DOD Established Targets for Reducing Excess Inventory Based on the Best Data Available, but Its Targets May Not Effectively Guide Continued Improvement

DOD may find that the two targets for reducing on-order and on-hand  excess inventory that it established when developing the Plan in fiscal  year 2010 are ineffective in guiding future inventory management  improvement efforts. DOD reduced its percentage of on-order  excess inventory from 8.5 percent, or approximately $1.15 billion, in fiscal  year 2009 to 5.5 percent, or about $940 million, at the end of fiscal year  2010, thereby achieving its 2014 target 4 years early. In fiscal year 2011,  based on further analysis of the inventory data, DOD revised the  definition of on-hand excess inventory, which resulted in a reduction in its  percentage of on-hand excess from 9.4 percent, or $8.9 billion, in fiscal  year 2009 to 8.3 percent, or $8.4 billion, in fiscal year 2010, which is well  below its fiscal year 2012 target of 10 percent. It also notes that it is DOD policy  to periodically conduct performance evaluations of its supply chain  operations and inventory. DOD Has Made Progress in the Early Stages of the Plan’s Implementation, but Has Experienced Delays and Challenges Remain in Implementation

In addition to making progress toward achieving the targets discussed  above, DOD has made progress implementing the Plan’s actions for  improving inventory management, which began in late fiscal year 2010. However, DOD is only 18 months into a 4-year implementation effort and  has experienced some delays and faces continued challenges during the  remainder of implementation. Inventory categorization. DOD Is Developing a Set of Metrics to Assess Inventory Management Effectiveness and Efficiency, but Has Not Determined If It Will Incorporate These Metrics into Guidance

As part of the Plan, DOD is developing a set of metrics to assess the  effectiveness and efficiency of its inventory management beyond the  percentage targets for on-order and on-hand excess inventory identified  in the Plan, but it has not determined if it will incorporate the set of metrics  into guidance. This may hamper its ability to assess inventory  management performance and sustain management attention on  improvement beyond the Plan’s implementation. Some of the potential metrics are currently reported by OSD, while others  would be new metrics that would require establishing a data source and  methodology. Based on our previous reporting, we have found that such  metrics should be reportable in a consistent fashion and used to evaluate  performance. The services and DLA will be relied upon to generate the data for  some of the departmentwide inventory management metrics; thus, efforts  to monitor and evaluate inventory management performance may be  hampered without standardized definitions, methodologies, and  procedures for the consistent collection of data for the metrics. DOD Has Achieved Cost Avoidances Based on Fiscal Years 2009 and 2010 Inventory Data and Plans to Reduce Resources Available for the Purchase of Secondary Items

DOD officials emphasized that the reductions achieved in the amount of  on-order and on-hand excess inventory represent about $710 million in  cost avoidances on the part of the department. The program completed $73.8 million  lateral redistributions and procurement offsets in fiscal year 2010 and  $68.3 million in fiscal year 2011, which prevented the acquisition of  additional items. Recommendations for Executive Action

To improve implementation of the Comprehensive Inventory Management  Improvement Plan and ensure sustained management attention beyond  the Plan’s implementation consistent with results-oriented management  practices, we recommend the Secretary of Defense direct the Assistant  Secretary of Defense for Logistics and Materiel Readiness to take the  following three actions:  conduct and document periodic re-examinations of its existing on- order and on-hand excess inventory percentage targets (such as  those officials say are planned) and update the targets and associated  timelines, if necessary, to guide continued improvement in its  inventory management through the Plan’s implementation; develop and implement guidance that establishes a comprehensive,  standardized set of departmentwide inventory management metrics,  including standardized definitions and procedures for measuring and  reporting the metrics; and employ these metrics in periodically monitoring the effectiveness and  efficiency of its inventory management practices. In written  comments, DOD concurred with our recommendations. Appendix I: Objectives, Scope, and Methodology

The objectives of our work were to determine the extent to which (1) the  Department of Defense (DOD) established and achieved targets for  reducing excess inventory in the Comprehensive Inventory Management  Improvement Plan (Plan), (2) DOD made progress in implementing the  Plan, (3) DOD has established and implemented standardized metrics to  track their progress in improving inventory management, and (4) DOD  has identified and realized any cost savings or cost avoidance from  implementing the Plan. Assessment: Not started, on schedule. Inventory that is not in DOD’s possession but for which a contract has  been awarded or funds have been obligated is considered to be on-order. DOD’s High-Risk Areas: Observations on DOD’s Progress and  Challenges in Strategic Planning for Supply Chain Management.
Why GAO Did This Study

