DOD guidance requires that the services and DLA report the current and projected status of their secondary item inventories to support OSD’s oversight responsibilities and for use in its procurement and repair budget deliberations. To ensure the department has consistent data, the services and DLA are required, among other things, to group their secondary item inventories into several specific categories, according to the purpose for which they are held (see figure 1). The reporting categories include the approved acquisition objective and three inventory categories that exceed the approved acquisition objective—economic retention stock, contingency retention stock, and potential reutilization stock (i.e., on-hand excess inventory). The approved acquisition objective incorporates both materiel needed to meet the requirements objective (i.e., the sum of stock represented by the economic order quantity, the safety level, the repair-cycle level, and the authorized additive levels) and 2 years of estimated future demand. DOD purchases inventory to meet the approved acquisition objective, according to DOD officials. Secondary item inventory that exceeds the approved acquisition objective is categorized as retention stock or potential reutilization stock. Retention stock includes economic retention stock, which is materiel that has been deemed more economical to keep than to dispose of because it is likely to be needed in the future, and contingency retention stock, which is materiel retained to support specific contingencies. Potential reutilization stock has been identified for possible disposal but has potential for reutilization. Potential reutilization stock is also referred to as on-hand excess inventory. Additionally, OSD, the services, and DLA track on-order excess inventory, which are items for which a contract has been awarded or funds have been obligated, but due to subsequent changes in requirements would be categorized as potential reutilization stock upon arrival. Figure 1 summarizes how DOD inventory categories are aggregated for reporting. Appendix III provides a printer-friendly version of figure 1. Additionally, see the glossary for key inventory management terms. The objective of DOD’s Plan is to achieve a prudent reduction in current inventory excesses as well as a reduction in the potential for future excesses without degrading materiel support to the customer. The Plan has two overarching goals, which are to reduce (1) total on-order excess inventory from 8.5 percent of total obligated on-order dollars in fiscal year 2009 to a target of 6 percent by the end of fiscal year 2014 and 4 percent by the end of fiscal year 2016 and (2) on-hand excess inventory from 11.3 percent of the total value of inventory in fiscal year 2009 to a target of 10 percent by the end of fiscal year 2012. DOD developed nine sub-plans, which are designed to assist in reducing excess inventory and improve inventory management practices across DOD. Each of the nine sub-plans focuses on a particular inventory management area and includes an objective, as identified in table 1. Additionally, see appendix IV through XII for detailed information for each sub-plan. Each of these nine sub-plans include actions, milestones, and implementation steps. See figure 2 for a depiction of the Plan’s implementation structure. OSD, the services, and DLA use a plan of action and milestones to manage the Plan’s implementation, which includes steps for each of the nine sub-plans and tracks the status of the implementation. The Plan outlines the roles and responsibilities of key stakeholders, including those of the Deputy Assistant Secretary of Defense for Supply Chain Integration, the Supply Chain Executive Steering Committee, the services, and DLA. The Deputy Assistant Secretary of Defense for Supply Chain Integration oversees the Plan’s implementation through progress review meetings held about every month. The Supply Chain Executive Steering Committee, which is comprised of executive-level members from the services and DLA, advises the Deputy Assistant Secretary of Defense for Supply Chain Integration on matters related to supply chain management, including the implementation of the Plan, and typically receives a briefing on the Plan’s implementation every three months. Also, the Supply Chain Executive Steering Committee is used to resolve issues encountered in implementation that cannot be resolved at a lower level. Any unresolved issues are discussed and resolved at the Joint Logistics Board, which is comprised of senior-level participants from the services, combatant commands, and DLA, and is responsible for reviewing the status of the logistics portfolio and the effectiveness of the defense-wide logistics chain in supporting to the warfighter. Three groups—forecasting and demand planning, inventory and retention, and supply chain metrics—are responsible for managing the day-to-day actions in the Plan. Representatives from OSD, the services, and DLA comprise the groups. Each group has responsibility for particular sub-plans as follows: Forecasting and demand planning group: Responsible for the sub- plans on demand forecasting and total asset visibility