A Significant Portion of the Navy’s Secondary Inventory Exceeded Current Requirements

Our analysis of Navy secondary inventory data for the 4-year period we  examined showed that, on average, about $11.3 billion (60 percent) of the  average annual total inventory value of $18.7 billion was needed to meet  current requirements and $7.5 billion (40 percent) exceeded current  requirements. A large proportion  of items that exceeded current requirements had no projected demand. Inventory Excess to Current Requirements Was Retained for Anticipated Future Needs

Of the nearly $7.5 billion in Navy secondary inventory that exceeded  current requirements in the time frame we examined, about half was being  retained for demands anticipated within 2 years, while the remainder was  being retained either as economic retention inventory, contingency  retention inventory, or potential excess (see fig. Excess Inventory Was Sufficient to Meet Many Years of Projected Demands

The Navy’s forecasts for items with a recurring demand in fiscal years 2004  and 2007 showed that inventory for some items exceeded the current  requirements necessary to meet many years and sometimes decades of  demand. As of the September 30 stratification report date for  fiscal years 2004 through 2007, the Navy had insufficient on-hand  inventory to meet reorder-level requirements for an average of about  15,000 items annually, totaling about $570 million in inventory deficits  each year. Several Factors Contributed to the Navy’s Having Large Inventory Levels in Excess of Current Requirements

Our review identified several factors that contributed to the Navy’s having  secondary inventory that did not align with current requirements,  including significant levels of inventory that were in excess of these  requirements over the 4-year period. In addition, although changes in demand account  for much of the inventory in excess of current requirements, the Navy has  not systematically evaluated why demand forecasting is unpredictable and  how to better manage it. These new designations provide an opportunity to enhance oversight of  such efforts. Navy Has Not Established Metrics and Goals for Tracking and Assessing the Cost Efficiency of Inventory Management

Although the Navy has emphasized the need to meet warfighter needs as  measured by supply support performance metrics and goals, it has not  established metrics and goals to track and assess the cost efficiency of its  inventory management practices. DOD’s supply chain management regulation requires the military services  to take several steps to provide for effective and efficient end-to-end  materiel support. They cited problems,  including a lack of communication and coordination among key personnel. As a  result, some items that are purchased based on the initial provisioning  estimates are ultimately not needed to meet requirements. Initial provisioning demand was  based on engineering estimates that proved to be inaccurate. On-Order Management Practices Limit Flexibility in Modifying Purchases

The Navy’s inventory management practices for on-order items limit  flexibility in modifying purchase decisions in cases where demand has  changed. Navy Has Not Adjusted Retention Practices in Response to Prior Recommendations

Although prior studies by our office and LMI have identified weaknesses in  DOD components’ inventory retention practices, the Navy has not  implemented corrective actions recommended in these reports. Much of the  inventory that exceeded current requirements or had inventory deficits  resulted from inaccurate demand forecasts, which the Navy attributed to  unpredictability of demand. Finally, since  inventory management is part of the Navy’s broader business operations  and transformation, it is reasonable to expect the newly established chief  management officer and deputy chief management officer to exercise  some level of oversight of the Navy’s inventory management improvement  efforts. Strengthening the Navy’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. To determine the extent to which the Navy’s on-hand and on-order  secondary inventory reflects the amount of inventory needed to support  requirements, we reviewed DOD and Navy inventory management policies,  past GAO products on DOD and Navy 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 and the Defense Logistics Agency effectively and efficiently manage DOD's secondary inventory to ensure that the warfighter is supplied with the right items at the right time. It is also imperative that they maintain good stewardship over the billions of dollars invested in their inventory. GAO reviewed the Navy'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 Navy's having secondary inventory in excess of current requirements or, conversely, for having inventory deficits. To address these objectives, GAO analyzed Navy secondary inventory data (spare parts such as aircraft and ship engines and their components and accessories) from fiscal years 2004 through 2007.

What GAO Found

For the 4-year period GAOexamined, the Navy had significantly more inventory than was needed to support current requirements. The Navy also experienced some inventory deficits, though to a far lesser extent. GAO's analysis of inventory data identified an annual average of about $18.7 billion of Navy secondary inventory for fiscal years 2004 to 2007, of which about $7.5 billion (40 percent) exceeded current requirements. About half of the $7.5 billion of inventory exceeding current requirements was retained to meet anticipated future demands, and the remainder was retained for other reasons or identified as potential excess. Based on Navy demand forecasts, inventory that exceeded current requirements was sufficient 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 Navy also had an annual average of about $570 million of inventory deficits over this 4-year period. Some items experienced persistent deficits for the 4 years covered in GAO's review. Navy inventory did not align with current requirements over this 4-year period because (1) the Navy has not established the cost efficiency of its inventory management, (2) its demand forecasting effectiveness is limited and requirements for items may change frequently after purchase decisions are made, and (3) it has not adjusted certain inventory management practices in response to the unpredictability in demand. As a result, the Navy had billions of dollars in excess inventory against current requirements each year. DOD's supply chain management regulation requires the military services to take several steps to provide for effective and efficient end-to-end materiel support. For example, the regulation directs the components to size secondary item inventories to minimize DOD investment while providing the inventory needed. However, while the Navy has performance measures related to meeting warfighter needs, it lacks metrics and targets for tracking and assessing the cost efficiency of its inventory management. In addition, although Navy managers most frequently attributed the accumulation and retention of inventory exceeding current requirements to changes in demand, the Navy has not systematically evaluated the effectiveness of its demand forecasting. Problems with demand forecasting that contribute to excess inventory include incomplete and inaccurate data and a lack of communication and coordination among key personnel. Finally, the Navy has not adjusted certain management practices--in areas such as initial provisioning, modifying purchase decisions for inventory that is on order and not yet in its possession, and retention--to provide flexibility for responding to changes in demand. First, initial provisioning of spare parts based on engineering estimates can result in the purchase of unneeded stock when these estimates prove to be inaccurate. Second, the Navy's management practices for on-order items limit flexibility in modifying purchase decisions in cases where demand has changed. Third, although prior studies have identified weaknesses in inventory retention practices, the Navy has not implemented recommended corrective actions. Also, the Navy's designation of new chief and deputy chief management officer positions provides an opportunity for enhanced oversight of inventory management improvement efforts. Strengthening the Navy'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.