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United States Government Accountability Office: 
GAO: 

Defense Inventory: 

Actions Needed to Improve the Defense Logistics Agency's Inventory 
Management: 

Defense Inventory: 

Report to the Subcommittee on Readiness, Committee on Armed Services, 
House of Representatives: 

June 2014: 

GAO-14-495: 

GAO Highlights: 

Highlights of GAO-14-495, a report to the Subcommittee on Readiness, 
Committee on Armed Services, House of Representatives. 

Why GAO Did This Study: 

DLA manages about one-fifth of DOD's $95 billion in secondary item 
inventory, such as spare parts to keep military equipment ready and 
operating. GAO has identified DOD supply-chain management as a high-
risk area due in part to ineffective and inefficient inventory-
management practices and weaknesses in forecasting the demand for 
spare parts. These factors have contributed to the creation of on-order
and on-hand excess inventory. 

GAO was asked to review DLA's inventory-management practices. GAO 
reviewed, among other things, the extent to which DLA has (1) developed
and met goals to reduce on-hand inventory and on-order excess 
inventory while reducing backorders, and any challenges faced in doing 
so, and (2) implemented initiatives using a comprehensive management 
approach to improve inventory management. GAO analyzed inventory data 
from 2009 through 2013, evaluated DLA's inventory processes, and 
interviewed DLA and DOD officials. 

What GAO Found: 

The Defense Logistics Agency (DLA) developed and met goals for 
reducing on-hand inventory and on-order excess inventory (i.e., 
already purchased items that may be excess due to subsequent changes 
in the services' requirements) and has made progress towards its goals 
for reducing backorders (shortages of spare parts), but challenges 
remain. DLA disposed of $4 billion in items for a net reduction of 
$2.5 billion to its on-hand inventory after continued replenishments
to achieve its fiscal year 2013 goal of $11.7 billion. DLA used a risk-
based approach to identify items to be disposed, resulting, for 
example, in a reduction of about $657 million in items with no demand 
in 5 years. Also, DLA has reduced on-order excess inventory from 6.7 
percent of the total value of on-order inventory in 2011 to 5.6 
percent in 2013, which is progress toward the Department of Defense's 
(DOD) 4 percent goal by the end of fiscal year 2016. DLA has also 
reduced backorders by nearly 30 percent through monthly reviews.
However, some challenges remain. 

On-hand inventory: To meet its fiscal year 2013 goal, DLA disposed of 
$855 million in items that DLA's economic analyses determined should 
be kept due to the risk DLA will need to buy the same items again in 
the future. The DLA Director stated that he was willing to accept the 
risk of needing to rebuy some inventory to reduce DLA's on-hand 
inventory. According to DLA's analysis, it will likely need to dispose 
of about $1.9 billion more in economic retention stock to meet its $10 
billion goal for fiscal year 2014, increasing the likelihood of buying
the same items again to meet future requirements. DOD guidance states 
that an economic analysis that balances the likelihood of repurchase 
with the cost of retention and disposal should guide retention 
decisions. In 2012, DLA estimated that it would have had to buy 42 
percent of the dollar value of the items again over a 5-year period if 
it had disposed of all its economic retention stock. Without 
reassessing its goals and schedule for achieving them, DLA risks 
unneeded expenditures to buy the disposed of items again. 

On-order excess inventory: Results across DLA's aviation, land, and 
maritime organizations-—referred to as supply chains-—have varied, 
with increases for land and maritime in fiscal year 2013. Also, DLA 
has not established supply chain–specific goals and does not regularly 
collect data or review on-order excess inventory performance for its 
supply chains, as it does with numerous other metrics, such as 
backorders. Although DLA has shown progress toward meeting DOD's goal 
for reducing on-order excess inventory, without establishing supplychain
goals and monitoring performance it may be challenged to meet its goal 
of reducing on-order excess to 4 percent by the end of fiscal year 
2016. 

DLA has implemented several improvement efforts, such as new methods 
for setting inventory levels and reducing procurement time. However, 
DLA data shows that its collaborative forecasting effort, which uses 
customer input to produce forecasts, has not improved aggregate 
forecast accuracy. DLA measures forecast accuracy, but lacks metrics 
for key aspects of performance, such as cost and return on investment, 
as required by DOD guidance, or regular performance meetings to 
monitor results and guide continued improvement. Without improved 
management of collaborative forecasting, DLA may not be using its 
resources efficiently and effectively to improve forecasting accuracy. 

What GAO Recommends: 

GAO is making multiple recommendations designed to strengthen 
inventory management, including that DLA reassess its inventory-
reduction goals and schedule for achieving them based on DLA's 
economic analyses; regularly monitor its progress in reducing on-order
excess inventory; establish supply chain–specific on-order excess
inventory goals; and take steps to improve its collaborative 
forecasting, such as regularly monitoring performance. DOD concurs with
GAO's recommendations. 

View GAO-14-495. For more information, contact Zina Merritt at (202) 
512-5257 or merrittz@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

DLA Has Reduced Its On-Hand Inventory and Met Reduction Goals, but 
Disposed of Items That May Have to Be Bought Again and Lacks Oversight 
of Its On-Order Excess Inventory: 

DLA Is Implementing Efforts to Improve Inventory Management but Can 
Strengthen Collaborative Forecasting: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: The Department of Defense's (DOD) Inventory Improvement 
Plan: 

Appendix II: The Defense Logistics Agency's Metrics Generally Balance 
Availability of Spare Parts and Total Supply-Chain Costs: 

Appendix III: Objectives, Scope, and Methodology: 

Appendix IV: Printer-Friendly Version of Figure 1--Selected Defense 
Logistics Agency (DLA) Categories of Inventory Items: 

Appendix V: Overview of Typical Causes of On-hand Excess Inventory: 

Appendix VI: On-Hand Inventory Levels for Aviation, Land, and Maritime 
Supply Chains: 

Appendix VII: Value of the Defense Logistics Agency's On-Order and On-
Order Excess Inventory: 

Appendix VIII: Additional Defense Logistics Agency Efforts to Improve 
Inventory Management: 

Appendix IX: Defense Logistics Agency's Approaches for Planning 
Amounts of Inventory: 

Appendix X: Print-Friendly Version of Figure 8--Overview of the 
Defense Logistics Agency's (DLA) Regular Performance-Management 
Meetings: 

Appendix XI: Comments from the Department of Defense: 

Appendix XII: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Value of the Department of Defense's (DOD) and the Defense 
Logistics Agency's (DLA) Inventory, Fiscal Years 2009-2012: 

Table 2: Value of Aviation, Land, and Maritime Supply Chains' 
Inventory, Fiscal Years 2009-2012: 

Table 3: Timeline of Changes to Defense Logistics Agency's (DLA) On-
Hand Inventory Goals and Schedule: 

Table 4: Total Backorders and Aged Backorders versus Command Goals as 
of September 2013: 

Table 5: Defense Logistics Agency's (DLA) Forecast Accuracy and Error 
Metrics: 

Table 6: The Nine Subplans and Corresponding Objectives: 

Table 7: The Defense Logistics Agency's (DLA) Value of On-Order and On-
Order Excess Inventory, Fiscal Years 2011-2013: 

Table 8: Value of Inventory DLA Redistributed and Procured to Reduce 
or Replace a Planned Purchase since Fiscal Year 2011: 

Table 9: DLA's Approaches to Determining the Amount of Inventory: 

Figures: 

Figure 1: Selected Categories of the Defense Logistics Agency's (DLA) 
Inventory Items: 

Figure 2: Defense Logistics Agency (DLA) Inventory Levels from End of 
March 2012 to End of September 2013: 

Figure 3: Value of Inventory Items with Years of No Demand Held by the 
Defense Logistics Agency's (DLA) Aviation, Land, and Maritime Supply 
Chains at the End of Fiscal Years 2012 and 2013: 

Figure 4: Value of the Defense Logistics Agency's (DLA) Aviation, 
Land, and Maritime Supply Chain Inventory beyond the Approved 
Acquisition Objective by Projected Years of Supply, End of Fiscal 
Years 2009-2013: 

Figure 5: The Defense Logistics Agency's (DLA) On-Order Excess 
Inventory Percentages, End of Fiscal Years 2011-2013: 

Figure 6: Value of Defense Logistics Agency (DLA) Backorders, End of 
Fiscal Years 2009-2013: 

Figure 7: Overview of DLA's Metrics in Customer Service, Cost, and 
Internal Efficiency Areas: 

Figure 8: Overview of the Defense Logistics Agency's (DLA) Regular 
Performance-Management Meetings: 

Figure 9: Defense Logistics Agency's (DLA) Aviation Supply Chain On-
Hand Inventory, End of Fiscal Years 2009-2013: 

Figure 10: Defense Logistics Agency's (DLA) Land Supply Chain On-Hand 
Inventory, End of Fiscal Years 2009-2013: 

Figure 11: Defense Logistics Agency's (DLA) Maritime Supply Chain On-
Hand Inventory, End of Fiscal Years 2009-2013: 

Abbreviations: 

DLA: Defense Logistics Agency: 

DOD: Department of Defense: 

DORRA: DLA Office of Operations Research and Resource Analysis: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

June 19, 2014: 

The Honorable Robert Wittman: 
Chairman: 
The Honorable Madeleine Z. Bordallo: 
Ranking Member: 
Subcommittee on Readiness: 
Committee on Armed Services: 
House of Representatives: 

The Department of Defense (DOD) manages more than 5 million secondary 
inventory items (hereafter referred to as inventory), including spare 
parts and other items,[Footnote 1] with a reported value of 
approximately $95 billion as of September 2012.[Footnote 2] The 
Defense Logistics Agency (DLA) manages about one-fifth of DOD's 
inventory, specifically consumable parts[Footnote 3] and other 
supplies needed to keep military equipment ready and operating. As we 
have previously reported, the federal government is facing serious 
long-term fiscal challenges, and DOD likely will encounter 
considerable budget pressures over the next decade.[Footnote 4] To 
address these pressures, DOD issued strategic guidance in January 2012 
emphasizing the need to reduce its cost of doing business, in 
particular finding efficiencies in overhead, business practices, and 
support activities.[Footnote 5] Furthermore, the Secretary of 
Defense's 2013 Strategic Choices Management Review, which explored 
defense strategy and management options in the face of continuing 
budget cuts, concluded that DOD needs to continue efforts to reduce 
overhead and become more efficient. In light of these efforts, 
effective and efficient inventory management--a key support activity 
that affects the readiness of the force--is critical for DOD to avoid 
spending resources on unneeded inventory that could be better applied 
to other defense and national priorities. 

Since 1990, we have identified DOD supply-chain management[Footnote 6] 
as a high-risk area due in part to ineffective and inefficient 
inventory-management practices and procedures, weaknesses in 
accurately forecasting the demand for spare parts, and challenges in 
achieving widespread implementation of key technologies aimed at 
improving asset visibility.[Footnote 7] These factors have contributed 
to the accumulation of billions of dollars in spare parts that are 
excess to current needs.[Footnote 8] We reported in 2012 and 2013 that 
DOD had made progress in reducing its excess inventory and 
implementing its Comprehensive Inventory Management Improvement Plan, 
which was developed and implemented in response to a provision of the 
National Defense Authorization Act for Fiscal Year 2010.[Footnote 9] 
DOD established overarching goals in the plan to reduce the enterprise-
wide percentages of on-order excess inventory--those items already 
purchased but that may be excess due to subsequent changes in 
requirements--and on-hand excess inventory[Footnote 10]--those items 
categorized for potential reuse or disposal. Since DOD was exceeding 
its initial goals for reducing excess inventory, we recommended that 
DOD's efforts would benefit from establishing more-challenging, but 
achievable, goals for reducing excess inventory and that the 
department periodically reexamine and update its goals. In response, 
DOD revised its on-hand excess inventory goal from 10 percent of the 
total value of inventory to 8 percent by fiscal year 2016. However, 
DOD did not make any changes to its on-order excess inventory goals 
and maintains that its current goals of 6 percent of the total value 
of on-order inventory by 2014 and 4 percent by 2016 are sufficient. We 
provide further information about DOD's Comprehensive Inventory 
Management Improvement Plan in appendix I. 

In response to your request that we evaluate DLA's inventory 
management, this report assesses the extent to which DLA has (1) 
developed and met goals to reduce on-hand inventory and on-order 
excess inventory while reducing backorders (i.e., parts shortages) and 
faced any implementation challenges, and (2) implemented initiatives 
using a comprehensive management approach to improve inventory 
management. We also examined the extent to which DLA's metrics balance 
the timely availability of spare parts with total supply-chain costs, 
and report on this issue in appendix II. This is the first in a series 
of our reviews examining DOD's inventory management. Three additional 
reviews on Army, Navy, and Air Force inventory management are 
underway, pursuant to a congressional request, and we plan to report 
the results in early 2015. 

To assess the extent to which DLA developed and met goals to reduce on-
hand inventory and on-order excess inventory while reducing shortages 
and faced any implementation challenges, we analyzed DLA's November 
2009 through September 2013 inventory data, which stratify inventory 
into categories to assess the ability of the inventory to meet 
military services' requirements and ensure that surplus inventories 
are kept only if warranted.[Footnote 11] To assess the reliability of 
the data, we reviewed DOD requirements for secondary spare parts 
inventory reporting, comparing the data we generated from DLA-provided 
electronic files to its summary tables, searching for and reconciling 
inconsistent information, and discussing DLA's data and our findings 
with database managers. We determined the inventory data were 
sufficiently reliable for the purposes of this report in determining 
DLA's amount of inventory and reasons for holding that inventory. We 
focused our analysis on data from DLA's aviation, land, and maritime 
supply chains since they constituted $9.8 billion of DLA's $13.1 
billion in nonenergy inventory[Footnote 12] at the end of fiscal year 
2012. With respect to on-order excess inventory, we analyzed DLA's 
inventory data to determine the amount of on-order excess inventory 
and reviewed DLA's processes for managing and overseeing on-order 
excess inventory and compared these processes against leading 
practices for results-oriented management.[Footnote 13] With respect 
to backorders for spare parts, we reviewed DLA-generated reports to 
assess the status and extent of its efforts to reduce the number of 
backorders, and reviewed DLA's aviation, land, and maritime goals for 
reducing backorders and evaluated DLA's progress in meeting those 
goals. We also examined DLA performance-management briefings; 
documentation related to DLA's effort to reduce its on-hand inventory, 
on-order excess inventory, and backorders; DOD and DLA inventory-
management policies and procedures; and other reports and analyses 
related to the potential for buying inventory again after it is 
disposed of.[Footnote 14] We interviewed DLA headquarters and 
aviation, land, and maritime supply-chain officials to discuss DLA's 
efforts to reduce on-hand inventory, on-order excess inventory, and 
backorders. Additionally, we met with Office of the Deputy Assistant 
Secretary of Defense for Supply Chain Integration officials to discuss 
DLA's efforts. 

To assess the extent to which DLA has implemented initiatives using a 
comprehensive management approach to improve inventory management, we 
interviewed officials with DLA headquarters and the Office of the 
Deputy Assistant Secretary of Defense for Supply Chain Integration to 
identify improvement initiatives. We focused on four key efforts DLA 
officials identified as significant to reducing excess inventory: 
collaborative forecasting, inventory level-setting for items with low 
or highly variable demand, improving acquisition lead-time accuracy 
and reducing acquisition lead times, and improving efficiency of DLA's 
supply, storage, and distribution processes. We analyzed DLA's 
collaborative forecasting, which is a process that allows DLA and the 
military services to work together to tailor forecast plans for items 
rather than DLA establishing a forecast based solely on historical 
demand patterns, by reviewing DLA's metrics to evaluate the extent its 
metrics addressed performance and costs, as required by DOD guidance. 
[Footnote 15] Additionally, we reviewed and analyzed DLA's management 
approach for the program to determine whether it followed leading 
practices for results-oriented management, such as holding regular 
performance-management meetings to guide continued 
improvement.[Footnote 16] We discussed the metrics and the assessment 
methodology DLA uses for tracking and evaluating collaborative 
forecasting performance with DLA headquarters and aviation, land, and 
maritime supply-chain officials. We also discussed the challenges and 
weaknesses of the metrics for assessing collaborative forecasting with 
various DLA officials. To examine the extent to which DLA has 
implemented metrics that balance the timely availability of spare 
parts to customers with total supply-chain costs, we analyzed DLA's 
use of metrics to manage its inventory and reviewed documentation from 
a number of different metrics meetings held at DLA headquarters and 
supply chains. Appendix III provides further information on our scope 
and methodology. 

We conducted this performance audit from June 2013 to June 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

The DOD supply chain is a global network that provides materiel, 
services, and equipment to the joint force. DOD's supply-chain 
responsiveness and reliability affects the readiness and capabilities 
of military forces and is critical to the overall success of joint 
operations. According to DOD joint doctrine, logisticians must manage 
DOD's equipment and inventory, manage global distribution and supplier 
networks, and integrate all aspects of the supply chain. Inventory 
management is the process of determining requirements, and procuring, 
managing, cataloging, distributing, overhauling, and disposing of 
materiel.[Footnote 17] Managing inventory throughout the supply chain 
requires collaboration with supply and maintenance activities and 
distribution providers to enable the greatest effect at best value. 
Managing global distribution and supplier networks is integral to 
supply-chain operations to ensure delivery of the right items to the 
right place at the right time.[Footnote 18] Logisticians manage 
supplies and equipment by providing visibility over assets, which 
should result in a seamless integration of supply operations from 
acquisition to delivery.[Footnote 19] 

The military services, U.S. Transportation Command, and DLA are key 
supply-chain organizations that constitute DOD's supply-chain network. 
The military services are responsible for supplying, organizing, 
training, and equipping the force. To carry out this responsibility, 
the military services procure and manage inventory to support the 
maintenance of their equipment and to equip the force. U.S. 
Transportation Command, in addition to its responsibilities for 
transporting supplies and equipment in support of military operations, 
has been designated as DOD's Distribution Process Owner with 
responsibility for overseeing the overall effectiveness, efficiency, 
and alignment of DOD-wide distribution activities.[Footnote 20] DLA 
manages, integrates, and synchronizes suppliers and supply chains to 
provide materiel to the military services, allies, and multinational 
partners. DLA provides support across nine diverse supply chains: 
aviation, clothing and textile, construction and equipment, energy, 
land, maritime, medical, industrial hardware, and subsistence. To 
carry out its responsibilities, DLA manages a global network of 
distribution depots that receive, store, and issue a wide range of 
commodities owned by the military services, General Services 
Administration, and DLA. 

Management and oversight of DLA inventory is a responsibility shared 
between the Under Secretary of Defense for Acquisition, Technology and 
Logistics and the DLA Director. The Under Secretary of Defense for 
Acquisition, Technology and Logistics is responsible for developing 
materiel-management policies and ensuring their implementation in a 
uniform manner throughout the department, while the DLA Director is 
responsible for implementing DOD policies and procedures for materiel 
management. 

DLA Currently Manages about One-Fifth of DOD's $95 Billion of 
Inventory: 

DOD reported that the total value of its inventory was about $95 
billion as of September 30, 2012. The value of DLA's inventory 
(including energy) at the end of fiscal year 2012 was $20.8 billion, 
which is approximately one-fifth of the value of DOD's inventory (see 
table 1).[Footnote 21] 

Table 1: Value of the Department of Defense's (DOD) and the Defense 
Logistics Agency's (DLA) Inventory, Fiscal Years 2009-2012: 

Billions of nominal dollars: 

Fiscal year: 2009; 
Value of DOD inventory[A]: $89.9; 
Value of DOD inventory owned by DLA (including energy): $16.9; 
Percentage of DOD inventory owned by DLA (including energy): 18.8%. 

Fiscal year: 2010; 
Value of DOD inventory[A]: 95.6; 
Value of DOD inventory owned by DLA (including energy): $19.0; 
Percentage of DOD inventory owned by DLA (including energy): 19.9%. 

Fiscal year: 2011; 
Value of DOD inventory[A]: 98.9; 
Value of DOD inventory owned by DLA (including energy): $21.3; 
Percentage of DOD inventory owned by DLA (including energy): 21.5%. 

Fiscal year: 2012; 
Value of DOD inventory[A]: 95.0; 
Value of DOD inventory owned by DLA (including energy): $20.8; 
Percentage of DOD inventory owned by DLA (including energy): 21.9%. 

Source: GAO analysis of DOD data. 

Notes: DOD values inventory at latest acquisition cost, with 
reductions for reparable inventory in need of repair and salvage 
prices for potential reutilization/disposal stock (or on-hand excess). 
These values are reported in DOD's annual Supply System Inventory 
Report. Fiscal Year 2013 department-wide inventory values were not 
available at the time of the issuance of this report. 

[A] Total values of DOD inventory includes inventory held by the 
military services. 

[End of table] 

In fiscal year 2012, the value of DLA's aviation, land, and maritime 
supply chains comprised approximately 75 percent of the value of DLA's 
non-energy inventory, or approximately $9.8 billion of DLA's $13.1 
billion non-energy inventory (see table 2). 

