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Defense Inventory: Spare and Repair Parts Inventory Costs Can Be Reduced (Letter Report, 01/17/97, GAO/NSIAD-97-47).

GAO reviewed how the military services can reduce their spare and repair
parts storage and holding costs by consolidating or disposing of
inventory that is not needed to meet current operating and war reserve
requirements or is requested infrequently.

GAO found that: (1) most of the services' inventory items stored at
nonmajor locations are in small quantities; (2) over 53 percent of the
items were in quantities of 3 or less, while only 25 percent were in
quantities of 11 or more; (3) however, the inventory at the nonmajor
locations is valued at over $8.3 billion; (4) the need for many of the
items stored at nonmajor locations is questionable; (5) of the $8.3
billion of inventory at the nonmajor locations, $2.7 billion of it was
not needed to meet the services' current operating and war reserve
requirements; (6) GAO's analysis also showed that many of the Army items
were infrequently issued over the 2-year period ending August 1996; (7)
over 53 percent of the items at nonmajor storage locations had no issues
and an additional 33 percent of the items had less than five issues
during the same 2-year period; (8) maintaining inventory that is not
needed is expensive and does not contribute to an effective, efficient,
and responsive supply system; and (9) based on GAO's analysis, GAO
estimates the services could save about $382 million annually in
inventory holding costs by eliminating inventory at nonmajor locations
that is not needed to meet current operating and war reserve
requirements.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-47
     TITLE:  Defense Inventory: Spare and Repair Parts Inventory Costs 
             Can Be Reduced
      DATE:  01/17/97
   SUBJECT:  Logistics
             Military inventories
             Military cost control
             Spare parts
             Military downsizing
             Property disposal
             Army supplies
             Air Force supplies
             Inventory control systems
             Surplus federal property

             
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Cover
================================================================ COVER


Report to the Secretary of Defense

January 1997

DEFENSE INVENTORY - SPARE AND
REPAIR PARTS INVENTORY COSTS CAN
BE REDUCED

GAO/NSIAD-97-47

Defense Inventory

(703136)


Abbreviations
=============================================================== ABBREV

  DLA -
  GAO -

Letter
=============================================================== LETTER


B-275462

January 17, 1997

The Honorable William J.  Perry
The Secretary of Defense

Dear Mr.  Secretary: 

This report discusses how the military services can reduce their
spare and repair parts storage and holding costs by consolidating
and/or disposing of inventory that is not needed to meet current
operating and war reserve requirements or is requested infrequently. 

The scope and methodology of our review are described in appendix I. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The Army, the Navy, and the Air Force have about 632,000 line items
of spare and repair parts inventory, valued at $83.5 billion,\1

that are available for general issue.\2 The majority of the general
issue spare and repair parts items are stored at a few major
locations that are managed and operated by the Defense Logistics
Agency (DLA), with the remaining being stored at hundreds of other
service-managed locations.  To illustrate, over 95 percent of the
value of the Army's general issue inventory is stored at
7 major locations and the remaining 5 percent is at 110 other
locations.  The Navy stores 81 percent of its inventory at 6
locations, the other 19 percent at 52 locations.  The Air Force's
storage pattern is similar to the other services.  About 96 percent
of its inventory is stored at 6 major locations and the other 4
percent at 105 locations.  At the DLA storage locations, DLA performs
the receipt, storage, and issue functions and bills the services for
performing these functions.  The services are also billed for the
storage space assigned to them for their items.  The storage costs
range from $0.48 a square foot to $5.15 a square foot depending on
whether it is open or covered storage.  DLA's accounting system
tracks storage costs only in total by type of storage space assigned,
not item-by-item. 


--------------------
\1 The value was determined by multiplying the inventory quantity
shown in the inventory master data files by the unit price. 

\2 General issue inventory is available for issue to the services'
customers.  It does not include inventory stored at contractor or the
services' maintenance facilities, inventory reserved for special
projects, or war reserve inventory. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Most of the services' inventory items stored at nonmajor locations
are in small quantities.  In fact, over 53 percent of the items were
in quantities of 3 or less, while only 25 percent were in quantities
of 11 or more.  However, the inventory at the nonmajor locations is
valued at over $8.3 billion. 

The need for many of the items stored at nonmajor locations is
questionable.  Of the $8.3 billion of inventory at the nonmajor
locations, $2.7 billion of it was not needed to meet the services'
current operating and war reserve requirements.  Our analysis also
showed that many of the Army items\3 were infrequently issued over
the 2-year period ending August 1996.  Over 53 percent of the items
at nonmajor storage locations had no issues and an additional 33
percent of the items had less than five issues during the same 2-year
period. 

