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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
December 2008:
Defense Inventory:
Management Actions Needed to Improve the Cost Efficiency of the Navy's
Spare Parts Inventory:
Defense Inventory:
GAO-09-103:
GAO Highlights:
Highlights of GAO-09-103, a report to congressional requesters
Why GAO Did This Study:
Since 1990, GAO has designated the Department of Defense’s (DOD)
inventory management as a high-risk area. It is critical that the
military services and the Defense Logistics Agency effectively and
efficiently manage DOD’s secondary inventory to ensure that the
warfighter is supplied with the right items at the right time. It is
also imperative that they maintain good stewardship over the billions
of dollars invested in their inventory. GAO reviewed the Navy’s
management of secondary inventory and determined (1) the extent to
which on-hand and on-order secondary inventory reflected the amount
needed to support current requirements and (2) causes for the Navy’s
having secondary inventory in excess of current requirements or,
conversely, for having inventory deficits. To address these objectives,
GAO analyzed Navy secondary inventory data (spare parts such as
aircraft and ship engines and their components and accessories) from
fiscal years 2004 through 2007.
What GAO Found:
For the 4-year period GAO examined, the Navy had significantly more
inventory than was needed to support current requirements. The Navy
also experienced some inventory deficits, though to a far lesser
extent. GAO’s analysis of inventory data identified an annual average
of about $18.7 billion of Navy secondary inventory for fiscal years
2004 to 2007, of which about $7.5 billion (40 percent) exceeded current
requirements. About half of the $7.5 billion of inventory exceeding
current requirements was retained to meet anticipated future demands,
and the remainder was retained for other reasons or identified as
potential excess. Based on Navy demand forecasts, inventory that
exceeded current requirements was sufficient to satisfy several years,
or even decades, of anticipated supply needs. Also, a large proportion
of items that exceeded current requirements had no projected demand.
The Navy also had an annual average of about $570 million of inventory
deficits over this 4-year period. Some items experienced persistent
deficits for the 4 years covered in GAO’s review.
Navy inventory did not align with current requirements over this 4-year
period because (1) the Navy has not established the cost efficiency of
its inventory management, (2) its demand forecasting effectiveness is
limited and requirements for items may change frequently after purchase
decisions are made, and (3) it has not adjusted certain inventory
management practices in response to the unpredictability in demand. As
a result, the Navy had billions of dollars in excess inventory against
current requirements each year. DOD’s supply chain management
regulation requires the military services to take several steps to
provide for effective and efficient end-to-end materiel support. For
example, the regulation directs the components to size secondary item
inventories to minimize DOD investment while providing the inventory
needed. However, while the Navy has performance measures related to
meeting warfighter needs, it lacks metrics and targets for tracking and
assessing the cost efficiency of its inventory management. In addition,
although Navy managers most frequently attributed the accumulation and
retention of inventory exceeding current requirements to changes in
demand, the Navy has not systematically evaluated the effectiveness of
its demand forecasting. Problems with demand forecasting that
contribute to excess inventory include incomplete and inaccurate data
and a lack of communication and coordination among key personnel.
Finally, the Navy has not adjusted certain management practices—in
areas such as initial provisioning, modifying purchase decisions for
inventory that is on order and not yet in its possession, and
retention—to provide flexibility for responding to changes in demand.
First, initial provisioning of spare parts based on engineering
estimates can result in the purchase of unneeded stock when these
estimates prove to be inaccurate. Second, the Navy’s management
practices for on-order items limit flexibility in modifying purchase
decisions in cases where demand has changed. Third, although prior
studies have identified weaknesses in inventory retention practices,
the Navy has not implemented recommended corrective actions. Also, the
Navy’s designation of new chief and deputy chief management officer
positions provides an opportunity for enhanced oversight of inventory
management improvement efforts. Strengthening the Navy’s inventory
management—while maintaining high levels of supply availability and
meeting warfighter needs—could reduce support costs and free up funds
for other needs.
What GAO Recommends:
GAO recommends that the Navy strengthen inventory management by
incorporating cost-efficiency metrics and goals, evaluating and
improving demand forecasting procedures, revising inventory management
practices to better accommodate demand fluctuations, and enhancing
oversight though the chief and deputy chief management officers. DOD
concurred with GAO’s recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-103]. For more
information, contact William M. Solis at (202) 512-8365 or
solisw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
A Significant Portion of the Navy's Secondary Inventory Exceeded
Current Requirements:
Several Factors Contributed to the Navy's Having Large Inventory Levels
In Excess of Current Requirements:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Value of DOD and the Navy Secondary Inventory (Fiscal Years
2004-2007):
Table 2: Stratification of Navy Fiscal Year Secondary Inventory (Annual
Average for Fiscal Years 2004-2007):
Table 3: Aviation and Maritime Inventory Exceeding Current Requirements
(Annual Average for Fiscal Years 2004-2007):
Table 4: Navy On-Order Inventory That Was Identified as Potential
Excess (Fiscal Years 2004-2007):
Table 5: Program Status of Inventory as a Percentage of Inventory Value
(Fiscal Year 2007):
Table 6: Estimated Frequency of Reasons for Navy Having Inventory That
Exceeded Current Requirements:
Table 7: Estimated Frequency of Reasons for Navy Having Inventory
Deficits:
Table 8: Navy Secondary Inventory by Cognizance Code (Annual Average
for Fiscal Years 2004-2007):
Table 9: Sample Disposition for Fiscal Year 2007 Items:
Figures:
Figure 1: Navy Secondary Inventory Meeting and Exceeding Current
Requirements (Fiscal Years 2004-2007):
Figure 2: Stratification of Inventory Exceeding Current Requirements by
Average Value (Fiscal Years 2004-2007):
Figure 3: Years of Supply Available for Inventory Exceeding Current
Requirements (Fiscal Years 2004 and 2007):
Figure 4: Condition of Reparable Inventory That Exceeded Current
Requirements (Fiscal Year 2007):
Figure 5: Value of Inventory Deficits (Fiscal Years 2004-2007):
Figure 6: Value of On-Hand and On-Order Secondary Inventory which
Exceeded Current Requirements (Fiscal Years 2004-2007):
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
December 12, 2008:
The Honorable Solomon P. Ortiz"
Chairman:
The Honorable Randy Forbes:
Ranking Minority Member:
Subcommittee on Readiness:
Committee on Armed Services:
House of Representatives:
The Honorable Bernie Sanders:
United States Senate:
The military services and the Defense Logistics Agency (DLA) procure
and manage large supplies of spare parts to keep military equipment
operating. At a time when U.S. military forces and their equipment are
in high demand, it is critical that the services and DLA effectively
and efficiently manage the Department of Defense's (DOD) secondary
inventory[Footnote 1] to ensure that the warfighter is supplied with
the right items at the right time. Because the military services and
DLA face challenges in competing for resources at a time when the
nation faces an increasingly constrained fiscal environment, it is also
imperative that they have good stewardship over the billions of dollars
invested in their inventory. DOD reported that the total value of its
secondary inventory as of September 30, 2007, was about $82.6
billion.[Footnote 2] Since 1990, we have identified DOD inventory
management as a high-risk area due to ineffective and inefficient
inventory management practices and procedures and to excessively high
levels of inventory beyond what is needed to support current
requirements. These high levels extend to both on-hand and on-order
inventory. Inventory in DOD's possession is considered to be on hand.
Inventory not in DOD's possession but for which contracts have been
awarded or funds have been obligated is considered to be on order.
In response to your request that we review DOD components' secondary
inventory, this report addresses the management of the Navy's secondary
inventory. Our objectives were to (1) determine the extent to which the
Navy's on-hand and on-order secondary inventory reflects the amount
needed to support current requirements and (2) identify causes, if
applicable, for the Navy's having secondary inventory in excess of
current requirements or, conversely, for having inventory deficits. We
previously reported on the management of the Air Force's secondary
inventory,[Footnote 3] and we plan to report separately on the
management of the Army's secondary inventory.
To determine the extent to which the Navy's on-order and on-hand
secondary inventory reflects the amount of inventory needed to support
current requirements, we analyzed fiscal years 2004 through 2007
stratification data,[Footnote 4] including summary reports and item-
specific data as of September 30 for each fiscal year. We determined
the total number of items that had more or less than enough inventory
to satisfy current requirements, and for each of these items also
determined the number and value of parts that were either in excess of
or less than needed to satisfy current requirements.[Footnote 5] In
presenting the value of inventory in this report, we converted then-
year dollars to constant fiscal year 2007 dollars using DOD Operations
and Maintenance price deflators.[Footnote 6] To determine the primary
causes for the Navy having inventory in excess of current requirements
or having inventory deficits, we selected a random probability sample
of inventory items that met these conditions and sent surveys to Navy
inventory personnel who are responsible for item management. Because we
used a random probability sample, the results of our survey analysis
statistically weight up to represent the population of all Navy items
that met our selection criteria. To gain additional understanding about
the management of secondary inventory, we interviewed numerous Navy
inventory personnel and discussed 70 items in more detail. Appendix I
provides further information on our scope and methodology. We conducted
this performance audit from November 2007 to December 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
In this report, we characterize inventory as exceeding current
requirements when existing inventory levels are greater than what DOD
calls its "requirements objective," defined as:
"For wholesale stock replenishment, the maximum authorized quantity of
stock for an item. It consists of the sum of stock represented by the
economic order quantity, the safety level, the repair-cycle level, and
the authorized additive levels."[Footnote 7]
We used the requirements objective as our baseline because it includes
the requirements used to determine when to order new parts
(collectively called the "reorder point"). In other words, if the Navy
had enough parts to meet the requirements objective, it would not
purchase new parts. We use the term "inventory deficit" to describe
items that have an amount of on-hand inventory that falls below reorder
point thresholds. We used this baseline because it reflected the Navy's
ability to respond to an immediate demand for a secondary inventory
item. The categories DOD and the Navy use to characterize and manage
inventory are discussed further in the background section of this
report.
Results in Brief:
For the 4-year period we examined, the Navy had significantly more
inventory than was needed to support current requirements. The Navy
also experienced some inventory deficits, though to a far lesser
extent. Our analysis of stratification data identified an annual
average of about $18.7 billion of Navy secondary inventory for fiscal
years 2004 through 2007, of which about $7.5 billion (40 percent)
exceeded current requirements. About half of the $7.5 billion of
inventory exceeding current requirements was retained to meet
anticipated future demands, and the remainder was retained for other
reasons or identified as potential excess. Based on Navy demand
forecasts, inventory that exceeded current requirements had enough
parts on hand to satisfy several years, or even decades, of anticipated
supply needs. Also, a large proportion of items that exceeded current
requirements had no projected demand. Inventory that exceeded current
requirements included both serviceable and unserviceable parts, and was
predominantly associated with steady programs--that is, programs that
were not significantly growing or declining. The Navy also had an
annual average of about $570 million of inventory deficits over this 4-
year period, which represented about 7 percent of its annual reorder
point requirements. Fewer items had inventory deficits than had
excesses, but some items experienced persistent deficits for the 4
years we reviewed.
On the basis of our review, we found that Navy secondary inventory did
not align with current requirements over the 4-year period because (1)
the Navy has not established the cost efficiency of its inventory
management, (2) the Navy's demand forecasting effectiveness is limited
and requirements for items may change frequently after purchase
decisions are made, and (3) the Navy has not adjusted certain inventory
management practices in response to the unpredictability in demand. As
a result, the Navy has accumulated and retained billions of dollars in
excess inventory against current requirements each year. DOD's supply
chain management regulation requires the military services to take
several steps to provide for effective and efficient end-to-end
materiel support. For example, the regulation directs the components to
size secondary item inventories to minimize the DOD investment while
providing the inventory needed. However, while the Navy has performance
measures for meeting warfighter needs, it lacks metrics and targets for
tracking and assessing the cost efficiency of its inventory management.
In addition, Navy managers most frequently attributed the accumulation
of inventory exceeding current requirements to changes in demand.
Although DOD's supply chain regulation states that customer demand
shall be part of all DOD components' inventory management decisions and
that variance in demand forecasts outside established parameters should
be flagged for management analysis and action, the Navy has not
systematically evaluated the effectiveness of its demand forecasting.