Table 2: Value of Aviation, Land, and Maritime Supply Chains' 
Inventory, Fiscal Years 2009-2012: 

Billions of nominal dollars: 

Fiscal year: 2009; 
Value of DLA inventory (including energy): $16.9; 
Value of DLA inventory (excluding energy): $12.4; 
Value of DLA aviation, land, and maritime supply chains: $9.8; 
Percentage of DLA inventory (excluding energy) held by aviation, land, 
and maritime supply chains: 79.0%. 

Fiscal year: 2010; 
Value of DLA inventory (including energy): $19.0; 
Value of DLA inventory (excluding energy): $13.7; 
Value of DLA aviation, land, and maritime supply chains: $11.0; 
Percentage of DLA inventory (excluding energy) held by aviation, land, 
and maritime supply chains: 80.3%. 

Fiscal year: 2011; 
Value of DLA inventory (including energy): $21.3; 
Value of DLA inventory (excluding energy): $13.7; 
Value of DLA aviation, land, and maritime supply chains: $11.1; 
Percentage of DLA inventory (excluding energy) held by aviation, land, 
and maritime supply chains: 81.0%. 

Fiscal year: 2012; 
Value of DLA inventory (including energy): $20.8; 
Value of DLA inventory (excluding energy): $13.1; 
Value of DLA aviation, land, and maritime supply chains: $9.8; 
Percentage of DLA inventory (excluding energy) held by aviation, land, 
and maritime supply chains: 74.8%. 

Source: GAO analysis of DOD data. 

Notes: DOD values inventory at latest acquisition cost, with 
reductions for reparable inventory in need of repair and salvage 
prices for potential reutilization/disposal stock (or on-hand excess). 
These values are reported in DOD's annual Supply System Inventory 
Report. Fiscal Year 2013 department-wide inventory values were not 
available at the time of the issuance of this report. 

[End of table] 

DLA's Process for Categorizing Inventory for Reporting Requirements: 

DOD guidance requires DLA to assess the ability of the inventory to 
meet the military services' requirements and ensure that surplus 
inventories are kept only if warranted.[Footnote 22] To accomplish 
this directive, the guidance requires the services and DLA to group 
their item inventories into several specific categories, according to 
the purpose for which they are held.[Footnote 23] The categorization 
is designed to provide visibility of DOD inventory requirements, 
assets (on-hand and on-order), demand, and overages or shortfalls. 

As specified in DOD guidance, the categories include inventory needed 
to support the approved acquisition objective[Footnote 24] and three 
inventory categories that exceed the approved acquisition objective 
(see figure 1).[Footnote 25] As reported by DLA, the approved 
acquisition objective includes materiel needed to meet the 
requirements objective, 2 years of estimated future demand, war-
reserve materiel held for the services,[Footnote 26] and materiel held 
because it comes from a diminishing manufacturing source.[Footnote 27] 
The three categories that exceed the approved acquisition objective 
are economic retention stock, contingency retention stock, and 
potential reutilization stock (i.e., on-hand excess inventory). Figure 
1 summarizes how DLA inventory categories are aggregated for 
reporting. Appendix IV provides a printer-friendly version of figure 1. 

Figure 1: Selected Categories of the Defense Logistics Agency's (DLA) 
Inventory Items: 

[Refer to PDF for image: Interactive graphic] 

Roll over an inventory term to see the definition. 

See appendix IV for the printer-friendly version. 

Source: GAO analysis of Department of Defense (DOD) guidance and DLA 
inventory practices. GAO-14-495. 

[End of figure] 

As reported by DLA, the requirements objective is the sum of stock 
represented by: 

* safety levels--amount of stock that is to be kept on hand in case of 
minor interruptions in the resupply process or fluctuations in demand; 

* backorders--customer-requisitioned materiel that is not immediately 
available to issue, but is recorded as a commitment for future issue; 

* stock needed to cover acquisition lead times;[Footnote 28] 

* the economic order quantity--quantity derived from a mathematical 
technique used to determine the lowest total variable costs to order 
and hold inventory; and: 

* items with low, infrequent, or highly variable demand.[Footnote 29] 

Inventory that exceeds the approved acquisition objective is 
categorized as retention stock or potential reutilization stock. 
Retention stock includes economic retention stock, which is materiel 
that has been calculated to be more economical to keep than to dispose 
of because it is likely to be needed in the future, and contingency 
retention stock, which is materiel retained to support specific 
contingencies.[Footnote 30] Potential reutilization stock has been 
identified for possible disposal but has potential for reuse and is 
under review for transfer to DLA Disposition Services.[Footnote 31] 
Potential reutilization stock is also referred to as on-hand excess 
inventory. Additionally, DLA tracks on-order excess inventory, which 
are items for which a contract has been awarded or funds have been 
obligated, but due to subsequent changes in requirements would be 
categorized upon arrival as economic retention stock, contingency 
retention stock, or potential reutilization stock. (See appendix V for 
an overview of the typical causes of on-hand excess inventory.) 

DLA Has Reduced Its On-Hand Inventory and Met Reduction Goals, but 
Disposed of Items That May Have to Be Bought Again and Lacks Oversight 
of Its On-Order Excess Inventory: 

DLA has significantly reduced its amount of on-hand inventory by 
setting internal goals for inventory reduction and disposing of nearly 
$4 billion of on-hand inventory; however, DLA disposed of about $855 
million in items that DLA's analyses show were more economical to keep 
due to the likelihood of the items needing to be bought again. DLA has 
also made progress in reducing its on-order excess inventory since 
2011, but results across DLA's aviation, land, and maritime supply 
chains have varied, including increases in on-order excess inventory 
in fiscal year 2013 for the land and maritime supply chains. In 
addition, DLA does not routinely monitor on-order excess levels and 
lacks supply chain-specific goals to focus the supply chains' efforts. 
Finally, DLA has reduced backorders--part shortages that can affect 
the readiness of operational units as well as delay work at 
maintenance depots--by nearly 30 percent through intensive management 
practices, such as monthly reviews. 

DLA Has Disposed of Significant Amounts of Excess Inventory to Meet 
Its Inventory-Reduction Goals, but Analyses Show That Some Stock May 
Have to Be Bought Again in the Near Future: 

DLA established goals for reducing the amount of its on-hand inventory 
in February 2012 and met its fiscal year 2013 goal in part by 
disposing of more than $4 billion of on-hand inventory; however, DLA 
disposed of about $855 million in items that DLA's analyses show were 
more economical to keep due to the likelihood of the items needing to 
be bought again. DLA used a risk-based approach to identify inventory 
to be disposed of, resulting, for example, in a reduction of about 
$660 million of inventory for which there had been no demand in over 5 
years. Furthermore, to meet its end of fiscal year 2014 goal, DLA's 
analysis shows that it will likely need to reduce, largely through 
disposals, approximately $1.9 billion more in inventory that DLA 
analyses have determined are more economical to keep. 

DLA Goals and Timelines for Reducing Its On-Hand Inventory by $6 
Billion Have Evolved over Time: 

In February 2012, DLA established a goal of achieving a $6 billion on-
hand inventory reduction by the end of fiscal year 2017, which meant 
reducing on-hand inventory from $14.2 billion to approximately $8.2 
billion.[Footnote 32] According to DLA headquarters officials, the 
goal was established to reduce warehouse costs for storing inventory 
and to right-size DLA's inventory to prevent cuts to DLA's working 
capital fund obligation authority.[Footnote 33] In December 2012, DLA 
accelerated its target date for reaching $8.2 billion in on-hand 
inventory to the end of fiscal year 2015. In addition, DLA established 
end of the fiscal year interim goals of $11.7 billion and $10.1 
billion for 2013 and 2014, respectively. In May 2013, DLA again 
accelerated its schedule for reducing on-hand inventory to $8.2 
billion and achieving a $6 billion reduction in on-hand inventory by 
the end of fiscal year 2014. See table 3 for a timeline of changes to 
DLA's on-hand inventory goals and schedule. 

Table 3: Timeline of Changes to Defense Logistics Agency's (DLA) On-
Hand Inventory Goals and Schedule: 

Date: February 2012; 
DLA's on-hand inventory goal: $8.2 billion by end of fiscal year 2017; 
Action taken: DLA establishes goal of a net $6 billion reduction to on-
hand inventory (from $14.2 billion to $8.2 billion). 

Date: December 2012; 
DLA's on-hand inventory goal: $11.7 billion by end of fiscal year 2013; 
$10.1 billion by end of fiscal year 2014; 
$8.2 billion by end of fiscal year 2015; 
Action taken: DLA accelerates the schedule for achieving the net $6 
billion reduction to fiscal year 2015 and identifies annual goals for 
fiscal years 2013 and 2014. 

Date: May 2013; 
DLA's on-hand inventory goal: $11.7 billion by end of fiscal year 2013; 
$8.2 billion by end of fiscal year 2014; 
Action taken: DLA accelerates the schedule for achieving the net $6 
billion reduction to fiscal year 2014. 

Date: November 2013; 
DLA's on-hand inventory goal: $10 billion by end of fiscal year 2014; 
Action taken: DLA changes the fiscal year 2014 goal to $10 billion 
after aviation, land, and maritime supply-chain officials demonstrate 
potential negative effects of reducing on-hand inventory to $8.2 
billion. 

Source: GAO analysis of DLA information. 

[End of table] 

From June through September 2013, aviation, land, and maritime supply-
chain officials presented analyses to the DLA Director demonstrating 
the potential negative effect--the need to buy inventory again after 
disposal and the decrease in the availability of spare parts to 
customers--of reducing on-hand inventory to $8.2 billion by the end of 
fiscal year 2014. As a result, in October 2013 the DLA Director 
revised the goal for the end of fiscal year 2014 to approximately $10 
billion in on-hand inventory, thereby slowing the reduction of DLA's 
on-hand inventory. According to DLA officials, the fiscal year 2014 
goal of $10 billion may be changed later in fiscal year 2014 if it 
appears unobtainable without significant rebuy risk. Also, future 
inventory reductions beyond the fiscal year 2014 goal will be 
discussed and analyzed in late fiscal year 2014, according to DLA 
officials. 

DLA Has Disposed of $4 Billion in On-Hand Inventory to Reach Its 
Fiscal Year 2013 Goal: 

To meet its fiscal year 2013 goal of $11.7 billion on-hand inventory, 
DLA disposed of $4 billion in inventory over fiscal years 2012 and 
2013, which contributed to a net inventory reduction of more than $2.5 
billion.[Footnote 34] Disposing of inventory is the process of 
reutilizing, transferring, selling, or destroying items.[Footnote 35] 
See figure 2 below for DLA's on-hand inventory levels from March 2012 
until the end of fiscal year 2013. In addition, see appendix VI for 
the on-hand inventory levels at the aviation, land, and maritime 
supply chains. 

Figure 2: Defense Logistics Agency (DLA) Inventory Levels from End of 
March 2012 to End of September 2013: 

[Refer to PDF for image: stacked vertical bar graph] 

Billions of nominal dollars: 

Date: March 2012; 
Approved acquisition objective[E]: $8.28; 
Economic retention stock[D]: $3.78; 
Contingency retention stock[C]: $1.72; 
Potential reutilization stock[B]: $0.45. 

Date: September 2012; 
Approved acquisition objective[E]: $7.7; 
Economic retention stock[D]: $3.46; 
Contingency retention stock[C]: $1.89; 
Potential reutilization stock[B]: $0.64. 

Date: March 2013; 
Approved acquisition objective[E]: $7.93; 
Economic retention stock[D]: $3.38; 
Contingency retention stock[C]: $1.8; 
Potential reutilization stock[B]: $0.63. 

Date: September 2013; 
Approved acquisition objective[E]: $8.36; 
Economic retention stock[D]: $1.89; 
Contingency retention stock[C]: $0.47; 
Potential reutilization stock[B]: $0.95. 

Date: January 2014; 
Approved acquisition objective[E]: $8.74; 
Economic retention stock[D]: $2.04; 
Contingency retention stock[C]: $0.54; 
Potential reutilization stock[B]: $0.66. 

Date: September 2014 goal[A]; 
Approved acquisition objective[E]: $8.2; 
Economic retention stock[D]: $1.44; 
Contingency retention stock[C]: $0.26; 
Potential reutilization stock[B]: $0.1. 

Source: GAO analysis of DLA data. GAO-14-495. 

[A] The breakout of the categories for the September 2014 goal is 
notional. 

[B] Potential reutilization stock is materiel exceeding the approved 
acquisition objective and not being retained as economic or 
contingency retention stock, and has been identified as excess 
materiel for possible disposal but has potential for reutilization. 
Potential reutilization stock is also referred to as on-hand excess 
inventory. 

[C] Contingency retention stock is materiel that is retained to 
support specific contingencies, such as to support foreign military 
sales, future military operations, and disaster relief or civil 
emergencies, or to mitigate risk associated with diminishing 
manufacturing sources or nonprocurable stock. 

[D] Economic retention stock is materiel that has been deemed more 
economical to keep than to discard because it is likely to be needed 
in the future. 

[E] Approved acquisition objective includes materiel needed to meet 
the requirements objective, 2 years of estimated future demand, war-
reserve materiel held for the services, and materiel held because it 
comes from a diminishing manufacturing source. 

[End of figure] 

According to DLA headquarters officials, the benefits of reducing on-
hand inventory are (1) achieving cost-savings by reducing the 
warehouse infrastructure needed to store on-hand inventory and (2) 
preventing reductions to DLA's working capital fund obligational 
authority, which might reduce supply availability for the military 
customers. First, according to DLA headquarters officials, the 
inventory reductions have helped DLA to reduce its warehouse 
infrastructure and return 6.7 million gross square feet of warehouse 
space to its owner, typically a military service, since June 2011. 
[Footnote 36] However, DLA's inventory-reduction effort has not 
focused on maximizing warehouse reductions and there is not a direct 
or consistent correlation between the dollar value of inventory and 
the amount of space required to store the inventory. Second, according 
to DLA headquarters officials, the inventory-reduction effort also has 
demonstrated DLA's commitment to right-sizing its on-hand inventory 
against current operational requirements, which officials believe will 
minimize the likelihood of reductions to DLA's working capital fund's 
obligation authority.[Footnote 37] A reduction to DLA's working 
capital fund obligation authority could prevent DLA from procuring 
parts needed by its customers. 

Of the $4 billion in inventory disposed of over fiscal years 2012 and 
2013, the aviation, land, and maritime supply chains collectively 
disposed of $3.6 billion in inventory. DLA headquarters and aviation, 
land, and maritime supply-chain officials told us they used risk 
assessments to identify inventory for disposal. Generally, DLA 
headquarters and these supply chains prioritized inventory for 
disposal based on numerous variables, such as potential effects on 
customer service and responsiveness, risk of needing to buy the 
inventory again, and years with no demand. For example, the aviation 
supply chain, in collaboration with a private contractor, developed a 
tool that assesses individual items based on a number of factors, such 
as demand frequency, the criticality to particular weapon systems, and 
procurement characteristics, such as long production lead times. The 
tool prioritizes amounts of inventory for each item into categories 
that allow the aviation supply chain to identify the risk level 
associated with disposal. 

DLA headquarters officials and aviation, land, and maritime supply-
chain officials generally prioritized inventory for disposal in the 
following manner: 

* Identified potential reutilization stock and changed potential 
reutilization stock policies: Per DLA's monthly inventory-
stratification process, DLA identified inventory categorized as 
potential reutilization stock, which is stock that is no longer needed 
and has been identified for disposal, but has potential for reuse. 
Additionally, DLA changed its policy to decrease the amount of time 
between when an item is procured and is eligible to be categorized as 
potential reutilization stock from 2 years to 1 year in an effort to 
increase the amount of inventory eligible for disposal. Using the 
standard process for identifying potential reutilization stock and the 
change in policy, the aviation, land, and maritime supply chains 
disposed of $1.4 billion of potential reutilization stock in fiscal 
years 2012 and 2013. 

* Changed contingency retention stock policies for weapon systems: 
Prior to the inventory-reduction effort at DLA, the military services 
were allowed to exclude from disposal all inventory associated with a 
particular weapon system that was not needed to meet the approved 
acquisition objective or would not be retained for economic reasons. 
[Footnote 38] The inventory that was excluded from disposal was 
retained as contingency retention stock. Based on our previous work 
[Footnote 39] and actions associated with the implementation of the 
Comprehensive Inventory Management Improvement Plan,[Footnote 40] DLA, 
in collaboration with the military services, reduced the number of 
excluded weapon systems from 96 in fiscal year 2010 to 17 in fiscal 
year 2013. In addition, DLA imposed constraints on the amount of 
inventory that could be retained as contingency retention stock for 
the excluded weapon systems. As a result, the aviation, land, and 
maritime supply chains were able to dispose of approximately $1.1 
billion in inventory DLA deemed it no longer needed. 

* Changed categorization of inventory items associated with the Mine-
Resistant Ambush Protected (MRAP) vehicle: Prior to the inventory 
reduction, all items supporting the MRAP were categorized as part of 
the approved acquisition objective. During the inventory reduction 
effort, DLA worked closely with the MRAP program and determined that 
DLA could reduce the amount of inventory supporting the program. As a 
result, the aviation, land, and maritime supply chains disposed of 
approximately $211 million in MRAP-related inventory. 

* Approved disposal of economic retention stock: As a result of the 
risk assessments conducted, the aviation, land, and maritime supply 
chains disposed of about $855 million inventory categorized as 
economic retention stock--inventory that DLA, through its economic 
analyses, had deemed more economic to keep than to dispose--in order 
to meet the end of the fiscal year 2013 on-hand inventory goal. 

Our analysis of inventory data shows that the disposal of inventory at 
the aviation, land, and maritime supply chains considerably reduced 
(1) the value of inventory held above the approved acquisition 
objective that did not have demands in over a year (see figure 3) and 
(2) the value of inventory held beyond the approved acquisition 
objective by years of supply (see figure 4). As shown in figure 3, the 
aviation, land, and maritime supply chains collectively reduced from 
fiscal years 2012 to 2013 the value of on-hand inventory above the 
approved acquisition objective by about $950 million for items with 1 
to 4 years of no demand, by about $460 million for items with 5 to 10 
years of no demand, and by about $200 million for items with 10 years 
or more of no demand.[Footnote 41] 

Figure 3: Value of Inventory Items with Years of No Demand Held by the 
Defense Logistics Agency's (DLA) Aviation, Land, and Maritime Supply 
Chains at the End of Fiscal Years 2012 and 2013: 

[Refer to PDF for image: vertical bar graph] 

Millions of nominal dollars: 

1-4 years of no demand: 
2012: $1,419; 
2013: $464. 

5-10 years of no demand: 
2012: $664; 
2013: $203. 

More than 10 years of no demand: 
2012: $251; 
2013: $53. 

Source: GAO analysis of DLA data. GAO-14-495. 

[End of figure] 

In addition, DLA has reduced inventory with over 2 years of projected 
supply and substantially reduced inventory with over 10 years of 
projected supply. A comparison of the supply data for fiscal year 2013 
against fiscal year 2012 shows considerable progress in the reduction 
of on-hand inventory by years of supply. As shown in figure 4, about 
$164 million of the inventory beyond the approved acquisition 
objective in fiscal year 2013 would supply up to 2 additional years of 
forecasted demand, about $514 million of parts would meet more than 2 
and up to 10 years of forecasted demand, and about $564 million of 
parts would meet forecasted demand for over 10 years. 

Figure 4: Value of the Defense Logistics Agency's (DLA) Aviation, 
Land, and Maritime Supply Chain Inventory beyond the Approved 
Acquisition Objective by Projected Years of Supply, End of Fiscal 
Years 2009-2013: 

[Refer to PDF for image: stacked horizontal bar graph] 

Millions of nominal dollars: 

Fiscal year: 2009[A]; 
0 to 2 years of supply: $159; 
More than 2 to 10 years of supply: $650; 
More than 10 years of supply: $1,186. 

Fiscal year: 2010; 
0 to 2 years of supply: $150; 
More than 2 to 10 years of supply: $664; 
More than 10 years of supply: $1,540. 

Fiscal year: 2011; 
0 to 2 years of supply: $139; 
More than 2 to 10 years of supply: $679; 
More than 10 years of supply: $1,582. 

Fiscal year: 2012; 
0 to 2 years of supply: $146; 
More than 2 to 10 years of supply: $729; 
More than 10 years of supply: $1,806. 

Fiscal year: 2013; 
0 to 2 years of supply: $164; 
More than 2 to 10 years of supply: $514; 
More than 10 years of supply: $564. 

Source: GAO analysis of DLA data. GAO-14-495. 

[A] End of fiscal year 2009 inventory data were not available, so we 
used November 2009 data. 

