We reviewed these items to determine if the Navy had valid requirements to support inventory purchases, what caused purchases to exceed requirements, and what the Navy was doing to cancel purchases that were beyond what was needed. Inventory Purchases Were Not Always Supported by Valid Needs

Our analysis of 200 judgmentally selected items showed that the Navy duplicates some inventory requirements, resulting in unnecessary purchases and inventory that exceeds needs. Recurring demands had decreased, engineering estimates for requirements had not materialized, nonrecurring demands had slipped or were not needed, and parts had become obsolete. In some cases, the changes could not have been anticipated. However, in other cases, better management could have eliminated or minimized the accumulation of inventory that exceeded needs. The effectiveness of using planned program requirements to satisfy future needs was not measured, and purchase decisions did not adequately take into account broken parts to be returned for repair. However, more cancellations could have been made. Additional opportunities to cancel purchases were missed because item managers did not exercise their responsibility to direct cancellation of contracts, economic analyses were not made, and inventory and contracting records did not agree. The amount of a contract that is canceled is the portion that exceeds the protection level. In other words, the 2-year usage protected nearly four times the amount of inventory that the Navy supply system would recommend buying. While we cannot precisely quantify the overall extent of the problems discussed in this report, we do know that the problems affect the decision-making process for purchasing billions of dollars of inventory. Inventory purchases often were not based on valid needs. Changing requirements was a major cause of the excess inventory on contract. The Navy also could do a better job of canceling purchases that exceed requirements. Improve the process for canceling contracts where items are excess to needs by (1) eliminating 1- and 2-year protection levels when considering purchases for cancellation, (2) reemphasizing to item managers that they have the responsibility and authority to direct cancellation of contracts, (3) requiring economic analyses to determine if it is economical to cancel contracts for excess material, and (4) automatically adjusting item manager cancellation recommendations when the recommended quantities exceed the quantities available to cancel. We did not recommend that the Navy adjust procurements on the basis of one quarter of demand.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the excess inventory the Navy had on order, focusing on whether the Navy: (1) had valid requirements to support inventory purchases; (2) had purchased items that exceeded needs and the causes of this condition; and (3) was cancelling purchases that exceeded needs.

What GAO Found

GAO noted that: (1) it identified several problems that affect the decisionmaking process for billions of dollars of inventory; (2) however, GAO cannot precisely quantify the overall extent of the problems; (3) specifically, its work shows that in some cases purchases: (a) were not based on valid needs; (b) were excess to needs because the requirements changed after orders were placed; and (c) occurred even though contracts could have been cancelled; (4) the Navy did not always have valid requirements to support inventory purchases; (5) GAO previously recommended that the Department of Defense (DOD) revise policies and procedures to eliminate this duplication of requirements; (6) while DOD has acted on many of GAO's past recommendations, it has not taken corrective action on this one; (7) several factors contributed to the excess inventory on contract; (8) recurring demands for certain items had decreased, engineering estimates for requirements had not materialized, nonrecurring demands were delayed or were not needed, and parts had become obsolete; (9) although some of these factors could not have been anticipated, in other cases better management could have eliminated or minimized the accumulation of inventory that exceeded needs; (10) the Navy did not know if planned program requirements accurately reflected needs; (11) also, broken parts to be returned for repair were not adequately considered when making purchase decisions; (12) the Navy cancelled some contracts for excess inventory but could have cancelled more; (13) a major reason for not cancelling more purchases was that the Navy adds protection levels, representing as much as 2 years of usage, to requirements before considering cancellation and cancels only the amount of the purchases that exceeds the protection levels; (14) the 2-year usage represented nearly four times the amount of inventory that the Navy would normally buy; (15) the Navy missed additional opportunities to cancel purchases because item managers did not exercise their responsibility to direct the cancellation of contracts, economic analyses were not made, and inventory and contracting records did not agree; and (16) collectively, these problems contribute to the Navy having inventory in excess of needs.