Problems with demand forecasting that contribute to excess inventory
include incomplete and inaccurate data and a lack of communication and
coordination among key personnel. Another factor contributing to the
Navy having inventory that does not align with requirements is its
failure to adjust certain management practices--in areas such as
initial provisioning, on-order management, and retention--to allow for
flexible responses to fluctuations in demand. First, initial
provisioning of spare parts based on engineering estimates can result
in the purchase of unneeded stock when these estimates prove to be
inaccurate. Second, the Navy's inventory management practices for on-
order items limit flexibility in modifying purchase decisions in cases
where demand has changed. Third, although prior studies by our office
and the Logistics Management Institute (LMI) have identified weaknesses
in DOD components' inventory retention practices, the Navy has neither
implemented recommended corrective actions nor ensured that required
annual reviews validating its methodologies for making retention
decisions are performed. In addition, the Navy has established a new
chief management officer and deputy chief management officer
responsible for business transformation. These new designations provide
an opportunity to enhance oversight of inventory management improvement
efforts. Strengthening the Navy's inventory management--while
maintaining high levels of supply availability and meeting warfighter
needs--could reduce support costs and free up funds for other needs.
To improve the management of Navy secondary inventory, we are
recommending that the Navy incorporate cost-efficiency metrics and
goals, evaluate and improve demand forecasting procedures, revise
inventory management practices to better accommodate fluctuations in
demand, and enhance Navy oversight of inventory improvement efforts.
DOD, in its comments on a draft of this report, concurred with our
recommendations.
Background:
Under DOD's supply chain materiel management policy, the secondary item
inventory should be sized to minimize DOD's investment while providing
sufficient inventory to support both peacetime and war
requirements.[Footnote 8] The Offices of the Secretary of Defense and
the Navy share the responsibility for management and oversight of the
secondary item inventory. The Under Secretary of Defense for
Acquisition, Technology, and Logistics is responsible for the uniform
implementation of inventory management policies throughout the
department, while the Secretary of the Navy is responsible for
implementing DOD inventory policies and procedures. Navy inventory
management functions are primarily the responsibility of the Naval
Inventory Control Point, a component of the Navy Supply Systems Command
that has offices in Philadelphia and Mechanicsburg, Pennsylvania.
Aviation and maritime items are managed in Philadelphia and
Mechanicsburg, respectively. The Navy prescribes guidance and
procedural instructions for computing requirements for its secondary
inventory. Navy managers develop inventory management plans for their
assigned items, which include developing budgetary requirements for
procurement and repair, monitoring and discussing inventory performance
with contractors and repair depots, evaluating requests for stocking
from individual DOD activities, and processing requisitions for
materiel that cannot be satisfied by automated processes.
Value of Navy's Secondary Inventory Decreased Since 2004:
DOD requires each service and DLA to semiannually prepare inventory
stratification reports, which are primarily used to determine
procurement and repair budget requirements, and potential excess or
reutilization stock.[Footnote 9] Stratification is a process that
identifies and prioritizes requirements and allocates inventory to
those requirements based on availability. DOD annual stratification
reports show that for the 4 years covered in our review, the value of
the Navy's secondary inventory decreased both in dollar amounts and as
a percentage of DOD's overall secondary inventory (see table 1).
Table 1: Value of DOD and Navy Secondary Inventory (Fiscal Years 2004-
2007):
Dollars (in billions).
Fiscal year: 2004;
DOD secondary inventory: $84.5;
Navy secondary inventory: $25.9;
Percentage of DOD secondary inventory held by the Navy: 31.
Fiscal year: 2005;
DOD secondary inventory: 83.7;
Navy secondary inventory: 22.5;
Percentage of DOD secondary inventory held by the Navy: 27.
Fiscal year: 2006;
DOD secondary inventory: 87.6;
Navy secondary inventory: 21.4;
Percentage of DOD secondary inventory held by the Navy: 24.
Fiscal year: 2007;
DOD secondary inventory: 82.6;
Navy secondary inventory: 18.6;
Percentage of DOD secondary inventory held by the Navy: 23.
Source: GAO analysis of DOD data.
Notes: Values are expressed in constant fiscal year 2007 dollars. DOD
values inventory at latest acquisition cost, with reductions for
reparable inventory in need of repair and salvage prices for potential
reutilization/disposal stock.
[End of table]
While the total reported value of DOD's secondary inventory decreased
by almost $2 billion from fiscal year 2004 through fiscal year 2007,
the reported value of the Navy's inventory decreased by more than $7
billion. According to Navy inventory managers, this decrease was
attributable to the following factors: (1) a greatly accelerated
disposal rate for items in the F-14 program, (2) an accounting cleanup
of records on unserviceable parts in transit, (3) sales of inventory
that had accrued in support of major war operations in 2002 and 2003,
(4) an increase in aviation assets that could not be repaired and
therefore were disposed of, and (5) the transfer of inventory control
for consumable aviation items from the Navy to DLA.
Navy's Process for Determining Needed Amount of Secondary Inventory:
The Navy uses a process called requirements determination to calculate
the respective amounts of inventory it either needs to have available
in storage (on hand) or needs to purchase (on order). A central
database called the Master Item File provides data for the requirements
determination process. The Navy also uses the Master Item File to
develop a stratification report showing the amount of inventory
allocated to meet specific requirements, including operating and
acquisition lead time requirements.
* Operating requirements include the war reserves authorized for
purchase; customer-requisitioned materiel that has not yet been shipped
(also known as due-outs); a safety level of reserve to be kept on hand
in case of minor interruptions in the resupply process or unpredictable
fluctuations in demand; minimum quantities for essential items for
which demand cannot normally be predicted (also referred to as numeric
stockage objective or insurance items); and inventory reserve
sufficient to satisfy demand while broken items are being repaired
(also referred to as repair cycle stock).
* Acquisition lead time requirements include administrative lead time
requirements, which refer to inventory reserves sufficient to satisfy
demand[Footnote 10] 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; and production lead time requirements,
which refer to inventory reserves 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 the combined total of on-hand and on-order inventory for an item
drops to a threshold level--called the reorder point--the item manager
may place an order for additional inventory of that item, to avoid the
risk of the item's going out of stock in the Navy's inventory. The
reorder point includes both operating requirements and acquisition lead
time requirements. 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. The reorder point factors in demand for inventory
items during the reordering period so that Navy managers can replace
items before they go out of stock, and a safety level to ensure a
supply of stock during interruptions in production or repair. A
purchase request can be terminated or modified if requirements change.
These requirements collectively constitute the requirements objective,
which we refer to as the Navy's current requirements in this report. An
assessment of the Navy's requirements or requirements determination
process was outside the scope of our review. In accounting for its
inventory, the Navy uses the stratification process to allocate, or
apply, inventory to each requirement category. On-hand inventory in
serviceable condition is applied first, followed by on-hand inventory
in unserviceable condition.[Footnote 11] On-order inventory is applied
when on-hand inventory is unavailable to be applied to requirements. We
refer to situations when on-hand inventory is insufficient to satisfy
reorder point requirements as inventory deficits.
Inventory that exceeds current requirements may include:
* inventory that satisfies 2 years of projected future demand, which
together with current requirements is known as the approved acquisition
objective;[Footnote 12]
* economic retention inventory, which exceeds the approved acquisition
objective but has been deemed more economical to keep than to discard
because it will likely be needed in the future;
* contingency retention inventory, which exceeds the economic retention
inventory but is retained for specific contingencies; and:
* potential excess materiel,[Footnote 13] which exceeds contingency
retention inventory and has been identified for possible disposal but
has potential for reutilization.
A Significant Portion of the Navy's Secondary Inventory Exceeded
Current Requirements:
Our analysis of Navy secondary inventory data for the 4-year period we
examined showed that, on average, about $11.3 billion (60 percent) of
the average annual total inventory value of $18.7 billion was needed to
meet current requirements and $7.5 billion (40 percent) exceeded
current requirements. About half of the inventory that exceeded current
requirements was being retained for demands anticipated within 2 years,
and the remainder was held as economic retention inventory, contingency
retention inventory, or marked as potential excess. According to the
Navy's demand forecasts for items exceeding current requirements in
fiscal years 2004 and 2007, inventory levels of some items were
sufficient to meet many years and sometimes decades of demand. A large
proportion of items that exceeded current requirements had no projected
demand. Reparable inventory that exceeded current requirements included
both serviceable and unserviceable parts, and the proportion of items
associated with steady programs--that is, programs that were not
significantly growing or declining--was similar for inventory meeting
and exceeding current requirements. Relatively few inventory deficits
were identified, but these persisted for some items during the 4 years
we reviewed.
About $7.5 Billion, or 40 Percent, of the Navy's On-Hand and On-Order
Inventory Value Exceeded Current Requirements Each Year:
Our analysis of Navy secondary inventory data showed that, on average,
about $11.3 billion (60 percent) of the total annual inventory value
was needed to meet current requirements, whereas $7.5 billion (40
percent) exceeded current requirements. Measured by number of parts,
these percentages were reversed: 40 percent of the parts applied to
current requirements on average each year, and the remaining 60 percent
exceeded current requirements. Our data for the 4-year period revealed
that 121,380 (65 percent) of the Navy's 186,465 unique items with
reported inventory had parts in excess of current requirements. Table 2
shows the stratification of Navy secondary inventory for the 4-year
period, including inventory meeting requirements and inventory
exceeding requirements.
Table 2: Stratification of Navy Fiscal Year Secondary Inventory (Annual
Average for Fiscal Years 2004-2007):
Dollars (in billions).
Annual average: Total inventory;
Items: 186,465;
Parts (in millions): 19.1;
Percentage of total parts: 100%;
Value: $18.7;
Percentage of total value: 100%.
Inventory meeting current requirements: Operating requirements;
Items: 93,153;
Parts (in millions): 2.2;
Percentage of total parts: 11;
Value: 7.6;
Percentage of total value: 41.
Inventory meeting current requirements: Acquisition lead time;
Items: 34,286;
Parts (in millions): 3.5;
Percentage of total parts: 18;
Value: 1.9;
Percentage of total value: 10.
Inventory meeting current requirements: Economic order quantity;
Items: 172,869;
Parts (in millions): 2.0;
Percentage of total parts: 10;
Value: 1.8;
Percentage of total value: 9.
Inventory meeting current requirements: Subtotal;
Items: 184,606;
Parts (in millions): 7.6;
Percentage of total parts: 40;
Value: $11.3;
Percentage of total value: 60%.
Inventory exceeding current requirements: Future demand;
Items: N/A;
Parts (in millions): 1.1;
Percentage of total parts: 6;
Value: 3.7;
Percentage of total value: 20.
Inventory exceeding current requirements: Economic retention;
Items: 81,419;
Parts (in millions): 1.7;
Percentage of total parts: 9;
Value: 1.2;
Percentage of total value: 6.
Inventory exceeding current requirements: Contingency retention;
Items: 26,052;
Parts (in millions): 1.2;
Percentage of total parts: 6;
Value: 0.7;
Percentage of total value: 4.
Inventory exceeding current requirements: Potential excess;
Items: 52,634;
Parts (in millions): 7.4;
Percentage of total parts: 39;
Value: 1.8;
Percentage of total value: 10.
Inventory exceeding current requirements: Subtotal;
Items: 121,380;
Parts (in millions): 11.4;
Percentage of total parts: 60;
Value: $7.5;
Percentage of total value: 40%.
Source: GAO analysis of Navy data.
Notes: Values are expressed in constant fiscal year 2007 dollars and
are less cost recovery rates (overhead charges).
Some of the totals may not add up due to rounding.
[End of table]
The data in table 2 show that the Navy has applied a significant amount
of inventory to future demand as well as to current requirements. On
average, about 1.1 million parts comprising 6 percent of total parts
and 20 percent of total inventory value were designated for future
demand. Furthermore, the average value of these parts ($3.7 billion)
was nearly half the average value of the parts needed to meet annual
operating requirements ($7.6 billion). The balance between inventory
meeting current requirements and inventory exceeding current
requirements stayed relatively constant from year to year (see fig. 1).
Figure 1: Navy Secondary Inventory Meeting and Exceeding Current
Requirements (Fiscal Years 2004-2007):
This figure is a combination bar graph showed Navy secondary inventory
meeting and exceeding current requirements (fiscal years 2004-2007).