[End of figure] 

DLA Has Disposed of Inventory That May Have to Be Bought Again and 
Projects It Will Likely Dispose of Similar Stock to Meet Future Goals: 

To meet DLA's goal of having $11.7 billion in on-hand inventory at the 
end of fiscal year 2013, the aviation, land, and maritime supply 
chains disposed of $855 million of inventory in fiscal year 2013 that 
was categorized as economic retention stock--items that were 
determined to be more economical to keep than to dispose of according 
to DLA's economic analyses. Further, in order to meet its goal of $10 
billion in on-hand inventory by the end of fiscal year 2014, DLA's 
analysis shows that it will likely have to reduce, largely through 
disposals, all its inventory categorized as retention stock, worth 
about $3.3 billion, which will include all of its economic retention 
stock, contingency retention stock, and potential reutilization stock. 
[Footnote 42] Of this $3.3 billion in inventory, DLA projects, based 
on January 2014 inventory data, that it would need to reduce, largely 
through disposals, approximately $1.9 billion in economic retention 
stock across all of its supply chains. Specifically, the aviation 
supply chain would need to reduce about $757 million, the land supply 
chain about $452 million, the maritime supply chain about $186 
million, and DLA's other supply chains about $476 million. 

DOD guidance states that inventory items for which there is no 
requirement should be disposed of unless economic or contingency 
reasons support their retention.[Footnote 43] Furthermore, DOD 
guidance states that the decision to retain economic retention stock 
must be based on an economic analysis that balances the likelihood the 
item will need to be bought again with the cost of retention and 
disposal of the item.[Footnote 44] Lastly, Standards for Internal 
Control in the Federal Government[Footnote 45] and leading practices 
for results-oriented management emphasize the importance of reviewing 
and validating performance measures to ensure these measures remain 
appropriate.[Footnote 46] 

DLA's economic retention analyses have been extensively researched and 
recently updated. In 2008, DLA commissioned LMI[Footnote 47] to 
develop a mathematical methodology to meet all of DOD's guidance for 
establishing economic retention limits, incorporate the best 
techniques from prior economic retention studies,[Footnote 48] and be 
fully implemented within DLA's enterprise resource-planning system. 
[Footnote 49] In 2009, DLA implemented LMI's methodology to determine 
its economic retention limits for items with a reasonably predictable 
demand rate.[Footnote 50] Using this methodology, DLA determines the 
amount of economic retention stock that should be retained by 
establishing economic retention limits--the maximum amount of an 
item's inventory that can be retained according to an economic 
justification.[Footnote 51] The economic retention limits are 
developed through analyses that consider a number of variables, such 
as the cost of holding an item, the potential long-term demand for the 
items, potential rebuy costs, and items essential to the operation of 
a weapon system. In 2011, as part of the implementation of the 
Comprehensive Inventory Management Improvement Plan, DLA reevaluated 
its economic retention methodology in collaboration with the military 
services and the Office of the Deputy Assistant Secretary of Defense 
for Supply Chain Integration.[Footnote 52] In 2012 and 2013, DLA 
updated its methodology to account for changes in methods being used 
to manage its items as well as to update several cost factors, such as 
increasing the cost of storage, that are used in the analyses to 
determine the economic retention limits. 

In 2012, DLA conducted a simulation that identified a large potential 
risk of needing to buy inventory again in the future due to disposing 
of all of its economic retention stock. The simulation showed that if 
DLA had disposed of its economic retention stock--worth about $2 
billion--in 2006, it would have bought 42 percent--or $850 million--of 
the dollar value of the disposed items again over the next 5 years. 
According to a 2007 LMI study on economic retention of inventory 
within DOD, the risk of buying inventory again after disposal is high 
enough that buying inventory again should be viewed as a probability 
rather than a possibility, and the retain-or-dispose decision should 
be thought of in terms of planning for repurchasing. Furthermore, the 
study concluded that the savings from reduced inventory levels (i.e., 
holding less economic retention stock) do not offset the costs 
associated with having to buy inventory again. While the risk of 
buying inventory again varies among the components as well as among 
item groups across DLA and the military services, the study stated 
that economic retention limits, in general, should be set for at least 
20 years of demand for most items. 

Even though DLA's analyses have identified a significant rebuy risk 
from disposing of its economic retention stock, DLA disposed of $855 
million in economic retention stock in fiscal year 2013 in order to 
meet its inventory-reduction goals. According to DLA officials, the 
inventory reduction goals were meant originally to be "stretch" goals, 
but the accelerated schedule for achieving the goals resulted in the 
need to dispose of inventory rather than allowing it to be potentially 
consumed or become eligible for disposal when there was no longer an 
economic justification to retain the stock. DLA evaluated the option 
of disposing of $855 million in economic retention stock, and the DLA 
Director stated that in order to reduce DLA's on-hand inventory he was 
willing to accept the risk of potentially having to buy previously 
disposed of inventory again. Furthermore, DLA's analysis shows that to 
meet the end of the 2014 fiscal year on-hand inventory goal of 
approximately $10 billion, DLA will likely need to reduce, largely 
through disposal, most, if not all, of its economic retention stock--
valued at approximately $2 billion. We recognize that the DLA Director 
must balance the costs of holding and storing inventory that may not 
be needed in the short-term with the costs of potentially having to 
buy inventory again in the long term if it is disposed of. However, 
DLA's own analyses show that the savings from disposing of economic 
retention stock do not outweigh the likely rebuy costs over the long-
term. Without reassessing its inventory-reduction goals and timelines 
in light of its own analysis of economic retention stock, DLA risks 
having to buy hundreds of millions of dollars in inventory again, and 
incurring higher costs to do so, in order to meet customer demand and 
continue to support the readiness of the military services. 

DLA Has Reduced On-Order Excess Inventory, but Supply-Chain 
Performance Varies and DLA Lacks Management Oversight of Its On-Order 
Excess Inventory Processes: 

Based on end of the 2011 through 2013 fiscal year data, DLA has 
reduced its organization-wide percentage of on-order excess inventory 
since 2011. However, performance in reducing on-order excess inventory 
varies across the aviation, land, and maritime supply chains. In 
addition, DLA does not routinely monitor on-order excess levels and 
lacks supply chain-specific goals to focus the supply chains' efforts 
and establish accountability for helping to achieve DLA's and DOD's 
overall goals for reducing on-order excess inventory. 

DLA Has Reduced Its Aggregate On-Order Excess Inventory, but Supply-
Chain Performance in Reducing On-Order Excess Inventory Has Varied: 

Since DOD began implementing the Comprehensive Inventory Management 
Improvement Plan, DLA has reduced its organization-wide amount of on-
order excess inventory from 6.7 percent of the total value of on-order 
inventory in 2011 to 5.6 percent at the end of 2013.[Footnote 53] 
These percentages are calculated based on end of the fiscal year 
inventory data. The Office of the Deputy Assistant Secretary of 
Defense for Supply Chain Integration uses inventory data from 
September of each year to review DLA's and the services' on-order 
excess inventory performance against DOD's goal of having less than 6 
percent on-order excess inventory at the end of fiscal year 2014 and 
less than 4 percent on-order excess inventory at the end of fiscal 
year 2016. The Office of the Deputy Assistant Secretary of Defense for 
Supply Chain Integration reports the department-wide percentage of on-
order excess inventory, as of the end of September each year, to the 
DOD Deputy Chief Management Officer to be included in DOD's Annual 
Performance Plan as a key performance measure for logistics and 
acquisition.[Footnote 54] Additionally, the Office of the Deputy 
Assistant Secretary of Defense for Supply Chain Integration reviews 
the percentage of on-order excess inventory as of the end of March 
each year as well. 

At the end of fiscal year 2013, DLA's reported amount of on-order 
excess inventory was below DOD's interim goal of having 6 percent or 
less of on-order excess inventory at the end of fiscal year 2014. 
[Footnote 55] However, the performance of the aviation, land, and 
maritime supply chains varies considerably. For example, the aviation 
supply chain reduced its level of on-order excess from 10 percent at 
the end of fiscal year 2011 to 6.5 percent at the end of fiscal year 
2013. On the other hand, the land supply chain experienced an increase 
from 4.2 percent at the end of fiscal year 2011 to 5.2 percent at the 
end of fiscal year 2013. Furthermore, the maritime supply chain 
experienced an increase in the percentage of on-order excess inventory 
from 3.7 percent at the end of fiscal year 2012 to 4.3 percent at the 
end of fiscal year 2013. See figure 5 for DLA's on-order excess 
inventory percentages for the end of fiscal years 2011-2013. See 
appendix VII for the total value of on-order inventory and on-order 
excess inventory for fiscal years 2011 through 2013. 

Figure 5: The Defense Logistics Agency's (DLA) On-Order Excess 
Inventory Percentages, End of Fiscal Years 2011-2013: 

[Refer to PDF for image: multiple line graph] 

Fiscal year 2011; 
DLA Aviation: 10%; 
DLA: 6.7%; 
DLA Land: 4.2%; 
DLA Maritime: 4.6%. 

Fiscal year 2012; 
DLA Aviation: 9%; 
DLA: 6.3%; 
DLA Land: 3.9%; 
DLA Maritime: 3.7%. 

Fiscal year 2013; 
DLA Aviation: 6.5%; 
DLA: 5.6%; 
DLA Land: 5.2%; 
DLA Maritime: 4.3%. 

Source: GAO analysis of DLA data. GAO-14-495. 

[End of figure] 

DLA Lacks Oversight of Its On-Order Excess Inventory Processes and 
Supply Chain-Specific Goals: 

While DLA's organization-wide percentage of on-order excess inventory 
has decreased since fiscal year 2011, DLA senior management's 
oversight of its on-order excess inventory can be strengthened. 
Standards for Internal Control in the Federal Government[Footnote 56] 
and leading practices of federal agencies for results-oriented 
management[Footnote 57] emphasize the importance of reviewing 
performance measures at the functional or activity level and linking 
the goals of component organizations to departmental strategic goals. 

While the supply chains managed by DLA have processes established to 
monitor and reduce on-order excess inventory, senior managers at DLA 
headquarters do not regularly monitor performance of these processes. 
For example, DLA headquarters senior management also does not 
regularly review on-order excess inventory performance at DLA's 
monthly performance management meetings as it does with numerous other 
performance metrics, such as backorders and materiel availability, 
even though reducing on-order excess inventory is a key DOD goal to 
measure inventory-management improvement efforts.[Footnote 58] DLA 
officials said that in establishing the key metrics for senior 
management review in late 2011 and early 2012, the DLA Director 
decided to focus on material availability, backorders, and the 
administrative workload associated with procuring inventory and that 
on-order excess inventory metrics was not included as a metric for 
regular review. 

In addition, DLA has not consistently tracked and reported data to 
thoroughly measure its efforts to reduce on-order excess inventory. 
While it tracks the percentage of on-order excess inventory by each 
supply chain, DLA has not systemically and consistently tracked the 
amount of on-order excess inventory that is reviewed by supply 
planners for cancellation or modification, the amount that is canceled 
or modified, and the reasons for not canceling or modifying an on-
order excess contract. Some of these data were manually collected in 
the past, but DLA officials told us that the effort to collect this 
type of data was halted after mid-2011 due to the need to refocus 
personnel on other inventory efforts. In late 2013, DLA began 
implementing a new automated report that will allow it to collect 
extensive data on its on-order excess inventory-management process, 
such as reasons for not modifying or canceling on-order excess 
inventory. However, DLA headquarters officials told us that management 
has not yet decided how it will use the information generated by the 
report to monitor performance and make necessary improvements to 
reduce on-order excess inventory. 

Finally, DLA senior management has not established goals for each of 
its supply chains for reducing on-order excess inventory since late 
2011, although DLA has established supply chain-specific goals for 
numerous other areas, such as backorders, materiel availability, and 
the percentage of items procured through long-term contracts. 
According to DLA headquarters and supply-chain officials, supply chain-
specific goals in these other areas have helped to focus improvement 
efforts and improve performance. Specifically, DLA headquarters and 
supply-chain officials emphasized that supply chain-specific goals 
that are reviewed consistently by DLA senior management through 
regular performance briefings increase accountability throughout the 
chain of command. However, DLA management did not establish on-order 
excess inventory goals for each supply chain because this was not a 
management priority at the time, according to DLA officials. 
Additionally, supply chain-specific goals could take into account any 
expected variance in performance on reducing the percentage of on-
order excess inventory, as do DLA's already-established supply chain-
specific goals. 

Since DLA is not monitoring performance regularly, is not consistently 
tracking and reporting performance data, and has not established on-
order excess inventory goals to guide improvement at the individual 
supply chains, DLA is not in the best position to maximize its 
reduction of on-order excess inventory. Focusing on preventing on-
order excess inventory can assist in reducing on-hand excess inventory 
as well as prevent the increase in on-hand inventory levels, both of 
which are key goals at DLA. Strengthening its management of on-order 
excess inventory could better position DLA to invest only in inventory 
that meets the needs of the department at the time of its procurement. 

DLA Has Reduced the Value and Number of Backorders since Fiscal Year 
2010: 

Since fiscal year 2010, DLA has made progress reducing backorders--
part shortages that can affect the readiness of operational units as 
well as delay work at maintenance depots--through intensive management 
practices, such as monthly reviews of backorders. It is DOD policy 
that DOD supply-chain management organizations, such as DLA, be 
responsive to customer requirements.[Footnote 59] DLA maintains its 
responsiveness to customer requirements in part by monitoring and 
mitigating its backorders. GAO's analysis of DLA data shows that the 
value of backorders has decreased by about $700 million overall from 
$2.1 billion at the end of fiscal year 2010 to about $1.4 billion at 
the end of fiscal year 2013. As part of this total amount, the 
aviation, land, and maritime supply chains have collectively reduced 
their backorders by about $136 million from about $1.0 billion in 
fiscal years 2010 and 2011 to $864 million in fiscal year 2013, just 
over the level of 2009. The remaining $564 million in reductions came 
from other DLA supply chains. Figure 6 identifies the respective 
values of backorders for the aviation, land, and maritime supply 
chains. 

Figure 6: Value of Defense Logistics Agency (DLA) Backorders, End of 
Fiscal Years 2009-2013: 

[Refer to PDF for image: stacked vertical bar and line graph] 

Millions of nominal dollars: 

Fiscal year: 2009[A]; 
DLA Maritime: $457; 
DLA Land: $179; 
DLA Aviation: $224; 
DLA total: $1,987. 

Fiscal year: 2010; 
DLA Maritime: $542; 
DLA Land: $201; 
DLA Aviation: $271; 
DLA total: $2,132. 

Fiscal year: 2011; 
DLA Maritime: $524; 
DLA Land: $234; 
DLA Aviation: $268; 
DLA total: $2,038. 

Fiscal year: 2012; 
DLA Maritime: $481; 
DLA Land: $170; 
DLA Aviation: $220; 
DLA total: $1,823. 

Fiscal year: 2013; 
DLA Maritime: $473; 
DLA Land: $209; 
DLA Aviation: $182; 
DLA total: $1,442. 

Source: GAO analysis of DLA data. GAO-14-495. 

[A] End of the fiscal year 2009 inventory data were not available, so 
we used November 2009 data. 

[End of figure] 

DLA has established supply chain-specific goals for reducing the 
number of backorders to make improvements in the availability of 
materiel to its customers. According to DLA headquarters officials, 
DLA senior management developed the backorder goals based on an 
assessment that there were too many backorders and action needed to be 
taken to reduce them. Thus, the DLA Director issued guidance 
establishing the backorder goals. Specifically, using January 2012 
figures as a baseline, DLA established a goal of reducing the number 
of backorders by 25 percent by the end of fiscal year 2013. 
Furthermore, DLA established a goal to limit the number of aged 
backorders--backorders that have existed for longer than 180 days--by 
15 percent of its total number of backorders in January 2012. These 
are overall goals for DLA, but each supply chain also was held 
accountable to achieve the same percentage reductions in the number of 
backorders and aged backorders based on the January 2012 baseline. For 
example, the aviation supply chain end of fiscal year 2013 goal was to 
have fewer than about 103,000 backorders and fewer than 21,000 aged 
backorders in any given month. As of the end of fiscal year 2013, the 
aviation supply chain had reduced the total number of its backorders 
and aged backorders during the previous 6 months, but had not yet met 
its goals. On the other hand, the land supply chain individually met 
the goal for the number of backorders and aged backorders, though the 
maritime supply chain has not. Table 4 shows the specific backorder 
data by supply chain through September 2013. 

Table 4: Total Backorders and Aged Backorders versus Command Goals as 
of September 2013: 

Supply chain: Aviation; 
Total backorders: 112,449; 
Goal for total backorders: 102,262; 
Met goal for total backorders: No; 
Aged backorders: 38,222; 
Goal for aged backorders: 20,452; 
Met goal for aged backorders: No. 

Supply chain: Land; 
Total backorders: 47,706; 
Goal for total backorders: 51,932; 
Met goal for total backorders: Yes; 
Aged backorders: 9,537; 
Goal for aged backorders: 10,387; 
Met goal for aged backorders: Yes. 

Supply chain: Maritime; 
Total backorders: 53,891; 
Goal for total backorders: 53,721; 
Met goal for total backorders: No; 
Aged backorders: 14,761; 
Goal for aged backorders: 10,744; 
Met goal for aged backorders: No. 

Source: GAO analysis of Defense Logistics Agency (DLA) data. 

[End of table] 

While only one of the three supply chains above has met both of their 
goals, DLA has reduced the value and number of backorders through 
intensive management oversight. Senior DLA management, such as the DLA 
Director and Vice Director, and the senior management of the aviation, 
land, and maritime supply chains regularly review progress made in 
reducing backorders. The DLA Director reviews backorder metrics on a 
quarterly basis while other senior DLA managers review backorders 
monthly. Additionally, DLA's logistics operations directorate holds a 
monthly meeting, which is focused on understanding and addressing key 
backorder drivers across the enterprise. Senior managers at the supply 
chains are also briefed monthly on the status of efforts to reduce 
backorders. 

Finally, the DLA Director has challenged the supply chains to reduce 
the number of backorders by 25 percent from the backorder levels 
reported in September 2013. Additionally, the DLA Director established 
a new goal to limit the number of aged backorders by 15 percent of its 
total number of backorders in September 2013 and have no aged 
backorders over 3 years old. 

DLA Is Implementing Efforts to Improve Inventory Management but Can 
Strengthen Collaborative Forecasting: 

DLA is implementing a number of efforts aimed at reducing excess 
inventory and backorders; however, DLA has not established return-on-
investment metrics and does not hold regular performance-management 
reviews to monitor and evaluate the performance of its collaborative 
forecasting effort. Collaborative forecasting allows DLA and the 
military services to work together with the intent of developing more-
accurate demand forecasts for items. However, DLA has not used a 
comprehensive approach to managing, evaluating, and improving the 
performance of collaborative forecasting. DLA's other efforts--(1) 
implementing new methods to determine inventory levels for items with 
low or highly variable demand; (2) improving acquisition lead time 
accuracy and reducing acquisition lead times; and (3) improving the 
efficiency of supply, storage, and distribution processes--are in the 
early stages of implementation, and more time is needed to determine 
their effect. See appendix VIII for an overview of these three 
improvement efforts. 

DLA and the Military Services Have Expanded the Use of Collaborative 
Forecasting: 

Since 2005, DLA, the Navy, and the Air Force have expanded 
collaborative forecasting to additional participating sites, and DLA 
and the Army are evaluating whether to use it to improve materiel 
support to the Army's industrial depots.[Footnote 60] Through 
collaborative forecasting, DLA works with customers on selected items 
to evaluate historical demand data and tailor forecast plans. 
Participating customers select items for the program that they 
anticipate would benefit from collaborating with DLA on the 
development of a forecast rather than DLA solely relying on historical 
demand patterns to establish a forecast. For example, an item may be 
selected because requirements are expected to fluctuate. 

As of February 2014, Navy and Air Force participating locations 
submitted collaborative forecasts for about 25,000 items at an annual 
forecasted value of about $730 million.[Footnote 61] 

In addition, DLA and the Army are currently analyzing the potential 
use of collaborative forecasting for tens of thousands of items by 
evaluating the Army collaborative forecast submissions in late 2013. 
However, at the time of our review, DLA had not made a final decision 
on whether to use collaborative forecasting with the Army after a 
preliminary analysis showed that it would require DLA to procure 
hundreds of millions of dollars in new stock and would increase the 
annual demand forecast for the participating locations by tens of 
millions of dollars. 

DOD's Comprehensive Inventory Management Improvement Plan is focused, 
in part, on the improvement of demand forecast accuracy through 
expanding and refining its collaborative forecasting processes. 
[Footnote 62] According to DLA officials, collaborative forecasting 
should improve forecast accuracy by incorporating the customer's 
understanding of its future spare-part requirements, which 
theoretically should be more accurate than a forecast generated by 
DLA's enterprise resource-planning system that is based on historical 
demand trends.[Footnote 63] Improving demand forecasting accuracy 
could improve the ability of DLA to meet military customer 
requirements in a financially prudent manner without accumulating 
unnecessary excess inventory or backorders for spare parts. 

