $20.4 million did not have shortages the following September. For example, in March 1993, a receiver transmitter used on various aircraft had a reorder point shortage for eight valued at $126,244. The inventory manager at the Aviation Supply Office did not expect to buy any receiver transmitters because the Army, the Navy, and the Air Force were turning in large quantities of the transmitters and the demand for it was decreasing. In September 1993, the Air Force was short six fiberglass containers used for shipping the inlet fan on the F100 engine. The shortage was valued at $39,345. The San Antonio Air Logistics Center did not buy for the shortage because the fiberglass container had been replaced by a metal container. The fiberglass containers were discontinued because they had higher damage rates than the metal containers and the repair procedures for the fiberglass containers were not environmentally acceptable. In May 1994, DLA was short 42,992 sweaters valued at $484,286.