The X axis represents the fiscal year, and the Y axis represents the
dollars (in millions).
Fiscal year: 2004;
Current requirements: 11.8936996460;
Beyond current requirements: 7.8607597351.
Fiscal year: 2005;
Current requirements: 11.8028993607;
Beyond current requirements: 7.8672199249.
Fiscal year: 2006;
Current requirements: 11.3425998688;
Beyond current requirements: 7.3581199646.
Fiscal year: 2007;
Current requirements: 10.0296993256;
Beyond current requirements: 6.7833499908.
[See PDF for image]
GAO analysis of Navy data.
Note: Values are expressed in constant fiscal year 2007 dollars.
[End of figure]
The secondary inventory data further showed that while the aviation
community had fewer spare parts than the maritime community, these
parts constituted a higher average value; conversely, the maritime
community had more parts but at lower average value. Table 3 shows the
average number and value of parts exceeding current requirements for
each of these communities at the end of each fiscal year.
Table 3: Aviation and Maritime Inventory Exceeding Current Requirements
(Annual Average for Fiscal Years 2004-2007):
Aviation;
Number of parts (millions): 1.7;
Percent: 15;
Value of parts (billions): $5.6;
Percent: 75.
Maritime;
Number of parts (millions): 9.7;
Percent: 85;
Value of parts (billions): 1.8;
Percent: 25.
Total;
Number of parts (millions): 11.4;
Percent: 100;
Value of parts (billions): $7.5;
Percent: 100.
Source: GAO analysis of Navy data.
Notes: Totals may not add up due to rounding.
Values are expressed in constant fiscal year 2007 dollars and are less
cost recovery rates (overhead charges).
[End of table]
Inventory Excess to Current Requirements Was Retained for Anticipated
Future Needs:
Of the nearly $7.5 billion in Navy secondary inventory that exceeded
current requirements in the time frame we examined, about half was
being retained for demands anticipated within 2 years, while the
remainder was being retained either as economic retention inventory,
contingency retention inventory, or potential excess (see fig. 2).
Figure 2: Stratification of Inventory Exceeding Current Requirements by
Average Value (Fiscal Years 2004-2007):
This figure is a pie graph showing stratification of inventory
exceeding current requirements by average value (fiscal years 2004-
2007).
Projected future demand: 47%;
Potential excess: 26%;
Economic retention: 17%;
Contingency retention: 10%.
[See PDF for image]
Source: GAO analysis of Navy data.
[End of figure]
With regard to on-order inventory, the Navy marked approximately $10
million (1 percent) of this inventory each year as potential excess to
be reviewed for possible disposal. This means that demands had
decreased significantly since the time the order was placed, yet the
Navy had not terminated the order. Navy managers told us that on-order
inventory marked as potential excess is routinely cancelled to prevent
the immediate disposal of new inventory. We did not independently
verify whether this practice was consistently followed. Table 4 shows
the amount of potential excess inventory the Navy had on order at the
end of fiscal years 2004 to 2007.
Table 4: Navy On-Order Inventory That Was Identified as Potential
Excess (Fiscal Years 2004-2007):
Dollars (in millions).
Aviation;
Fiscal year: 2004: $7.2;
Fiscal year: 2005: $10.1;
Fiscal year: 2006: $5.6;
Fiscal year: 2007: $7.6.
Maritime;
Fiscal year: 2004: 4.0;
Fiscal year: 2005: 1.3;
Fiscal year: 2006: 2.1;
Fiscal year: 2007: 3.7.
Total;
Fiscal year: 2004: $11.1;
Fiscal year: 2005: $11.4;
Fiscal year: 2006: $7.6;
Fiscal year: 2007: $11.3.
Source: GAO analysis of Navy data.
Notes: Values are expressed in constant fiscal year 2007 dollars and
are less cost recovery rates (overhead charges).
Some of the totals may not add up due to rounding.
[End of table]
Excess Inventory Was Sufficient to Meet Many Years of Projected
Demands:
The Navy's forecasts for items with a recurring demand in fiscal years
2004 and 2007 showed that inventory for some items exceeded the current
requirements necessary to meet many years and sometimes decades of
demand. In addition, a substantial amount of this inventory showed no
projected demand. The results of this analysis are shown in figure 3.
Figure 3: Years of Supply Available for Inventory Exceeding Current
Requirements (Fiscal Years 2004 and 2007):
This figure is a combination bar graph showing the years of supply
available for inventory exceeding current requirements (fiscal years
2004 and 2007). The X axis represents the years of supply, and the Y
axis represents the dollars (in billions). One bar represents the
fiscal year 2004, and the other bar represents fiscal year 2007.
Years of supply: >0 and <2;
Fiscal year 2004: 2.21;
Fiscal year 2007: 1.85.
Years of supply: >=2 and <10;
Fiscal year 2004: 2.55;
Fiscal year 2007: 2.457.
Years of supply: >=10 and <50;
Fiscal year 2004: 0.62;
Fiscal year 2007: 0.463.
Years of supply: >=50 and <100;
Fiscal year 2004: 0.20;
Fiscal year 2007: 0.07.
Years of supply: No demand;
Fiscal year 2004: 2.24;
Fiscal year 2007: 1.87.
Values rounded.
[See PDF for image]
Source: GAO analysis of Navy data.
Notes: We identified the annual demand forecast for individual items in
the fiscal years 2004 and 2007 September stratification reports. We
removed nonrecurring demands from the excess inventory, and then
divided the remainder by the annual demand forecast to obtain the
number of years of supply the inventory levels would satisfy.
Values are expressed in constant fiscal year 2007 dollars.
[End of figure]
As shown in figure 3, about $1.9 billion (27 percent) of the inventory
exceeding current requirements in fiscal year 2007 was sufficient to
satisfy 2 years of demand, $2.5 billion (36 percent) was sufficient to
meet between 2 and 10 years of supply, and $0.5 billion (8 percent) was
sufficient to meet demand for 10 years or more. In addition, the Navy
in fiscal year 2007 had $1.9 billion (28 percent) of inventory
exceeding current requirements for which there was no forecasted
demand. About $1.1 billion (60 percent) of these items were being
retained because of economic or contingency retention requirements, and
the remaining $0.8 billion (40 percent) were considered for disposal or
reutilization. In commenting on a draft of this report, the Navy stated
that a majority of these items are in low demand, are used on older
weapon systems, and can no longer be procured, so the Navy will retain
inventory as requirements trend down. We could not independently verify
the Navy's statement using the stratification data, and the Navy did
not provide supporting data.
Inventory Exceeding Current Requirements Included Both Serviceable and
Unserviceable Assets:
Reparable inventory that exceeded current requirements included both
serviceable and unserviceable parts. The Navy pays storage costs for
all items regardless of condition. Based on DLA data, we estimate that
the Navy incurred at least $18 million in storage costs for its
wholesale secondary inventory that exceeded current requirements in
fiscal year 2007. In fiscal year 2007, serviceable parts constituted
about 45 percent of the total reparable parts exceeding current
requirements and about 39 percent of the total value (see fig. 4).
Figure 4: Condition of Reparable Inventory That Exceeded Current
Requirements (Fiscal Year 2007):
This figure is a combination of two pie graphs showing condition of
reparable inventory that exceeded current requirements (fiscal year
2007).
Value:
Serviceable: 39%: $2.4 billion;
Unserviceable: 61%: $3.7 billion.
Parts:
Serviceable: 45%: 226,225;
Unserviceable: 55%: 275,699.
[See PDF for image]
Source: GAO analysis of Navy data.
[End of figure]
Program Status Was Not Significantly Different for Items Exceeding
Current Requirements and Items Meeting Current Requirements:
The proportion of Navy secondary inventory associated with steady
programs was similar for inventory meeting and exceeding current
requirements. Each Navy inventory item is assigned a program status
that indicates whether the item or the item's higher assembly is part
of a weapon system program that is growing, staying steady, declining,
or obsolete. In fiscal year 2007, 81 percent of the value of aviation
parts and 79 percent of the value of maritime parts which met current
requirements were associated with steady programs. For items exceeding
current requirements, these proportions were similar--79 and 73 percent
for aviation and maritime items, respectively. Table 5 shows the
percentage of items in each category by program status.
Table 5: Program Status of Inventory as a Percentage of Inventory Value
(Fiscal Year 2007):
Inventory: Meeting current requirements: Aviation[B];
Percent increasing: Meeting current requirements:: 15%;
Percent steady: 81%;
Percent decreasing: 4%;
Percent obsolete[A]: 0%.
Inventory: Meeting current requirements: Maritime[C];
Percent increasing: Meeting current requirements:: 14;
Percent steady: 79;
Percent decreasing: 7;
Percent obsolete[A]: [A].
Inventory: Exceeding current requirements: Aviation[B];
Percent increasing: Meeting current requirements:: 5%;
Percent steady: 79%;
Percent decreasing: 12%;
Percent obsolete[A]: 5%.
Inventory: Exceeding current requirements: Maritime[C];
Percent increasing: Meeting current requirements:: 17;
Percent steady: 73;
Percent decreasing: 11;
Percent obsolete[A]: [A].
Source: GAO analysis of Navy data.
[A] Managers of maritime items do not assign items to the obsolete
status code.
[B] Aviation program status data were current as of March 2008.
[C] Maritime program status data were current as of September 2008.
[End of table]
Relatively Few Inventory Deficits Were Identified, but Some Items Had
Persistent Deficits:
The Navy had inventory deficits for some items--that is, an
insufficient level of inventory on hand to meet the reorder levels
identified in its current requirements. As of the September 30
stratification report date for fiscal years 2004 through 2007, the Navy
had insufficient on-hand inventory to meet reorder-level requirements
for an average of about 15,000 items annually, totaling about $570
million in inventory deficits each year. Normally, inventory managers
will place an order for new parts when an item's inventory falls to the
reorder level, but in fiscal year 2007 there were a total of 13,775
items with an inventory deficit, of which 6,315 (46 percent) had no
inventory on order. In commenting on our report the Navy said some of
these deficit items will not be procured because they are obsolete or
have been replaced by other items. However, of the 6,315 items on
order, only 840 were in declining programs where items would not be
procured. Further, 21 percent of items with deficits had unfilled
requisitions from previous time periods, indicating that some items had
persistent deficits over time. Navy inventory managers said that
deficits occur and can persist for various reasons, including cases in
which a supplier is no longer in business or producing the part needed,
and a new, qualified supplier must be identified to produce the item.
Our random sample of items with inventory deficits in fiscal year 2007
showed that 35 percent of these items had an inventory deficit in each
of the 4 years we reviewed. We could not determine the criticality of
these deficits because this information is not available in
stratification reporting. In terms of number of parts, the Navy had
fewer inventory deficits for aviation items than for maritime items,
but the aviation items constituted a higher average value. Figure 5
shows the value of Navy's inventory deficits for each of the fiscal
years included in our review.
Figure 5: Value of Inventory Deficits (Fiscal Years 2004-2007):
This figure is a combination bar graph showing value of inventory
deficits (fiscal years 2004-2007). The X axis represents the fiscal
year, and the Y axis represents the dollars (in millions). The bars
represent maritime and aviation.
Fiscal year: 2004;
Aviation: 391.326;
Maritime: 230.129.
Fiscal year: 2005;
Aviation: 595.018;
Maritime: 166.117.
Fiscal year: 2006;
Aviation: 293.951;
Maritime: 152.12.
Fiscal year: 2007;
Aviation: 290.23;
Maritime: 171.725.
[See PDF for image]
Source: GAO analysis of Navy data.
Note: Values are expressed in constant fiscal year 2007 dollars and are
less cost recovery rates (overhead charges).
[End of figure]
However, the Navy would need considerably more inventory to meet its
total requirements objective for these items. For example, when both on-
hand and on-order inventory are included, in fiscal year 2007 the Navy
had a total deficit against the total requirements objective of about
880,000 parts valued at about $1.5 billion This amount is about three
times the level of its on-hand deficits alone.
