A Significant Portion of DLA’s Secondary Inventory Did Not Align with Current Requirements and Had Limited Demand

Our analysis of DLA secondary inventory data for the 3-year period we  examined showed that, on average, about half (52 percent) of DLA’s total  inventory was not needed to meet current requirements (the requirements  objective) and more than one-third (37 percent) was not needed to meet  the approved acquisition objective—the requirements objective plus   2 years of estimated future demand. About $7.1 Billion, or 52 Percent, of DLA’s On- Hand and On-Order Inventory Value Exceeded the Requirements Objective Each Year

Our analysis of DLA secondary inventory data showed that, for the 3 fiscal  years 2006 through 2008, an average of about $6.5 billion (48 percent) of  the total annual inventory value was needed to meet the requirements  objective, whereas $7.1 billion (52 percent) was not needed for these  requirements. These factors involve  deficiencies in (1) accurately forecasting customer demands,   (2) estimating lead times for acquiring parts, (3) meeting the services’  estimated additional requirements for spare parts, (4) improving  communications among stakeholders to ensure purchase decisions are  based on accurate and timely data, (5) modifying or canceling planned  purchases of items that may no longer be needed to meet currently  estimated requirements, (6) determining whether inventory being stored  as contingency retention stock is still needed, and (7) assessing and  tracking the overall cost efficiency of its inventory management. The first three factors relate to determining how many  parts to buy. The next three factors relate to DLA initiatives that, while  showing promise for reducing the acquisition and retention of parts not  needed to meet requirements, do not appear to be achieving their full  potential due to limits on their implementation. Inaccurate Demand Forecasts May Result in Acquiring More Spare Parts Than Needed to Meet Requirements

DLA faces challenges in aligning inventory levels with requirements due, in  part, to inaccurate demand forecasting for the parts it manages. DLA Has Not Resolved Problems with Estimating Lead Times Needed to Acquire Spare Parts

DLA has not resolved problems in accurately estimating acquisition lead  times for the parts it acquires. For fiscal  years 2006 through 2008, parts needed for lead time requirements had an  annual average value of $2.7 billion (20 percent) of the $13.7 billion in total  inventory value. DODIG found the buy-back program to be effective  at reducing procurement quantities, and thereby minimized investment for  some inventory. Some of this inventory may  no longer be needed. As a  result, DLA does not know whether it is meeting inventory requirements at  least cost. The Secretary of Defense’s comprehensive  plan is to include (among other things): (1) a plan for a comprehensive  review of demand forecasting procedures to identify and correct any  systematic weaknesses in such procedures, including the development of  metrics to identify bias toward over-forecasting and adjust forecasting  methods accordingly; (2) a plan to reduce the average level of on-order  secondary inventory that is excess to requirements, including a  requirement for the systemic review of such inventory for possible  contract termination; (3) a plan for the review and validation of methods  used by the military departments and DLA to establish economic retention  requirements; (4) a plan for an independent review of methods used by the  military departments and DLA to establish contingency retention  requirements; and (5) a plan for a comprehensive assessment of inventory  items on hand that have no recurring demands, including metrics to track  years of no demand for items in stock and procedures for ensuring the  systemic review of such items for potential reutilization or disposal. Conclusions

Our review showed that DLA can enhance its efforts to manage spare parts  more effectively primarily by focusing on the front end of the process  when decisions are being made on what items to buy and how many in  response to requirements. Acquiring inventory for which  demand is much lower than expected reduces the amount of funding  available for other military needs. We used DLA stratification data to determine the extent to which the  DLA’s inventory of spare parts reflected the amount needed to support  requirements.
Why GAO Did This Study

The Defense Logistics Agency (DLA) procures and manages large supplies of spare parts to keep military equipment ready and operating. At a time when U.S. military forces and equipment are in high demand and the nation faces long-term fiscal challenges, it is critical that DLA ensure that the warfighter is supplied with the right items at the right time and exercise good stewardship over the billions of dollars invested in its inventories. GAO has identified supply chain management as a high-risk area due in part to high levels of inventory beyond what is needed to support requirements and problems in accurately forecasting demand for spare parts. GAO's objectives were to (1) determine the extent to which DLA's inventory of spare parts reflects the amount needed to support requirements; and (2) identify causes, if applicable, for DLA's having spare parts inventory that does not align with requirements. GAO analyzed DLA inventory data for fiscal years 2006 through 2008.

What GAO Found

GAO's review showed that DLA can enhance its efforts to manage spare parts more effectively primarily by focusing on the front end of the process when decisions are being made on what items to buy and how many in response to requirements. GAO's analysis of DLA data showed the agency had significantly more spare parts secondary inventory than was needed to meet current requirements in fiscal years 2006 through 2008. Current requirements include all the requirements used by DLA to determine when to order new parts, which Department of Defense (DOD) guidance refers to as the "requirements objective." The average annual value of the inventory for the 3 years reviewed was about $13.7 billion. Of this total, about $7.1 billion (52 percent) was beyond the amount needed to meet the requirements objective, and about $5.1 billion (37 percent) was not needed to meet the requirements objective plus 2 years of estimated future demand. Of the $5.1 billion, DLA had an average of $4.1 billion in retention stock (materiel for possible contingencies or materiel deemed to be more economical to keep than to dispose of) and had identified $1 billion as potential excess (for reutilization or disposal). Although DOD policy requires that DLA minimize investment in inventory while also meeting requirements, at least seven factors are continuing to cause DLA to order and stock parts that do not align with requirements. Three factors relate to how many parts to buy: inaccurate demand forecasting for parts, unresolved problems with accurately estimating lead times needed to acquire spare parts, and challenges in meeting the military services' special requests to DLA for future spare parts support for weapon systems. Three more factors relate to DLA initiatives that, while showing promise for reducing the acquisition and retention of parts not needed to meet requirements, do not appear to be achieving their full potential: closing gaps in providing accurate, timely data to inventory managers as input into purchase decisions; modifying or canceling planned purchases that may no longer be needed to meet currently estimated requirements; and reducing contingency retention stock that may no longer be needed. Lastly, DLA is not tracking the overall cost efficiency of its inventory management. Although DLA has recognized and begun to address many of these factors, its current efforts may not be fully effective at reducing the significant mismatches GAO identified between spare parts inventory levels and requirements. Acquiring inventory for which demand is much lower than expected reduces the amount of funding available for other military needs.