	Background

Under DOD’s supply chain materiel management policy, the secondary item  inventory is to be sized to minimize DOD’s investment while providing the  inventory needed to support both peacetime and wartime requirements. Army Secondary Inventory Exceeded Amount Needed to Satisfy Current Requirements

Our analysis of Army secondary inventory data for the 4-year period we  examined showed that about $3.6 billion (22 percent) of the average  annual total inventory value of $16.3 billion was not needed to meet  current requirements. During this  same time period, the value of Army inventory deficits decreased but  remained substantial—an average value of $3.5 billion over the 4-year  period. About $3.6 Billion, or 22 Percent, of the Army’s On- Hand and On-Order Inventory Value Exceeded Current Requirements Each Year

Our analysis of Army secondary inventory data showed that, on average,  about $12.7 billion (78 percent) of the total annual inventory value was  needed to meet current requirements, whereas $3.6 billion (22 percent)  exceeded current requirements. The value of the inventory that exceeded  current requirements increased over the period of our review, from $2.9  billion in fiscal year 2004 to $4.4 billion in fiscal year 2007, as did the  number of parts that exceeded current requirements, from 5.2 million  parts to 10.2 million parts (see table 3). 1). Inaccurate demand forecasting for spare parts also  contributed to the Army having inventory that was in excess of current  requirements as well as having inventory deficits. After evaluating its  demand forecasting procedures, the Army has issued guidance that the  Army expects will improve the accuracy of its forecasts. DOD’s supply chain  management regulation requires the military services to take a number of  steps to provide for effective and efficient end-to-end materiel support. While these methods may be effective management tools, we found that  the Army has not established metrics and goals for measuring the cost  efficiency of its inventory management. Demand Forecasting Has Been Inaccurate

Our review showed that demand forecasting for spare parts has been  inaccurate. According to the Army regulation on centralized management of  the Army supply system, the Army uses a computer model to forecast its  spare parts requirements. Army officials stated that  when demand data does not accurately reflect usage or forecasts for future  usage are incorrect, the result is a misalignment between inventory and  current requirements. As a result,  inventory did not always align with requirements. The Army’s guidance also directs managers to update forecast models  based on the readiness portion of the Army Operations Update to match  actual quantities of weapon systems being used in Southwest Asia. According to Army officials, previous models were updated based on  estimates that were not always timely or accurate. The Army guidance was issued as we were completing our audit work. In 2008, the Army designated the Under Secretary of  the Army as its chief management officer responsible for business  transformation. Taking steps to  reduce the high levels of inventory exceeding requirements could help to  ensure that DOD is meeting supply performance goals at least cost. Strengthening the Army’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 Army’s secondary inventory, we  recommend that the Secretary of Defense direct the Secretary of the Army  to take the following three actions:    Establish metrics and goals for tracking and assessing the cost  efficiency of inventory management and incorporate these into existing  management and oversight processes. Appendix I: Scope and Methodology

To determine the extent to which the Army’s on-hand and on-order  secondary inventory reflects the amount of inventory needed to support  current requirements, we obtained the Central Secondary Item  Stratification Budget Summary and item-specific reports for the Army’s  Aviation and Missile Command (AMCOM) and the Tank-automotive and  Armaments Command (TACOM), including summary reports and item- specific data as of September 30 for fiscal years 2004 through 2007. To determine the extent to which the Army’s on-order and on-hand  secondary inventory reflects the amount of inventory needed to support  requirements, we reviewed DOD and Army inventory management  guidance, past GAO products on DOD and Army inventory management  practices for secondary inventory items, and other related documentation.
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 effectively and efficiently manage DOD's secondary inventory to ensure that the warfighter is supplied with the right items at the right time and to maintain good stewardship over the billions of dollars invested in their inventory. GAO reviewed the Army'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 Army having secondary inventory that exceeded current requirements or, conversely, for having inventory deficits. To address these objectives, GAO analyzed Army data on secondary inventory (spare parts such as aircraft and tank engines) from fiscal years 2004 through 2007.

What GAO Found

For the 4-year period GAO examined, the Army had significantly more inventory than was needed to support current requirements. At the same time, the Army had substantial inventory deficits. GAO's analysis of Army data reflected an annual average of about $16.3 billion of secondary inventory for fiscal years 2004 to 2007, of which about $3.6 billion (22 percent) exceeded current requirements. On average, approximately 97 percent of the inventory value exceeding requirements was on hand and the remaining 3 percent was on order. Based on Army demand forecasts, inventory that exceeded current requirements had enough parts on hand for some items 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 Army also had an annual average of about $3.5 billion of inventory deficits over this 4-year period. Army inventory did not align with current requirements over this period because of (1) a lack of cost-efficiency metrics and goals and (2) inaccurate demand forecasting. DOD's supply chain management regulation requires the military services to take a number of steps to provide for effective and efficient end-to-end materiel support. For example, the regulation directs the components to size secondary inventory to minimize DOD's investment while providing the inventory needed. Although the Army has supply support performance measures for meeting warfighter needs, it has not established metrics and goals that can measure the cost efficiency of its inventory management practices. Furthermore, the Army's demand forecasts have frequently been inaccurate. The Army uses a computer model to forecast its spare parts requirements, but when demand data are inaccurate or untimely, the result is a misalignment between inventory and current requirements. As a result, the Army has accumulated billions of dollars in excess inventory against current requirements for some items and substantial inventory deficits in other items. Without accurate and timely demand data, managers cannot ensure that their purchasing decisions will result in inventory levels that are sized to minimize DOD's investment needed to support requirements. The Army has acknowledged that challenges exist in its forecasting procedures and has begun to take steps to address shortcomings. In October 2008, the Army issued guidance directing managers to reduce the forecast period from 24 months to 12 months to better account for changes in the size of the force and the resulting changes in demands. The guidance also directs managers to update forecast models to match actual quantities of weapon systems being used in Southwest Asia; previous models were updated based on estimates that were not always timely or accurate. These two changes constitute steps toward improving the accuracy of demand forecasts, but GAO was unable to assess their effectiveness because this guidance was issued as GAO was completing its audit work. Also, the Army's recent designation of the Under Secretary of the Army as its chief management officer responsible for business transformation provides an opportunity for enhanced oversight of inventory management improvement efforts. Strengthening the Army'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.