Several Factors Contributed to the Navy's Having Large Inventory Levels
in Excess of Current Requirements:
Our review identified several factors that contributed to the Navy's
having secondary inventory that did not align with current
requirements, including significant levels of inventory that were in
excess of these requirements over the 4-year period. While the Navy
strives to provide effective supply support in meeting warfighter needs
and reports meeting or almost meeting many of its own supply
availability targets, it has placed less emphasis on doing so at least
cost. The Navy has not established metrics and goals for tracking and
assessing the cost efficiency of its inventory management. In addition,
although changes in demand account for much of the inventory in excess
of current requirements, the Navy has not systematically evaluated why
demand forecasting is unpredictable and how to better manage it.
Further, the Navy has not adjusted certain inventory management
practices to allow for flexibility in responding to unpredictable
demand.
In addition, our review noted that although the Navy's newly
established chief management officer and deputy chief management
officer will oversee business transformation, the Navy has not yet
defined their respective roles in overseeing inventory management
improvement efforts. These new designations provide an opportunity to
enhance oversight of such efforts.
Navy Has Not Established Metrics and Goals for Tracking and Assessing
the Cost Efficiency of Inventory Management:
Although the Navy has emphasized the need to meet warfighter needs as
measured by supply support performance metrics and goals, it has not
established metrics and goals to track and assess the cost efficiency
of its inventory management practices. As a result, the Navy does not
know whether it is meeting inventory requirements at least cost as
required by DOD's supply chain management regulation.
DOD's supply chain management regulation requires the military services
to take several steps to provide for effective and efficient end-to-end
materiel support. The regulation also sets out a number of management
goals and directs the components to take a number of steps including
sizing secondary item inventories to minimize the DOD investment while
providing the inventory needed; considering all costs associated with
materiel management in making best-value logistics decisions; balancing
the use of all available logistics resources to accomplish timely and
quality delivery at the lowest cost; and measuring total supply chain
performance based on timely and cost-effective delivery. To ensure
efficient and effective supply chain management, the regulation also
calls for the use of metrics to evaluate the performance and cost of
supply chain operations. These metrics should, among other things,
monitor the efficient use of DOD resources and provide a means to
assess costs versus benefits of supply chain operations.[Footnote 14]
However, the regulation does not prescribe specific cost metrics and
goals for the services to use to track and assess the efficiency of
their inventory management practices.
According to Navy officials, they have processes and controls for
efficiently managing secondary inventory. For example, they use a
requirements-setting process for determining secondary items necessary
to meet performance goals, while evaluating the trade-offs between the
requirements and acceptable risk of being out of stock. They also
compare requirements to available assets and identify funding needed
during the next 2-year budget period. After budget approval, they use a
supply demand review process and repair workload forecasting to
initiate procurements and plan repairs throughout the year. The supply
demand reviews enable them to determine significant requirement changes
and recommend additional procurement or termination of existing
procurements. They also stated that the semiannual stratification
review acts as a check and balance. They noted that Navy item managers
are required to meet goals that ensure that the Navy does not
unnecessarily build inventories but rather balances the costs for
terminating a contract against that of initiating a new contract in the
near future. They said they are confident that these processes and
controls work because the Navy is able to meet required performance
goals at budgeted costs.
Moreover, the Navy uses metrics to track and assess performance toward
meeting inventory support goals. These include metrics showing supply
material availability and customer wait time.[Footnote 15] For example,
the Navy tracks the extent to which it is meeting supply material
availability goals--which are set at 85 percent (except for nuclear
propulsion-related material, which has a goal of 95 percent)--as well
as average customer wait time. Recent data show that the Navy generally
meets or almost meets these goals, although we did not independently
verify these performance data during our review. The Navy also measures
financial performance by the extent to which budgeted amounts are
obligated and net sales plans are achieved. In this way inventory
managers may be accountable for goals related to supply material
availability and customer wait time, as well as budget performance.
The Navy, however, has not established metrics and goals for
determining whether it is meeting its performance goals at least cost.
For example, it has not established a metric related to its cost
efficiency in meeting the supply material availability goal. The
overall secondary inventory data we analyzed show that the Navy carried
about $1.66 in inventory for every $1 in requirements to meet its
supply material availability goal during the 4-year period of fiscal
years 2004 through 2007. Such a metric, in combination with other cost
metrics and established goals, could give the Navy the capability to
track trends and assess progress toward achieving greater cost
efficiency. Because cost metrics and goals have not been established,
Navy managers are not held accountable and lack incentives for
achieving efficient supply support. Measuring performance goals such as
supply material availability and average customer wait time without
also tracking cost metrics encourages higher levels of inventory. As a
result, the Navy carries billions of dollars in excess inventory
against current requirements each year without having to demonstrate
that these inventory levels are cost effective.
Demand Forecasting Procedures Have Not Been Systematically Evaluated:
Our review showed that unpredictability in forecasting demand for spare
parts was a primary cause of the Navy's inability to align inventory
levels with current requirements. DOD's supply chain regulation states
that customer demand shall be part of all DOD components' inventory
management decisions, components shall not stock an item that does not
have any possibility of future demand, and variance in demand forecasts
outside established parameters should be flagged for management
analysis and action.[Footnote 16] According to Navy managers, demand is
the single most significant data element for forecasting requirements
and a driving factor in identifying the reorder point. While Navy
managers agreed that accurately forecasting demand is a long-standing
difficulty, they said that they forecast demand as best as they can and
could not readily identify ways to significantly improve on their
current procedures. However, they could not show where the Navy has
systematically evaluated its demand forecasting procedures to identify
areas where forecasts have been consistently inaccurate in order to
correct any systemic weaknesses. Another related difficulty, according
to Navy managers we interviewed, is a lack of timely communications
among stakeholders, including promptly relaying changes in programs and
other decisions that affect purchases of spare parts. More prompt
communication of demand updates could help to mitigate the effects of
demand fluctuations, they said.
Navy item managers who responded to our survey most frequently cited
changes in demand as the reason inventory did not align with current
requirements. Changes may include demand decreasing, fluctuating, or
not materializing at all, resulting in inventory exceeding current
requirements; or demand increasing, resulting in inventory deficits.
Table 6 shows the results of our representative survey of items with
inventory excesses (384 items), and table 7 shows the results of our
survey for items with inventory deficits (40 items).
Table 6: Estimated Frequency of Reasons for Navy Having Inventory That
Exceeded Current Requirements:
Cause: Demands decreased, fluctuated, or did not materialize;
Sample count: 201;
Estimated frequency and 95%, two-sided confidence interval[A]: 54%;
(48.42% to 59.10%).
Cause: Changes occurred in wear-out or survival rate;
Sample count: 2;
Estimated frequency and 95%, two-sided confidence interval[A]: 1%;
(0.06% to 2.15%).
Cause: Anticipated nonrecurring demands did not occur;
Sample count: 5;
Estimated frequency and 95%, two-sided confidence interval[A]: 1%;
(0.31% to 2.97%).
Cause: Weapon system was being phased out or reduced;
Sample count: 21;
Estimated frequency and 95%, two-sided confidence interval[A]: 8%;
(5.16% to 11.92%).
Cause: A change was made in the implementation schedule of the weapon
system;
Sample count: 30;
Estimated frequency and 95%, two-sided confidence interval[A]: 6%;
(3.60% to 8.55%.
Cause: Potential support for a new weapon system was available with
current item;
Sample count: 3;
Estimated frequency and 95%, two-sided confidence interval[A]: 1%;
(0.17% to 2.84%).
Cause: Item was replaced or became obsolete;
Sample count: 8;
Estimated frequency and 95%, two-sided confidence interval[A]: 2%;
(0.93% to 4.80%).
Cause: Purchase was for a minimum quantity or value;
Sample count: 22;
Estimated frequency and 95%, two-sided confidence interval[A]: 5%;
(2.72% to 7.23%).
Cause: Repair capacity was underutilized;
Sample count: 4;
Estimated frequency and 95%, two-sided confidence interval[A]: 1%;
(0.17% to 2.35%).
Cause: Contracts for on-order parts were not changed or terminated;
Sample count: 5;
Estimated frequency and 95%, two-sided confidence interval[A]: 1%;
(0.12% to 2.13%).
Cause: No excess was reported;
Sample count: 1;
Estimated frequency and 95%, two-sided confidence interval[A]: b.
Cause: Inaccurate data were used;
Sample count: 2;
Estimated frequency and 95%, two-sided confidence interval[A]: [B].
Cause: Other;
Sample count: 184;
Estimated frequency and 95%, two-sided confidence interval[A]: 54%;
(48.79% to 59.29%).
Source: GAO survey of Navy inventory managers.
[A] Reasons are not mutually exclusive; therefore, percentages do not
total to 100.
[B] Less than 1 percent.
[End of table]
Table 7: Estimated Frequency of Reasons for Navy Having Inventory
Deficits:
Cause: Demands increased;
Sample count: 9;
Estimated frequency and 95%, two-sided confidence interval[A]: 24%;
(11.39% to 42.23%).
Cause: Changes occurred in wear-out or survival rate;
Sample count: 1;
Estimated frequency and 95%, two-sided confidence interval[A]: 1%;
(0.06% to 13.16%).
Cause: Item was replaced with substitute item;
Sample count: 2;
Estimated frequency and 95%, two-sided confidence interval[A]: 4%;
(0.40% to 16.81%).
Cause: No inventory deficit was reported;
Sample count: 1;
Estimated frequency and 95%, two-sided confidence interval[A]: 1%;
(0.06% to 13.16%).
Cause: Qualified supplier was not available;
Sample count: 3;
Estimated frequency and 95%, two-sided confidence interval[A]: 9%;
(1.93% to 24.96%).
Cause: Other;
Sample count: 27;
Estimated frequency and 95%, two-sided confidence interval[A]: 64%;
(45.87% to 79.27%).
Source: GAO survey of Navy inventory managers.
[A] Reasons are not mutually exclusive; therefore, percentages do not
total to 100.
[End of table]
Responses in the "other" category varied but included issues related to
procuring and retaining minimum quantities of parts, obsolescence, or
other explanations of demand changes. Regarding parts excess to current
requirements, for example, one respondent said the Navy has upgraded to
a new module, but support is still required to meet Air Force
requirements. Regarding a deficit, for example, one respondent said
they are working with a sole source vendor and the estimated shipping
date slipped.
In follow-up discussions Navy managers confirmed that changes in demand
were the main cause of inventory exceeding current requirements or
inventory deficits. In some cases, they attributed these changes to
incomplete or inaccurate demand data, owing to a lack of communication
among the various key participants in the demand-forecasting process.
In several cases, they cited poor communications with other service
components that were generating the demand. The following cases
illustrate challenges Navy managers face in predicting demands for
items:
* An example of an item in excess due to demand changes was the blades
used in the F404 engine that goes into the Navy's F-18 model A/D
aircraft. The Navy had 13,852 of these parts valued at $3.6 million as
excess to current requirements. The next higher assembly is now on a
contract under which the contractor supplies the item, so the demand
for the blades disappeared. Thus, the Navy's anticipated demand for
these parts never materialized. In commenting on our draft report, the
Navy stated that all 13,852 parts were being offered to the contractor
in return for a cost reduction on the contract.
* Another example of an item with inventory excess to current
requirements was a special cable assembly also used on the Navy's F-18
model A/D aircraft's forward-looking infrared radar. The item was being
phased out by the Navy, and the last purchase was in fiscal year 2006
for six parts valued at $76,087 to support the Coast Guard's continued
use of the item. However, since the Navy did not know the Coast Guard
requirements for this item, it did not determine the proper level of
inventory to carry for this item.
* An example of an inventory deficit that should have been more
predictable because it involved a planned program alteration was a
valve assembly used on various ship hulls for firefighting and air
conditioning systems. The item is being phased in to support a planned
ship alteration. We identified it as having an on-order excess of 16
parts valued at $77,021 in our analysis as of September 30, 2007, but
by March 2008 this item was in a deficit position. This case
illustrates the challenges Navy managers face in predicting demand for
an item, even when demand is driven by a planned program change.
Navy managers said that demands Navy-wide have been decreasing for
reasons they did not fully understand, and they provided data submitted
by managers of ships' inventory showing that two-thirds of demand
forecasts were incorrect by more than 10 percent. In order to meet
materiel availability support goals, managers said, they need to err on
the side of having rather than not having the items.
