Defense Inventory: Management Actions Needed to Improve the Cost Efficiency of the Navy's Spare Parts Inventory

The Navy has established a cost-efficiency metric--the materiel replacement rate--that tracks the rate at which obligation authority is being used to replenish inventory levels. It is a predictive measure of Navy Working Capital Fund inventory build-up or sell-down. A materiel replacement rate above 100 percent means the Navy's inventory is expanding while a rate below 100 percent means the Navy's inventory is decreasing. Additionally, OSD, the services, and DLA are also working to establish a set of department-wide cost-efficiency metrics as part of the implementation of the Comprehensive Inventory Management Plan.

In 2010, the Naval Inventory Control Point developed a demand forecast metric using the enterprise resource planning data that considers variable lead-time. The metric, once fully implemented, will enable the identification of areas where forecasts have been consistently inaccurate, and the correction of any systemic weaknesses in forecasting procedures. In addition, DOD's Comprehensive Inventory Management Improvement Plan includes a demand forecasting sub-plan that serves as the action plan for OSD, the services, and DLA for improving demand forecasting through fiscal year 2015. The plan includes goals, objectives, timeframes, and the development of metrics for tracking forecasting error and bias department-wide. OSD, the services, and DLA are working to establish a demand forecasting metric, which was recommended in a study conducted by the Logistics Management Institute.

Based on our recommendation, to improve its initial provisioning, the Navy Supply Systems Command sponsored a study in 2010 which confirmed forecasting challenges with initial provisioning. Additionally, the Navy updated policy concerning initial provisioning and revised how its supply support requests, which support initial provisioning, should be processed and funded. The Navy completed an analysis of supply support requests with DLA, which resulted in more intense focus on supply support request policy and guidance. To further improve initial provisioning, the Navy established a demand forecasting metric. With respect to on-order management, the Navy has issued guidance in 2011, in accordance with the revised DOD guidance on on-order management. For retention management, the Navy Supply Systems Command issued guidance requiring annual reviews to validate methodologies used for making retention decisions, and the Commander, Naval Inventory Control Point, certified the reviews were completed for the July 2009 - June 2010 period as part of an annual report on management internal controls for inventory management. Combined, the actions taken will help improve the Navy's initial provisioning management, on order management, and its retention management.

The Navy Supply Systems Command in May 2009 issued guidance requiring annual reviews to validate methodologies used for making retention decisions, and the Commander, Naval Inventory Control Point, certified the reviews were completed for the July 2009-June 2010 period as part of an annual report on management internal controls for inventory management. Furthermore, this area is being addressed across the department by the Comprehensive Inventory Management Improvement Plan, which is scheduled to be completed in fiscal year 2015. These actions improve the Navy's management practices that in the past have contributed to excess levels of inventory.