Under DOD’s supply chain materiel management policy, secondary item inventory is to be sized to minimize DOD’s investment while providing the inventory needed to support both wartime and peacetime requirements. Management and oversight of DLA inventory is a responsibility shared between the Under Secretary of Defense for Acquisition, Technology and Logistics and the Director, DLA. The Under Secretary of Defense for Acquisition, Technology and Logistics is responsible for developing materiel management policies and ensuring their implementation in a uniform manner throughout the department, while the Director, DLA, is responsible for implementing DOD policies and procedures for the assets DLA manages. DLA provides support in the areas of subsistence, medical, construction and equipment, clothing and textile, and fuel, as well as aviation, land, and maritime spare parts. Aviation items are managed at DLA’s office in Richmond, Virginia; maritime and land items are managed at DLA’s office in Columbus, Ohio. Inventory managers at these locations are assigned to manage individual items. DLA has developed guidance and procedural instructions for computing requirements for its secondary inventory. In fiscal year 2006, DLA issued its plan to transform how it does business in order to improve warfighter support and reduce costs through business process reengineering, workforce development, technology modernization, and organizational change. The plan notes that DLA altered its business model, redefined its supporting processes, and introduced new information systems architecture. DLA also undertook initiatives in customer relationship management, supplier management relations, and business systems modernization, which involved a major information technology reengineering effort. DLA replaced its legacy materiel management information systems with a new enterprise resource planning system—called the Enterprise Business System—using commercial-off-the-shelf software applications. The transition to the Enterprise Business System took 6 years and achieved full operating capability in July 2007. DLA continues to enhance the system and resolve identified problems. Another major change at DLA involved a reorganization of its inventory management personnel. Before DLA’s reorganization, item managers were the sole points of contact for handling orders and the distribution of items assigned to them. As part of the reorganization, DLA made a major shift, dividing this responsibility and establishing two main facets of planning: demand planning and supply planning. Demand planners gather data, determine how the demand plan will be created, generate the plan, and provide the plan to others in the organization. In contrast, supply planners use the demand plan to determine how best to meet the customers’ expected demands and generate supply plans. Within DLA, the demand and supply planning functions also require input from weapon systems managers, customer account specialists, and procurement officials. In addition to these changes DLA has made, decisions made as part of the Base Realignment and Closure (BRAC) process in 2005 were aimed at achieving economies and efficiencies related to supply and storage of secondary inventory. Specifically, the military services were directed to (1) realign or relocate management and related support functions for the procurement of depot-level reparables to DLA; (2) relocate consumable item management to DLA to consolidate missions and reduce excess capacity; and (3) transfer supply contracting functions for tires, packaged petroleum products, and compressed gases to DLA, and privatize all other supply, storage, and distribution functions for these commodities. DOD is in the process of implementing the BRAC 2005 actions, which are required to be completed by September 15, 2011. We have recently reported on the progress made and challenges DLA still faces to consolidate supply-related functions at 13 depot locations. DOD reported that the total value of its secondary inventory decreased from fiscal years 2006 to 2007 before increasing to $94.1 billion as of September 30, 2008. DOD stratification reports show that the value of DLA’s secondary inventory—which includes spare parts and other commodities managed by the agency—followed a similar pattern, decreasing by $1.1 billion from fiscal years 2006 to 2007 and then increasing by $4.8 billion in fiscal year 2008 (see table 1). According to DLA, most of this increase was caused by higher fuel costs. The value of DLA secondary inventory as a percentage of the DOD total remained steady at 19 percent in fiscal years 2006 and 2007 before rising to 22 percent in fiscal year 2008. DLA determines requirements by calculating the amount of wholesale inventory it needs to either have in storage (on hand) or purchase (on order). According to DLA officials, the agency identifies in its stratification reporting the amount of inventory allocated to meet its requirements objective, which includes various operating requirements and acquisition lead time, as well as a calculated economic order quantity that may be added to these requirements. Operating requirements include low demand items and war reserves, back orders, and safety levels. Low demand items are requirements for parts for which demand cannot be forecast but nevertheless need to be stocked. War reserves include mission-essential secondary items sufficient to attain and sustain authorized operational objectives. Back orders are customer-requisitioned materiel that is not immediately available to issue, but is recorded as a commitment for future issue. Safety levels are stock that is to be kept on hand in case of minor interruptions in the resupply process or unpredictable fluctuations in demand. Acquisition lead time includes both administrative and production lead time requirements. Administrative lead time requirements 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. Production lead time requirements refer to inventory purchases 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 on-hand and on-order inventory levels drop to a threshold level— called the reorder point—the supply manager may place an order for additional inventory of that item. The reorder point factors in demand for an inventory item during the reordering period so that DLA can replace it before it goes out of stock, and a safety level to ensure a supply of stock during interruptions in production or repair. 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, if applicable. A purchase request or purchase order may be terminated or modified if requirements change. On-hand and on-order parts that are not needed to meet DLA’s requirements objective may include some inventory that satisfies 2 years of estimated future demand. As noted earlier, the approved acquisition objective incorporates both materiel needed to meet the requirements objective and materiel needed to meet 2 years of estimated future demand. Materiel that is on hand or on order that exceeds the approved acquisition objective is referred to as inactive inventory. Inactive inventory includes economic retention stock, which is materiel that has been deemed more economical to keep than to discard because it is likely to be needed in the future; contingency retention stock, which is material retained for specific contingencies; and potential excess materiel, which has been identified for possible disposal but has potential for reutilization. Figure 1 summarizes how DOD inventory categories are aggregated in the context of DLA stratification reporting. Our analysis of DLA secondary inventory data for the 3-year period we examined showed that, on average, about half (52 percent) of DLA’s total inventory was not needed to meet current requirements (the requirements objective) and more than one-third (37 percent) was not needed to meet the approved acquisition objective—the requirements objective plus 2 years of estimated future demand. More than one-third of DLA’s total inventory (37 percent) was inactive, comprising retention stock and material DLA had identified as potential excess (for reutilization or disposal). In addition, according to DLA’s demand forecasts for items exceeding the requirements objective in fiscal years 2006 and 2008, the inventory levels of some items were sufficient to meet over 10 years of demand, or had no projected demand. We also identified on-hand inventory deficits for some items. Our analysis of DLA secondary inventory data showed that, for the 3 fiscal years 2006 through 2008, an average of about $6.5 billion (48 percent) of the total annual inventory value was needed to meet the requirements objective, whereas $7.1 billion (52 percent) was not needed for these requirements. Measured by total number of parts, 45 percent applied to the requirements objective on average each year, and the remaining 55 percent did not apply to these requirements. Our analysis revealed that DLA managed an average of about 1.7 million unique items each year, and many of these had more parts than were needed to meet the requirements. Table 2 shows DLA’s spare parts secondary inventory grouped by stratification category. DLA identified $1.0 billion on average each year as potential excess to be reviewed for possible reutilization or disposal. In table 2, the approved acquisition objective includes the requirements objective subtotal ($6.5 billion) plus the 2 years of forecasted demand ($2.1 billion). Using the approved acquisition objective as a criterion, about $8.6 billion (63 percent) of the total inventory was needed to meet these requirements, and $5.1 billion (37 percent) was not needed. In effect, DLA had already purchased a significant amount of inventory toward its future needs. If some of these forecasted demands do not materialize, the purchased parts may become part of DLA’s inactive inventory and may eventually be marked for potential reutilization or disposal. Our data analysis also showed some variability from year to year in the balance between inventory meeting current requirements (the requirements objective) and inventory beyond those requirements (composed of both the 2-year forecasted demand and the inactive inventory).