Furthermore, incomplete or inaccurate data can cause widespread
problems in cases where the Navy relies on automated data processing
for past recurring demand requisition history to predict future
customer demands, then adjust these data when changes occur that are
significant enough to be flagged. Navy managers said they actively
manage items that are in high demand, costly, or identified for other
reasons; the remaining items often require less attention. They said
that Navy policy allows for automated procurements of all items costing
less than $50,000. In the aviation community, these buys represented an
average of about 52 percent of the total buys and 7 percent of the
total value of procurements between fiscal years 2005 and 2007. With
thousands of items to manage and generally little time to spend on all
but the highest value, most significant, or problem items, Navy
managers rely on the historical demand data provided electronically
from requisitions.
Navy managers observed that some customers and some secondary inventory
items are more predictable than others. They cited problems, including
a lack of communication and coordination among key personnel. For
example, they said that the nuclear propulsion community is better
coordinated because the engineers, contract managers, and inventory
managers are collocated and work closely with program officials,
maintenance locations, and contractors. However, for aviation and
maritime support equipment such as mobile generators or test equipment,
a variety of issues have made demands more difficult to predict. For
example, support equipment is used on multiple platforms, needs
periodic calibration, and may have more obsolescence issues. They
observed that having timely, complete, and reliable data, as well as
coordinated communications among contract, maintenance, program,
inventory, and contractor officials and other suppliers, can improve
demand data predictability.
While the Navy recognizes that unpredictable demand is a driving factor
in the lack of alignment between inventory and current requirements, it
has not systematically evaluated why its demand-based forecasts
fluctuate, why demands across the Navy inventory are decreasing, and
how demand fluctuations vary among item manager groups or across items.
The Navy does not formally track the accuracy of its demand forecasts
or what can be done to improve them. Navy officials also said that many
Navy secondary inventory items require long production lead times,
rendering orders for these items more vulnerable to inaccuracy due to
demand fluctuations. In addition, they said that while they could
improve demand forecasting, this would increase administrative support
costs and would not be affordable across the Navy supply system.
However, the Navy could not provide data specifying what these costs
would be. In addition, the Navy has not determined the extent to which
it could avoid costs by purchasing fewer items in accordance with more
accurate, updated demand data.
Navy Has Not Adjusted Certain Inventory Management Practices in
Response to Demand Unpredictability:
Although the Navy acknowledged that demand unpredictability is a
driving factor in the lack of alignment between inventory and current
requirements, it has not adjusted certain inventory management
practices to incorporate flexibility for accommodating demand
fluctuations. We identified three specific areas--initial provisioning
management, on-order management, and retention management--where
current practices contributed to the Navy having significant amounts of
inventory in excess of current requirements.
Initial Provisioning Practices Can Result in the Purchase of Unneeded
Stock:
Under DOD's supply chain management regulation, calculated risks may be
taken during the initial provisioning for selected items when program
uncertainties or other circumstances make such risks
acceptable.[Footnote 17] Navy inventory managers told us they rely on
weapon system program managers to identify inventory requirements
needed to meet initial provisioning estimates. However, they said these
estimates often prove to be inaccurate. For example, configuration
changes may be made to the system or parts may last longer or shorter
than initially estimated. As a result, some items that are purchased
based on the initial provisioning estimates are ultimately not needed
to meet requirements. For example:
* One item, a sonar set used on the Los Angeles Class submarine, had
nine parts in inventory of which seven (valued at $69,314) were
identified as excess to current requirements. The estimated demand for
these parts--which went through initial provisioning in 1991--did not
materialize. The parts have been in inventory since that time. Navy
managers noted this was not uncommon with initial provisioning.
* Another item, an electronic module used in a number of ship and air
combat systems by the Navy and the Air Force, was last purchased in
1988. Nineteen parts were purchased, of which 15 (valued at $48,363)
were currently identified as excess. Initial provisioning demand was
based on engineering estimates that proved to be inaccurate. Navy
managers said that inaccurate high or low estimates happen with some
regularity.
On-Order Management Practices Limit Flexibility in Modifying Purchases:
The Navy's inventory management practices for on-order items limit
flexibility in modifying purchase decisions in cases where demand has
changed. Modifying purchase decisions can include reducing or canceling
the quantities being purchased. The Navy identifies purchase requests
and contracts for modification when quantities being purchased exceed
the sum of requirements and an added "termination protection
level."[Footnote 18] The amount of a contract that is canceled is the
portion that exceeds the protection level. Because the protection level
often exceeds an item's economic order quantity, purchase requests and
contracts for inventory that exceeds requirements often are not
considered for cancellation or the amount of a contract that is
canceled is limited by a protection level. Thus, while modification of
purchase contracts can be triggered when assets exceed protection
levels, these protection levels are often set so high that they limit
modification actions.
Navy managers said they reduce or cancel purchases only when quantities
of an item exceed established protection levels. They added that
protection levels provide an effective safeguard against canceling a
purchase decision only to have to place new orders when demand for an
item increases. In our follow-up discussions with 10 Navy aviation
managers who had on-order inventory that exceeded current requirements,
none of the items involved a termination action. In one example
involving a holdback bar assembly,[Footnote 19] the Navy had 31 on-
order parts valued at $103,124 that exceeded current requirements.
Although items are reviewed at least quarterly for termination,
managers took no action on this item because of the established
protection level. Also, managers had been informed that some of these
items might potentially be needed for use in Iraq.
While cancellation of on-order inventory can reduce purchases of
unneeded inventory in response to changes in demand, a relatively small
proportion of the Navy's total inventory exceeding requirements is on
order compared to the amount that is already on hand. As shown in
figure 6, about 98 percent of the value of the Navy's secondary
inventory that exceeded current requirements was on hand and just 2
percent of the value was on order in the years we reviewed.
Figure 6: Value of On-Hand and On-Order Secondary Inventory which
Exceeded Current Requirements (Fiscal Years 2004-2007):
This figure is a combination bar graph showing the value of on-hand and
on-order secondary inventory which exceeded current requirements
(fiscal years 2004-2007). The X axis represents the fiscal year, and
the Y axis represents dollars (in billions). One bar represents On
order and the other represents On hand.
Fiscal year: 2004;
On hand: 7.70;
On order: 0.16.
Fiscal year: 2005;
On hand: 7.72;
On order: 0.14.
Fiscal year: 2006;
On hand: 7.23;
On order: 0.13.
Fiscal year: 2007;
On hand: 6.65;
On order: 0.13.
Values rounded.
[See PDF for image]
Source: GAO analysis of Navy data.
Note: Values are expressed in constant fiscal year 2007 dollars, and
are less cost recovery rates (overhead charges).
[End of figure]
DOD's supply chain materiel management regulation addresses management
of on-order items, and includes a number of provisions intended to
provide for effective and efficient end-to-end support. For example,
when economic order quantity methods are used in making purchase
decisions, the regulation requires that every attempt shall be made to
purchase materiel under indefinite delivery and indefinite quantity
contracts so that the order quantity and delivery times are
reduced.[Footnote 20] Our analysis of Navy inventory data showed that
the preponderance of items purchased as economic order quantity was
already on hand. Of the $1.63 billion applied to economic order
quantity in fiscal year 2007, about $1.37 billion (84 percent) was on
hand and $260 million (16 percent) was on order. More closely managing
the purchase of economic order quantities can add some flexibility in
minimizing investments in secondary inventory. However, the Navy loses
this flexibility once the inventory is delivered.
Navy Has Not Adjusted Retention Practices in Response to Prior
Recommendations:
Navy Has Not Defined Oversight Role of Chief and Deputy Chief
Management Officers Regarding Inventory Management Improvements:
Although prior studies by our office and LMI have identified weaknesses
in DOD components' inventory retention practices, the Navy has not
implemented corrective actions recommended in these reports. As a
result, the Navy's inventory retention practices have contributed to
the significant levels of secondary inventory exceeding current
requirements, including a substantial amount of inventory that had no
projected demand. As discussed earlier, our analysis showed the Navy
annually held about $1.9 billion of its secondary inventory in economic
and contingency retention categories in fiscal years 2004 through 2007.
The Navy has a retention and disposal program aimed at identifying
inventory that should be retained and inventory that is potential
excess and should be considered for disposal or reutilization. The
Navy's inventory retention policy calls for an economic retention level
to ensure that an item is available for a specified number of
years.[Footnote 21] Economic retention formulas are applied to
inventory items based in part on program status. For example, in a
steady program the Navy wants a minimum of three items to be available
for economic retention for 8 years. Different formulas would apply to
secondary inventory associated with increasing or declining programs.
According to Navy managers, they annually review the program status of
inventory items to ensure correct economic retention formulas are
applied to each.
Additionally, the Navy has contingency retention requirements to
preclude disposal of assets that might be needed for future
nonrecurring demand, such as outfitting or planned maintenance actions;
items used primarily in wartime which have limited use in peacetime;
and future foreign military sales. The Navy policy also directs that
material normally not be disposed of within 7 years of its material
support date with some exceptions,[Footnote 22] to prevent premature
disposal decisions based on initial provisioning forecasts. These
economic and contingency retention requirements, along with potential
excess stock, are to be reviewed on a semiannual basis and prior to
disposal and the results of these reviews are to be provided in
briefings to the Naval Supply Systems Command prior to the final
stratification report.
Prior reports by our office and LMI have identified weaknesses in DOD
components' retention practices and recommended corrective actions. In
2001, we reported that DOD components had not properly documented the
approaches they have taken in making economic retention decisions,
lacked sound analytical support for the maximum levels they used, and
had not annually reviewed their methodologies for making economic
retention decisions as required by DOD's supply chain
regulation.[Footnote 23] We recommended that DOD establish milestones
for reviewing approaches used for making decisions on whether to hold
or dispose of economic retention inventory and to annually review their
approaches to meet DOD regulations to ensure that they have sound
support for determining economic retention inventory levels. In
responding to our report, DOD stated that further study of retention
practices was needed, noting that the National Defense Authorization
Act for Fiscal Year 2000 directed DOD to sponsor an independent study
on secondary inventory and parts shortages.[Footnote 24]
DOD subsequently tasked LMI in 2001 and again in 2003 to examine
whether current economic retention policy requirements and procedures
could be improved. LMI's review yielded recommendations similar to
ours. In 2006, we reported that DOD had yet to implement our 2001
recommendations on economic retention inventory management, and we
reiterated the need to implement them.[Footnote 25] We noted in that
report that DOD places emphasis on purging from its inventory items
which no longer support its mission and needlessly consume warehouse
space. We further found that some DOD components had not followed DOD
policies and procedures to ensure they were retaining the appropriate
amount of contingency retention inventory.
A separate LMI study of the Air Force's economic retention practices
identified the need to incorporate new techniques for accommodating
demand uncertainty.[Footnote 26] DOD then tasked LMI to repeat the
analysis for the other components and to address the retention of
materiel in the DOD supply system. LMI reported in July 2007 that the
question of retaining or disposing of inventory is subject to demand
uncertainties.[Footnote 27] It found that the DOD regulation correctly
defines the economics of retention and the need to use economic
analysis and up-to-date cost factors when deciding what to retain.
Among other things, LMI linked retention practices with demand
forecasting and called for components to use additional techniques for
more accurately determining the probability of future demand or
repurchase. For example, it called on the services to determine whether
an item with no recent demand history is still part of a weapon system
configuration and said that items with extended periods of no demand
should be candidates for item reduction. LMI also recommended
augmenting traditional demand forecast accuracy metrics with a measure
of bias to identify the potential for overforecasting, and adjust
forecasting methods accordingly. It noted that some forecast methods
have a tendency for positive bias, with the result that forecasts are
too high more often than they are too low. This leads to inflated
inventory levels, especially for low-demand items which can be harder
to sell than high-demand items. LMI called for monitoring demand
forecasting methods to identify bias which can lead to overinvestment
in inventory.
We found no evidence that the Navy had taken these actions. On the
basis of our review, we believe they could strengthen the management of
the Navy's secondary inventory. For example, although the Navy
continues to have a substantial amount of inventory each year for which
it shows no projected demand (about 85,700 unique items valued at over
$1.9 billion in fiscal year 2007), data have not been developed to show
whether these items are still part of a current weapon system
configuration, have had extended periods of no demand, and should be
candidates for item reduction.