GAO has identified supply chain management as a high-risk area due in part to ineffective and inefficient inventory management practices that have caused DOD to accumulate billions of dollars worth of unneeded inventory. DOD reported that as of September 2010 it had $8.4 billion worth of on-hand excess inventory, categorized for potential reuse or disposal, and $940 million worth of on-order excess inventory, already purchased but likely to be excess due to changes in requirements. Under the National Defense Authorization Act for Fiscal Year 2010, GAO is required to assess DODs implementation of the Comprehensive Inventory Management Improvement Plan (Plan) DOD submitted to Congress. GAOs objectives were to determine the extent to which DOD has (1) established and achieved targets for reducing excess inventory in the Plan, (2) made progress in implementing the overall Plan, (3) metrics to track progress in improving inventory management, and (4) identified and realized any cost savings or avoidance. GAO reviewed relevant data, assessed DODs actions through January 1, 2012, and interviewed officials implementing the Plan.

What GAO Found

The Department of Defense (DOD) set two goalsreducing on-order and on-hand excess inventorywith percentage targets for each based on the best available data in fiscal year 2009 as part of its Comprehensive Inventory Management Improvement Plan (Plan). Sustained management oversight led to reductions in on-order and on-hand excess inventory in fiscal year 2010 prior to the Plans implementation, and thus DOD may find the current targets are not meaningful in guiding improvement. Specifically, at the end of fiscal year 2010, DOD had reduced its percentage of on-order excess inventory to 5.5 percent, thereby achieving its 2014 target 4 years early. It also revised the definition and calculation of on-hand excess inventory, which resulted in DOD being below the fiscal year 2012 target of 10 percent. It is DOD policy to conduct periodic evaluations of its inventory management, and results-oriented management practices emphasize validating performance measures to ensure they remain appropriate. Without challenging, yet achievable targets, DODs Plan will not be effective in guiding further improvement.
DOD has made progress implementing its Plan since implementation began in late fiscal year 2010, but DOD is only 18 months into a 4-year implementation effort and many planned activities still remain. Most but not all of the progress to date has been in gathering and analyzing data, and reviewing guidance and practices. In addition, DOD has made progress in particular areas, such as developing tentative sub-categories to further clarify its existing inventory categories. Overall implementation is generally on schedule, but some of the Plans efforts have experienced delays. Moving forward, DOD faces such challenges as adjusting demand planning to changing circumstances, and enforcing consistent implementation of guidance at the military service level.
As part of the Plan, DOD is developing metrics to assess the effectiveness and efficiency of its inventory management, but it has not determined if it will incorporate these metrics into guidance. This may hamper its ability to assess inventory management performance and sustain management attention on improvement. Materiel managers should evaluate and be capable of reporting on the performance of inventory management. Based on previous reporting, GAO has found that such metrics should be reportable in a consistent fashion. DOD is currently developing a portfolio of metrics that fall under five key areas: readiness, responsiveness, reliability, cost, and planning and precision. Some metrics that have been identifiedsuch as customer wait timeare currently reported by DOD, while others would be new metrics that would require establishing a data source and methodology. However, the Plan does not include steps to incorporate the metrics, including their methodologies, into DOD guidance. Without guidance specifying standardized definitions, methodologies, and procedures for data collection procedures, DODs efforts to employ metrics to monitor and evaluate inventory management performance may be hampered.
Finally, DOD achieved about $710 million in cost avoidances reducing excess inventory in fiscal year 2010, and plans to reduce funding for the purchase of items by $365 million between fiscal year 2012 and 2016. Additionally, DOD completed about $140 million in lateral redistributions and procurement offsets in fiscal years 2010 and 2011, which prevented the acquisition of additional items.

What GAO Recommends

GAO recommends that DOD periodically re-examine its targets for on-hand and on-order excess inventory; and develop guidance to establish a set of metrics including standardized definitions and calculations that are then employed to monitor its inventory management practices. DOD concurs with GAOs recommendations.