Maintaining inventory that is not needed is expensive and does not
contribute to an effective, efficient, and responsive supply system. 
Based on our analysis, we estimate the services could save about $382
million annually in inventory holding costs by eliminating inventory
at nonmajor locations that is not needed to meet current operating
and war reserve requirements. 


--------------------
\3 Information was not readily available from the Air Force and the
Navy to determine the number of inventory issues on an item-by-item
basis at each storage location. 


   SERVICES HAVE SMALL QUANTITIES
   OF INVENTORY STORED AT NUMEROUS
   LOCATIONS
------------------------------------------------------------ Letter :3

The Army, the Navy, and the Air Force own and manage about 632,000
line items of general issue spare and repair parts.  These items have
an inventory quantity of about 108 million, an inventory value of
$83.5 billion, and are stored at 229 different locations by service
as shown in table 1.




                                Table 1
                
                Storage Locations, Quantities, and Value
                  of Army, Navy, and Air Force General
                            Issue Inventory

                         (Dollars in millions)

                             Number of    Number
                               storage   of line  Quantiti
Service                      locations     items        es       Value
------------------------  ------------  --------  --------  ----------
Army                               117    83,759  42,234,6   $10,185.8
                                                        65
Navy                                58   310,762  33,557,3    33,696.8
                                                        88
Air Force                          111   237,460  32,288,8    39,596.9
                                                        96
======================================================================
Total                            286\a   631,981  108,080,   $83,479.5
                                                       949
----------------------------------------------------------------------
\a The same item may be stored at more than one location.  As a
result, the 286 storage locations actually represent 229 separate and
distinct storage locations. 

Even though the services' general issue inventories are stored at
numerous locations, the vast majority of the items are concentrated
at a few major locations.  As shown in table 2, the value of the
general issue inventory at the other-than-major storage locations is
relatively small.  However, it is still worth over $8.3 billion. 



                                     Table 2
                     
                     Value of General Issue Inventory by Type
                               of Storage Location

                              (Dollars in millions)

            Major storage locations               Other storage locations
      ------------------------------------  ------------------------------------
                        Inventory                             Inventory
                --------------------------            --------------------------
Serv                Line                                  Line
ice     Number     items  Quantity   Value    Number     items  Quantity   Value
----  --------  --------  --------  ------  --------  --------  --------  ------
Army         7    81,747  39,464,4  $9,642       110    11,159  2,770,17  $543.6
                                86      .2                             9
Navy         6   239,781  16,631,1  27,359        52   154,069  16,926,2  6,337.
                                04      .3                            84       5
Air          6   222,972  30,680,5  38,163       105    19,097  1,608,35  1,433.
 For                            42      .0                             4       9
 ce
================================================================================
Tota        19  544,500\  86,776,1  $75,16       267  184,325\  21,304,8  $8,315
 l                     a        32     4.5                   a        17      .0
--------------------------------------------------------------------------------
\a The same line item could be stored at both a major and nonmajor
storage location.  For that reason, the sum of line items at the
major and nonmajor storage locations is greater than the number of
line items shown in table 1. 

Our analysis of the items stored at nonmajor locations showed that
the majority of items had small quantities on hand.  As shown in
table 3, over 53 percent of the items (147,232 of the 276,750) had an
on-hand inventory of 3 or less, while about 25 percent of the items
(69,173 of the 276,750) had quantities of 11 or more. 



                                     Table 3
                     
                        Number of Items Stored at Nonmajor
                      Locations by Frequency of Inventory on
                                       Hand

                         Number of items stored at nonmajor locations with a
                                             quantity of:
                      ----------------------------------------------------------
           Number of
                line
Service      items\a         1         2         3       4-6      7-10       11+
--------  ----------  --------  --------  --------  --------  --------  --------
Army          14,532     4,657     2,282     1,230     1,923     1,162     3,238
Navy         242,087    76,715    35,083    18,693    32,029    19,310    60,257
Air           20,131     3,247     3,856     1,469     3,374     2,547     5,638
 Force
================================================================================
Total        276,750    84,619    41,221    21,392    37,326    23,019    69,173
--------------------------------------------------------------------------------
\a Because some items are stored at multiple locations with different
quantities on hand, the number of line items in tables 2 and 3 will
not agree. 


   SOME INVENTORY AT NONMAJOR
   STORAGE LOCATIONS IS NOT NEEDED
   AND IS ISSUED INFREQUENTLY
------------------------------------------------------------ Letter :4

Our analysis of the general issue inventory at nonmajor storage
locations showed that over $2.7 billion of it was excess to the
amount needed to meet current operating and war reserve requirements. 
For these items, there was sufficient inventory on hand at the major
storage locations to meet the peacetime operating and war reserve
requirements.  If the items are not needed to meet current operating
and war reserve requirements, then the question is why the services
continue to store them and incur the inventory storage and holding
costs. 