In addition, the Navy could not document that it has conducted required
annual reviews to validate its retention decision practices. DOD's
regulation states that to ensure that economic and contingency
retention stocks correspond with current and future force levels, the
components shall review and validate their methodologies for making
economic and contingency retention decisions.[Footnote 28] The review
shall occur at least annually, and the inventory management
organization commander or designee shall attest to its validity in
writing. The methodology used to set economic retention levels should
be based on economic analysis that balances the cost of retention and
the costs of disposal. Under the regulation, the service components'
reviews should focus on better analyses supporting retention decisions
by using forecasting models that take into account potential upward or
downward trends in demand and/or the uncertainties of predicting long-
term demand based on historical data, and improved estimates for costs
used in retention decision making. Contingency retention reviews should
focus on verifying that the reason for contingency retention still
exists and the reason is properly recorded.
Navy officials said briefings provided to the Navy Supply Systems
Command prior to the final stratification review include economic
retention data. However, we do not believe these briefings fulfill the
DOD requirement for an annual review which the commander attests to in
writing. In addition, these briefings do not address the elements set
out in DOD's regulation, such as validation that retention levels are
based on economic analysis balancing retention and disposal costs. Navy
officials also said they performed a full study of the execution of the
Navy's economic retention policy in 2005. During the study they
verified that the model was in compliance with policy. They also
performed sensitivity analysis of the model, which confirmed the model
continues to perform cost-effective retention computations. They
provided a briefing that summarized the results of this study and
recommended maintaining economic retention policy "as is," continually
monitoring the retention policy to identify methods to improve cost
estimates, explore benefits of no-demand options, explore reductions in
minimum retention limits, and continue to proactively dispose of
obsolete material and monitor DLA warehousing costs. While this study
may be useful to the Navy in managing retention inventory, as stated
above, we do not believe it fulfills the requirement for an annual
review which the commander attests to in writing.
Navy Has Not Defined Oversight Role of Chief and Deputy Chief
Management Officers Regarding Inventory Management Improvements:
Although the Navy has established a chief management officer and deputy
chief management officer for business transformation, it has not
defined what, if any, role these individuals will play in overseeing
inventory management improvement. The costs of DOD's business
operations have been a continuing concern. In April 2008, for example,
the Defense Business Board raised concerns that DOD had not
aggressively reduced the overhead costs related to supporting the
warfighter, which it noted accounted for about 42 percent of DOD's
total spending each year. The Defense Business Board recommended that
DOD align strategies to focus on reducing overhead while supporting the
warfighter.[Footnote 29]
In May 2007, DOD established a chief management officer position with
responsibility for improving and evaluating the overall economy,
efficiency, and effectiveness of the department's business activities.
The Navy also established a chief management officer, effective April
2008. Both DOD and the Navy planned to have a deputy chief management
officer actively implementing business transformation by October 2008.
Although the Navy's chief management officer and deputy chief
management officer would not likely have direct responsibility for
inventory management, they have been assigned responsibility for
transforming DOD's business operations. Therefore, these newly
designated positions provide an opportunity for an enhanced level of
oversight of inventory management improvement.
Conclusions:
The Navy has accumulated and retained levels of secondary inventory
each year that exceed current requirements without justifying that
these inventory levels are sized to minimize DOD's investment. When the
Navy invests in the purchase of inventory items that become excess to
its requirements, these funds are not available to meet other military
needs. Taking steps to reduce the levels of inventory exceeding
requirements could help to ensure that DOD is meeting supply
performance goals at least cost. The Navy lacks metrics and goals for
tracking and assessing cost efficiency along with supply availability,
customer wait time, and other supply performance metrics and goals.
Among other things, cost-efficiency metrics and goals could provide a
basis for effective management and oversight of inventory reduction
efforts. Much of the inventory that exceeded current requirements or
had inventory deficits resulted from inaccurate demand forecasts, which
the Navy attributed to unpredictability of demand. However, the Navy
has not systematically evaluated and addressed demand unpredictability
or adjusted certain inventory management practices to enhance
flexibility in adapting to fluctuations in demand. In the absence of
such actions, the Navy will likely continue to purchase and retain
items that it does not need and then spend additional resources to
handle and store these items. Finally, since inventory management is
part of the Navy's broader business operations and transformation, it
is reasonable to expect the newly established chief management officer
and deputy chief management officer to exercise some level of oversight
of the Navy's inventory management improvement efforts. Strengthening
the Navy's inventory management--while maintaining high levels of
supply availability and meeting warfighter needs--could reduce support
costs and free up funds for other needs.
Recommendations for Executive Action:
To improve the management of the Navy's secondary inventory, we
recommend that the Secretary of Defense direct the Secretary of the
Navy, in conjunction with the Commander, Navy Supply Systems Command,
and the Commander, Naval Inventory Control Point, to take the following
four actions:
* Establish metrics and goals for tracking and assessing the cost
efficiency of inventory management and incorporate these into existing
management and oversight processes.
* Evaluate demand forecasting procedures to identify areas where
forecasts have been consistently inaccurate, correct any systemic
weaknesses in forecasting procedures, and improve communications among
stakeholders, to include promptly relaying changes in programs and
other decisions that affect purchases of spare parts. Further, the
Commander, Naval Supply Systems Command, and the Commander, Naval
Inventory Control Point, should develop an evaluation plan and interim
milestones for assessing the impact of ongoing efforts and take
additional corrective actions, if warranted, to improve demand
forecasting for secondary inventory.
* Revise inventory management practices to incorporate the flexibility
needed to minimize the impact of demand fluctuations. Specific
attention should be given to revising practices regarding initial
provisioning management, on-order management, and retention management.
Further, the Commander, Naval Supply Systems Command, and the
Commander, Naval Inventory Control Point, should develop an evaluation
plan and interim milestones for assessing the impact of ongoing efforts
and take additional corrective actions, if warranted, to incorporate
flexibility into inventory management practices.
* Ensure that required annual reviews validating methodologies used for
making retention decisions are performed and documented.
We also recommend that the Secretary of the Navy direct that the Navy's
Chief Management Officer and Deputy Chief Management Officer exercise
appropriate oversight of Navy inventory management improvement to align
improvement efforts with overall business transformation and to reduce
support costs.
Agency Comments and Our Evaluation:
In its written comments on a draft of this report, DOD concurred with
our recommendations and identified corrective actions and estimated
dates for these actions to be completed. On the basis of DOD's
comments, we have modified two of our recommendations. The Navy also
provided technical comments, which we have incorporated as appropriate.
The department's written comments are reprinted in appendix II.
Although it concurred with our recommendations, DOD took issue with our
finding that 40 percent of the Navy's secondary inventory exceeded
current requirements and stated that it was important to frame this
finding in proper context. DOD commented that 50 percent of the
inventory we portrayed as excess to current requirements is applicable
to the 2-year budget horizon, another 10 percent is retained as
economic retention stock which is less expensive to retain than to
dispose and later procure, and 30 percent is contingency retention
stock which is held for specific contingencies, leaving only 10 percent
identified as potential excess. It said the department will continue to
focus on reducing potential excess, as well as improving forecasts and
ensuring a correct balance between the cost to hold inventory and the
cost to dispose and repurchase. For the purposes of our analysis, we
defined excess inventory as that portion of the inventory that exceeds
the requirements objective, which is defined in the department's supply
chain materiel management regulation. As we noted in the report, we
selected the requirements objective as our baseline because it includes
the requirements used to determine when to order new parts. In other
words, if the Navy had enough parts to meet the requirements objective,
it would not purchase new parts. The inventory categories and data
cited by DOD in its comment are discussed in the report. The
department's comment places too little emphasis on the need to reduce
the accumulation and retention of inventory that exceeds current
requirements, which amounted to about $7.5 billion each year. When the
Navy invests in inventory sooner than it is needed, the chances
increase that more inventory will become excess, and funds used to
purchase inventory before it is needed are not available to meet other
military needs. Thus, we continue to believe that taking steps to
reduce the high levels of inventory exceeding current requirements
could help ensure that the Navy is meeting supply performance goals at
least cost. Some of the actions that DOD identified in its responses to
our specific recommendations should help.
DOD concurred with our recommendation that the Navy establish metrics
and goals for tracking and assessing the cost efficiency of inventory
management. It said the Navy Supply Systems Command will incorporate
into existing management and oversight processes a metric and goal for
tracking and assessing the cost efficiency of inventory management, and
identified October 31, 2009, as the estimated completion date for this
action.
DOD concurred with our recommendation that the Navy improve demand
forecasting procedures and communications among stakeholders. However,
DOD cited ongoing Navy efforts to evaluate current forecasting
procedures and tools, implement a long-planned enterprise business
information system, and continue its annual training of inventory
managers, and it did not identify additional corrective actions beyond
those already planned. DOD estimated these actions would be completed
by September 30, 2010. While the ongoing Navy efforts cited by DOD in
its comment may have a positive impact, we continue to believe that the
Navy could derive benefits from a systemic evaluation of its demand
forecasting procedures. Therefore, the Navy should establish an
evaluation plan and interim milestones for assessing the impact of
ongoing efforts and take additional corrective actions, if warranted.
We have modified our recommendation accordingly.
DOD concurred with our recommendation that the Navy revise inventory
management practices to incorporate flexibility needed to minimize the
impact of demand fluctuations. However, DOD cited ongoing Navy efforts
to improve inventory management practices, including those related to
initial provisioning and on-order inventory management, and estimated
these corrective actions would be completed by September 30, 2010.
While the ongoing Navy efforts cited by DOD in its comment may have a
positive impact, its comment provided no indication that the Navy plans
any changes to the way it conducts business. Therefore, the Navy should
establish an evaluation plan and interim milestones for assessing the
impact of ongoing efforts and take additional corrective actions, if
warranted. We have modified our recommendation accordingly.
DOD concurred with our recommendation that the Navy perform and
document required annual reviews validating methodologies used for
making retention decisions. According to DOD, the Navy Supply Systems
Command will modify its management internal control program to assure
this requirement is met and estimated this corrective action would be
completed by May 31, 2009. We believe this planned action is responsive
to our recommendation.
DOD concurred with our recommendation that the Navy direct its Chief
Management Officer and Deputy Chief Management Officer to exercise
appropriate oversight of Navy inventory management improvement to align
improvement efforts with overall business transformation and to reduce
support costs. DOD said the Navy is developing a business
transformation implementation strategy to align with Office of the
Secretary of Defense actions in this area. Through this development
process, the Navy will determine the appropriate role the Chief
Management Officer should exercise in inventory management oversight.
DOD estimated that it would complete this corrective action by April
30, 2009. We believe this planned action is responsive to our
recommendation.
We are sending copies of this report to interested congressional
committees; the Secretary of Defense; the Secretary of the Navy; the
Secretary of the Air Force; the Director, Defense Logistics Agency; the
Under Secretary of Defense for Acquisition, Technology, and Logistics;
and the Director, Office of Management and Budget. We will also make
copies available to others upon request. In addition, the report will
be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov/].
If you or your staff have any questions concerning this report, please
contact me on (202) 512-8365 or solisw@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix III.
Signed by:
William M. Solis:
Director, Defense Capabilities and Management:
[End of section]
Appendix I: Scope and Methodology:
To determine the extent to which the Navy's on-order and on-hand
secondary inventory reflected the amount needed to support current
requirements, we obtained the Navy's Central Secondary Item
Stratification Budget Summary and item-specific reports for September
30 of each fiscal year from 2004 through 2007. The stratification
reports serve as a budget request preparation tool and a mechanism for
matching assets to requirements. Our analysis was based on analyzing
the Navy's item stratifications within the opening position table of
the Central Secondary Item Stratification Reports.[Footnote 30] To
validate the data in the budget stratification reports we generated
summary reports using electronic data and verified our totals against
the summary stratification reports obtained from the Navy. After
discussing the results with Navy managers, we determined that the data
were sufficiently reliable for the purposes of our analysis and
findings. Upon completion of the data validation process, we revalued
the Navy's secondary inventory items identified in its budget
stratification summary reports because these reports value useable
items and items in need of repair at the same rate, and do not take
into account the cost of repairing broken items. We computed the new
value for items in need of repair by subtracting repair costs from the
unit price for each item. We also removed overhead charges, called cost
recovery rates, from the value of each item. Using information obtained
from Navy managers, we identified and removed from our data set items
managed under Performance Based Logistics (PBL) contracts. According to
the Navy, published stratification data on PBL items are inaccurate
because the Navy does not determine requirements for these items.
