In prior reports, we have identified major risks associated with DOD’s spare parts inventory management practices. In 1996, and then again in 1998, we reported that the Navy’s logistics system often could not provide fleet customers with necessary parts in a timely manner, despite billions of dollars invested in inventory. In 2001, we found that chronic spare parts shortages had degraded combat readiness for selected Navy weapon platforms and had also contributed to problems in retaining skilled maintenance personnel. Navy item managers interviewed for the 2001 report indicated that spare parts shortages resulted from inaccurate spare parts requirements forecasts, as well as contracting problems with private companies and repair delays at military and privately owned facilities. Most recently, in our January 2003 report on major management challenges and program risks, we recommended that DOD take action to address key spare parts shortages as part of a long-range strategic vision and a department wide, coordinated approach for improving logistics management processes. In addition to the risk associated with ineffective spare parts management practices, DOD recently voiced concerns over the adverse impact spare parts shortages have on readiness of weapon systems. In its August 2002 report on its inventory management practices, DOD said that the models it uses to determine inventory purchases are generally biased towards the purchase of low-cost items with high demands, not necessarily the items that would improve readiness the most. The report recommended that the services improve their ability to make inventory purchase decisions based on weapon system readiness. Furthermore, the report recommended that the services’ requests for funds to increase inventory investments be justified on the basis of the corresponding increase in weapon system readiness. The Navy provides the fleet with spare parts through a multitiered inventory system. Retail inventory refers to spare parts that are stored shipside or planeside in accordance with standardized spare parts allowance lists. Retail level spare parts are funded by the Navy’s procurement and operations accounts. Funding for initial outfitting parts is provided by procurement appropriations, while funding for replenishment parts is provided by operations and maintenance appropriations. Wholesale inventory refers to spare parts the Navy buys to replenish retail inventory. Initially Navy program managers tasked with developing weapon systems purchase parts directly from vendors using money from the procurement accounts. However, once a weapon system is fully developed and integrated into the fleet, the Naval Supply Systems Command assumes full responsibility for supporting that system through funding provided by the Navy Working Capital Fund. At this point, fleet customers use funding from outfitting procurement and operations accounts to purchase parts from the Navy’s wholesale inventory. The wholesale system functions as a middleman by purchasing spare parts from vendors with Navy Working Capital Fund dollars, and then reselling these parts to fleet customers. In order to avoid inventory shortages, the wholesale system must accurately forecast demand for spare parts and factor in lead times for procurement and repair actions to mitigate delays in delivery of parts to the fleet. Furthermore, the wholesale system must maintain a cash balance in the Navy Working Capital Fund that approximates 7 to 10 days and, consequently, cannot stock more parts than it expects to resell to the fleet. Sponsor-owned inventory refers to items that program managers purchase with appropriated funds to develop, test, and sustain weapon systems. Program managers store sponsor-owned materials to support work conducted at various locations, including air and sea warfare centers. DOD guidance provides, in part, that when items are no longer needed, they may be returned to the wholesale supply system or reissued to other fleet customers. The Deputy Chief of Naval Operations for Fleet Readiness and Logistics is responsible for strategic planning of logistics functions and ensures that the logistics system supports the Navy’s readiness objectives. The Naval Supply Systems Command develops inventory management policies, determines spare parts requirements, and formulates the Navy Working Capital Fund budget. Within the Naval Supply Systems Command, the Naval Inventory Control Point is assigned primary responsibility for material management tasks, such as computing requirements and providing procurement, distribution, disposal, and rebuild direction. The Naval Air Systems Command, the Naval Sea Systems Command, and the Space and Naval Warfare Systems Command, collectively referred to as the hardware systems commands, interact with the wholesale supply system to ensure that it procures sufficient quantities of spare parts to satisfy the fleet’s allowance requirements. The Navy’s servicewide strategic plans do not specifically address means to mitigate critical spare parts shortages. The Navy’s fiscal year 2001 High Yield Logistics Transformation Plan focused on improving logistics overall, but did not state how the Navy expects to reduce spare parts shortages. Also, while a key subordinate plan developed by the Naval Supply Systems Command has a strategy to ensure the availability of spare parts meets required performance levels; its objectives do not specifically focus on mitigating critical spare parts shortages. This subordinate plan does focus on improving supply availability and reducing customer wait time, but does not specifically address mitigation of spare parts shortages. Although the Navy is developing a new strategy, the Sea Enterprise plan, it has not been published, and therefore we do not know whether it will address ways to mitigate critical spare parts shortages. In fiscal year 2001, the Navy published a servicewide