DLA's Analysis Shows That Collaborative Forecasting Is Less Accurate 
than DLA's Forecasts Based on Historical Demand: 

The actual performance of forecasts developed using collaborative 
forecasting has fallen short of expectations. DLA measures the 
performance of collaborative forecasts by evaluating improvements to 
demand forecasting accuracy and error, and its analysis shows that 
collaborative forecasts are less accurate and increase the error of 
the demand forecast when results are aggregated across all 
participating locations. While collaborative forecasts may be more 
accurate for some particular items, the process has not improved the 
aggregate accuracy of forecasts for the selected items when compared 
to the forecasts that would have been generated by DLA's enterprise 
resource-planning system using historical demand. 

DLA and the participating military services measure the performance of 
collaborative forecasting in two ways. First, DLA compares the 
collaborative forecast against actual demands. Using the result of 
this comparison, DLA and the customer can evaluate the collaborative 
forecast submitted by the customer and make necessary adjustments to 
improve its accuracy. Second, DLA compares the collaborative forecast 
against the forecast that would have been generated by DLA's 
enterprise resource-planning system using historical demand.[Footnote 
64] DLA and the customer can use this comparison to determine if the 
collaborative forecast is improving forecasting accuracy and error. 
[Footnote 65] 

To make these comparisons, DLA uses three metrics--demand plan 
accuracy, absolute percent forecast error, and net percent forecast 
error. See table 5 for a brief overview of DLA's forecast accuracy and 
error metrics. Each metric provides a different type of information 
for assessing demand forecasts. 

Table 5: Defense Logistics Agency's (DLA) Forecast Accuracy and Error 
Metrics: 

Metric: Demand plan accuracy; 
Information provided by metric: Accuracy of the forecasted demand 
against actual demands over any given number of months, with a range 
from 0 to 100 percent, with 100 percent reflecting perfect accuracy; 
Level of analysis: Individual items or aggregate across multiple items. 

Metric: Absolute percent forecast error; 
Information provided by metric: Magnitude of the forecasting error 
over any given number of months, with 0 percent reflecting no error. 
This metric is dollar weighted, thus the error assists in 
understanding effects on business outcomes; 
Level of analysis: Individual items or aggregate across multiple items. 

Metric: Net percent forecast error; 
Information provided by metric: Direction--over (+) or under (-)--and 
magnitude of the forecasting error over any given number of months, 
with 0 percent reflecting no error. This metric is dollar weighted, 
thus the error assists in understanding effects on business outcomes; 
Level of analysis: Individual items. 

Source: GAO analysis of DLA information. 

[End of table] 

Aggregately for all Navy and Air Force participating sites from 
September 2011 to December 2013, DLA's analysis shows that demand plan 
accuracy for the collaborative forecasts is about 7.0 percentage 
points less accurate on average per month than the forecast that would 
have been generated by DLA's enterprise resource-planning system. 
Additionally, the same DLA analysis shows that absolute percent 
forecast error is approximately 120 percentage points higher on 
average per month for collaborative forecasts than for the forecast 
that would have been generated by DLA's enterprise resource-planning 
system.[Footnote 66] Furthermore, DLA reported that during fiscal year 
2012 the demand forecast accuracy improved for only 37 percent of the 
items using a collaborative forecast. The procurement of inventory for 
these 37 percent of items was valued at $218 million, which was 
slightly less than one-third of the total value--$702 million--of 
inventory procured through a collaborative forecasting approach. Thus, 
collaborative forecasting did not improve, or resulted in less-
accurate forecasts, for 63 percent of the items, valued at $483 
million. 

Implementation of a new collaborative forecasting process, referred to 
as gross demand planning, has improved demand plan accuracy and 
outperformed DLA's enterprise resource-planning system at one Navy 
site over the last several months of 2013 and early 2014. DLA 
developed the gross demand plan process as a solution to improve 
customer collaboration, such as improving collaborative planning 
approaches for low-demand items. According to DLA officials, as 
implementation moves forward with other Navy sites, they are 
evaluating the option of using gross demand planning with the Army and 
Air Force. 

DLA Lacks Comprehensive Metrics and Regular Performance-Management 
Meetings to Guide Improvement: 

Outside of measuring for improvements to demand forecasting accuracy 
and error, DLA does not regularly use other performance metrics or 
have regular performance-management meetings to guide improvement. 
Specifically, DLA does not regularly use performance metrics, such as 
costs or return on investment, to evaluate the performance of 
collaborative forecasting across the enterprise. DOD guidance requires 
DLA to adopt metrics that evaluate the performance and cost of supply-
chain activities, including monitoring the efficient use of resources 
and assessing costs versus benefits of supply-chain 
operations.[Footnote 67] Furthermore, DOD guidance requires DLA to 
establish internal controls, such as performance measures, to ensure 
investment in inventory resulting from collaborative forecasting does 
not lead to excessive growth in inventory.[Footnote 68] 

Additionally, DLA has not used a comprehensive approach to managing, 
evaluating, and improving the performance of collaborative 
forecasting. In our prior work examining leading practices in results-
oriented management, we found that leading organizations use 
performance information to monitor and evaluate program performance 
through frequent, regular performance-review meetings to discuss 
progress made toward the achievement of results, identify performance 
problems, and develop performance-improvement plans to achieve program 
goals.[Footnote 69] DLA does not regularly evaluate the results of 
collaborative forecasting across the enterprise through its 
performance-management meetings. Prior to February 2013, DLA 
headquarters held performance meetings with the individuals 
responsible for collaborative forecasting programs at the supply 
chains, but these meetings were suspended to redirect resources to 
implementing collaborative forecasting with the Army and the gross 
demand planning process with the Navy. DLA officials have noted that 
they intend to begin holding regular performance meetings in the near 
future on collaborative forecasting to ensure collaboration across 
supply chains as well as to monitor performance comprehensively. While 
DLA has some information available, such as the lack of improvements 
made to demand forecasting accuracy by the program, it has not 
developed efforts to improve collaborative forecasting across the 
enterprise. Officials told us that there are ongoing discussions about 
expanding gross demand planning to the Air Force and Army, but there 
are no official plans to guide and monitor this improvement effort. 
Also, officials stated that they intend to address other improvement 
efforts, such as automating and expanding across the enterprise a 
collaboration scorecard used with the Marine Corps' depots to provide 
period performance updates on the accuracy of collaborative forecasts. 
However, without regular performance-management meetings on 
collaborative forecasting, it will be difficult for these efforts to 
achieve their potential and improve performance. 

DLA currently projects that it will procure approximately $730 million 
in inventory using collaborative forecasts from March 2014 to March 
2015 and could potentially need to procure hundreds of millions of 
dollars of additional inventory as a result of collaborative 
forecasting with the Army, based on its preliminary analysis. This is 
a significant investment of resources, but DLA does not have a suite 
of metrics and regular performance-management meetings for its 
collaborative forecasting program to comprehensively evaluate results 
and make improvements. Furthermore, as noted above, DLA's analysis 
indicates that collaborative forecasts do not improve demand 
forecasting accuracy and error in the aggregate. Improving demand 
forecasting accuracy and error could directly improve the ability of 
DLA to meet military customer requirements in a financially prudent 
manner without accumulating unnecessary excess inventory or backorders 
for spare parts. Without a suite of metrics to evaluate the program 
and regular performance-management meetings that help it to develop 
and implement the necessary steps to monitor and improve the program's 
results, it will be difficult for DLA and the military services to 
know whether the program is improving supply-chain management 
performance, providing an adequate return on its investments, and 
taking the necessary corrective actions to improve results. 

Conclusions: 

Effective and efficient management of DOD's inventory is critical to 
supporting the readiness of the force, and requires a balanced 
approach. To be effective as a key supply-chain organization that 
manages billions of dollars in inventory, DLA must have the correct 
amount of spare parts on hand at the correct time to support the 
fighting force, but it must also manage its inventory efficiently to 
avoid the unnecessary and wasteful accumulation of secondary inventory 
that could divert resources away from defense priorities. While DLA 
has made progress reducing on-hand inventory that it can no longer 
justify retaining, such as contingency retention stock, and making 
other improvements to its inventory-management efforts, DLA has a 
number of issues that are hindering progress toward achieving a 
balanced approach. First, without reassessing its goals and schedule 
for reducing on-hand inventory in accordance with its economic 
retention analyses, DLA's attempt to meet its fiscal year 2014 goal 
could again result in the disposal of inventory that should have been 
retained due to its likelihood of being bought again. Second, 
maintaining progress toward goals is often aided by ongoing management 
attention to relevant performance measures and oversight of processes. 
Ensuring progress in reducing on-order excess inventory will require 
high-level attention within DLA, and without regular review at senior 
management meetings, performance monitoring through DLA's new 
automated reporting system, and supply chain-specific goals and 
related metrics, DLA leadership will have limited insight into what 
areas are in need of further focus and effort. Third, although DLA has 
taken some steps intended to improve demand forecasting, its 
collaborative forecasting effort has not yet resulted in better 
performance than DLA's traditional forecasting methods. Without 
metrics that evaluate multiple aspects of performance, such as costs 
and accuracy, and a more-intensive management approach, such as 
regular performance-management meetings, it is unclear whether DLA 
will be able to improve its collaborative forecasting effort and 
aggregate forecasting accuracy. 

Without changes to the measurement and oversight of DLA's efforts to 
reduce excess inventory and improve its forecasting, DOD will continue 
to face challenges in assuring that it can meet the inventory needs of 
the warfighters in an efficient and cost-effective manner. At a time 
when DOD can reasonably anticipate ongoing fiscal pressure, it is 
especially important for DLA to avoid inefficient use of taxpayer 
dollars or putting the department's readiness at risk. 

Recommendations for Executive Action: 

To ensure that DLA does not dispose of inventory that is more economic 
to keep, in accordance with DOD guidance, we recommend the Secretary 
of Defense direct the Director, DLA, to reassess and, if determined 
appropriate, revise DLA's inventory-reduction goals and schedule to 
achieve them in a way that minimizes risks and costs of having to buy 
items again in the long term. 

To improve management and minimize the amount of on-order excess 
inventory, consistent with federal standards for internal control and 
leading practices for performance management, we recommend the 
Secretary of Defense direct the Director, DLA, to take the following 
four actions: 

* regularly monitor progress reducing on-order excess inventory 
through DLA's senior management performance briefings; 

* track and regularly review performance data, such as the amount of 
on-order excess inventory reviewed, modified, or canceled, and the 
reasons for not modifying or canceling, in its on-order excess 
inventory management processes through its newly established automated 
report; 

* establish supply chain-specific on-order excess goals that support 
DLA minimizing its investment in inventory that is not needed to meet 
requirements and achieving the DOD goal of 4 percent of the total 
value of on-order inventory by the end of fiscal year 2016; and: 

* monitor on a regular basis DLA's progress toward achieving the 
supply chain-specific goals. 

To ensure DLA is improving its collaborative forecasting effort, in 
accordance with DOD guidance that emphasizes monitoring the efficient 
use of resources and leading practices for results-oriented 
management, we recommend that the Secretary of Defense direct the 
Director, DLA, in collaboration with the Office of the Assistant 
Secretary of Defense for Logistics and Materiel Readiness and the 
Secretaries of the Army, Navy, and Air Force, to take the following 
three actions: 

* develop metrics, in addition to currently developed demand forecast 
accuracy and error metrics, that allow DLA and the services to 
evaluate whether the program is improving supply-chain management 
performance and providing an adequate return on its investments; 

* use these metrics to monitor the performance of collaborative 
forecasting across DOD through a results-oriented management approach, 
such as regular performance management meetings; and: 

* develop and implement the necessary corrective actions to improve 
the results of collaborative forecasting across DOD. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to DOD for comment. In written 
comments, DOD concurred with our eight recommendations. DOD's comments 
are reprinted in their entirety in appendix XI. DOD also provided 
technical comments, which we incorporated into the report as 
appropriate. 

DOD concurred with our recommendation for DLA to reassess its 
inventory-reduction goals and schedule to achieve them in a way that 
minimizes risks and costs of having to buy items again in the long 
term. DOD stated that it will continue to reassess the on-hand 
inventory-reduction goals and anticipates additional changes to these 
goals at future senior-management performance meetings. 

DOD concurred with our four recommendations aimed at improving the 
management of on-order excess inventory and minimizing the amount of 
on-order excess inventory. DOD stated that DLA senior management will 
review progress reducing on-order excess inventory and other on-order 
excess-inventory metrics, such as the amount of on-order excess 
inventory reviewed, modified, and canceled, and the reasons for not 
modifying and canceling, on a quarterly basis. Additionally, DOD 
stated that DLA will establish and monitor supply chain-specific on-
order-excess inventory goals by August 2014. 

DOD concurred with our three recommendations aimed at improving 
collaborative forecasting between DLA and the military services. DOD 
stated that DLA, in collaboration with the Office of the Assistant 
Secretary of Defense for Logistics and Materiel Readiness and the 
Secretaries of the Army, Navy, and Air Force, will evaluate the 
effectiveness of current forecasting performance metrics, modify 
current logic as needed, and develop additional metrics as 
appropriate. Also, DOD stated that DLA will monitor collaborative 
forecasting performance against other approaches, such as statistical 
forecasting, at regular performance-management meetings. Lastly, DLA, 
in collaboration with the Office of the Assistant Secretary of Defense 
for Logistics and Materiel Readiness and the Secretaries of the Army, 
Navy, and Air Force, will develop corrective actions for collaborative 
forecasting by November 2014, and implementation of these corrective 
actions will occur in coordination with the military services. 

We are sending copies of this report to the appropriate congressional 
committees, the Secretary of Defense, the Director of DLA, and the 
Secretaries of the Army, Navy, and Air Force. In addition, the report 
is available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have questions about this report, please contact 
me at merrittz@gao.gov or (202) 512-5257. GAO staff who made key 
contributions to this report are listed in appendix XII. 

Signed by: 

Zina D. Merritt: 
Director: 
Defense Capabilities and Management: 

[End of section] 

Appendix I: The Department of Defense's (DOD) Inventory Improvement 
Plan: 

Background: 

In late fiscal year 2010, DOD began implementing its Comprehensive 
Inventory Management Improvement Plan, which was developed and 
implemented in response to a provision of the National Defense 
Authorization Act for Fiscal Year 2010. 

Oversight of the Plan's Implementation: 

The Deputy Assistant Secretary of Defense for Supply Chain Integration 
oversees the plan's implementation through progress-review meetings 
held about monthly. The Supply Chain Executive Steering Committee, 
which comprises executive-level members from the services and the 
Defense Logistics Agency (DLA), advises the Deputy Assistant Secretary 
of Defense for Supply Chain Integration on matters related to supply-
chain management, including the implementation of the plan, and 
typically receives a briefing on the plan's implementation every 3 
months. Additionally, any unresolved issues with respect to the plan's 
implementation are discussed and resolved at the Joint Logistics 
Board, which comprises senior-level participants from the services, 
combatant commands, and DLA. The Joint Logistics Board is responsible 
for reviewing the status of DOD's logistics portfolio and the 
effectiveness of the defense-wide logistics chain in supporting the 
warfighter. 

Goals of the Plan: 

The plan has two overarching goals, which are to reduce (1) total on-
order excess inventory to 6 percent of total on-order obligated 
dollars by the end of fiscal year 2014 and to 4 percent by the end of 
fiscal year 2016 and (2) on-hand excess inventory to 8 percent of the 
total value of inventory by the end of fiscal year 2016. 

The Structure of the Plan: 
	
To achieve the plan's goals, DOD developed nine sub-plans that include 
an objective, supporting actions with milestones, and performance 
measures to track results. See table 6 for the objectives of the 
subplans. 

Table 6: The Nine Subplans and Corresponding Objectives: 

Subplan: 1. Demand forecasting; 
Objective of the subplan: To improve the prediction of future demand 
so that inventory requirements more accurately reflect actual needs. 

Subplan: 2. Total asset visibility[A] and multiechelon modeling[B]; 
Objective of the subplan: To minimize the size of purchases by 
considering all accessible inventories. 

Subplan: 3. On-order excess inventory; 
Objective of the subplan: To reduce or terminate purchases that result 
in inventory excesses due to a decrease in requirements. 

Subplan: 4. Economic retention stock; 
Objective of the subplan: To ensure economic retention decisions are 
based on current cost factors and economic principles. 

Subplan: 5. Contingency retention stock; 
Objective of the subplan: To ensure the military services and DLA 
justify the retention of contingency retention stock. 

Subplan: 6. Storage and direct vendor delivery[C]; 
Objective of the subplan: To use commercial vendors to store items 
when use of vendors represents the best value to the government. 

Subplan: 7. Items with no demand; 
Objective of the subplan: To eliminate items with a history of no 
recurring demand and a low probability of future demand, unless there 
is sufficient justification for the retention of the item. 

Subplan: 8. Disposition of potential reutilization stock (i.e., on-
hand excess inventory); 
Objective of the subplan: To ensure timely disposition of items 
categorized as potential reutilization stock. 

Subplan: 9. Other inventory improvement efforts; 
Objective of the subplan: To accomplish several cross-functional 
improvements, including revising current inventory categories to 
better reflect the rationale behind retaining the inventory, improving 
acquisition lead times, and establishing department-wide metrics for 
inventory management. 

Source: DOD's 2010 Comprehensive Inventory Management Improvement Plan 
and its supporting documents. 

[A] Total asset visibility is the capability to provide all users with 
timely and accurate information about the location, movement, status, 
and identity of supplies and the capability to act on this information. 

[B] Multiechelon modeling is the use of mathematical models that 
compute the optimal number and type of parts needed at the wholesale 
and retail levels to achieve readiness and cost goals. 

[C] Direct vendor delivery is a materiel acquisition and distribution 
method that requires supplier delivery directly to the customer, which 
can reduce the storage of items by the services and DLA. 

[End of table] 

[End of section] 

Appendix II: The Defense Logistics Agency's Metrics Generally Balance 
Availability of Spare Parts and Total Supply-Chain Costs: 

Defense Logistics Agency (DLA) metrics generally manage to balance 
availability of spare parts with total supply-chain costs, in 
accordance with Department of Defense (DOD) guidance. DLA uses a 
metrics framework to comprehensively assess the performance of its 
inventory-management activities. Furthermore, DLA reviews these 
metrics at regular intervals through a series of performance-
management meetings that take place at the Director, headquarters, and 
supply-chain levels. 

DLA Has a Metrics Framework That Covers Key Inventory Areas: 

DLA has a metrics framework that it uses to assess its overall 
performance on a regular and consistent basis. This framework 
addresses a wide spectrum of DLA's operations and balances a number of 
metric areas, such as customer service, cost, and internal 
efficiency.[Footnote 70] Furthermore, the framework provides 
flexibility to allow the DLA Director and senior managers to focus the 
agency on specific performance areas. For example, the current 
Director has focused the agency generally on customer service and 
internal efficiency metrics by holding the supply chains responsible 
for meeting certain performance goals with respect to those metrics. 

DOD guidance requires DLA, the military services, and other supply-
chain organizations to be responsive to customer requirements while 
balancing risk and total cost, conduct periodic performance and cost 
evaluations, and adopt metrics that provide information on customer 
service, cost, and internal efficiency.[Footnote 71] DLA evaluates its 
supply chain by looking at multiple metrics in the key areas of 
customer service, cost, and internal efficiency. See figure 7 for an 
overview of DLA's metrics in the key areas. 

Figure 7: Overview of DLA's Metrics in Customer Service, Cost, and 
Internal Efficiency Areas: 

[Refer to PDF for image: illustration] 

Triangle: 
Customer service; 
Cost; 
Internal efficiency. 

Optimal: The tradeoffs between parts availability, costs, and internal 
efficiency are being actively managed, which results in a balance 
between metrics areas, which can be seen as an indicator of a healthy 
supply chain. 

Examples Of Potential Imbalances: 

* Customer service metrics are prioritized, which means better parts 
availability for customers and reduced backorders. The additional 
inventory increases the potential for excess, but can positively 
affect readiness. However, because of increased parts purchases and 
storage costs, as well as the increased potential for excess, cost 
metrics are now performing poorly. 

* Cost metrics are prioritized. Because of reduced costs, the 
organization is currently stocking fewer parts. This increases the 
amount of time that customers have to wait for parts, as well as the 
likelihood of backorders. The supply chain is now operating using less 
money at the expense of reduced parts availability. 

Source: GAO. GAO-14-495, 

[End of figure] 

A balanced approach across these key areas is important because 
without it any given metric could be optimized at the expense of other 
metrics. For example, a supply chain could achieve a high availability 
of parts if it was less focused on the costs of purchasing excess 
materiel and storing it. Alternatively, a supply chain could 
significantly reduce its costs if it was less focused on the resultant 
effect on parts availability and readiness. Effects on customer 
service can also affect readiness. For example, if a customer does not 
have a part that is needed, then this could have effects on the 
availability of a weapon system or the efficient functioning of a 
military depot that is trying to repair a weapon system. 