Table 8 summarizes the Navy inventory data we used, showing the annual
averages for items, parts, and value of the Navy's inventory, organized
by supply cognizance code.
Table 8: Navy Secondary Inventory by Cognizance Code (Annual Average
for Fiscal Years 2004-2007):
Description of cognizance code: 1H - Navy Working Capital Fund
Material[A];
Items: 70,455;
Parts: 14,094,707;
Value: $722,288,668.53.
Description of cognizance code: 1R - Aeronautical, Photographic, and
Meteorological Material[A];
Items: 25,371;
Parts: 3,777,093;
Value: 1,029,257,926.32.
Description of cognizance code: 3H - Field Level Repairables[A];
Items: 1,898;
Parts: 68,684;
Value: 83,537,920.50.
Description of cognizance code: 7E - Depot Level Repairable Ordnance
Equipment, Ordnance Repair Parts and Air Missile Repair Parts Related
to NAVAIR Equipment[B];
Items: 3,968;
Parts: 19,529;
Value: 173,843,991.40.
Description of cognizance code: 7G - Depot Level Repairable Electronic
Material[B];
Items: 9,950;
Parts: 58,876;
Value: 350,106,408.27.
Description of cognizance code: 7H - Depot Level Repairable Shipboard
and Base Equipment[B];
Items: 40,400;
Parts: 322,350;
Value: 2,603,130,018.93.
Description of cognizance code: 7R - Aeronautical Depot Level
Repairable Spares[B];
Items: 33,571;
Parts: 706,708;
Value: 13,753,431,722.51.
Description of cognizance code: 7Z - General Purpose Electronic Test
Equipment to Support Various Naval Systems Commands Equipment/
Programs[B];
Items: 853;
Parts: 4,897;
Value: 19,239,558.23.
Description of cognizance code: Total;
Items: 186,465;
Parts: 19,052,843;
Value: $18,734,836,214.69.
Source: GAO analysis of Navy data.
Notes: Values are expressed in constant fiscal year 2007 dollars and
are less cost recovery rates (overhead charges).
[A] Consumable items.
[B] Reparable items.
[End of table]
In presenting the value of inventory in this report, we converted then-
year dollars to constant fiscal year 2007 dollars using Department of
Defense (DOD) Operations and Maintenance price deflators.[Footnote 31]
We considered Navy inventory to exceed current requirements if more
inventory than needed is available to satisfy its requirements based on
the opening position table of the Navy's budget stratification report.
Collectively, these requirements are referred to by DOD as the
"requirements objective," defined as the maximum authorized quantity of
stock for an item.[Footnote 32] However, if more inventory is on hand
or on order than is needed to satisfy its requirements, the Navy does
not consider the inventory beyond current requirements to be unneeded.
Instead, the Navy uses this inventory to satisfy future demands over a
2-year period, economic retention requirements,[Footnote 33] and
contingency retention requirements.[Footnote 34] Only after applying
inventory to satisfy these additional requirements would the Navy
consider that it has more inventory than is needed and consider this
inventory for potential reutilization or disposal.[Footnote 35] We do
not agree with the Navy's practice of not identifying inventory used to
satisfy these additional requirements as excess because it overstates
the amount of inventory needed to be on hand or on order by billions of
dollars. The Navy's requirements determination process does not
consider these additional requirements when it calculates the necessary
amount of on-hand and on-order inventory, which means that if the Navy
did not have enough inventory on hand or on order to satisfy these
additional requirements, the requirements determination process would
not result in additional inventory being purchased to satisfy these
requirements.
We consider the Navy to have inventory deficits if levels of on-hand
inventory are insufficient to meet the reorder level, which the Navy
defines as the level of on-hand assets at the time an order must be
placed to achieve the acceptable stock-out risk.[Footnote 36] Normally,
item managers place an order for the number of parts below the reorder
level, plus an economic order quantity. However, due to variation in
acquisition lead times, these parts may not be delivered when they are
needed. We did not include the procurement cycle (economic order
quantity) requirement when calculating inventory deficits, because this
requirement defines the maximum level of on-hand or on-order inventory
that may be above the reorder level, and does not define a minimum
level of on-hand inventory.[Footnote 37] For comparison purposes with
the excess inventory, we calculated the amount of inventory that the
Navy would have to acquire to meet acquisition lead time and economic
order quantity in order to achieve current operating requirements for
these items where there was a deficit.
To determine the extent to which the Navy's on-hand and on-order
secondary inventory reflects the amount of inventory needed to support
requirements, we reviewed DOD and Navy inventory management policies,
past GAO products on DOD and Navy inventory management practices for
secondary inventory items, and other related documentation. We also
created a database which compared the Navy's current inventory to its
current requirements and computed the amount and value of secondary
inventory exceeding or not meeting current operating requirements. We
also determined how the Navy applied the inventory that exceeded
current requirements to future demands, economic retention, contingency
retention, or potential reutilization/disposal. We determined how much
of the Navy's inventory was in serviceable condition, and compared this
portion to the inventory in unserviceable condition. We also used codes
provided by the Navy to determine the program status of items we
identified as meeting or exceeding current requirements.
We developed a survey to estimate the frequency of reasons why the Navy
maintained inventory items that were not needed to support current
requirements or did not meet requirements. The survey asked general
questions about the higher assembly (component parts) and/or weapon
systems that the items support, and the level of experience of the item
manager with responsibility for the item. In addition, we asked survey
respondents to identify the reason(s) why inventory exceeded current
requirements or was in deficit. We provided potential reasons which we
identified during our discussions with Navy managers from which they
could select. Since the list was not exhaustive, we provided an open-
ended response option to allow other reasons to be provided. In
addition to an expert technical review of the survey by a survey
methodologist, we conducted pretests with Navy managers for aviation
and maritime items in Philadelphia and Mechanicsburg, Pennsylvania,
prior to sending out the final survey instrument. We revised the survey
accordingly based on findings from the pretests.
We e-mailed this electronic survey to specific Navy managers in charge
of sampled unique aviation and maritime items at the Navy's Inventory
Control Point locations in Philadelphia and Mechanicsburg,
Pennsylvania. We conducted this survey from May 2008 through July 2008.
To estimate the frequency of reasons for inventory not needed to meet
requirements and inventory deficits, we drew a stratified random
probability sample of 424 unique items--353 unique items with on-hand
inventory not needed to support current requirements, 31 unique items
with on-order inventory not needed to support current requirements, and
40 unique items with inventory deficits--from a study population of
126,331 items (112,567 with inventory not needed to meet current
requirements and 13,764 with inventory deficits). These categories
identified a combined value of $6.8 billion of inventory not needed to
meet current requirements. All of these items met our criteria to be
included in our study population of items not needed to meet current
requirements. Additionally, based on our analysis of the stratification
data, all of the 13,764 unique items with inventory deficits, valued at
$462 million, met our criteria to be included in our inventory deficit
study population. We stratified using the scheme shown in table 9,
dividing the on-hand and on-order excess into 3 substratum each by the
amount of supply on hand and stratifying within Philadelphia and
Mechanicsburg. With the inclusion of a stratum for inventory deficit
items within each office, our sample contained 14 total strata. The
divisions of the population, sample, and respondents across the strata,
as well as the number of responses by stratum, are also shown in table
9.
Table 9: Sample Disposition for Fiscal Year 2007 Items:
Stratum of items: Philadelphia on-hand excess (0 to 2 years of supply);
Total population: 3,538;
Total sample size: 18;
Number of responses: 16.
Stratum of items: Philadelphia on-hand excess (more than 2 years of
supply);
Total population: 4,113;
Total sample size: 21;
Number of responses: 21.
Stratum of items: Philadelphia on-hand excess (no demand or
nonrecurring demand only);
Total population: 28,566;
Total sample size: 142;
Number of responses: 141.
Stratum of items: Philadelphia on-order excess (0 to 2 years of
supply);
Total population: 1,064;
Total sample size: 6;
Number of responses: 6.
Stratum of items: Philadelphia on-order excess (more than 2 years of
supply);
Total population: 156;
Total sample size: 5;
Number of responses: 5.
Stratum of items: Philadelphia on-order excess (no demand or
nonrecurring demand only);
Total population: 321;
Total sample size: 5;
Number of responses: 5.
Stratum of items: Philadelphia on-hand deficits;
Total population: 2,680;
Total sample size: 14;
Number of responses: 14.
Stratum of items: Mechanicsburg on-hand excess (0 to 2 years of
supply);
Total population: 5,364;
Total sample size: 13;
Number of responses: 13.
Stratum of items: Mechanicsburg on-hand excess (more than 2 years of
supply);
Total population: 9,989;
Total sample size: 24;
Number of responses: 24.
Stratum of items: Mechanicsburg on-hand excess (no demand or
nonrecurring demand only);
Total population: 57,834;
Total sample size: 135;
Number of responses: 132.
Stratum of items: Mechanicsburg on-order excess (0 to 2 years of
supply);
Total population: 1075;
Total sample size: 5;
Number of responses: 5.
Stratum of items: Mechanicsburg on-order excess (more than 2 years of
supply);
Total population: 121;
Total sample size: 5;
Number of responses: 5.
Stratum of items: Mechanicsburg on-order excess (no demand or
nonrecurring demand only);
Total population: 426;
Total sample size: 5;
Number of responses: 5.
Stratum of items: Mechanicsburg on-hand deficits;
Total population: 11,084;
Total sample size: 26;
Number of responses: 26.
Stratum of items: Total;
Total population: 126,331;
Total sample size: 424;
Number of responses: 418.
Source: GAO analysis of Navy budget stratification data and survey
responses.
[End of table]
We sent 424 electronic surveys--one for each item in the sample--to the
Navy managers identified as being responsible for these items.
Inventory control for three of the items in our sample had recently
been transferred to the Defense Logistics Agency, so we treated these
cases as out of scope. We did not receive completed data collection
instruments for 3 of the remaining items in our sample. We received 418
usable responses to our surveys, providing a total response rate of
98.6 percent. Each sampled item was subsequently weighted in the final
analysis to represent all the members of the target population.
Because we followed a probability procedure based on random selections,
our sample of unique items is only one of a large number of samples
that we might have drawn. Because each sample could have provided
different estimates, we express our confidence in the precision of our
particular sample's results in 95 percent confidence intervals. These
are intervals that would contain the actual population values for 95
percent of the samples we could have drawn. As a result, we are 95
percent confident that each of the confidence intervals in this report
will include the true values in the study population. All percentage
estimates from our sample have margins of error (that is, widths of
confidence intervals) of plus or minus 5 percentage points or less, at
the 95 percent confidence level unless otherwise noted.
In addition to sampling errors, the practical difficulties of
conducting any survey may introduce errors, commonly referred to as
nonsampling errors. For example, difficulties in how a particular
question is interpreted, in the sources of information that are
available to respondents, or in how the data are entered into a
database or were analyzed can introduce unwanted variability into the
survey results. We took steps in the development of the survey, the
data collection, and the data analysis to minimize these nonsampling
errors. We reviewed each survey to identify unusual, incomplete, or
inconsistent responses and followed up with item management specialists
by telephone to clarify those responses. In addition, we performed
computer analyses to identify inconsistencies and other indicators of
errors and had a second independent reviewer for the data analysis to
further minimize such error.
To determine reasons for the types of answers given in the surveys, we
held additional on-site interviews with Navy inventory managers on 70
of the items in our sample. We chose an equal number of aviation and
maritime items based on the highest value of inventory to identify 10
each from on-hand, on-order, and deficits. We also held follow-up
discussions on 10 other items where we found that demand had been
increasing, yet there were excess parts; or conversely where demand had
been decreasing, yet there was an inventory deficit. These cases were
atypical because, according to Navy managers, demand increases would
likely lead to deficits, and, conversely, demand decreases would likely
lead to increases in inventory excess to requirements. These included 5
aviation items and 5 maritime items based on the pattern of demand
forecasts we observed for these items from fiscal year 2004 through
2007. During these discussions we obtained additional detailed comments
and documentation related to demand, demand forecasting, acquisitions,
terminations, and retention and disposal actions.
