From fiscal year 2002 through fiscal year 2005, the Air Force’s total on- hand inventory increased by $1.2 billion, representing about 10 percent of  the total $12.6 billion increase in DOD inventory during this period. More than Half of the Air Force’s Secondary Inventory Was Not Needed to Support Requirements, Although Demand for Some Items Increased

More than half of the Air Force’s on-order and on-hand secondary  inventory, worth an average of $31.4 billion, was not needed to support its  requirements from fiscal years 2002 through 2005, although increases in  demand have contributed to a slight reduction in the percentage of this on- hand inventory and a reduction in the number of years of supply this  inventory represents. However, this  inventory represents an average of about 65 percent (about $18.7 billion)  of the value of unneeded on-hand inventory. While increasing demands  have resulted in the Air Force reducing the number of years of supply this  inventory represents, 79 percent of the Air Force’s inventory items not  needed to support requirements had no recurring demands at all, resulting  in a potentially infinite supply of those items. Although DOD’s supply chain management  regulation provides guidance for developing materiel requirements based  on customer expectations while minimizing inventories, over the 4-year  period an average of 52 percent ($1.3 billion) of the Air Force’s on-order  inventory was not needed. Our analysis shows that between  September 30, 2002, and September 30, 2005, the percentage of the Air  Force’s unneeded on-hand inventory was reduced by 2.7 percent, due, in  part, to increases in the demand for the items, although the value of this  unneeded inventory remained the same. Reasons Vary for Air Force Maintaining On-Order and On-Hand Inventory Not Needed to Support Requirements

Responses from Air Force item management specialists and our analysis  of the Air Force’s inventory data identified a variety of reasons for  maintaining on-order and on-hand inventory not needed to support current  requirements, such as decreasing demands, retaining items used to  support aging weapon systems that have diminishing sources of supply or  are being phased out of service, retaining items to support new weapon  systems, and not terminating eligible contracts for on-order items not  needed to support requirements. During our  analysis, Air Force officials acknowledged that they are aware that  decreases in demand have resulted in having more inventory than is  needed to support requirements; however, the Air Force has not evaluated  why it continues to experience these decreases in demand or taken  actions to mitigate the effect of these changes. Air Force Inventory Shortages Remained the Same

Although more than half of its secondary inventory was not needed to  support requirements, the Air Force still had shortages of certain items in  inventory. When the Air Force buys  unneeded items, it is obligating funds unnecessarily, which could lead to  not having sufficient funds to purchase needed items, which also may  negatively affect readiness. Without modifying its policies to provide incentives to  reduce the amount of inventory on order that is not needed to support  requirements or conducting a comprehensive assessment to validate the  need to retain unneeded on-hand inventory that does not have recurring  demands, the Air Force will continue its past practices of purchasing and  retaining items that it does not need and then spending additional  resources to handle and store these items. Recommendations for Executive Action

To meet customer expectations while minimizing inventory and to reduce  the Air Force’s inventory not needed to support requirements, we are  recommending that the Secretary of Defense direct the Secretary of the  Air Force to take the following four actions:    modify its policies to provide incentives to reduce purchases of on-order  inventory that are not needed to support requirements, such as requiring  contract termination review for all unneeded on-order inventory or  reducing the funding available for the Air Force Materiel Command by an  amount up to the value of the Air Force’s on-order inventory that is not  needed to support requirements;    conduct a comprehensive assessment of the inventory items on hand that  are not needed to support requirements and that have no recurring  demands and revalidate the need to continue to retain these items, and, as  part of this assessment, consider establishing ongoing requirements for  items supporting weapon systems that have lengthy projected life spans;    evaluate the reasons why the Air Force continually experiences decreases  in demands which have contributed to having more than half of its  inventory on hand not needed to support requirements; and    after evaluating the reasons for the decreases in demand, determine what  actions are needed to address these decreases and then take steps to  implement these actions.
Why GAO Did This Study

At a time when U.S. military forces and their equipment are in high demand, effective management of the Department of Defense's (DOD) inventory is critical to ensure that the warfighter has the right items at the right time. The Air Force is the largest contributor to DOD's total on-hand inventory on the basis of inventory value. Under the statutory authority of the Comptroller General to conduct evaluations on his own initiative, GAO determined the extent to which (1) the Air Force's on-order and on-hand inventory reflect the amount of inventory needed to support required inventory levels from fiscal years 2002 through 2005, and (2) the Air Force had shortages in its inventory needed to support required levels during this period. To address these objectives GAO analyzed Air Force secondary inventory data (spare parts such as engines and guided missiles) from fiscal years 2002 through 2005.

What GAO Found

More than half of the Air Force's secondary inventory (spare parts), worth an average of $31.4 billion, was not needed to support required on-hand and on-order inventory levels from fiscal years 2002 through 2005, although increased demand due to ongoing military operations contributed to slight reductions in the percentage of inventory on hand and the number of years of supply it represents. DOD regulations provide guidance for developing materiel requirements based on customer expectations while minimizing inventories. However, the value of Air Force on-order inventory not needed to support required inventory levels increased by about 7.8 percent, representing an average of 52 percent ($1.3 billion) of its on-order inventory. The Air Force has continued to purchase unneeded on-order inventory because its policies do not provide incentives to reduce the amount of inventory on order that is not needed to support requirements. When the Air Force buys these items it may obligate funds unnecessarily, which could lead to not having sufficient obligation authority to purchase needed items and could negatively impact readiness. In addition, although the percentage of the Air Force on-hand inventory was reduced by 2.7 percent due to increases in demand, about 65 percent ($18.7 billion) of this inventory was not needed to support required inventory levels. GAO calculated that it costs the Air Force from $15 million to $30 million annually to store its unneeded items. Of the Air Force's inventory items not needed to support required inventory levels, 79 percent had no recurring demands (such as engines and airframe components), resulting in a potentially infinite supply of those items. The Air Force has continued to retain this unneeded inventory with no recurring demands, in part, because the Air Force has not performed a comprehensive assessment to revalidate the need to continue to retain these items. For the remaining 21 percent of items that had recurring demands, increasing demands resulted in a reduction in the number of years of supply that this inventory represents, with the largest quantity and value of items having between 2 to 10 years of supply. Inventory not needed to support required inventory levels can be attributed to many long-standing problems, such as decreasing demands, retaining items used to support aging weapon systems that have diminishing sources of supply or are being phased out of service, and not terminating contracts for on-order items. Air Force officials acknowledged that decreases in demand have resulted in having more inventory than is needed; however, the Air Force has not evaluated why it continues to experience decreases in demand or taken actions to mitigate the effect of these changes. Without taking actions to reduce its unneeded inventory, the Air Force will continue its past practices of purchasing and retaining items it does not need and then spending additional resources to handle and store these items. Although more than half of its secondary inventory was not needed to support required levels, the Air Force still had shortages of certain items. From fiscal years 2002 through 2005, the percentage and value of the Air Force's inventory shortages remained the same at about 8 percent and $1.2 billion.