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Defense Inventory: Management Actions Needed to Improve the Cost Efficiency of the Navy's Spare Parts Inventory

GAO-09-103 Published: Dec 12, 2008. Publicly Released: Dec 17, 2008.
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Highlights

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.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Defense To improve the management of the Navy's secondary inventory, the Secretary of Defense should direct the Secretary of the Navy, in conjunction with the Commander, Navy Supply Systems Command, and the Commander, Naval Inventory Control Point, to establish metrics and goals for tracking and assessing the cost efficiency of inventory management and incorporate these into existing management and oversight processes.
Closed – Implemented
The Navy has established a cost-efficiency metric--the materiel replacement rate--that tracks the rate at which obligation authority is being used to replenish inventory levels. It is a predictive measure of Navy Working Capital Fund inventory build-up or sell-down. A materiel replacement rate above 100 percent means the Navy's inventory is expanding while a rate below 100 percent means the Navy's inventory is decreasing. Additionally, OSD, the services, and DLA are also working to establish a set of department-wide cost-efficiency metrics as part of the implementation of the Comprehensive Inventory Management Plan.
Department of Defense To improve the management of the Navy's secondary inventory, the Secretary of Defense should direct the Secretary of the Navy, in conjunction with the Commander, Navy Supply Systems Command, and the Commander, Naval Inventory Control Point, to evaluate demand forecasting procedures to identify areas where forecasts have been consistently inaccurate, correct any systemic weaknesses in forecasting procedures, and improve communications among stakeholders, to include promptly relaying changes in programs and other decisions that affect purchases of spare parts. Further, the Commander, Naval Supply Systems Command, and the Commander, Naval Inventory Control Point, should develop an evaluation plan and interim milestones for assessing the impact of ongoing efforts and take additional corrective actions, if warranted, to improve demand forecasting for secondary inventory.
Closed – Implemented
In 2010, the Naval Inventory Control Point developed a demand forecast metric using the enterprise resource planning data that considers variable lead-time. The metric, once fully implemented, will enable the identification of areas where forecasts have been consistently inaccurate, and the correction of any systemic weaknesses in forecasting procedures. In addition, DOD's Comprehensive Inventory Management Improvement Plan includes a demand forecasting sub-plan that serves as the action plan for OSD, the services, and DLA for improving demand forecasting through fiscal year 2015. The plan includes goals, objectives, timeframes, and the development of metrics for tracking forecasting error and bias department-wide. OSD, the services, and DLA are working to establish a demand forecasting metric, which was recommended in a study conducted by the Logistics Management Institute.
Department of Defense To improve the management of the Navy's secondary inventory, the Secretary of Defense should direct the Secretary of the Navy, in conjunction with the Commander, Navy Supply Systems Command, and the Commander, Naval Inventory Control Point, to revise inventory management practices to incorporate the flexibility needed to minimize the impact of demand fluctuations. Specific attention should be given to revising practices regarding initial provisioning management, on-order management, and retention management. Further, the Commander, Naval Supply Systems Command, and the Commander, Naval Inventory Control Point, should develop an evaluation plan and interim milestones for assessing the impact of ongoing efforts and take additional corrective actions, if warranted, to incorporate flexibility into inventory management practices.
Closed – Implemented
Based on our recommendation, to improve its initial provisioning, the Navy Supply Systems Command sponsored a study in 2010 which confirmed forecasting challenges with initial provisioning. Additionally, the Navy updated policy concerning initial provisioning and revised how its supply support requests, which support initial provisioning, should be processed and funded. The Navy completed an analysis of supply support requests with DLA, which resulted in more intense focus on supply support request policy and guidance. To further improve initial provisioning, the Navy established a demand forecasting metric. With respect to on-order management, the Navy has issued guidance in 2011, in accordance with the revised DOD guidance on on-order management. For retention management, the Navy Supply Systems Command issued guidance requiring annual reviews to validate methodologies used for making retention decisions, and the Commander, Naval Inventory Control Point, certified the reviews were completed for the July 2009 - June 2010 period as part of an annual report on management internal controls for inventory management. Combined, the actions taken will help improve the Navy's initial provisioning management, on order management, and its retention management.
Department of Defense To improve the management of the Navy's secondary inventory, the Secretary of Defense should direct the Secretary of the Navy, in conjunction with the Commander, Navy Supply Systems Command, and the Commander, Naval Inventory Control Point, to ensure that required annual reviews validating methodologies used for making retention decisions are performed and documented.
Closed – Implemented
The Navy Supply Systems Command in May 2009 issued guidance requiring annual reviews to validate methodologies used for making retention decisions, and the Commander, Naval Inventory Control Point, certified the reviews were completed for the July 2009-June 2010 period as part of an annual report on management internal controls for inventory management. Furthermore, this area is being addressed across the department by the Comprehensive Inventory Management Improvement Plan, which is scheduled to be completed in fiscal year 2015. These actions improve the Navy's management practices that in the past have contributed to excess levels of inventory.
Department of the Navy The Secretary of the Navy should direct that the Navy's Chief Management Officer and Deputy Chief Management Officer exercise appropriate oversight of Navy inventory management improvement to align improvement efforts with overall business transformation and to reduce support costs.
Closed – Not Implemented
The Navy CMO and DCMO offices were unable to provide any evidence of oversight.

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Topics

Comparative analysisCost analysisData collectionData integrityDefense economic analysisFederal regulationsInteragency relationsInventoriesInventory controlInventory control systemsMilitary forcesMilitary inventoriesMilitary materielNaval procurementProgram evaluationProgram managementProperty and supply managementRequirements definitionSpare partsStrategic planningCorrective actionExecutive agency oversightSupply and demand