The military services and the Defense Logistics Agency (DLA) purchase spare parts to keep military equipment ready and operating. At the end of fiscal year 2009, the Department of Defense (DOD) reported that the total value of its inventory of over 4 million spare parts and other support itemsnot including weapons systems and other primary equipmentwas more than $90 billion. GAO has identified weaknesses in DOD's inventory management practices, including problems in accurately forecasting demand for spare parts. At a time when U.S. military forces and materiel are in high demand and the nation and military face long-term fiscal challenges, it is critical that DOD demonstrate good stewardship over the billions of dollars invested in its spare parts inventory while continuing to supply warfighters with the right items at the right time.
DOD can enhance efficiencies in the management of its spare parts inventory and potentially achieve significant cost avoidance in the future by aligning inventory levels more closely with current needs and projected demand. DOD has made some improvement in recent years but continues to consistently have higher levels of inventory than needed to meet current needs (called the requirements objective) plus projected demands over the next 2 years. DOD inventory data show that much of the inventory that is beyond current needs and projected demand is either retention stock (stock that is considered inactive but is being held for possible future use or for other reasons) or potential reutilization stock (stock that has been identified as "excess" and may be disposed of). These data include both on-hand inventory and on-order inventory that is not yet in DOD's possession. Some inventory items may be in such low demand that current supplies could last for decades. Acquiring large amounts of inventory for which actual demand is much lower than expected reduces the amount of funding available for other current military needs.
In a series of reports issued from 2007 to 2010, GAO analyzed spare parts inventory managed by the Air Force, the Navy, the Army, and DLA and identified factors contributing to higher-than-needed inventory levels. Most recently, GAO reviewed DLA inventory levels and reported in 2010 that DLA, over a period of 3 fiscal years, averaged $1 billion of inventory annually in potential reutilization stock. DOD policy requires that its components minimize investment in inventory while also providing inventory needed to support requirements, but several factors were causing DLA to order and stock parts that did not align with current needs and projected demand. These factors often occur in the initial stages of the inventory process when acquisition decisions are being made.
GAO identified similar issues in its prior reviews of spare parts inventory managed by the Air Force, the Navy, and the Army. In all three of those reviews, the predominant reason for mismatches between inventory levels and needs was changes in demand. In addition, Army data revealed substantial amounts of inventory deficits, where quantities of on-hand and on-order spare parts were not sufficient to meet current requirements. In prior reports, GAO also has addressed other aspects of inventory management, including problems with asset visibility, lead times for acquiring parts, and managing retention stocks.
GAO has identified a number of areas where DOD could improve the efficiency of its inventory management, while maintaining effective supply support for warfighter requirements. Since GAO's work has consistently shown that the greatest opportunities to minimize investment in unneeded inventory are at the initial stages of the inventory management process when acquisition decisions are being made, DOD could limit future costs by focusing its efforts on better managing on-order inventory, with a view toward reducing on-order inventory levels that are not needed for current needs or projected demand. For example, GAO found in its review of DLA inventory that the agency could benefit from efforts to (1) identify and evaluate planned purchases of spare parts that, if carried out, might result in the potential procurement of unneeded parts, and (2) take action to modify or cancel these planned purchases. Also, GAO has recommended that DOD address systemic weaknesses in demand forecasting, revise management practices to incorporate flexibility needed to minimize the impact of demand fluctuations, and track the cost efficiency of its inventory management processes. DOD has generally concurred with these recommendations.
Recent legislative action underscores the need for DOD to address inventory management weaknesses. Specifically, Section 328 of the National Defense Authorization Act for Fiscal Year 2010 required the Secretary of Defense to submit a comprehensive plan for improving the inventory management systems of the military departments and DLA, with the objective of reducing the acquisition and storage of inventory that is excess to requirements. The act directed DOD to address eight areas of inventory management. DOD submitted its plan to Congress in November 2010.
DOD states in its plan that it has already reduced unneeded inventory and that further reductions are possible. DOD has reported, for example, that $10.3 billion (11 percent) of its secondary inventory has been designated as excess and categorized for potential reuse or disposal. The plan cites a number of improvement efforts and establishes two broad goals for reducing (1) the value of on-order potential reutilization stock as a percentage of total obligated on-order dollars and (2) the value of on-hand potential reutilization stock as a percentage of total inventory value. DOD's plan is an important step in improving inventory management practices; however, successful implementation will be challenging and will require sustained oversight by DOD as well as collaboration among the services and DLA.
To assess the potential for DOD to achieve cost savings by better aligning inventory levels with requirements, GAO relied on its prior work as listed under the "Related GAO Products" tab.
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