Table 4 shows the extent of the inventory at nonmajor storage
locations that is not needed to meet current operating and war
reserve requirements. 



                                Table 4
                
                  General Issue Inventory at Nonmajor
                  Storage Locations Not Needed to Meet
                   Current Operating and War Reserve
                              Requirements

                         (Dollars in millions)

                         Inventory at nonmajor storage locations that
                        is excess to current operating and war reserve
                                         requirements
                        ----------------------------------------------
                        Number of line       Inventory       Inventory
Service                          items        quantity           value
----------------------  --------------  --------------  --------------
Army                             4,735         897,638          $169.2
Navy                            95,989      11,945,962         2,398.0
Air Force                        2,981         298,260           176.7
======================================================================
Total                          103,705      13,141,860        $2,743.9
----------------------------------------------------------------------
The following is an example of inventory at a nonmajor storage
location that is not needed to meet current operating and war reserve
requirements.  An Army truck engine for a commercial cargo vehicle,
unit price of $7,010, has a current operating and war reserve
requirement of 214.  There are 360 engines on hand at 4 major storage
locations and an additional 543 engines on hand at 2 nonmajor storage
locations.  The truck engine and its container occupy about 53.6
cubic feet and the total storage space occupied by the 543 engines at
the two nonmajor locations is
29,104 cubic feet.  Because the quantity of engines at nonmajor
storage locations is not needed to meet the current operating and war
reserve requirements, these engines could be disposed of, storage
space could be freed up, and storage costs could be reduced. 

Our analysis of the general issue inventory at nonmajor storage
locations also showed that many of the items are issued infrequently. 
DLA classifies inventory items that have not been requested in the
past 24 months as dormant.  DLA routinely requests the services to
review their dormant stock to determine if the stock is still needed. 
Our analysis of the frequency of inventory issues at nonmajor storage
locations showed that over 53 percent of the Army items,\4 with an
inventory value of $144 million, had no issues for the 2-year period
ending August 1996.  Another 33 percent of the items, with an
inventory value of $132 million, had 5 or fewer issues during the
same 2-year period.  The fact that the number of items issued from
these storage locations is relatively small raises the question of
why the Army continues to store the inventory items there.  Table 5
shows the frequency of issues for the Army's general issue inventory
items at the nonmajor storage locations. 



                                     Table 5
                     
                      Frequency of Army Inventory Issues for
                       the 2-Year Period Ending August 1996

                                       Number of items with:
                    ------------------------------------------------------------
Servic   Number of                                6-10       11-15    16 or more
e          items\a    0 issues  1-5 issues      issues      issues        issues
------  ----------  ----------  ----------  ----------  ----------  ------------
Army        11,159       5,950       3,695         894         416           541
--------------------------------------------------------------------------------
\a The number of line items will not agree with the total number of
issues because the same item may be stored at more than one location
and could have had a different number of issues at each location.  In
such cases, the number of issues would be cumulative. 

The following example illustrates the type of items that are stored
at the nonmajor storage locations and have not had any issues during
the past
2 years. 

  -- An electronics unit, unit price of $12,532, which is used on the
     multiple launch rocket system has an on-hand balance of 11 at 4
     nonmajor storage locations.  This item has not been issued from
     the four locations during the past 2 years.  Therefore, there is
     no need to maintain these items at the four storage locations
     and incur storage costs. 


--------------------
\4 The Navy and the Air Force does not maintain inventory issue data
by storage location.  As a result, we could not determine the number
of issues for the Navy and the Air Force items stored at nonmajor
storage locations. 


   MAINTAINING UNNEEDED
   INVENTORIES IS EXPENSIVE AND
   DOES NOT CONTRIBUTE TO SUPPLY
   EFFECTIVENESS
------------------------------------------------------------ Letter :5

Maintaining inventory that is not needed or is issued infrequently is
expensive.  DLA's charge for covered storage is $5.15 a square foot. 
The charge is not based on the space the particular item occupies but
rather the square footage assigned to it.  To illustrate, if a pack
of washers is being stored in a bin, the storage cost is based on the
bin size and not the number of washer packs in the bin.  Therefore,
if washers are being stored at numerous locations, a storage cost is
charged at each location even though all the washers could be
consolidated into one location. 

According to DLA officials, the Base Realignment and Closure
Commission's reductions in force structure have resulted in the
depots experiencing considerable increases in materiel returns and
redistribution orders.  As a result, the Department of Defense's
storage space occupancy goal of 85 percent\5 is being exceeded by
some depots. 

