Principal Findings

		Selected Spare Parts Price Increases Are Driven by Higher Material Costs

In our recent review of prices for a selected group of spare parts for three Navy aircraft and their engines that we examined in the November 2000 report, we found that prices continued to rise. Our analysis suggested that the major factor driving these increases was the cost of the materials used to repair spare parts, while other factors, such as higher overhead fees and growing labor costs, also contributed. Between fiscal year 1999 and 2002, the total cost of spare parts increased from $1.6 billion to $2.7 billion. The prices for the remaining 258 parts, however, spiraled dramatically—an average of 91.5 percent during the 3-year period (see app. However, the Navy’s data systems did not provide sufficient information on each repair event to allow us to determine why the prices increased for each spare part. It has undertaken several initiatives to control repair costs, but these have centered on enhancing the reliability and maintenance process, which could help stabilize prices for repairable parts. Also, the Navy might learn from DLA’s efforts to address price increases for consumable spare parts. These efforts focus on improving the reliability of repairable parts, and thereby reducing demand while reducing or eliminating support costs. Tracking System May Identify Causes of Repair Cost Hikes

One promising initiative—a serial number tracking system for the Navy’s inventory of parts—has the potential for identifying the underlying reasons for price changes. Recommendations for Executive Action

In order to develop the information and action necessary to address the underlying causes for price increases, we recommend that the Secretary of Defense direct the Secretary of the Navy to:
Develop an overall plan with implementation milestones, resource requirements, and accountability within the Naval Supply Systems Command to identify the underlying reasons for price increases in aviation spare parts. Overall, the average increase in the price charged to customers for these parts was 37.2 percent between fiscal year 1999 and fiscal year 2002. The report contained three recommendations: (1) the Secretary of Defense ensure that the Navy follow through on the results of its planned studies by identifying and implementing solutions to reduce and stabilize prices and surcharge rates, (2) the Secretary of Defense direct the Navy to allocate condemnation costs to the specific parts or groups of parts incurring the costs, and (3) the Secretary of Defense report to the Congress on the Navy’s progress in addressing these recommendations.
What GAO Found

Since fiscal year 1999, the Navy's budget for repairing spare parts to support its aviation weapons systems has increased by about 50 percent, from $1.2 billion to $1.8 billion. Some military commands have asserted that the escalating cost of these parts has adversely impacted the funds available for the readiness of military forces. Overall, the prices for Navy repairable spare parts continue to climb for the three aircraft and their engines that GAO focused on in its November 2000 report. GAO's assessment of selected parts being repaired showed that while nearly 45 percent of the parts decreased in price, about 55 percent increased an average of 91.5 percent between fiscal year 1999 and 2002. The price increases were primarily due to the dramatically higher costs of the materials needed to repair spare parts, although other factors, such as overhead fees and labor rates, contributed. However, GAO could not determine the underlying causes for the rising material costs because the Navy's database lacked key information on each repair. The Navy's progress in developing an overall plan to identify and address the reasons for higher spare parts prices has been limited. It has not yet identified and implemented ways to reduce and stabilize prices. Further, the Navy has undertaken several initiatives, but most of these efforts focused on improving the reliability or the maintenance processes for repairing spare parts rather than on identifying why prices continue to rise. One initiative, the establishment of an automated serial number tracking system for spare parts, however, has potential for providing the specific information needed to determine why the spare parts prices are increasing and develop a strategy for stabilizing them. In addition, the Navy may learn from the Defense Logistics Agency's efforts to address causes for price increases--thereby allowing the Navy to better apply its resources supporting the readiness of the forces.