We conducted this performance audit from November 2007 to December 2008
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. On the basis of information
obtained from the Navy on the reliability of its inventory management
systems' data, and the survey results and our follow-up analysis, we
believe that the data used in this report were sufficiently reliable
for reporting purposes.
[End of section]
Appendix II: Comments from the Department of Defense:
Deputy Under Secretary Of Defense For Logistics And Materiel Readiness:
3500 Defense Pentagon:
Washington, DC 20301-3500:
November 20, 2008:
Mr. William M. Solis:
Director, Defense Capabilities and Management:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, DC 20548:
Dear Mr. Solis:
This is the Department of Defense (DoD) response to the GAO draft
report, GAO- 09-103, "Defense Inventory: Management Actions Needed to
Improve the Cost Efficiency of the Navy's Spare Parts Inventory," dated
October 24, 2008 (GAO Code 351104). Detail comments on the report
recommendations are enclosed.
While the Department concurs with the recommendations in the report, it
is important to frame the Government Accountability Office's (GAO)
basic premise that 40 percent of the Navy's Secondary Inventory exceeds
current requirements, in proper context. Half of the inventory GAO
portrays as excess to current requirements is applicable to the 2 year
budget horizon. Thus 80 percent of the inventory has a requirement
within the next two years. Another 10 percent is retained as Economic
Retention Stock, less expensive to retain than to dispose and later
procure, or Contingency Retention Stock, held for specific
contingencies. This leaves only 10 percent as potential excess. The
Department continues its focus on reducing potential excess, as well as
improving forecasts and ensuring a correct balance between the cost to
hold inventory and the cost to dispose and repurchase.
Signed by:
Jack Bell
Enclosure:
As stated;
GAO Draft Report – Dated October 24, 2008 GAO Code 351104/GAO-09-103:
"Defense Inventory: Management Actions Needed to Improve the Cost
Efficiency of the Navy's Spare Parts Inventory":
Department Of Defense Comments To The Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy, in conjunction with the Commander,
Navy Supply Systems Command and the Commander, Naval Inventory Control
Point, to establish metrics and goals for tracking and assessing the
cost efficiency of inventory management and incorporate these into
existing management and oversight processes.
DOD Response: Concur. The Navy Supply Systems Command (NAVSUP) will
incorporate into existing management and oversight processes a metric
and goal for tracking and assessing the cost efficiency of inventory
management. Estimated completion date for corrective action is October
31, 2009.
Recommendation 2: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy, in conjunction with the Commander,
Navy Supply Systems Command and the Commander, Naval Inventory Control
Point, to evaluate demand forecasting procedures to identify areas
where forecasts have been consistently inaccurate, correct any systemic
weaknesses in forecasting procedures, and improve communications among
stakeholders, to include promptly relaying changes in programs and
other decisions that affect purchases of spare parts. DOD RESPONSE:
Concur. NAVSUP will continue to evaluate demand forecasting procedures
and tools such as Statistical Demand Forecasting and demand re-
centering to identify opportunities to improve demand forecast
accuracy. The Navy expects to gain efficiencies in improved forecasting
with the implementation of the Single Supply Solution (Navy ERP 1.1)
scheduled for implementation in February 2010. NAVSUP will also
continue annual training of Inventory Managers to reinforce the
importance of communication with stakeholders. Estimated completion
date for corrective action is September 30, 2010.
Recommendation 3: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy, in conjunction with the Commander,
Navy Supply Systems Command and the Commander, Naval Inventory Control
Point, to revise inventory management practices to incorporate
flexibility needed to minimize the impact of demand fluctuations.
Specific attention should be given to revising practices regarding
initial provisioning management, on-order management, and retention
management.
DOD Response: Concur. NAVSUP will continue to evaluate various methods
of demand forecasting, including Statistical Demand Forecasting,
Kendall S, and exponential smoothing techniques to minimize the impact
of demand fluctuations. NAVSUP will continue to raise concerns and
challenge questionable initial provisioning demand forecasts during
maintenance plan development meetings and provisioning conferences
before items are established. For on-order management, NAVSUP will
continue to monitor the impact of demand changes and aggressively
enforce contract termination policies when it is cost efficient to do
so. Estimated completion date for corrective action is September 30,
2010.
Recommendation 4: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy, in conjunction with the Commander,
Navy Supply Systems Command and the Commander, Naval Inventory Control
Point, to ensure that required annual reviews validating methodologies
used for making retention decisions are performed and documented.
DOD Response: Concur. NAVSUP currently performs annual reviews to
validate retention decisions as evident by the $7.3 billion or 28
percent reduction in Secondary Inventory items between Fiscal Years
2004 and 2007. However, NAVSUP will add an assessable unit to their
Management Internal Control program that will assure the methodology
for making retention decisions are reviewed and documented annually.
Estimated completion date for corrective action is May 31, 2009.
Recommendation 5: The GAO recommends that the Secretary of the Navy
direct that the Navy's Chief Management Officer and Deputy Chief
Management Officer exercise appropriate oversight of Navy inventory
management improvement to align improvement efforts with overall
business transformation and to reduce support costs.
DOD Response: Concur. The Department of the Navy (DON) is actively
developing a Business Transformation implementation strategy to comply
with legislation and align with Office of Secretary of Defense actions
in this area. Through this development process, the DON will determine
the appropriate role the Chief Management Officer should exercise in
inventory management oversight. Estimated completion date for
corrective action is April 30, 2009.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
William M. Solis, (202) 512-8365:
Acknowledgments:
In addition to the contact named above, Thomas Gosling, Assistant
Director; Carl Barden; Lionel C. Cooper, Jr; Foster Kerrison; Carl
Ramirez; Minnette Richardson; Steve Pruitt; and Cheryl Weissman made
key contributions to this report.
[End of section]
Footnotes:
[1] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, AP1.1.137 (May 2003). Secondary inventory items include
reparable components, subsystems, and assemblies other than major end
items (e.g., ships, aircraft, and helicopters), consumable repair
parts, bulk items and materiel, subsistence, and expendable end items,
including clothing and other personal gear.
[2] These were the most recent data available at the time we began our
review.
[3] AO, Defense Inventory: Opportunities Exist to Save Billions by
Reducing Air Force's Unneeded Spare Parts Inventory, [hyperlink,
http://www.gao.gov/products/GAO-07-232] (Washington, D.C.: Apr. 27,
2007).
[4] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, C9.1.2.3 (May 2003). DOD requires each service and DLA to
prepare inventory stratification reports semiannually to match assets
to requirements. One stratification is as of September 30 (for
inventory reporting and funding reviews) and the other is as of March
31 (for budget preparation).
[5] The Navy secondary inventory data are identified by unique stock
numbers for each spare part, such as a component for an engine, which
we refer to as unique items. The Navy may have in its inventory
multiple quantities of each unique item, which we refer to as
individual parts.
[6] DOD Comptroller, National Defense Budget Estimates for FY 2009
(March 2008) p. 47.
[7] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, AP1.1.126 (May 23, 2003). The Navy refers to this inventory
level as its "total requirements objective." The authorized additive
levels cited in the definition include wartime reserve stock and
inventory for acquisition lead times.
[8] Department of Defense Directive 4140.1, Supply Chain Materiel
Management Policy (April 2004) establishes policy and responsibilities
for materiel management. Department of Defense Supply Chain Materiel
Management Regulation 4140.1-R (May 2003) implements this directive.
[9] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, C9.1.2.3 (May 2003).
[10] To determine acquisition lead time requirements for reparable
parts the Navy uses "attrition demand," which is the number of parts
that need to be procured to make up for parts that do not survive the
repair process.
[11] The Navy retains unserviceable parts in case they are needed to
support requirements. These parts would be repaired prior to being
issued to a customer.
[12] DOD uses the approved acquisition objective for budgeting
purposes.
[13] "Potential Excess" is a term used by the Navy to describe materiel
that Department of Defense Supply Chain Management Regulation 4140.1-R
would categorize as "Potential Reutilization and/or Disposal Materiel."
Potential reutilization and/or disposal materiel is defined as materiel
identified by an item manager for possible disposal, but with potential
for reutilization.
[14] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, C1.5.1 (May 2003).
[15] Supply material availability is the percent of time that material
requisitioned is available. Customer wait time is the total elapsed
time between the issuance of an order and the satisfaction of that
order.
[16] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, C2.5.1.1, and C2.5.1.6 (May 2003).
[17] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, AP2.2.1.2 (May 2003).
[18] The Navy has established the protection level for items on
contract as the greater of the item's economic order quantity or eight
quarters (2 years) of 'attrition' demand above the reorder point. For
items on purchase requests, this is the greater of the item's economic
order quantity or 2 quarters (6 months) of 'attrition' demand above the
reorder point. The amount of a contract or purchase request that is
cancelled or terminated is the portion that exceeds the reorder point
and protection level. Attrition demand is the quarterly forecasted
demand times the wear-out rate. The wear-out rate is the percentage of
reparable items that fail which will not, through repair, be returned
to serviceable condition.
[19] The item is part of the Navy's arresting gear used for the P-3
aircraft.
[20] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, C2.6.3.1.2 (May 2003).
[21] Naval Supply Systems Command letter to the Commander, Naval
Inventory Control Point (03, 05); Subject: Retention Policy, 4111B,
dated March 21, 1996.
[22] Material Support Date (MSD) is the date the Navy assumes
responsibility for all spares and repair parts needed to support a new
weapons system, subsystem, or support equipment end item at Fleet
operational sites.
[23] GAO, Defense Inventory: Approach for Deciding Whether to Retain or
Dispose of Items Needs Improvement, [hyperlink,
http://www.gao.gov/products/GAO-01-475] (Washington, D.C.: May 25,
2001).
[24] National Defense Authorization Act for Fiscal Year 2000, Pub. L.
No. 106-65, §362 (1999).
[25] GAO, Defense Inventory: Actions Needed to Improve Inventory
Retention Management, [hyperlink, http://www.gao.gov/products/GAO-06-
512] (Washington, D.C.: May 25, 2006).
[26] According to LMI, the Air Force sponsored the 2006 study in
response to GAO's audit, which found Air Force retention levels were
not based on economics.
[27] LMI, Economic Retention in the Department of Defense, A Risk
Perspective, Report LG608T1 (July 2007).
[28] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, C2.8.1.1.2 (May 2003).
[29] Defense Business Board, Task Group Report on Tooth-to-Tail
Analysis, FY08-2 (April 2008). The Deputy Secretary of Defense tasked
the board to assess and make recommendations regarding the relationship
between the force structure executing the department's major combat and
irregular warfare missions ("tooth") and the infrastructure used to
manage and support those forces ("tail").
[30] The opening position table shows current requirements as of a
certain cutoff date and does not include any forecasted requirements or
simulations.
[31] DOD Comptroller, National Defense Budget Estimates for FY 2009
(March 2008) p. 47.
[32] Department of Defense Supply Chain Materiel Management Regulation
4140.1-R, AP1.1.126 (May 2003). The Navy refers to this inventory level
as its "total requirements objective." The authorized additive levels
cited in the definition include wartime reserve stock and inventory for
acquisition lead times.
[33] Economic retention inventory includes items that have been
determined to be more economical to keep than to dispose of because
they are likely to be needed in the future. Economic retention
inventory is not applied to on-order inventory not needed to satisfy
requirements.
[34] Contingency retention inventory exceeds economic retention
inventory (items that are more economical to keep than to dispose of)
and would normally be processed for disposal but is retained for
specific contingencies.
[35] Potential reutilization and/or disposal materiel exceeds
contingency retention and has been identified for possible disposal but
with potential for reutilization.
[36] Naval Inventory Control Point Instruction 4440.458A,
Stratification Scrub, Enclosure (7) p. 6 (July 31, 2002).
[37] Naval Supply Systems Command Instruction 4440.47J, Stratification
of Assets, Enclosure (1) p. 3 (Aug. 6, 1984).
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