In an attempt to address this problem, DLA performed a study to
identify ways to free up storage space and reduce storage costs by
disposing of items that are not needed.  The DLA Defense Distribution
Region West's analysis of 3,130 dormant line items of inventory at
its storage facilities showed that by eliminating the dormant line
items, over 126,000 square feet of storage space could be freed up
and the services could save an estimated $989,000 in storage
costs--an average savings of about $316 per line item.\6 It should be
noted that the DLA analysis only covered one of its regions and only
addressed the dormant stock.  It did not address those situations
where inventory quantities could be consolidated into fewer storage
locations.  Therefore, the potential savings in storage costs would
be much greater on a DLA-wide basis. 

During our visit to a storage location, we noted numerous examples
where storage bins capable of holding many items contained only a
few.  Our analysis of the services' inventory data showed that 31
percent of the 276,750 items stored at nonmajor locations had only 1
unit on hand.  In total, 53 percent of the items stored at these
locations had three or less on hand.  In addition, the same items
were also stored at other locations and the on-hand quantities at all
the locations often exceeded the current operating and war reserve
requirements.  The following examples illustrate the inefficiencies
of storing small quantities of items, many of which are unneeded, at
multiple storage locations. 

  -- One $2.96 nonmetallic bumper that is used on the main gun of the
     Bradley fighting vehicle was the only item in a standard, small
     storage bin.  The bin, which occupies 1.83 square feet of space,
     can hold 259 nonmetallic bumpers.  Based on the least expensive
     form of covered storage of
     $5.15 per square foot, it costs the Army $9.42 a year to store
     the $2.96 item.  Our review of Army inventory records showed
     that there are 1,675 stored at 2 other locations.  The Army's
     requirement for this item is 1,271.  Therefore, 404 of the items
     are excess to the Army's needs.  Additionally, over the past 2
     years, there have been only three issues of this item and none
     of the issues were from the storage location where the single
     item was stored. 

  -- Two small bolts, unit price of $9.30, were being stored in a bin
     capable of holding 200 bolts.  The bolt, which is used on the
     MQM 107 target drone, is also stored at 2 other locations and
     the total on-hand quantity is 499 versus a current operating and
     war reserve requirement of 8.  During the last
     2 years, there has only been 1 issue for 20 of the bolts and
     that was from a storage location other than the one visited. 

  -- One ring spacer with a unit price of $0.93 was being stored in a
     bin that could accommodate 177 spacers.  This item, which is
     used on the engine for the OH-58 helicopter, is also stored at 2
     other locations and the on-hand quantity is 137 versus a current
     operating and war reserve requirement of 102.  In the past 2
     years, there have been two issues for a total quantity of six,
     none of which were from the storage location visited. 

  -- Two nonmetallic grommets with a unit price of $2.33 were being
     stored in a bin that can accommodate 20 items.  The item, which
     is used on air delivery equipment, is also stored at another
     location and the total on-hand quantity is 480 versus a current
     operating and war reserve requirement of 54.  During the past 2
     years, there have been 4 issues of the grommet for a total
     quantity of 20.  None of the issues were from the storage
     location visited. 

DLA officials said that from a cost-effectiveness and supply
responsiveness standpoint, it is not necessary to store items at
multiple locations.  They said that the services should not be
concerned where the stock is physically located if DLA can meet the
services' response requirements.  However, under the services'
current inventory stocking policies, the services direct where the
items are stored.  Consequently, this does not always result in the
most economical and cost-effective storage decisions.  The DLA
officials believed that if the decision as to where the stock should
be stored was vested with DLA, better stocking decisions would be
made and storage costs would be reduced.  Based on our analysis of
the number of items stored at nonmajor storage locations, the number
of items not needed to meet current operating and war reserve
requirements, and the number of items that are issued on an
infrequent basis, we would agree that better decisions are needed
concerning where inventory should be stored. 

In addition to the cost to store inventory, the services incur
holding costs.  The services calculate a variable holding cost on an
item-by-item basis to identify those items that are more economical
to stock than not to.\7 Using the services' data, we estimate that
the services could save about $382 million in holding costs by
eliminating inventory at nonmajor locations that is not needed to
meet current operating and war reserve requirements as shown in table
6. 



