Furthermore,  an item’s reorder point can move up or down over time and—depending  on the item—may include one or more of the following:    war reserves,    unfilled requisitions,    a safety level to be on hand in case of minor interruptions in the resupply  process or unpredictable fluctuations in demand,    minimum quantities for essential items for which demand is not normally  predicted (also referred to as insurance items),  inventory to satisfy demands while broken items are being repaired,  inventory to satisfy demands during the period between when the need to  replenish an item through a purchase is identified and when a contract is  let (also referred to as administrative lead time), and  inventory to satisfy demands during the period between when a contract  for inventory is let and when the inventory is received (also referred to as  production lead time). In addition, large imbalances in the  inventory continue to exist. As of September 30, 2001, over 1.7 million  items had $38 billion of inventory on hand or on order that exceeded the  items’ current inventory operating requirements of $24.9 billion. We also  identified 523,000 items that did not have enough inventory on hand or  on order to meet the items’ current inventory operating requirements. 1 and 2). Management Changes Will Reduce the Size of the Department’s Inventory

The services are implementing management changes that will reduce  the size of DOD’s reported inventory and the amount of inventory that  satisfies requirements. Requirements Are Increasing, but Some of Navy’s Are Overstated

DOD’s overall inventory requirements increased by $10.6 billion, or  26 percent, between the end of fiscal years 1999 and 2001, with some of  the Navy’s requirements being overstated. A large part of the Navy  increase, $3.4 billion, was due to the Navy reporting change we discussed  in the previous section—that is, reporting aviation parts held by ships  and air squadrons as inventory that were previously not reported. However, some Navy increases were  caused by inaccurate data used to compute administrative lead time  requirements, and as a result, those requirements are overstated. The Navy was responsible for the  largest share of DOD’s overall inventory requirements increase, with  $4.7 billion of the $10.6 billion inventory change. Navy Inventory Requirements Increased for a Variety of Reasons

Navy requirements increased $4.7 billion between September 30, 1999,  and September 30, 2001, primarily due to a change in how the Navy  accounts for aviation inventory requirements. The remaining Navy  increase was due to such reasons as price increases and increased usage  of items. A large part of the Navy’s increase was due to a change in the way the  Navy accounts for aviation inventory requirements for parts held by ships  and air squadrons. Since 1997 the Navy has generally  reduced its actual administrative lead time. For example, revised data reduced the lead time from 200 days to  183 days for medium-sized sole-source contracts for repairable items.
Why GAO Did This Study

Changes in the Department of Defense's (DOD) mission can lead to changes in inventory requirements, which, in turn, determine the size of DOD's inventory. Since 1990, GAO has identified DOD's management of inventory as a high-risk area because levels of inventory were too high and management systems and procedures were ineffective. Furthermore, DOD has attributed readiness problems to parts shortages. In this report, GAO (1) provides information on changes in and make up of the department's inventory and (2) analyzes changes in inventory requirements, focusing on the Navy.

What GAO Found

DOD reported a $5.6 billion increase in inventory on hand and a $1.7 billion increase in inventory on order between September 30, 1999, and September 30, 2001. The reported inventory increases were primarily due to the Navy reporting aviation parts held by ships and air squadrons that were previously not reported and to overall DOD inventory requirements increases. In addition, GAO identified large imbalances in the department's inventory; as of September 30, 2001, over 1.7 million items had $38 billion of inventory that exceeded the items' current inventory operating requirements of $24.9 billion. At the same time, there were 523,000 items that needed an additional $10.4 billion of inventory to meet the items' current inventory operating requirements. Generally, inventory increases are the result of increases in inventory requirements. DOD's overall inventory requirements increased by $10.6 billion, or 26 percent, between the end of fiscal years 1999 and 2001, with some of the Navy's requirements being overstated. The Navy was responsible for the largest dollar increase, $4.7 billion of the $10.6 billion increase. A large part of the Navy increase, $3.4 billion, was attributable to a change in the way the Navy accounted for aviation parts held by ships and air squadrons. The remaining Navy increase was attributable to a variety of reasons, such as price increases; increased demand and item wear-out rates; and, in some cases, inaccurate data. Also, since 1997 the Navy has reduced the amount of administrative lead time it takes to place inventory orders (the period between when the need to replenish an item through a purchase is identified and when a contract is let), yet it has not formally updated the data used to compute those requirements. For example, the Navy reduced the administrative lead time for medium-sized sole-source contracts for repairable items from 200 days to 130 days, but it did not recognize the reduction in its requirements computations. As a result, those requirements are inaccurate and overstated.