DLA uses a number of metrics to assess its customer service. Materiel 
availability is the primary metric it uses to measure whether 
customers are getting the right parts at the right time; the current 
agency-wide goal for this metric is 90 percent.[Footnote 72] The 
agency also closely tracks backorders, including both the number and 
the age of backorders. Materiel availability and backorders have been 
identified as key metrics by the DLA Director, who has provided supply 
chain-specific goals through departmental guidance for each of these 
metrics and regularly monitors progress against these goals. 
Additional metrics used by DLA to assess customer service include on-
time delivery and order response time. 

DLA also has several key metrics that it reviews regularly in order to 
assess its cost performance. These cost metrics measure the net 
operating result, cash plan performance, and the number of days of 
cash remaining in the working capital fund.[Footnote 73] DLA also 
looks at the amount of the obligation authority provided by Congress. 
Several of these cost metrics are assessed regularly through internal 
reviews, while others, such as obligation authority, are used to help 
inform analysis of potential inventory improvements. In addition, the 
direct costs of making changes to DLA's processes are another way in 
which costs are considered. For example, at an inventory-management 
meeting in November 2013, a number of cost-related issues were 
discussed, such as the potential effect of different pricing 
mechanisms for storage costs and the trade-off of improving materiel 
availability at the expense of increasing the amount of inventory 
purchased. Finally, as noted earlier, DLA also has the ability to 
track on-order excess--a cost-efficiency metric--but this metric is 
not regularly reviewed except at the aviation supply chain. Further 
details about on-order excess inventory are discussed earlier in this 
report. 

In addition to customer service and cost metrics, DLA has a number of 
internal efficiency metrics that it uses to assess its internal 
processes and identify potential workload backlogs. Two of the most 
critical to current DLA management are the backlog and age of purchase 
requests.[Footnote 74] DLA management has also used recent 
departmental guidance to set a goal of reducing the backlog and age of 
purchase requests by reducing the administrative lead times associated 
with these requests. Additional DLA metrics look at the percentage of 
automated awards and the amount of funds obligated through long-term 
contracts.[Footnote 75] 

The metrics framework at DLA can be adjusted as needed. For example, 
DLA has a web-based tool that provides managers at all levels with the 
ability to see on a daily basis how a given supply chain or individual 
unit within a supply chain is performing against key performance and 
cost metrics. This tool focuses on key metrics as identified by the 
Director and those performance metrics that DLA committed to meet 
through performance-based agreements it has made with the 
services.[Footnote 76] According to DLA officials, additional metrics 
could be added to the web-based tool with relatively little effort 
whenever necessary, thereby giving DLA an additional option for 
emphasizing specific performance metrics. 

DLA Reviews Its Metrics in Regular Performance-Management Meetings at 
Multiple Levels within the Organization: 

DLA's metrics are regularly reviewed at multiple levels within the 
organization. The DLA Director, other senior managers at DLA 
headquarters, and the commanders and senior managers of the aviation, 
land, and maritime supply chains review the metrics through a number 
of regularly scheduled performance-management meetings. While there 
are no single meetings at which all of DLA's metrics are discussed, 
the regularly recurring meetings ensure that metrics that cover key 
areas of inventory management, such as customer service, cost, and 
internal efficiency, are reviewed. 

For example, one of the key metrics briefings is the Agency 
Performance Review. This review includes DLA's key customer-service, 
cost, and internal-efficiency metrics, such as net operating result, 
days of cash in the working capital fund, materiel availability, 
backorders, and purchase request workload. The metrics in this review 
are briefed monthly at the supply-chain and DLA headquarters levels. 
Furthermore, the DLA Director receives monthly updates on the metrics, 
in addition to conducting a more in-depth review of the Agency 
Performance Review metrics each quarter as part of the Executive Board 
meeting. These reviews provide the DLA Director with a consistent 
structure to assess performance according to established metrics, and 
also allow for special attention to specific issues as they arise. For 
example, officials told us that one metric was added to the Agency 
Performance Reviews for the DLA Director when there were concerns 
about a particular aspect of performance. That metric was removed once 
those concerns were addressed. However, one metric--the percentage of 
on-order excess inventory--is not included in the Agency Performance 
Review even though it is one of two metrics the Office of the Deputy 
Assistant Secretary of Defense for Supply Chain Integration is using 
to measure progress in addressing inventory management practices. 
Further details on monitoring on-order excess inventory are discussed 
earlier in this report. 

In addition to the Agency Performance Reviews, the DLA Director, 
senior DLA managers, and supply-chain representatives review and 
analyze inventory-management performance-specific and cost-related 
issues at approximately monthly meetings. These inventory-management 
council meetings are flexible, and contain a mixture of recurring and 
onetime discussions that can touch on any number of inventory-
management issues. For example, almost every council meeting since 
February 2013 has included an update on the status of the inventory 
reduction effort. In contrast, only two of the meetings since February 
2013 have discussed the on-order excess metric. 

DLA headquarters elements hold additional metrics meetings to review 
DLA's performance. For example, the DLA headquarters element focused 
on acquisition conducts a monthly review and analysis meeting where it 
reviews procurement metrics, such as the use of long-term contracts 
for procuring spare parts, contract review time, and additional 
metrics related to contract compliance. The DLA headquarters element 
focused on finance, meanwhile, regularly provides updates on financial 
metrics to key personnel. Finally, the DLA headquarters element 
focused on logistics operations conducts additional meetings focused 
on those metrics that are of interest to management--backorders, 
amount of on-hand inventory, and purchase request workload. See figure 
8 for an overview of DLA's regular performance-management meetings. 
Appendix X provides a printer-friendly version of figure 8. 

Figure 8: Overview of the Defense Logistics Agency's (DLA) Regular 
Performance-Management Meetings: 

[Refer to PDF for image: interactive graphic] 

Interactivity instructions: 
Roll over a meeting to read more. 

See appendix X for the printer-friendly version. 

Source: GAO analysis of DOD guidance and inventory practices. GAO-14-
495. 

[End of figure] 

In addition to the meetings held at DLA headquarters, metrics are also 
regularly reviewed at the supply chains. For example, the aviation, 
land, and maritime supply chains use the Agency Performance Review 
metrics in their own regularly scheduled supply-chain meetings. The 
aviation supply chain supplements the agency performance metrics with 
additional supply chain-specific metrics in its monthly Corporate 
Board meetings. These additional metrics allow aviation supply-chain 
managers to assess areas of performance that might otherwise not be 
captured by the agency-wide metrics. Some of these metrics include 
potential backorders, production and administrative lead times, and on-
order excess inventory. The land and maritime supply chains supplement 
their monthly command review of the agency performance metrics with an 
additional monthly business review, which alternates month-to-month 
looking at DLA's land and maritime supply-chain distribution 
detachments. The metrics contained in these reviews alternate as well, 
and cover production and administrative lead times, materiel 
availability, as well as additional metrics pertaining to the service 
performance-based agreements. 

[End of section] 

Appendix III: Objectives, Scope, and Methodology: 

To assess the extent to which the Defense Logistics Agency (DLA) has 
developed and met goals to reduce on-hand inventory and on-order 
excess inventory while reducing shortages and any implementation 
challenges, we analyzed DLA inventory data as of the end of November 
2009 and every subsequent September 30 for fiscal year 2010 through 
2013.[Footnote 77] The Department of Defense (DOD) and DLA stratify 
inventory into categories to assess the ability of the inventory to 
meet the stated requirements and ensure that surplus inventories are 
kept only if warranted. In our analysis, we focused on the data 
associated with DLA's aviation, land, and maritime supply chains since 
these supply chains comprised $9.8 billion of DLA's $13.1 billion 
nonenergy inventory at the end of fiscal year 2012.[Footnote 78] To 
assess the reliability of the data, we reviewed DOD requirements for 
secondary spare-parts inventory reporting, comparing the data we 
generated from DLA-provided electronic files to its summary tables, 
searching for and reconciling inconsistent information (e.g., out-of-
range and missing data), and discussing DLA's data and our findings 
with database managers. We determined the inventory data were 
sufficiently reliable for the purposes of determining DLA's amount of 
inventory and reasons for holding that inventory. Using the inventory 
data, we determined DLA's total amount of on-hand inventory and 
categorized this on-hand inventory by the reasons DLA was retaining 
it, such as economic or contingency reasons. It is important to note 
that our analysis reflects points in time over the approximate 5-year 
period we reviewed and that requirements and inventory levels are 
constantly fluctuating. 

With respect to on-order excess inventory, we analyzed DLA's inventory 
data from fiscal year 2011 through fiscal year 2013 to determine the 
amount of on-order excess inventory, and examined DLA's efforts to 
minimize on-order excess. We compared DLA's amounts of on-order excess 
inventory against DOD's goals for reducing on-order excess inventory 
in its Comprehensive Inventory Management Improvement Plan. 
Additionally, we reviewed DLA's process for managing and overseeing on-
order excess inventory and compared these processes against leading 
practices for results-oriented management.[Footnote 79] With respect 
to shortages (i.e., backorders) of spare parts, we reviewed DLA-
generated reports on backorders to assess the status and extent of its 
efforts to reduce the number of backorders and aged backorders (i.e., 
backorders more than 6 months old) in addition to the analysis of 
DLA's inventory data previously described above. Also, we reviewed 
DLA's aviation, land, and maritime goals for reducing backorders and 
evaluated DLA's progress in meeting those goals. 

To supplement our analysis of DLA's inventory data, we examined DLA 
performance-management briefings; documentation related to DLA's 
effort to reduce its on-hand inventory, on-order excess inventory, and 
backorders; DOD and DLA inventory-management policies and procedures; 
and other reports and analyses related to the potential for buying 
inventory again after it is disposed of. Specifically, we compared DOD 
policies on using economic analyses to determine inventory that is 
more economical to keep than dispose of with DLA's procedures and 
processes and DLA's decision to dispose of items that its analyses 
deemed more economical to keep.[Footnote 80] We interviewed DLA 
headquarters and aviation, land, and maritime supply-chain officials 
to discuss DLA's efforts to reduce on-hand inventory, on-order excess 
inventory, and backorders. Additionally, we met with Office of the 
Deputy Assistant Secretary of Defense for Supply Chain Integration 
officials to discuss DLA's efforts to improve its inventory management. 

To assess the extent to which DLA has implemented initiatives using a 
comprehensive management approach to improve inventory management, we 
identified improvement efforts through interviewing DLA headquarters 
officials and Office of the Deputy Assistant Secretary of Defense for 
Supply Chain Integration officials. We focused on four key efforts DLA 
officials identified as significant for reducing excess inventory: 
collaborative forecasting, inventory level-setting for items with low 
or highly variable demand, improving acquisition lead-time accuracy 
and reducing acquisition lead times, and improving the efficiency of 
DLA's supply, storage, and distribution processes. Across the four 
areas, we analyzed DLA's efforts in the following manner: 

* Collaborative forecasting: We analyzed DLA's collaborative 
forecasting--a process that allows DLA and the military services to 
work together to tailor forecast plans for items rather than DLA 
establishing a forecast based solely on historical demand patterns--by 
reviewing DLA's collaborative forecasting metrics to evaluate the 
extent its metrics addressed performance and costs, as required by DOD 
guidance.[Footnote 81] Additionally, we reviewed and analyzed DLA's 
management approach for the program to determine if it followed 
leading practices for results-oriented management, such as the need to 
have regular performance-management meetings to guide continued 
improvement.[Footnote 82] We discussed the metrics and the assessment 
methodology DLA uses for tracking and evaluating collaborative 
forecasting with DLA headquarters and supply-chain officials. We also 
discussed the challenges and weaknesses of the metrics for assessing 
collaborative forecasting with various DLA officials. 

* Inventory level-setting for items with low or highly variable 
demand: We conducted interviews with officials at the DLA headquarters 
level and aviation, land, and maritime supply chains, to understand 
the rationale behind implementing a new method--referred to as Peak 
and Next-Gen--to set inventory levels for items with low or highly 
variable demand; the anticipated benefits of the new method; the 
implementation of the new method; and the plan for assessing the 
method's effectiveness. Finally, we reviewed DLA's analysis comparing 
Peak and Next-Gen against other level-setting methodologies, as well 
as data provided by DLA on the current metrics being tracked to assess 
the implementation of Peak and Next-Gen. 

* Acquisition lead times: We reviewed and analyzed documents and 
guidance on the goal of efforts to improve the accuracy of acquisition 
lead times and reduce the actual acquisition lead times to improve 
inventory planning. Also, we reviewed planning documentation to 
understand the rationale and intended outcomes of the efforts; status 
update briefings to analyze progress in implementing the efforts; and 
the metrics used to assess the effectiveness of these efforts. Lastly, 
we conducted interviews with officials at DLA headquarters, as well as 
at the aviation, land, and maritime supply chains, to supplement our 
understanding of DLA's efforts. 

* The efficiency of DLA's supply, storage, and distribution processes: 
We analyzed documents and briefings to determine the intended purposes 
of the strategic network optimization program, assess the current 
implementation status of the effort, and identify any upcoming 
challenges in implementation. Specifically, we examined the business 
plans, program status briefings, fiscal year 2013 annual report on 
strategic network optimization, and estimates of potential savings 
from implementation. We discussed the status of program 
implementation, as well as the methodologies and reasoning for 
proposed program savings with DLA and Office of the Deputy Assistant 
Secretary of Defense for Supply Chain Integration officials. 

To examine the extent to which DLA has implemented a framework of 
inventory management metrics that balances the timely availability of 
spare parts to customers and total supply-chain costs (discussion is 
in appendix II), we analyzed DOD and DLA policies, regulations, and 
guidance pertaining to the use of metrics for the management of 
inventory at DLA. We reviewed briefing documentation from a number of 
different metrics meetings held at the DLA headquarters and supply-
chain levels to understand which metrics were briefed on a regular 
basis. We also conducted interviews with officials at the DLA 
headquarters level, as well as at the aviation, land, and maritime 
supply chains, to understand how the metrics were used to help inform 
inventory decisions. 

We conducted this performance audit from June 2013 to June 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix IV: Printer-Friendly Version of Figure 1--Selected Defense 
Logistics Agency (DLA) Categories of Inventory Items: 

Term: Potential reutilization stock; 
Definition: Materiel exceeding the approved acquisition objective and 
not being retained as economic or contingency retention stock, and has 
been identified as excess materiel for possible disposal but has 
potential for reutilization. Potential reutilization stock is also 
referred to as on-hand excess inventory. 

Term: Contingency retention stock; 
Definition: Materiel that is retained to support specific 
contingencies, such as to support foreign military sales, future 
military operations, and disaster relief or civil emergencies, or to 
mitigate risk associated with diminishing manufacturing sources or 
nonprocurable stock. 

Term: Economic retention stock; 
Definition: Materiel that has been deemed more economical to keep than 
to discard because it is likely to be needed in the future. 

Term: Two years of forecasted demand; 
Definition: The projected amount of consumption of an item for the 
next 2 years. 

Term: War-reserve materiel; 
Definition: Items held by the Defense Logistics Agency at the request 
of the military services to meet unfunded war-reserve requirements. 

Term: Quantities for items with diminishing manufacturing sources; 
Definition: Items that are procured because they are no longer 
expected to be produced. 

Term: Economic order quantity; 
Definition: Quantity derived from a mathematical technique used to 
determine the lowest total variable costs to order and hold inventory. 

Term: Acquisition lead time quantity; 
Definition: Stock needed to cover acquisition lead times, which are 
made up of the administrative and production lead times. 

Term: Backorders; 
Definition: Customer-requisitioned materiel that is not immediately 
available to issue, but is recorded as a commitment for future issue. 

Term: Safety stock quantity; 
Definition: Amount of stock that is to be kept on hand in case of 
minor interruptions in the resupply process or fluctuations in demand. 

Term: Quantities for items with low, infrequent, or highly variable 
demand; 
Definition: Demand for items with low, infrequent, or highly variable 
demand cannot be forecast, but nevertheless need to be stocked. 

Source: GAO analysis of Department of Defense (DOD) guidance and DLA 
inventory practices. 

[End of table] 

[End of section] 

Appendix V: Overview of Typical Causes of On-hand Excess Inventory: 

Why On-Hand Excess Inventory Matters: 

In addition to the money spent procuring items that are determined to 
be on-hand excess inventory, there are also costs incurred in 
handling, storing, processing, and disposing of excess items. Also, 
money used to purchase the excess item is not available to purchase 
other needed items because working capital funds rely on the sales of 
on-hand items to fund future purchases. This could negatively affect 
readiness by limiting availability of spare parts to military 
customers. 

Key Terms: 

Approved acquisition objective: 
The materiel needed to meet the requirements objective and 2 years of 
estimated future demand. 

Economic retention stock: 
Materiel that has been deemed more economical to keep than to dispose 
of because it is likely to be needed in the future. 

Contingency retention stock: 
Materiel that is retained to support specific contingencies, such as 
to support foreign military sales, future military operations, and 
disaster relief or civil emergencies. 

On-hand excess inventory: 
Inventory that is excess to the approved acquisition objective and is 
not being retained as economic or contingency retention stock. 

Lead times: 
The length of time between the identification of a materiel 
requirement and the receipt of that materiel into the supply system. 

On the basis of our[Footnote 1] and third-party reports[Footnote 2] on 
inventory management and discussions with Department of Defense (DOD) 
and Defense Logistics Agency (DLA) officials, we have identified three 
typical causes of on-hand excess inventory. We did not quantify the 
extent to which these causes are individually responsible for on-hand 
excess inventory. 

1. Forecast Error: The forecast for an item may be inaccurate due to a 
number of factors. For example, demand planners may not have up-to-
date information, such as maintenance plans for a weapon system, to 
appropriately adjust forecasts. Also, forecast approaches have not 
always appropriately matched the characteristics of items, resulting 
in too much inventory being ordered and the accumulation of on-hand 
excess inventory. For example, items with low and variable demand 
require different forecast approaches than items with regular and 
frequent demand. 

2. Changes in Demand: The forecast could have been accurate based on 
the most up-to-date requirement, but demand changes after the item has 
been procured. For example, an item is procured based on a requirement 
and is categorized as part of the approved acquisition objective 
initially. Over the course of time, the demand for the item may 
decrease—-due to changes in the type and pace of operations or changes 
in the maintenance plan following the time in which parts needed to be 
ordered—resulting in a decrease in the amount of the item that can be 
categorized under the approved acquisition objective, which results in 
stock being recategorized as economic retention stock, contingency 
retention stock, or on-hand excess inventory.  

3. Long Lead Times: An item's lead time is used to calculate the 
appropriate reorder point. So, for example, if an item's recorded lead 
time is three months, then the reorder point will be set to cover an 
estimated three months worth of demands before the item breaches its 
safety stock. Long lead times, even when accurate, can potentially 
create excess due to the greater possibility for changes in demand 
over the course of the lead time period. 

Footnotes: 

[1] See GAO, Defense Inventory: Actions Underway to Implement 
Improvement Plan, but Steps Needed to Enhance Efforts, GAO-12-493 
(Washington, D.C.: May 3, 2012); Defense Inventory: Defense Logistics 
Agency Needs to Expand on Efforts to More Effectively Manage Spare 
Parts, GAO-10-469 (Washington, D.C.: May 11, 2010); Defense Inventory: 
Army Needs to Evaluate Impact of Recent Actions to Improve Demand 
Forecasts for Spare Parts, GAO-09-199 (Washington, D.C.: Jan. 12, 
2009); Defense Inventory: Management Actions Needed to Improve the 
Cost Efficiency of Navy's Spare Parts Inventory, GAO-09-103 
(Washington, D.C.: Dec. 12, 2008); Defense Inventory: Opportunities 
Exist to Save Billons by Reducing Air Force's Unneeded Spare Parts 
Inventory, GAO-07-232 (Washington, D.C.: Apr. 27, 2007); Defense 
Inventory: Opportunities Exist to Improve the Management of DOD's 
Acquisition Lead Times for Spare Parts, GAO-07-281 (Washington, D.C.: 
Mar. 2, 2007). 

[2] LMI, Lifecycle Forecasting Improvement: Causative Research and 
Item Introduction Phase (November 2010) and RAND National Defense 
Research Institute, Integrating the Department of Defense Supply Chain 
(2012). 

[End of section] 

Appendix VI: On-Hand Inventory Levels for Aviation, Land, and Maritime 
Supply Chains: 

As part of the Defense Logistics Agency (DLA) efforts to reduce on-
hand inventory, the aviation, land, and maritime supply chains each 
reduced their on-hand inventory from the end of fiscal year 2012 to 
the end of fiscal year 2013. See figures 9, 10, and 11 for the trends 
in the aviation, land, and maritime supply chains' on-hand inventory, 
specifically the amount of inventory being held as part of the 
approved acquisition objective or as economic retention stock, 
contingency retention stock, and potential reutilization stock. 