and multi- echelon modeling and a section of the sub-plan on other inventory improvement actions, specifically actions associated with reducing acquisition lead times for spare parts. Inventory and retention group: Responsible for the sub-plans on on-order excess inventory, economic retention, contingency retention, storage and direct vendor delivery, no-demand items, and disposition of potential reutilization stock and the section of the sub-plan on other inventory improvement actions associated with inventory segmentation, inventory systems modernization, and efficiency metrics. Supply chain metrics group: Responsible for leading efforts to standardize the definitions and computation of metrics across DOD, validating the effectiveness of measures as indicators of progress, translating metrics to inform future decisions, and integrating the metrics in the Plan into the DOD performance measurement framework. DOD may find that the two targets for reducing on-order and on-hand excess inventory that it established when developing the Plan in fiscal year 2010 are ineffective in guiding future inventory management improvement efforts. DOD set measurable targets for each of its goals based on the best data available according to DOD officials, but since that time more recent data revealed that the on-order excess inventory target was met 4 years early and prior to the Plan’s implementation efforts’ beginning. Additionally, the on-hand excess inventory target was surpassed because DOD revised the definition and calculation of on-hand excess inventory. DOD’s target for the on-order excess inventory goal is to reduce, collectively among the services and DLA, the percentage of total obligated on-order dollars to 6 percent by end of fiscal year 2014 and 4 percent by the end of fiscal year 2016. Reducing the percentage of on- order excess inventory would result in less economic or contingency retention stock being held by the department and/or less potential on- hand excess inventory that must be disposed of by the department since there is not a need for the item. DOD reduced its percentage of on-order excess inventory from 8.5 percent, or approximately $1.15 billion, in fiscal year 2009 to 5.5 percent, or about $940 million, at the end of fiscal year 2010, thereby achieving its 2014 target 4 years early. The Air Force and Navy (including the Marine Corps), as of fiscal year 2010, were below the 6 percent on-order excess inventory target for fiscal year 2014, whereas the Army and DLA were above the target. (See figure 3 for the percentage of on-order excess inventory for fiscal years 2008 to 2010 across DOD.) DOD achieved its fiscal year 2014 target for on-order excess inventory prior to the implementation of the Plan, which began in fiscal year 2011. DOD’s target for the on-hand excess inventory goal is to reduce, collectively among the services and DLA, the percentage of the total value of secondary item inventory designated as excess to 10 percent by the end of fiscal year 2012. Reducing the percentage of on-hand excess inventory is an indicator of a more effective and efficient inventory management system, according to DOD officials. In fiscal year 2011, based on further analysis of the inventory data, DOD revised the definition of on-hand excess inventory, which resulted in a reduction in its percentage of on-hand excess from 9.4 percent, or $8.9 billion, in fiscal year 2009 to 8.3 percent, or $8.4 billion, in fiscal year 2010, which is well below its fiscal year 2012 target of 10 percent. DOD revised the definition of on-hand excess inventory to exclude the projected number of condemned items, which are unserviceable assets that are determined to be beyond the point of economic repair during the repair process. OSD officials stated they, in collaboration with the services and DLA, decided that the projected number of condemnations would not be included in the on-hand excess inventory calculation because the services and DLA have no way to dispose of future condemned items, and therefore these items should not be counted as on-hand excess inventory. In addition, they stated inclusion of the condemned items would inflate the amount of on- hand excess inventory, thus DOD plans to report projected condemned items as a separate inventory category in the future. The Army, Air Force, and DLA are below the 10 percent on-hand excess inventory target for fiscal year 2012, whereas the Navy (including the Marine Corps) is slightly above the target. (See figure 4 for the percentage of on-hand excess inventory for fiscal years 2008 to 2010 across DOD.) The Standards for Internal Control in the Federal Government and results-oriented management practices emphasize the importance of reviewing and validating performance measures to ensure these measures remain appropriate. Specifically, we have reported that without sufficiently ambitious goals or targets, managers may not have incentives to use performance information to identify opportunities for significant improvement. A critical factor in the success of goal-setting is developing ambitious, but realistic “stretch” goals that challenge the organization to achieve performance improvements.