About $4.0 Billion of the Inventory Exceeding Current Operating Requirements Was Consumed Since September 30, 2001

Our analysis of approximately 1.5 million items with inventory on hand  valued at $35.1 billion that exceeded current operating requirements as of  September 30, 2001, showed that about $2.5 billion of the inventory was  used, $0.5 billion was disposed of, and $1.0 billion was condemned since  the onset of Operation Enduring Freedom and through the initial phases of  Operation Iraqi Freedom. About 937,000 items with $24.4 billion of on-hand inventory exceeding  current operating requirements as of September 30, 2001, had neither  inventory usage nor gains during the period of review—these items had an  equal amount of inventory returned for repair as was disposed of,  condemned, and demanded. Further, 923,000 of the 1.5 million items had no customer demands. Some DOD Practices Contribute to Ineffective and Inefficient Inventory Management

While reviewing Air Force and Army items to determine why inventory  exceeding current operating requirements was being retained, we  identified three ineffective and inefficient inventory management practices  that may affect inventory levels, including the inventory exceeding current  operating requirements. First, although DLA has begun to charge its  customers for inventory storage based on the actual space occupied  by items, the military components are not using the DLA storage cost data,  and instead continue to use estimated storage costs in their inventory  management decision-making processes. Third, Air Force item  managers are not required to enter codes into the Air Force inventory  system for items that are categorized as potential reutilization and/or  disposal materiel, but that the Air Force wants to retain; thus, the items  are not properly categorized and are at risk of disposal. Recommendations for Executive Action

To address the inventory management shortcomings that we identified, we  recommend that the Secretary of Defense take the following three actions:    direct the military services and the Defense Logistics Agency to determine  whether it would be beneficial to use the actual storage cost data provided  by DLA in their computations, instead of using estimated storage costs,  and include that data in their systems and models as appropriate;    direct the Secretary of the Air Force to establish and implement a  systemwide process for correcting causes of inventory discrepancies  between the inventory for which item managers are accountable and the  inventory reported by bases and repair centers; and    direct the Secretary of the Air Force to revise its policy to require item  managers to code inventory so that the inventory is properly categorized.
Why GAO Did This Study

Since 1990, GAO has identified the Department of Defense's (DOD) inventory management as a highrisk area. Ineffective management practices--such as the use of inaccurate data, lack of inventory controls and visibility, and information system weaknesses--have contributed to high levels of inventory. DOD has reduced its inventory since 1990, from about $100 billion to about $67 billion as of September 30, 2002. However, at the start of Operation Enduring Freedom, about half of the inventory exceeded current operating requirements. GAO, under its statutory authority, analyzed the extent to which inventory that exceeded current operating requirements as of September 30, 2001, was consumed through cutoff dates ranging from March through October 2003 and identified three ineffective and inefficient inventory management practices.

What GAO Found

GAO's analysis of 1.5 million items with $35.1 billion of inventory on hand that exceeded current operating requirements as of September 30, 2001, showed that about $4.0 billion was consumed--$2.5 billion was used, $0.5 billion was disposed of, and $1.0 billion was condemned--since the onset of Operation Enduring Freedom and through the initial phases of Operation Iraqi Freedom. GAO found that, once disposals and condemnations were accounted for, 539,000 items had inventory that was used, 18,000 had inventory gains, and 937,000 had neither inventory usage nor gains. Of the 1.5 million items, customers did not make demands for 923,000 items during the period of review. GAO also identified three ineffective and inefficient inventory management practices that may affect inventory levels, including the inventory exceeding current operating requirements. First, although Defense Logistics Agency (DLA) has begun to charge its customers for inventory storage based on the actual space occupied by items, the military components are not using the DLA storage cost data, and instead continue to use estimated storage costs in their inventory management decision-making processes. Second, the Air Force does not have a systemwide process for correcting the causes of discrepancies between the inventory for which item managers are accountable and the inventory reported by bases and repair centers. Third, Air Force item managers are not required to enter codes into the Air Force inventory system for items that are categorized as potential reutilization and/or disposal materiel, but that the Air Force wants to retain; thus, the items are not properly categorized and are at risk of disposal.