Figure 9: Defense Logistics Agency's (DLA) Aviation Supply Chain On-
Hand Inventory, End of Fiscal Years 2009-2013: 

[Refer to PDF for image: stacked vertical bar graph] 

Billions of nominal dollars: 

Date: Nov. 2009[A]; 
Approved acquisition objective[E]: $3.663; 
Economic retention stock[D]: $1.043; 
Contingency retention stock[C]: $1.176; 
Potential reutilization stock[B]: $0.147. 

Date: Sept. 2010; 
Approved acquisition objective[E]: $3.536; 
Economic retention stock[D]: $1.65; 
Contingency retention stock[C]: $1.079; 
Potential reutilization stock[B]: $0.063. 

Date: Sept. 2011; 
Approved acquisition objective[E]: $3.596; 
Economic retention stock[D]: $1.744; 
Contingency retention stock[C]: $1.041; 
Potential reutilization stock[B]: $0.063. 

Date: Sept. 2012; 
Approved acquisition objective[E]: $3.307; 
Economic retention stock[D]: $1.591; 
Contingency retention stock[C]: $0.996; 
Potential reutilization stock[B]: $0.155. 

Date: Sept. 2013; 
Approved acquisition objective[E]: $3.63; 
Economic retention stock[D]: $0.772; 
Contingency retention stock[C]: $0.25; 
Potential reutilization stock[B]: $0.04. 

Source: GAO analysis of DLA data. GAO-14-495. 

[A] End of the fiscal year 2009 inventory data were not available, so 
we used November 2009 data. 

[B] Potential reutilization stock is materiel exceeding the approved 
acquisition objective and not being retained as economic or 
contingency retention stock, and has been identified as excess 
materiel for possible disposal but has potential for reutilization. 
Potential reutilization stock is also referred to as on-hand excess 
inventory. 

[C] Contingency retention stock is materiel that is retained to 
support specific contingencies, such as to support foreign military 
sales, future military operations, and disaster relief or civil 
emergencies, or to mitigate risk associated with diminishing 
manufacturing sources or nonprocurable stock. 

[D] Economic retention stock is materiel that has been deemed more 
economical to keep than to discard because it is likely to be needed 
in the future. 

[E] Approved acquisition objective includes materiel needed to meet 
the requirements objective, 2 years of estimated future demand, war-
reserve materiel held for the services, and materiel held because it 
comes from a diminishing manufacturing source. 

[End of figure] 

Figure 10: Defense Logistics Agency's (DLA) Land Supply Chain On-Hand 
Inventory, End of Fiscal Years 2009-2013: 

[Refer to PDF for image: stacked vertical bar graph] 

Billions of nominal dollars: 

Date: Nov. 2009[A]; 
Approved acquisition objective[E]: $0.93; 
Economic retention stock[D]: $0.22; 
Contingency retention stock[C]: $0.085; 
Potential reutilization stock[B]: $0.049. 

Date: Sept. 2010; 
Approved acquisition objective[E]: $1.414; 
Economic retention stock[D]: $0.345; 
Contingency retention stock[C]: $0.097; 
Potential reutilization stock[B]: $0.069. 
				
Date: Sept. 2011; 
Approved acquisition objective[E]: $1.411; 
Economic retention stock[D]: $0.379; 
Contingency retention stock[C]: $0.094; 
Potential reutilization stock[B]: $0.068. 

Date: Sept. 2012; 
Approved acquisition objective[E]: $0.805; 
Economic retention stock[D]: $0.426; 
Contingency retention stock[C]: $0.088; 
Potential reutilization stock[B]: $0.141. 

Date: Sept. 2013; 
Approved acquisition objective[E]: $0.927; 
Economic retention stock[D]: $0.772; 
Contingency retention stock[C]: $0.025; 
Potential reutilization stock[B]: $0.036. 

Source: GAO analysis of DLA data. GAO-14-495. 

[A] End of the fiscal year 2009 inventory data were not available, so 
we used November 2009 data. 

[B] Potential reutilization stock is materiel exceeding the approved 
acquisition objective and not being retained as economic or 
contingency retention stock, and has been identified as excess 
materiel for possible disposal but has potential for reutilization. 
Potential reutilization stock is also referred to as on-hand excess 
inventory. 

[C] Contingency retention stock is materiel that is retained to 
support specific contingencies, such as to support foreign military 
sales, future military operations, and disaster relief or civil 
emergencies, or to mitigate risk associated with diminishing 
manufacturing sources or nonprocurable stock. 

[D] Economic retention stock is materiel that has been deemed more 
economical to keep than to discard because it is likely to be needed 
in the future. 

[E] Approved acquisition objective includes materiel needed to meet 
the requirements objective, 2 years of estimated future demand, war-
reserve materiel held for the services, and materiel held because it 
comes from a diminishing manufacturing source. 

[End of figure] 

Figure 11: Defense Logistics Agency's (DLA) Maritime Supply Chain On-
Hand Inventory, End of Fiscal Years 2009-2013: 

[Refer to PDF for image: stacked vertical bar graph] 

Billions of nominal dollars: 

Date: Nov. 2009[A]; 
Approved acquisition objective[E]: $1.362; 
Economic retention stock[D]: $0.433; 
Contingency retention stock[C]: $0.522; 
Potential reutilization stock[B]: $0.07. 

Date: Sept. 2010; 
Approved acquisition objective[E]: $1.266; 
Economic retention stock[D]: $0.564; 
Contingency retention stock[C]: $0.57; 
Potential reutilization stock[B]: $0.084. 
				
Date: Sept. 2011; 
Approved acquisition objective[E]: $1.255; 
Economic retention stock[D]: $0.589; 
Contingency retention stock[C]: $0.561; 
Potential reutilization stock[B]: $0.059. 

Date: Sept. 2012; 
Approved acquisition objective[E]: $1.082; 
Economic retention stock[D]: $0.445; 
Contingency retention stock[C]: $0.462; 
Potential reutilization stock[B]: $0.124. 

Date: Sept. 2013; 
Approved acquisition objective[E]: $1.233; 
Economic retention stock[D]: $0.197; 
Contingency retention stock[C]: $0.109; 
Potential reutilization stock[B]: $0.011. 

Source: GAO analysis of DLA data. GAO-14-495. 

[A] End of the fiscal year 2009 inventory data were not available, so 
we used November 2009 data. 

[B] Potential reutilization stock is materiel exceeding the approved 
acquisition objective and not being retained as economic or 
contingency retention stock, and has been identified as excess 
materiel for possible disposal but has potential for reutilization. 
Potential reutilization stock is also referred to as on-hand excess 
inventory. 

[C] Contingency retention stock is materiel that is retained to 
support specific contingencies, such as to support foreign military 
sales, future military operations, and disaster relief or civil 
emergencies, or to mitigate risk associated with diminishing 
manufacturing sources or nonprocurable stock. 

[D] Economic retention stock is materiel that has been deemed more 
economical to keep than to discard because it is likely to be needed 
in the future. 

[E] Approved acquisition objective includes materiel needed to meet 
the requirements objective, 2 years of estimated future demand, war-
reserve materiel held for the services, and materiel held because it 
comes from a diminishing manufacturing source. 

[End of figure] 

[End of section] 

Appendix VII: Value of the Defense: 

Logistics Agency's On-Order and On-Order Excess Inventory: 

The Defense Logistics Agency (DLA) tracks the amount of on-order and 
on-order excess inventory on a monthly basis and reports its amount of 
on-order excess twice a year to the Office of the Deputy Assistant 
Secretary of Defense for Supply Chain Integration. Specifically, DLA 
tracks and reports the value of its on-order inventory, which are 
items that are not in DLA's possession but for which a contract has 
been awarded or funds have been obligated. DLA also tracks and reports 
the value of its on-order excess inventory, which are items for which 
a contract has been awarded or funds have been obligated, but due to 
subsequent changes in requirements would be categorized upon arrival 
as economic retention stock, contingency contention stock, or 
potential reutilization stock. On-order excess inventory that is not 
able to be modified or canceled and is taken into DLA's possession is 
not necessarily disposed of. Rather, the inventory may be categorized 
as economic retention stock or contingency retention stock and 
potentially used in the future. See table 7 for DLA's value of on-
order and on-order excess inventory for fiscal years 2011-2013. 

Table 7: The Defense Logistics Agency's (DLA) Value of On-Order and On-
Order Excess Inventory, Fiscal Years 2011-2013: 

Millions of nominal dollars: 

Supply chain: Aviation supply chain; 
Fiscal Year 2011[A]: 
Total value of on-order inventory: $2,157.9; 
Total value of on-order excess inventory: $216.6; 
Percentage of on-order excess inventory: 10.0%; 
Fiscal Year 2012[A]: 
Total value of on-order inventory: $2,228.5; 
Total value of on-order excess inventory: $200.1; 
Percentage of on-order excess inventory: 9.0%; 
Fiscal Year 2013[A]: 
Total value of on-order inventory: $2,120.2; 
Total value of on-order excess inventory: $136.8; 
Percentage of on-order excess inventory: 6.5%. 

Supply chain: Land supply chain; 
Fiscal Year 2011[A]: 
Total value of on-order inventory: $443.2; 
Total value of on-order excess inventory: $18.7; 
Percentage of on-order excess inventory: 4.2%; 
Fiscal Year 2012[A]: 
Total value of on-order inventory: $447.1; 
Total value of on-order excess inventory: $17.3; 
Percentage of on-order excess inventory: 3.9%; 
Fiscal Year 2013[A]: 
Total value of on-order inventory: $364.7; 
Total value of on-order excess inventory: $19.1; 
Percentage of on-order excess inventory: 5.2%. 

Supply chain: Maritime supply chain; 
Fiscal Year 2011[A]: 
Total value of on-order inventory: $511.4; 
Total value of on-order excess inventory: $23.5; 
Percentage of on-order excess inventory: 4.6%; 
Fiscal Year 2012[A]: 
Total value of on-order inventory: $509.0; 
Total value of on-order excess inventory: $18.6; 
Percentage of on-order excess inventory: 3.7%; 
Fiscal Year 2013[A]: 
Total value of on-order inventory: $479.7; 
Total value of on-order excess inventory: $20.7; 
Percentage of on-order excess inventory: 4.3%. 

Supply chain: Total DLA[B]; 
Fiscal Year 2011[A]: 
Total value of on-order inventory: $4,131.2; 
Total value of on-order excess inventory: $278.3; 
Percentage of on-order excess inventory: 6.7%; 
Fiscal Year 2012[A]: 
Total value of on-order inventory: $4,603.1; 
Total value of on-order excess inventory: $288.0; 
Percentage of on-order excess inventory: 6.3%; 
Fiscal Year 2013[A]: 
Total value of on-order inventory: $4,237.0; 
Total value of on-order excess inventory: $236.7; 
Percentage of on-order excess inventory: 5.6%. 

Source: GAO analysis of DLA data. 

Notes: DLA tracks on-order excess inventory, which are items for which 
a contract has been awarded or funds have been obligated, but due to 
subsequent changes in requirements would be categorized upon arrival 
as economic retention stock, contingency retention stock, or potential 
reutilization stock. 

[A] The value of inventory is based on DLA's inventory data at the end 
of the fiscal year. 

[B] The total value for DLA includes all of its supply chains. 

[End of table] 

[End of section] 

Appendix VIII: Additional Defense Logistics Agency Efforts to Improve 
Inventory Management: 

The Defense Logistics Agency (DLA) has implemented a number of efforts 
aimed at reducing excess inventory and backorders. These efforts are 
in the early stages of implementation, and more time is needed to 
determine their effect. These efforts are focused on (1) implementing 
new methods to determine inventory levels for items with low or highly 
variable demand, (2) improving acquisition lead time accuracy and 
reducing acquisition lead times, and (3) improving the efficiency of 
supply, storage, and distribution processes. 

DLA Has Implemented New Methods to Determine Inventory Levels for 
Items with Low or Highly Variable Demand, but More Time Is Needed to 
Determine Their Effect: 

In January 2013, DLA instituted two new processes that set inventory 
levels for over 495,000 items with low or highly variable demand 
instead of using traditional forecasting methods that were ineffective 
for these items. DLA evaluates the performance of these items on a 
regular basis through reviewing a host of metrics--such as materiel 
availability, purchase request workload, and on-hand inventory levels-
-but it is too early to tell whether these processes are reducing 
administrative workload, improving availability of parts, and reducing 
costs, because sufficient data are not yet available. 

The difficulty of forecasting demand for items has been a recurring 
problem within inventory management. Previous GAO reports have cited 
difficulty with demand forecasting at each of the services and DLA. 
[Footnote 83] In addition, we have identified the Department of 
Defense (DOD) supply-chain management as a high-risk area since 1990 
due in part to weaknesses in accurately forecasting the demand for 
spare parts.[Footnote 84] Furthermore, DOD's Comprehensive Inventory 
Management Improvement Plan is focused, in part, on the improvement of 
forecast accuracy, specifically improving level-setting for low-demand 
items.[Footnote 85] Finally, the Office of the Deputy Assistant 
Secretary of Defense for Supply Chain Integration commissioned a study 
on forecasting across the department that recommended that DLA and the 
services should tailor their approach based on an item's demand 
pattern.[Footnote 86] For example, items with regular demand patterns 
would require traditional forecasting methodologies that rely on 
historical demand, whereas items with low or highly variable demand 
would require alternative item-management approaches, such as level-
setting. For more information on DLA's approaches for planning amounts 
of needed inventory, see appendix IX. 

These level-setting methodologies, referred to as Peak and Next-Gen, 
do not attempt to generate a forecast for the item based on past 
demand; rather they employ a statistical model that uses 5 years of 
historical data and assesses the risk of backorders based on factors 
such as the cost of the item and time between demands. The Peak and 
Next-Gen methodologies have been applied to about a third of DLA's 
active inventory items, which were selected based on their demand 
history characteristics.[Footnote 87] Items with infrequent demand are 
handled by the Peak methodology, while items with a high degree of 
demand variability are handled by the Next-Gen method. These models 
then generate quarterly minimum and maximum inventory levels for the 
items, instead of generating a new forecast each month through the 
traditional forecasting approach. The minimum and maximum levels set 
by Peak and Next-Gen are not intended to maximize the performance of 
each individual item; instead, the goal is to maximize the performance 
of certain key inventory metrics--such as materiel availability, 
purchase request workload, and on-hand inventory levels--over entire 
groups of items.[Footnote 88] As a result, the process may set the 
maximum level of any given item to zero, based on the optimization 
calculation for the group of items to which it belongs. 

Currently, a number of items are excluded from the Peak and Next-Gen 
methods. First, items with less than 2 years of demand history are 
excluded because the calculations for Peak and Next-Gen require at 
least a 2-year history. Second, items that would have slowed 
implementation due to complexity, such as items stocked at multiple 
locations, retail sites,[Footnote 89] or overseas distribution centers 
were not included. Third, items that were already being managed under 
special efforts, such as some nuclear and aviation engine items or 
items using a collaborative forecasting approach, were excluded from 
Peak and Next-Gen. DLA officials noted that Peak and Next-Gen are 
designed for items for which there is very little information beyond 
the demand history; items with additional information--such as those 
under active collaboration--may perform better under those different 
methods. 

Modeling performed by the DLA Office of Operations Research and 
Resource Analysis (DORRA)[Footnote 90] prior to the adoption of Peak 
and Next-Gen suggests that the Peak and Next-Gen methodologies have 
the potential to improve a number of performance metrics, while 
significantly reducing the administrative workload associated with 
ordering these items. In 2011, DORRA conducted an analysis on a number 
of different level-setting models, including those that had been 
developed by DLA and contractors. Using a simulated environment of 
41,000 items run over a hypothetical 3-year scenario, DORRA reported 
it found that the Peak and Next-Gen methods, coupled with the standard 
DLA forecasting method for more traditionally forecastable items, 
produced the best outcomes. This combination of methods in the 
simulation led to a substantial decrease in administrative workload, 
while reducing the amount of inventory and obligation authority 
required, and keeping materiel availability relatively unchanged. This 
analysis suggested that Peak and Next-Gen had the potential to improve 
upon a number of inventory metrics. When finalizing its decision on 
its approach forward, DLA determined through a second study conducted 
in 2012 that a mixture of the Peak, Next-Gen, and traditional DLA 
forecasting methods produced the best outcomes for maximizing customer 
service goals, while also reducing inventory levels. 

At this time, Peak and Next-Gen require DLA to provide inventory data 
to a contractor, which performs the computer calculations necessary to 
arrive at the item levels, which are then passed back to DLA. DLA is 
still investigating the best way to bring this model into its 
enterprise resource-planning system, but officials from the DLA 
headquarters element focused on information technology and systems 
suggest that it could take 2 or 3 years to develop a Peak-and Next-Gen-
type capability that resides within DLA's system and does not require 
the exporting and importing of data. 

DLA currently evaluates Peak and Next-Gen using numerous metrics, such 
as materiel availability, purchase request workload, and on-hand 
inventory levels. In the first few months of implementation, DLA 
experienced an increase in the amount of approved acquisition 
objective stock for these items, but this has since leveled off. In 
addition, as of January 2014, officials at DLA felt that the metrics 
do not show any negative effects from using the Peak and Next-Gen 
methodologies. However, given the nature of demand for Peak and Next-
Gen items--many can have several quarters of low or no demand--it will 
take some time before DLA can determine whether Peak and Next-Gen are 
having their intended effect. DLA officials told us that they do not 
expect to fully evaluate the effect of Peak and Next-Gen until January 
2015, when 2 years of data are available. Additionally, given that 
there are a number of other concurrent inventory-management efforts--
such as "Time to Award" and the on-hand inventory-reduction effort--it 
may be difficult for DLA to fully assess whether improved or degraded 
metrics are the result of any single policy or procedure change. 

DLA Is in the Process of Implementing Efforts to Improve Acquisition 
Lead Time Accuracy and Reduce Acquisition Lead Times: 

Within the last 2 years, DLA has initiated a number of efforts that 
are aimed at either ensuring recorded acquisition lead times are 
accurate or reducing lead times, though it is too early to determine 
the results of these efforts. In addition, it can be difficult to 
separate out the effect of a given inventory effort when it is taking 
place at the same time as a number of other inventory efforts. DLA has 
worked to correct its acquisition lead times on file, reduce the 
amount of time it takes to award contracts, and place more items onto 
long-term contracts. Acquisition lead time is the time interval 
between identifying a need to purchase an item and delivering that 
item to the customer. Acquisition lead times have two primary 
components: administrative lead time, which is the time between 
identifying the need to purchase and the award of a contract, and 
production lead time, which is the time between when the contract is 
awarded and when the item is delivered to the customer. DOD's 
Comprehensive Inventory Management Improvement Plan is focused, in 
part, on reducing the variance between actual acquisition lead times 
and recorded acquisition lead times, the latter of which are used for 
planning purposes in procuring items.[Footnote 91] In addition, DLA 
guidance has identified reducing backorders as a key agency goal. 
Previous GAO and third-party reports[Footnote 92] have noted that 
incorrect and long acquisition lead times can create backorders or on-
hand excess inventory.[Footnote 93] 

DLA Is Correcting File Acquisition Lead Times to Improve Its 
Acquisition Lead Time Variance: 

In February 2014, DLA revised the acquisition lead times--either 
administrative or production--of over 327,000 of the items that are 
recorded in its enterprise resource-planning system to decrease its 
acquisition lead time variance.[Footnote 94] However, officials do not 
expect to fully see the effect of this change until about January 
2015, after a few acquisition lead times have passed. Officials said 
that this change was done, in part, because of recent internal reviews 
that identified problems with the variance between the recorded 
acquisition lead times in the system and actual acquisition lead 
times.[Footnote 95] DLA has data on its acquisition lead time variance 
going back to fiscal year 2008; these data show that the acquisition 
lead times recorded in DLA's system were consistently at least two to 
three times larger than the actual observed acquisition lead times. As 
noted earlier, the overstating of the acquisition lead time means that 
DLA was at risk of purchasing too much inventory. This effort was led 
by headquarters DLA, with input from the supply chains. DLA officials 
anticipate that this onetime correction, combined with additional 
changes to internal business rules that determine when to update 
acquisition lead times of record, will improve the accuracy of the 
recorded acquisition lead times and allow the system to update more 
frequently. DLA officials have stated that their previous business 
rules were not always sensitive enough to correctly update the 
acquisition lead times on record, and that their recent revisions 
should help reduce DLA's acquisition lead time variance as tracked 
through the Comprehensive Inventory Management Improvement Plan 
monitoring effort and improve its planning parameters for deciding 
when to order inventory. 