strategic plan—the High Yield Logistics Transformation Plan—that identified initiatives undertaken by its major support commands to improve the service’s logistics overall and to address objectives listed in DOD’s Fiscal Year 2000 Logistics Strategic Plan. While the High Yield Plan contained attributes of an effective strategic plan consistent with the Government Performance and Results Act of 1993 (GPRA), such as long-term goals, objectives, and performance measures, it did not specifically address key objectives for mitigating critical spare parts shortages. The High Yield Plan identified nine major goals, six of which are linked to DOD’s fiscal year 2000 Logistics Strategic Plan, and three that are unique to the Navy. The plan served as a compendium of initiatives undertaken by Navy commands and program offices to improve overall logistics support processes. In total, the plan identified 80 individual initiatives; however, the plan did not contain information that highlighted specific efforts to mitigate spare parts shortages. Navy headquarters officials told us they stopped efforts to report to DOD on the status of the 80 initiatives after DOD published a new logistics strategic plan in June 2002, entitled the Future Logistics Enterprise, that contained several new transformation strategies. The Naval Supply Systems Command Strategic Plan has a strategy to ensure that the availability of spare parts meets required performance levels and includes numerous goals, objectives, and initiatives to improve supply availability. However, this strategy does not specifically focus on mitigating spare parts shortages, nor does it incorporate the objectives of the Navy’s High Yield Transformation Plan. In November 2001, the Naval Supply Systems Command updated its 1999 strategic plan to deliver combat capability through delivery of quality supplies and services on a timely basis. The plan identified 5 major goals, 16 implementation strategies, and 63 individual initiatives. Implementation status of each initiative is recorded in an automated tracking system and briefed to command leadership several times each year. Under its third goal—to achieve and demand the highest quality of service—one of the Command’s strategies is to ensure the availability of spare parts meets required performance levels, but its objectives do not specifically focus on mitigating critical spare parts shortages, nor does the strategy link directly to higher-level DOD and Navy strategic plans. Navy officials told us they expect to start updating the plan during the summer of 2003. Without a focus on mitigating spare parts shortages and linkage to the higher-level plans, the Navy may lack assurance that its overall strategic goals and objectives will be effectively addressed and that its key initiatives will systematically address spare parts shortages. In October 2002, the Navy embarked on a new servicewide strategic planning effort, referred to as the Sea Enterprise, that seeks to improve the efficiency and effectiveness of all aspects of the service’s business operations, including organizational alignments, refining logistics requirements, and reinvesting savings to purchase new weapon systems and enhance combat capability. As of March 2003, the Sea Enterprise plan had not been published, and the extent to which the new plan will address the mitigation of critical spare parts shortages is unclear. Navy documents indicate that officials were reviewing hundreds of ongoing and planned initiatives for improving business operations, and that they planned to select projects with the highest potential savings. The Navy expects to have preliminary project plans and savings estimates available for consideration in the fiscal year 2005 budget deliberations. Once key initiatives are identified for the Sea Enterprise plan, a board of directors will oversee development of implementation plans and monitor progress toward achieving anticipated savings. We reviewed six initiatives that the Navy has undertaken to improve the economy and efficiency of supply support. While some of these initiatives have improved the overall supply availability and reliability of some spare parts, we cannot measure their potential for mitigating critical parts shortages and their impact on weapon system readiness because they were not designed to specifically address this problem. The initiatives included projects to (1) obtain more cost effective and timely support from contractors, (2) improve the efficiency of inventory management practices, and (3) increase the reliability of parts provided to military customers. Performance based logistics contracts have generally improved supply support to the fleet, but the Navy does not assess the extent to which better supply availability mitigates critical spare parts shortages or enhances the fleet’s combat readiness. Through performance based logistics contracts, the Navy has outsourced a broad range of supply support activities that have traditionally been carried out by the Navy’s organic supply system, such as warehousing, repairing and distributing parts, and determining spare parts requirements. According to Navy and interim DOD guidance, the primary objective of performance based logistics is to improve supply support while maintaining or reducing costs. Under more extensive partnerships, contractors may redesign weapon system configurations to optimize system performance, and may also reengineer or replace spare parts to mitigate the effects of scarcity or obsolescence. In the most advanced partnerships, contractors provide technical and engineering support to fleet customers, perform weapon system overhauls, and guarantee timely delivery of quality spare parts to fleet customers. Our review of Navy aggregate and individual program statistics indicated that performance based logistics arrangements have generally improved supply support to the fleet.