DOD Overstated Its Inventory Shortage

We analyzed DOD’s secondary inventory records and found that on September 30, 1991, DOD’s secondary inventory shortage was $16.4 billion, not the $26 billion DOD cited. Also, DOD’s figure included $2.4 billion of standard price surcharges that increased acquisition costs by adding charges for transportation and inventory losses. Decreased Requirements Reduced the Shortage

Between September 1991 and September 1993, the inventory shortage decreased by about $8.3 billion (51 percent), from $16.4 billion to about $8.1 billion. Officials at these locations attributed the reduced shortage to removing Desert Storm requirements, downsizing the military forces, eliminating DLA war reserve requirements, and decreasing requirements due to reduced levels of operations. Our work showed that because of continuing demand, shortages recur. The inventory manager for the vane said that the shortages were a normal function of the supply system and resulted in inventory purchases. Reorder Point Shortages Did Not Always Result in Purchases

Inventory managers did not make purchases to satisfy reorder point shortages of $559 million for 3,240 items because (1) requirements for the items were not valid, had changed, or were uncertain; (2) purchases were not necessary for a variety of nonrequirement reasons such as items being returned to the supply system or the availability of substitute items; and (3) responsibility for the items was transferred to other organizations or the items were no longer in the supply system. DOD’s current inventory reporting categories, however, do not focus on the amount of inventory that is needed to be on hand. In its 1993 materiel management regulation, DOD defined its inventory requisitioning objective—equivalent to an item’s reorder point plus economic order quantity requirements—as the “maximum quantity of materiel to be maintained on-hand or on-order to sustain current operations and core war reserves.” Based on our analysis of inventory reported in DOD’s September 1993 Supply System Inventory Report and other inventory reports, we estimate that $28.8 billion of DOD’s $58.8 billion wholesale inventory was needed to satisfy reorder point and economic order quantity requirements.
Why GAO Did This Study

GAO reviewed inventory shortages in the Department of Defense's (DOD) secondary, nonweapon inventory, focusing on: (1) the size of the shortages; (2) inventory managers' actions in response to the shortages; (3) whether funding problems caused managers not to buy needed items; and (4) the need for revising DOD inventory reporting.

What GAO Found

GAO found that: (1) the September 1991 DOD secondary inventory shortage was $16.4 billion instead of the $26 billion DOD reported because DOD included some Navy nonsecondary inventory items and standard price surcharges for transportation and inventory losses that increased DOD acquisition costs; (2) between September 1991 and September 1993, the shortage decreased to $8.1 billion due to the removal of Desert Storm requirements, military downsizing, elimination of some war reserve requirements, and reduced levels of operations; (3) reorder point shortages were a normal part of the supply system because of continuing demand, but these shortages were rarely due to a lack of funding; (4) inventory managers decided not to order almost one-half of $1.1 billion in reorder point shortages because of invalid requirements, the availability of substitute items, the transfer to other units of certain items, and items being removed from the inventory; (5) in general, these procurement decisions were valid and probably saved millions of dollars, since the items probably would not have been used; and (6) DOD inventory reporting is not based on the amount of inventory needed to be on hand, but rather on reorder points and economic order quantity which can result in excessive inventory.