DLA's "Time to Award" Initiative Is Focused on Reducing Administrative 
Lead Times: 

In January 2013, the DLA Director also began encouraging the supply 
chains to reduce their administrative lead times through an effort 
called "Time to Award", but officials say that this effort is still in 
its implementation phase and it is too early to assess its full 
effect. This effort set aggressive goals for each of the supply chains 
to reduce the administrative lead times on its awards--in some cases 
by as much as 65 percent. The effort is intended to decrease 
administrative lead times by streamlining the contract award process, 
in part through the elimination of unnecessary or duplicative steps. 
According to officials, DLA has made some progress in eliminating 
duplicative or unnecessary steps in its award processes, though the 
effort is still in its early stages. For example, DLA has made changes 
to its processes to allow contracting officers more flexibility for 
smaller orders, reduced paperwork requirements, and eliminated some 
additional reviews that were not considered beneficial.[Footnote 96] A 
subset of metrics are also being tracked specifically to help inform 
the progress of the "Time to Award" effort, such as the percentage of 
automated awards,[Footnote 97] age of purchase requests, and 
administrative lead time. These metrics are regularly presented to the 
Director in a "Time to Award" briefing. 

DLA Supply Chains Are Working to Place More Items on Long-Term 
Contracts to Help Reduce Acquisition Lead Times: 

DLA is currently working to place more items onto long-term contracts, 
because officials say that these long-term contracts, which typically 
last between 3 and 5 years, often allow DLA to reduce administrative 
lead times, frequently to 15 days or less. While the use of long-term 
contracts has been tracked for many years at DLA, the analytical 
efforts described by officials at the aviation, land, and maritime 
supply chains to assess and pursue long-term contract candidate items 
based on their supply-chain effect are relatively recent and it is too 
early to assess the full effect. Officials said that the supply chains 
must constantly reassess whether a given contract makes sense based on 
current operations and demands from the services. In addition, 
officials at the DLA supply chains stated that they have recently 
taken steps to ensure that the items being placed onto long-term 
contracts are their business drivers--items that see a lot of sales 
volume, that account for a large percentage of spending, or that have 
an outsized influence on metrics such as materiel availability. DLA 
currently develops annual supply chain-specific goals for the 
percentage of obligations made through long-term contracts.[Footnote 
98] The fiscal year 2014 goal for the land and maritime supply chains 
is 49 percent of all obligations, while the aviation supply-chain goal 
is for 60 percent of all obligations to be made through a long-term 
contract. Officials at the land and maritime supply chains told us 
that they have recently begun to focus their long-term contract 
efforts on their big business drivers and report that roughly 80 
percent of these drivers will be placed on long-term contract award 
within the next year. Similarly, the aviation supply chain has 
identified roughly 10 percent of its recently active 
inventory[Footnote 99] as being the primary drivers of customer 
demands, inventory dollars spent, and items affecting their materiel 
availability metric. According to aviation supply-chain officials, 
their strategies to increase their use of long-term contracts have 
focused on these particular items. In addition to focusing on their 
business drivers, officials from the supply chains told us that they 
also conduct cost-benefit analyses of large long-term contracts to 
ensure that DLA will benefit from them. 

Efforts to Improve Efficiency of DOD's Supply, Storage, and 
Distribution Processes Are Underway, but Are in the Early Stages and 
Face Challenges: 

DOD's strategic network optimization program is intended to improve 
the efficiency of its supply, storage, and distribution processes 
across the globe while maintaining or enhancing responsiveness to the 
customer; however, the department has not fully implemented its 
efforts and its savings estimates are preliminary. The program, which 
is overseen by the Assistant Secretary of Defense for Logistics and 
Materiel Readiness and is being managed by DLA, has three phases. 
Phase 1 focuses on minimizing costs through effective stock 
positioning, phase 2 on reducing on-hand inventory levels, and phase 3 
on eliminating unneeded infrastructure. 

In phase 1, underway currently, DLA has begun revising its methodology 
for determining the optimal locations (i.e., distribution depots) to 
stock specific items in order to minimize transportation costs while 
maintaining responsiveness to the customer. DLA began implementing its 
new stock-positioning methodology in 2012 and plans to complete 
implementation by the end of fiscal year 2014. DLA is projecting it 
will achieve $402 million in net savings through reduction in 
transportation and inventory costs and has officially removed $231 
million from its working capital fund obligation authority across 
fiscal years 2014 to 2019. According to DLA officials, the remainder 
of the savings--$171 million--is expected to be "given back" to the 
services through reductions in transportation rates.[Footnote 100] 
However, these savings have not been finalized in a working capital 
fund budget. 

For phase 2, DOD aims to reduce the aggregate levels of its inventory 
by DLA achieving total visibility of consumable items and their 
associated inventories across DOD.[Footnote 101] DLA and the services 
have developed a business plan to guide implementation, which will 
occur during fiscal year 2015. Officials said that the basic concept 
of this phase involves enhancing the current in-storage visibility 
program, which provides limited visibility into DLA-managed consumable 
inventory across the department, regardless of location and 
ownership.[Footnote 102] DLA's current in-storage visibility program 
tracks the value of inventory that DLA was able to (1) redistribute 
from one military service to fill an order from another military 
service and (2) procure from a military service to reduce or replace a 
planned purchase of inventory. For example, the department 
redistributed $34.5 million in inventory and was able to avoid the 
procurement of an additional $44.7 million in inventory during fiscal 
year 2013 through the program. See table 8 for the value of inventory 
redistributed and procured by DLA from a military service to reduce or 
replace a planned purchase of inventory since fiscal year 2011. 

Table 8: Value of Inventory DLA Redistributed and Procured to Reduce 
or Replace a Planned Purchase since Fiscal Year 2011: 

Nominal dollars: 

Year: 2011; 
Amount redistributed: $54,809,311; 
Value of procurement avoided: $13,494,340; 
Total by year: $68,303,651. 

Year: 2012; 
Amount redistributed: $41,947,694; 
Value of procurement avoided: $11,735,937; 
Total by year: $53,683,631. 

Year: 2013; 
Amount redistributed: $34,453,282; 
Value of procurement avoided: $44,661,259; 
Total by year: $79,114,541. 

Source: GAO analysis of DOD data. 

[End of table] 

According to department officials, the current in-storage visibility 
program does not provide DLA the visibility into retail stocks it 
needs to efficiently and effectively plan its supply support 
activities. Specifically, DLA has limited visibility of DLA-managed 
inventory the services hold at the retail level. Consequently, it can 
have difficulty efficiently and effectively planning the procurement 
of needed items to meet retail demand. Additionally, officials said 
that DLA is dependent upon the services' retail locations to respond 
to DLA requests to obtain its excess stock for redistribution or the 
reduction of planned procurement. Furthermore, sites participating in 
the current in-storage visibility program have primarily been limited 
to the Army and Air Force.[Footnote 103] Through enhancements to the 
current in-storage visibility program, the department is striving to 
improve DLA's visibility into retail level demands, fill orders using 
service-owned retail stocks, and jointly set wholesale and retail 
inventory levels to achieve required performance with minimal 
inventory.[Footnote 104] 

DLA and Office of the Deputy Assistant Secretary of the Defense for 
Supply Chain Integration officials believe the phase 2 efforts, if 
accomplished, could enhance the efficiency and effectiveness of DOD's 
inventory-management practices, but the department recognizes that it 
confronts two major challenges in achieving its stated objectives. 
First, the department is faced with establishing business rules--such 
as policies and processes for improving visibility and accessibility 
to the military services' retail level inventory--to govern the 
department's planned enhancements, which will require considerable 
coordination and collaboration among the military services and DLA. 
Second, the department is challenged to ensure that it has the 
information-technology capabilities in place to adequately automate 
the processes. DLA is focused on addressing these challenges in its 
implementation of phase 2. 

For phase 2, DLA tentatively estimates savings of about $860 million, 
spread across fiscal years 2015 to 2019, but DLA officials have told 
us that the current projected savings are not directly attributable to 
the planned strategic network optimization phase 2 efforts, such as 
enhanced in-storage visibility. Specifically, DLA officials told us 
that the methodology used to determine these preliminary savings 
relies on DLA's ongoing inventory-reduction effort, rather than on any 
efforts attributable to the strategic network optimization program. 
Further, DLA officials stated that these savings are likely very 
optimistic. Currently, DLA is reviewing and validating the savings 
through its regular budgeting processes and changes may occur based on 
this review. 

Phase 3, predicated on the reduction of inventory in Phase 2, intends 
to reduce DOD's infrastructure footprint by eliminating warehouses, 
thus reducing storage and building sustainment costs. The strategic 
network optimization program plans to begin implementing this phase in 
fiscal year 2016 and currently is projecting $175 million in savings 
spread across fiscal years 2015 to 2019. However, the details of such 
an infrastructure reduction remain unclear at this point and the 
savings estimates are not finalized. 

[End of section] 

Appendix IX: Defense Logistics Agency's Approaches for Planning 
Amounts of Inventory: 

Background—Demand and Supply Planning: 

DLA has two main facets of inventory planning: demand planning and 
supply planning. Demand planners gather data (e.g., requirements from 
a military depot), determine how the demand plan will be created, 
generate the plan, and provide the plan to others in the organization. 
The process used to determine the amount needed varies based on the 
characteristics of the specific items. For example, statistical 
forecasting based on historical demand is used for items that have 
regular and frequent demand while other methods, such as level-
setting, are used for items that have low or highly variable demand. 
In contrast, supply planners use the demand plan to determine how best 
to procure the items. Within DLA, the demand and supply planning 
functions also require input from weapon-systems managers, customer-
account specialists, and procurement officials. 

Key Definitions: 

Coefficient of variation: As defined by DLA, the amount of variation 
seen in an item's demand history. A low coefficient of variation 
(below one) means relatively steady demand, while a high coefficient 
(above one) means a more variable demand. 

Demand data exchange: A customer-collaboration program intended to 
improve demand forecasting accuracy and the timely availability of 
spare parts to the military services. 

The Defense Logistics Agency (DLA) manages approximately 4.6 million 
consumable items. However, DLA does not stock about 3.1 million of the 
items. DLA generally supports these items through a direct vendor 
delivery approach or DLA procures items when they are requested by a 
customer. DLA supports its remaining 1.5 million items through 
stocking inventory so it is available to customers upon request. DLA 
uses a number of business rules, such as the number of demands over a 
period of time, to determine what items are not stocked and what items 
are stocked. 

DLA uses a number of approaches to determine the appropriate amount of 
inventory to have on-hand for its stocked items. See table 9 for the 
approaches used by DLA. In some cases, DLA may use multiple approaches 
for an item to determine the amount of inventory needed across the 
enterprise. For example, some demand for an item may be forecasted 
through its demand planning system while another portion is determined 
through collaboration. Additionally, the amount of inventory needed 
varies over time. Therefore, DLA is constantly adjusting, based on 
new, emerging or declining requirements, to make sure that inventory 
on-hand is sufficient to meet customers' needs, while trying not to 
accumulate excess inventory. 

Table 9: DLA's Approaches to Determining the Amount of Inventory: 

Approach: Demand planning system; 
Key criteria for using approach for an item: Demand in greater than 50 
percent of quarters over the last 5 years, with a coefficient of 
variation between those quarters of less than or equal to 1; 
Description: Simple and advanced forecast modeling, based on 
historical demand, determines the amount of inventory needed over time; 
Approximate number of items[A]: 200,000. 

Approach: Next-Gen; 
Key criteria for using approach for an item: Demand in more than 50 
percent of quarters over the last 5 years, with a coefficient of 
variation between those quarters greater than 1; 
Description: Optimization model evaluates several metrics to determine 
the minimum and maximum level of inventory for items; 
Approximate number of items[A]: 137,000. 

Approach: Peak; 
Key criteria for using approach for an item: Demand in less than 50 
percent of quarters over the last 5 years; 
Description: Computation establishes a minimum and maximum level of 
inventory for the item; 
Approximate number of items[A]: 334,000. 

Approach: Stock Keeping Unit (SKU) Build; 
Key criteria for using approach for an item: Item must have at least 
two demands in at least 1 month over the last 12 months in order to be 
stocked at the location. These items do not meet the criteria to use 
the demand planning system and are not suited for Peak methodology due 
to multiple location management; 
Description: Computation establishes the amount of inventory stocked 
at each location over time based on the activity at that particular 
location; 
Approximate number of items[A]: 834,000. 

Approach: Collaboration; 
Key criteria for using approach for an item: Items with a 
collaboration agreement with the customer, such as demand data 
exchange; 
Description: Customer input, rather than historical demand, determines 
the amount needed over time; 
Approximate number of items[A]: 38,000. 

Source: GAO analysis of Defense Logistics Agency (DLA) information. 

[A] Item numbers are as of March 2014 and can fluctuate over time. 

[End of table] 

[End of section] 

Appendix X: Print-Friendly Version of Figure 8--Overview of the 
Defense Logistics Agency's (DLA) Regular Performance-Management 
Meetings: 

Meeting name: Executive Board[A]; 
Level of meeting: DLA Director; 
Description: The Executive Board meets quarterly and reviews the 
supply-chain Agency Performance Review metrics, which are the key 
performance metrics for DLA. It reviews a number of metrics that 
describe different areas of inventory management, such as customer 
service, cost, and internal efficiency. 

Meeting name: Inventory Management Council; 
Level of meeting: DLA Director; 
Description: This meeting focuses on strategic-level initiatives that 
have the Director's interest. The metrics reviewed here will vary from 
month to month according to the specific initiatives being discussed. 
Many of the recent Inventory Management Council meetings have focused 
on the inventory reduction effort. 

Meeting name: J-3 Agency Performance Review[A]; 
Level of meeting: DLA Headquarters; 
Description: In months where the Executive Board does not meet, the 
Agency Performance Review metrics are still reviewed at the J-3 level. 
A summary of this meeting and the metrics discussed is still provided 
to the Director. 

Meeting name: J-3 Backorder, Purchase Request, and Inventory Reviews; 
Level of meeting: DLA Headquarters; 
Description: These reviews are focused on three areas: backorders, 
purchase requests, and inventory levels. Each supply chain will speak 
once per quarter about certain aged backorders and purchase requests, 
and describe what's being done to resolve those specific orders. They 
will also discuss any problems that arise from disposing of certain 
inventory items as part of the inventory-reduction effort. 

Meeting name: J-7 Review and Analysis; 
Level of meeting: DLA Headquarters; 
Description: This meeting is focused on a number of procurement-
related metrics such as the number of purchase requests, the use of 
long-term contracts, and the timeliness of awards. 

Meeting name: J-8 Business Assessment; 
Level of meeting: DLA Headquarters; 
Description: This assessment is focused on the days of cash that DLA 
has on hand to support the working capital fund as well as the net 
operating result of the supply chains and other DLA organizations. 

Meeting name: Aviation Corporate Board[A]; 
Level of meeting: DLA Supply Chain; 
Description: This meeting is focused on many of the same metrics 
reviewed at the higher-level Agency Performance Review meetings, but 
also includes a number of metrics used just by the supply chain such 
as potential backorders, administrative and production lead times, and 
on-order excess. 

Meeting name: Land and Maritime Agency Performance Review[A]; 
Level of meeting: DLA Supply Chain; 
Description: The land and maritime supply chains hold a mid-month 
update on the Agency Performance Review metrics with their commander. 

Meeting name: Land and Maritime Monthly Business Review; 
Level of meeting: DLA Supply Chain; 
Description: This meeting rotates between looking at DLA's land and 
maritime distribution detachments. 

Source: GAO analysis of DOD guidance and inventory practices. 

[A] These meetings focus on the Agency Performance Review metrics. 

[End of table] 

[End of section] 

Appendix XI: Comments from the Department of Defense: 

Assistant Secretary of Defense: 
Logistics And Materiel Readiness: 
3500 Defense Pentagon: 
Washington, DC 20301-3500: 

June 13, 2014: 

Ms. Zina D. Merritt: 
Director, Defense Capabilities and Management: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Ms. Merritt: 

This is the Department of Defense (DoD) response to the Government 
Accountability Office (GAO) Draft Report, GAO-14-495, "Defense 
Inventory: Actions Needed to Improve Defense Logistics Agency's 
Inventory Management," dated May 8, 2014 (GAO Code 351820). Detailed 
comments on the report recommendations are enclosed. 

Sincerely, 

Signed by: 

Paul D. Peters: 
Acting: 

Enclosure: As stated. 

GAO Draft Report Dated May 8, 2014: 
GAO-14-495 (GAO Code 351820): 

"Defense Inventory: Actions Needed To Improve Defense Logistics
Agency's Inventory Management" 

Department Of Defense Comments To The GAO Recommendation: 

Recommendation 1: The GAO recommends that the Secretary of Defense 
direct the Director, Defense Logistics Agency, to reassess and, if 
determined appropriate, revise DLA's inventory reduction goals and 
schedule for achieving them to minimize risks and costs of having
to re-buy items in the long-term. 

DoD Response: Concur. DLA reviews its inventory goals monthly via 
Inventory Management Council (IMC) meetings. Declining demand, recent 
and pending Logistics Reassignments, retail capitalization, and the 
probability of future demand for Economic Retention Stock are 
assessed. As is noted by GAO, DLA changed its inventory reduction goal
from $8.2B to $lOB and anticipates additional changes to be made at 
future IMC meetings based on the Supply Chain Commander input and 
subsequent decision made by the DLA Director. 

Recommendation 2: The GAO recommends that the Secretary of Defense 
direct the Director, Defense Logistics Agency, to regularly monitor 
progress reducing on-order excess inventory through DLA's senior 
management performance briefings. 

DoD Response: Concur. DLA will include a comprehensive on-order excess 
discussion at the IMC meeting on a quarterly basis. 

Recommendation 3: The GAO recommends that the Secretary of Defense 
direct the Director, Defense Logistics Agency, to track and regularly 
review performance data, such as the amount of on-order excess 
inventory reviewed, modified or canceled, and the reasons for not
modifying or canceling, on its on-order excess inventory management 
processes through its newly established automated report. 

DoD Response: Concur. DLA will include a comprehensive on-order excess 
discussion at the IMC meeting on a quarterly basis. 

Recommendation 4: The GAO recommends that the Secretary of Defense 
direct the Director, Defense Logistics Agency, to establish supply 
chain specific on-order excess goals that support DLA minimizing its 
investment in inventory that is not needed to meet requirements and
achieving the DoD goal of 4 percent by the end of fiscal year 2016. 

DoD Response: Concur. DLA will establish Supply Chain specific on-
order excess goals by August 2014. 

Recommendation 5: The GAO recommends that the Secretary of Defense 
direct the Director, Defense Logistics Agency, to monitor on a regular 
basis DLA's progress toward achieving the supply chain specific goals. 

DoD Response: Concur. After supply chain specific goals are 
established by August 2014, DLA will monitor progress toward achieving 
those goals during on-order excess discussions at the IMC meeting on a 
quarterly basis. 

Recommendation 6: The GAO recommends that the Secretary of Defense 
direct the Director, Defense Logistics Agency, in collaboration with 
the Office of the Assistant Secretary of Defense for Logistics and 
Materiel Readiness and the Secretaries of the Army, Navy, and Air 
Force, to develop metrics, in addition to currently developed demand 
forecast accuracy and error metrics, that allow DLA and the services 
to evaluate whether the program is improving supply chain management 
performance and providing an adequate return on its investments. 

DoD Response: Concur. DLA, in collaboration with the Office of the 
Assistant Secretary of Defense for Logistics and Materiel Readiness 
and the Military Services, will evaluate the effectiveness of current 
forecasting performance metrics, modify current logic as needed and
develop additional metrics, as appropriate. 

Recommendation 7: The GAO recommends that the Secretary of Defense 
direct the Director, Defense Logistics Agency, in collaboration with 
the Office of the Assistant Secretary of Defense for Logistics and 
Materiel Readiness and the Secretaries of the Army, Navy, and Air
Force, to use the metrics to monitor the performance of collaborative 
forecasting across DOD through a results-oriented management approach, 
such as regular performance management meetings. 

DoD Response: Concur. DLA, in collaboration with the Office of the 
Assistant Secretary of Defense for Logistics and Materiel Readiness 
and the Military Services, will compare collaborative forecasting 
against conventional statistical forecasting and other level setting
techniques, and use the results to monitor performance across the DoD 
at regular performance management meetings. 

Recommendation 8: The GAO recommends that the Secretary of Defense 
direct the Director, Defense Logistics Agency, in collaboration with 
the Office of the Assistant Secretary of Defense for Logistics and 
Materiel Readiness and the Secretaries of the Army, Navy, and Air
Force, to develop and implement the necessary corrective actions to 
improve the results of collaborative forecasting across DOD. 

DoD Response: Concur. DLA, in collaboration with the Office of the 
Assistant Secretary of Defense for Logistics and Materiel Readiness 
and the Secretaries of the Army, Navy, and Air Force, is developing 
feedback mechanisms and performance trending analysis to improve DLA
collaborative forecasting activities. Development of corrective 
actions will be complete by November 2014. Implementation of 
corrective actions will follow in coordination with the Military 
Services. 

[End of section] 

Appendix XII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Zina D. Merritt, (202) 512-5257 or merrittz@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, key contributors to this 
report were Suzanne Wren (Assistant Director); John Bumgarner; Richard 
Burkard; Elizabeth Curda; Dave Hubbell; James Lackey; Carol Petersen; 
Steve Pruitt; Greg Pugnetti; Terry Richardson; Amie Steele; Michael 
Willems; and Erik Wilkins-McKee. 