                                Table 6
                
                Annual Inventory Holding Cost for Items
                Not Needed to Meet Current Operating and
                        War Reserve Requirements

                         (Dollars in millions)

Service                   Number of line items     Annual holding cost
----------------------  ----------------------  ----------------------
Army                                     4,735                   $57.7
Navy                                    95,989                   319.5
Air Force                                822\a                     4.5
======================================================================
Total                                  101,546                  $381.7
----------------------------------------------------------------------
\a The Air Force only calculates holding costs for consumable items;
the other services calculate holding costs for reparable as well as
consumable items.  For this reason, the number of Air Force items
shown above does not agree with the number of items shown in table 4. 


--------------------
\5 When the storage occupancy rate exceeds 85 percent, warehousing
efficiency is affected as items must be moved and relocated in order
to make room for incoming items.  In turn, the frequent movement of
items can result in items being lost or misplaced. 

\6 The storage cost savings ($989,000) divided by the number of
dormant line items (3,130) equals a line item cost of about $316. 

\7 The annual holding cost for an item represents the unit cost of an
item multiplied by the variable cost to hold factor (cost of funds
invested in inventory, losses due to obsolescence, other inventory
losses, and storage costs) multiplied by the quantity on hand. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We recommend that the Secretary of Defense direct the service
secretaries to: 

  -- Begin to consolidate the warehousing of identical items that are
     not needed or infrequently issued at fewer storage locations. 
     This can be accomplished over time by filling item requests by
     depleting the stock at a particular location or locations,
     disposing of unneeded items, and not restocking the items at
     those locations. 

  -- After consolidating the warehousing of items not needed or
     infrequently requested, determine whether all storage facilities
     are needed.  If facilities are no longer needed, take actions to
     close them. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

The Department of Defense concurred with a draft of this report.  It
said that DLA was coordinating with the military services to
reengineer the distribution system with the objectives of providing
greater responsiveness to the customer and increasing efficiencies in
receiving, storing, and shipping spare parts inventories.  The
Department also stated that these increased efficiencies should
reduce the number of required storage facilities.  To accomplish
these objectives, the military services will be requested to review
the items stored in multiple locations, which are either not needed
or infrequently issued in order to identify opportunities for
consolidation. 


---------------------------------------------------------- Letter :7.1

As you know, 31 U.S.C.  720 requires the head of a federal agency to
submit a written statement on actions taken on our recommendations to
the House Committee on Government Reform and Oversight and the Senate
Committee on Governmental Affairs not later than 60 days after the
date of this report.  A written statement must also be submitted to
the House and Senate Committees on Appropriations with the agency's
first request for appropriations made more than 60 days after the
date of the report. 

We are sending copies of this report to the Secretaries of the Army,
the Navy, and the Air Force; the Commander of DLA; and the Director,
Office of Management and Budget.  Copies will also be sent to the
Chairmen and Ranking Minority Members, House Committee on Government
Reform and Oversight, Senate Committee on Governmental Affairs, House
and Senate Committees on Appropriations, House Committee on National
Security, Senate Committee on Armed Services, and House and Senate
Committees on the Budget. 

Please contact me on (202) 512-5140 if you have any questions
concerning this report.  Major contributors to this report are listed
in appendix II. 

Sincerely yours,

Mark E.  Gebicke
Director, Military Operations
 and Capabilities Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

We reviewed and analyzed master data files from the Army, the Navy,
and the Air Force to identify the number of spare and repair parts
they manage.  From these files, we determined the on-hand inventory
available for general issue and the storage locations of the general
issue inventory.  We arrayed the inventory by storage location and
dollar value in descending order to identify natural break points for
determining which storage locations should be considered major
storage locations and which nonmajor. 

Using the above information for the inventory at the nonmajor storage
locations, we determined whether the on-hand inventory was excess to
the current operating and war reserve requirements.  In making this
determination, we first applied the inventory at the major storage
locations to the requirements.  In those cases where the inventory at
the major locations was not sufficient to satisfy the requirements,
we then applied inventory from the nonmajor storage locations.  Any
remaining inventory at these storage locations was considered excess
to the current operating and war reserve requirements. 

We used the item transaction history data files, which show all
requests for an item for the past 24 months, to assess the frequency
of requests for items at the nonmajor storage locations.  We then
compared the results of this analysis to a similar analysis of
frequency of request for the same items at the major storage
locations in order to determine the extent that items at the nonmajor
storage locations are infrequently requested. 

We also interviewed service and DLA officials and reviewed internal
studies and reports to determine their views on the potential for
consolidating and/or eliminating inventory items that are not needed
or are infrequently requested. 

Our review was conducted between March and November 1996 in
accordance with generally accepted government auditing standards. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Sharon A.  Cekala
Robert J.  Lane

KANSAS CITY FIELD OFFICE

Leonard C.  Hill1 Robert C.  Sommer
Richard E.  Burrell
Mark T.  Amo


*** End of document. ***




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