[End of section] 

Related GAO Products: 

Defense Logistics: A Completed Comprehensive Strategy is Needed to 
Guide DOD's In-Transit Visibility Efforts. [hyperlink, 
http://www.gao.gov/products/GAO-13-201]. Washington, D.C.: February 
28, 2013. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-13-283]. Washington, D.C.: February 
14, 2013. 

Defense Logistics: DOD Has Taken Actions to Improve Some Segments of 
the Materiel Distribution System. [hyperlink, 
http://www.gao.gov/products/GAO-12-883R]. Washington, D.C.: August 3, 
2012. 

Defense Inventory: Actions Underway to Implement Improvement Plan, but 
Steps Needed to Enhance Efforts. [hyperlink, 
http://www.gao.gov/products/GAO-12-493]. Washington, D.C.: May 3, 2012. 

Defense Logistics: DOD Needs to Take Additional Actions to Address 
Challenges in Supply Chain Management. [hyperlink, 
http://www.gao.gov/products/GAO-11-569]. Washington, D.C.: July 28, 
2011. 

Opportunities to Reduce Potential Duplication in Government Programs, 
Save Tax Dollars, and Enhance Revenue. [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP]. Washington, D.C.: March 1, 
2011. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-11-278]. Washington, D.C.: February 
2011. 

DOD's 2010 Comprehensive Inventory Management Improvement Plan 
Addressed Statutory Requirements, but Faces Implementation Challenges. 
[hyperlink, http://www.gao.gov/products/GAO-11-240R]. Washington, 
D.C.: January 7, 2011. 

DOD's High-Risk Areas: Observations on DOD's Progress and Challenges 
in Strategic Planning for Supply Chain Management. [hyperlink, 
http://www.gao.gov/products/GAO-10-929T]. Washington, D.C.: July 27, 
2010. 

Defense Inventory: Defense Logistics Agency Needs to Expand on Efforts 
to More Effectively Manage Spare Parts. [hyperlink, 
http://www.gao.gov/products/GAO-10-469]. Washington, D.C.: May 11, 
2010. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January 
2009. 

Defense Inventory: Army Needs to Evaluate Impact of Recent Actions to 
Improve Demand Forecasts for Spare Parts. [hyperlink, 
http://www.gao.gov/products/GAO-09-199]. Washington, D.C.: January 12, 
2009. 

Defense Logistics: Lack of Key Information May Impede DOD's Ability to 
Improve Supply Chain Management. [hyperlink, 
http://www.gao.gov/products/GAO-09-150]. Washington D.C.: January 12, 
2009. 

Defense Inventory: Management Actions Needed to Improve the Cost 
Efficiency of the Navy's Spare Parts Inventory. [hyperlink, 
http://www.gao.gov/products/GAO-09-103]. Washington, D.C.: December 
12, 2008. 

DOD's High-Risk Areas: Efforts to Improve Supply Chain Can Be Enhanced 
by Linkage to Outcomes, Progress in Transforming Business Operations, 
and Reexamination of Logistics Governance and Strategy. [hyperlink, 
http://www.gao.gov/products/GAO-07-1064T]. Washington, D.C.: July 10, 
2007. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-07-310]. Washington, D.C.: January 
2007. 

Defense Inventory: Opportunities Exist to Improve the Management of 
DOD's Acquisition Lead Times for Spare Parts. [hyperlink, 
http://www.gao.gov/products/GAO-07-281]. Washington, D.C.: March 2, 
2007. 

DOD's High-Risk Areas: Progress Made Implementing Supply Chain 
Management Recommendations, but Full Extent of Improvement Unknown. 
[hyperlink, http://www.gao.gov/products/GAO-07-234]. Washington, D.C.: 
January 17, 2007. 

Defense Inventory: Opportunities Exist to Save Billions by Reducing 
Air Force's Unneeded Spare Parts Inventory. [hyperlink, 
http://www.gao.gov/products/GAO-07-232]. Washington, D.C.: April 27, 
2007. 

DOD's High-Risk Areas: Challenges Remain to Achieving and 
Demonstrating Progress in Supply Chain Management. [hyperlink, 
http://www.gao.gov/products/GAO-06-983T]. Washington, D.C.: July 25, 
2006. 

Defense Inventory: Actions Needed to Improve Inventory Retention 
Management. [hyperlink, http://www.gao.gov/products/GAO-06-512]. 
Washington, D.C.: May 25, 2006. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-05-207]. Washington, D.C.: January 
2005. 

[End of section] 

Footnotes: 

[1] DOD defines secondary inventory items as reparable components, 
subsystems, assemblies, consumable repair parts, bulk items and 
materiel, subsistence, and expendable end items (e.g., clothing and 
other personal gear). In this report, we refer to secondary inventory 
items as inventory. 

[2] End of fiscal year 2012 data were the most recent available at the 
time of this report since DOD had not released its Supply System 
Inventory Report for the end of fiscal year 2013. Unless otherwise 
stated, all dollar figures in this report are in nominal terms. 

[3] Consumables are those items that are normally expended or intended 
to be used up beyond recovery. 

[4] GAO, The Federal Government's Long-Term Fiscal Outlook: Spring 
2013 Update, [hyperlink, http://www.gao.gov/products/GAO-13-481SP] 
(Washington, D.C.: April 2013). 

[5] Department of Defense, Sustaining U.S. Global Leadership: 
Priorities for 21st Century Defense (Jan. 5, 2012). 

[6] DOD's supply chain is a global network that provides materiel, 
services, and equipment to the joint force. Supply-chain management 
encompasses the processes and systems for delivering the right items 
to the right place at the right time, and at the right cost. 

[7] This high-risk area was originally identified in 1990 as DOD 
inventory management. In 2005, it was expanded to DOD's management of 
its entire supply chain, which includes three focus areas for 
improvement: requirements forecasting, asset visibility, and materiel 
distribution. For our most-recent update, see GAO, High-Risk Series: 
An Update, [hyperlink, http://www.gao.gov/products/GAO-13-283] 
(Washington, D.C.: February 2013). 

[8] GAO, Opportunities to Reduce Potential Duplication in Government 
Programs, Save Tax Dollars, and Enhance Revenue, [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: Mar. 1, 
2011); High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February 
2011); High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January 
2009); High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-07-310] (Washington, D.C.: January 
2007); and High Risk-Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-05-207] (Washington, D.C.: January 
2005). 

[9] GAO, Defense Inventory: Actions Underway to Implement Improvement 
Plan, but Steps Needed to Enhance Efforts, [hyperlink, 
http://www.gao.gov/products/GAO-12-493] (Washington, D.C.: May 2012); 
and [hyperlink, http://www.gao.gov/products/GAO-13-283]. 

[10] On-hand excess inventory is distinct from on-hand inventory. On-
hand inventory is the amount of inventory in DLA's possession. 

[11] Per DOD guidance, DLA and the military services are required to 
stratify and report inventory data biannually as of March 31 and 
September 30 and use the stratification data to assess the ability of 
the inventory to meet the stated requirement and ensure that surplus 
inventories are kept only if warranted. DOD Manual 4140.01, Volume 10, 
DOD Supply Chain Materiel Management Procedures: Metrics and Inventory 
Stratification Reporting, and Volume 6, DOD Supply Chain Materiel 
Management Procedures: Materiel Returns, Retention, and Disposition 
(Feb. 10, 2014). DLA made changes to the structure of its inventory 
data in October 2009, which meant the earliest data we could use to 
conduct our analysis were from November 2009. 

[12] We did not include energy in our analysis because DOD's 
Comprehensive Inventory Management Improvement Plan does not focus on 
energy inventory. 

[13] GAO, Managing For Results: Data-Driven Performance Reviews Show 
Promise But Agencies Should Explore How to Involve Other Relevant 
Agencies, [hyperlink, http://www.gao.gov/products/GAO-13-228] 
(Washington, D.C.: Feb. 27, 2013); Managing For Results: Enhancing 
Agency Use of Performance Information for Management Decision Making, 
[hyperlink, http://www.gao.gov/products/GAO-05-927] (Washington, D.C.: 
Sept. 9, 2005); and Agency Performance Plans: Examples of Practices 
That Can Improve Usefulness to Decisionmakers, [hyperlink, 
http://www.gao.gov/products/GAO/GGD/AIMD-99-69] (Washington, D.C.: 
Feb. 26, 1999). 

[14] DOD Manual 4140.01, Volume 6, DOD Supply Chain Materiel 
Management Procedures: Materiel Returns, Retention, and Disposition 
(Feb. 10, 2014). 

[15] DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel 
Management Procedures: Metrics and Inventory Stratification Reporting, 
and Volume 2, DOD Supply Chain Materiel Management Procedures: Demand 
and Supply Planning (Feb. 10, 2014). 

[16] [hyperlink, http://www.gao.gov/products/GAO-13-228] and 
[hyperlink, http://www.gao.gov/products/GAO-05-927]. 

[17] See [hyperlink, http://www.gao.gov/products/GAO-12-493] for our 
most-recent work on DOD's inventory management. 

[18] See GAO, Defense Logistics: DOD Has Taken Actions to Improve Some 
Segments of the Materiel Distribution System, [hyperlink, 
http://www.gao.gov/products/GAO-12-883R] (Washington, D.C.: Aug. 3, 
2012) for our most-recent work on DOD's materiel distribution system. 

[19] See GAO, Defense Logistics: A Completed Comprehensive Strategy is 
Needed to Guide DOD's In-Transit Visibility Efforts, [hyperlink, 
http://www.gao.gov/products/GAO-13-201] (Washington, D.C.: Feb. 28, 
2013) for our most-recent work on DOD's asset visibility. 

[20] According to DOD Instruction 5158.06, Distribution Process Owner 
(DPO) (Sept. 11, 2007), the process owner "has the responsibility for 
coordinating, sustaining, and improving processes; coordinating the 
creation of new processes, where appropriate; and being accountable 
for their outcomes. Process owners advocate improvements for and 
across all DOD components for effectiveness, efficiency, and alignment 
relevant to a particular process." See also DOD Directive 5158.04, 
United States Transportation Command (USTRANSCOM) (Sept. 11, 2007). 

[21] DLA is the DOD executive agent for bulk petroleum and is 
responsible for all bulk petroleum supply management from source of 
supply to the point of customer acceptance, with emphasis on improving 
efficiency. 

[22] DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel 
Management Procedures: Metrics and Inventory Stratification Reporting. 

[23] DOD Manual 4140.01, Volume 6, DOD Supply Chain Materiel 
Management Procedures: Materiel Returns, Retention, and Disposition. 

[24] DOD guidance defines the approved acquisition objective as the 
quantity of an item authorized for peacetime and wartime requirements 
to equip and sustain U.S. and allied forces. 

[25] The amount of inventory in each category is based on a snapshot 
at a particular point in time and fluctuates due to changes in demand 
rates for individual items. The changes in demand affect the size of 
each category, thereby affecting the distribution of inventory across 
the categories on an item by item basis. For example, a specific item 
at one particular point in time may have stock categorized as economic 
retention stock, but several months later that item may not have any 
stock categorized as economic retention stock due to an increase in 
demand for the particular item. Since there are fluctuations in the 
size of the categories on an item by item basis, there are also 
fluctuations in the aggregate as well. Moreover, $1 billion in 
economic retention stock at one particular point of time cannot be 
assumed to be comprised of the same items at the same quantities as $1 
billion in economic retention stock at a later point in time. 

[26] DLA holds materiel in this category for the military services 
when the services have unfunded war-reserve requirements. 

[27] DLA holds materiel with a diminishing manufacturing source in 
this category. DLA plans to hold on-hand materiel that is above the 
approved acquisition objective with a diminishing manufacturing source 
as contingency retention stock by the end of fiscal year 2014. 

[28] Acquisition lead time includes both administrative and production 
lead time. Administrative lead time is the interval between 
identifying a need to purchase an item and the award of a contract. 
Production lead time is the interval between the award of a contract 
and receiving the purchased materiel into the supply system. 

[29] Low, infrequent, or highly variable demand items are those items 
that need to be stocked where the requirement for parts cannot be 
forecast. 

[30] The contingencies include, but are not limited to, supporting 
foreign military sales, future military operations, disaster relief or 
civil emergencies, or mitigating risk associated with diminished 
manufacturing sources or nonprocurable stock. 

[31] DLA Disposition Services supports and coordinates the disposal of 
excess and surplus property within DOD. Property not reutilized within 
DOD is available for transfer to other federal agencies or for 
donation to authorized nonprofit organizations, state governments, and 
local governments. Property not reused, transferred, or donated is 
either sold to the public on a competitive basis or disposed of in an 
environmentally safe manner. 

[32] One of the goals of the Comprehensive Inventory Management 
Improvement Plan is to reduce on-hand excess inventory (also referred 
to as potential reutilization stock) to 8 percent of the total value 
of on-hand inventory by fiscal year 2016. However, DLA's inventory-
reduction goals are much broader than reducing on-hand excess 
inventory. DLA is focused on reducing on-hand inventory levels 
regardless of whether the inventory is categorized as on-hand excess 
inventory, contingency retention stock, economic retention stock, or 
part of the approved acquisition objective. See appendix I for a brief 
overview of the Comprehensive Inventory Management Improvement Plan 
and [hyperlink, http://www.gao.gov/products/GAO-12-493] for our 
assessment of the implementation of the plan. 

[33] A working capital fund relies on sales revenue rather than direct 
appropriations to finance its continuing operations and is intended to 
(1) generate sufficient resources to cover the full costs of its 
operations and (2) operate on a break-even basis over time--that is, 
neither make a gain nor incur a loss. Customers use appropriated funds 
to finance orders placed with the working capital fund, and a working 
capital fund uses obligational authority to procure additional spare 
parts in advance of a customer placing an order. A reduction to 
obligational authority means that the working capital fund has reduced 
purchase authority resulting in a lower inventory-replenishment rate. 

[34] The disposal of $4 billion in on-hand inventory does not 
translate into a $4 billion reduction in total on-hand inventory due 
to inventory being procured and received to meet demands of customers. 
In other words, DLA's inventory is not static; the levels of inventory 
for individual items and in aggregate change constantly. For example, 
DLA is simultaneously providing inventory to its military customers, 
ordering more stock to satisfy future requirements, and disposing of 
inventory no longer needed. 

[35] DLA Disposition Services supports and coordinates the disposal of 
excess and surplus property within DOD. Property not reutilized within 
DOD is available for transfer to other federal agencies or for 
donation to authorized nonprofit organizations, state governments, and 
local governments. Property not reused, transferred, or donated is 
either sold to the public on a competitive basis or disposed of in an 
environmentally safe manner. In this review, we did not examine the 
disposal processes and the amount of disposed inventory that falls 
into each category. We have initiated work looking at DOD's process 
for disposing of excess personal property, including challenges DOD 
faces in this area and DOD's capacity to manage increases in the 
amount of excess personal property to be processed. We expect to 
report on this in 2015. 

[36] According to DLA headquarters officials, approximately 4 million 
gross square feet of this reduction is closely associated with on-hand 
inventory reduction at two DLA distribution centers--San Joaquin, 
California, and Susquehanna, Pennsylvania, where about 66 percent of 
DLA's on-hand inventory reduction occurred from June 2012 through 
September 2013. DLA operates 25 distribution centers around the world. 
Seventeen of the centers are in the continental United States while 
eight of the centers are outside of the continental United States. 
These centers are responsible for the receipt, storage, issue, 
packing, preservation, and transportation of DLA-managed items. 

[37] According to DLA headquarters officials, they are attempting to 
avoid the readiness effects that occurred as a result of the budget 
reductions during the 1990s. Specifically, DLA headquarters officials 
believe that high on-hand inventory levels were used as justification 
for substantially reducing the materiel replenishment rate of defense 
working capital funds for spare parts during the 1990s. A materiel 
replenishment rate is the ratio at which a working capital fund can 
replace sold inventory. For example, a ratio of 1.0 would allow a 
working capital fund to replace inventory sold dollar for dollar, 
whereas a ratio of less than 1.0 means for every dollar of inventory 
sold the working capital fund is replenished at a lower rate. 
According to DLA headquarters officials, during the 1990s its 
authorized replenishment rate allowed DLA to replenish only 50 to 60 
percent of its inventory sales. This low level of replenishment 
reduced its ability to purchase inventory needed by its customers 
(i.e., the military services) and created materiel availability and 
readiness issues, according to DLA officials. According to DLA 
headquarters officials, right-sizing on-hand inventory levels achieves 
the same result--reduction of on-hand inventory--by the targeting of 
unneeded inventory for disposal without the negative effect on 
materiel availability associated with reducing material replenishment 
rates. 

[38] The approved acquisition objective is the materiel needed to meet 
the requirements objective and 2 years of estimated future demand. The 
requirements objective is the maximum authorized quantity of stock for 
an item (for wholesale inventory replenishment), which consists of the 
sum of stock represented by the economic order quantity, the safety 
level, the quantity to cover acquisition lead times, quantities for 
items with low, infrequent, or highly variable demand, and backorders. 
Materiel retained based on economic reasons is referred to as economic 
retention stock, which is materiel that has been deemed more 
economical to keep than to dispose of because it is likely to be 
needed in the future. 

[39] See [hyperlink, http://www.gao.gov/products/GAO-10-469]. We found 
that contingency retention reviews should focus on verifying that the 
reason for contingency retention still exists and the reason is 
properly recorded. However, since DLA holds contingency retention 
stock for the military services, DLA depends on the services to 
provide input on which contingency inventory items are no longer 
needed and should be considered for disposal or reutilization. As a 
result, we recommended the Secretary of Defense direct the Secretaries 
of the Army, the Navy, and the Air Force to certify to DLA which items 
and what quantities of the contingency retention stock should be 
retained, in response to DLA's requests that they do so, and direct 
the Under Secretary of Defense for Acquisition, Logistics and 
Technology to provide guidance and oversight of this certification 
process. DOD concurred with the recommendation and, at the time of 
this report, was in the process of taking action to implement it. 

[40] DOD's Comprehensive Inventory Management Improvement Plan 
includes a subplan focused on improving the management of contingency 
retention stock. See appendix I for a brief overview of the 
Comprehensive Inventory Management Improvement Plan and [hyperlink, 
http://www.gao.gov/products/GAO-12-493] for our assessment of the 
implementation of the plan. 

[41] Items with no recurring demand are items that have not been 
needed by a customer over a specified period. In some cases, there may 
be justifiable reasons for retaining items that have not been needed 
in many years. For example, these items may be categorized and 
retained as part of the approved acquisition objective, economic 
retention stock, or contingency retention stock. The Comprehensive 
Inventory Management Improvement Plan has a subplan focused on 
reducing the amount of inventory that is being held with a history of 
no recurring demand across the department. The Office of the Deputy 
Assistant Secretary of Defense for Supply Chain Integration tracks the 
inventory value by number of years of no demand, the value of 
inventory with 5 or more years of no demand by each category, and the 
value of no demand stock retained and disposed. See appendix I for a 
brief overview of the Comprehensive Inventory Management Improvement 
Plan and [hyperlink, http://www.gao.gov/products/GAO-12-493] for our 
assessment of the implementation of the plan, including actions 
regarding items with no recurring demand. 

[42] As of January 2014, DLA held about $12.0 billion of non-energy 
inventory and approximately $3.3 billion of this inventory was being 
retained as retention stock--economic and contingency--or was 
categorized as potential reutilization stock. DLA also projects that 
it will receive about $1.3 billion in new inventory over the remainder 
of fiscal year 2014. Thus, DLA will need to reduce, largely through 
disposal, all $3.3 billion of retention stock to achieve its end of 
the fiscal year 2014 on-hand inventory goal of $10.0 billion. 

[43] DOD Instruction 4140.01, Supply Chain Materiel Management Policy 
(December 2011). The contingencies include, but are not limited to, 
supporting foreign military sales, future military operations, 
disaster relief or civil emergencies, or mitigating risk associated 
with diminished manufacturing sources or nonprocurable stock. 

[44] DOD Manual 4140.01, Volume 6, DOD Supply Chain Materiel 
Management Procedures: Materiel Returns, Retention, and Disposition. 

[45] GAO, Auditing and Financial Management: Standards for Internal 
Control in the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (November 1999). 

[46] See GAO, Results-Oriented Management: Strengthening Key Practices 
at FEMA and Interior Could Promote Greater Use of Performance 
Information, [hyperlink, http://www.gao.gov/products/GAO-09-676] 
(Washington, D.C.: Aug. 17, 2009); International Food Assistance: 
USAID Is Taking Actions to Improve Monitoring and Evaluation of 
Nonemergency Food Aid, but Weaknesses in Planning Could Impede 
Efforts, [hyperlink, http://www.gao.gov/products/GAO-09-980] 
(Washington, D.C.: Sept. 28, 2009); and [hyperlink, 
http://www.gao.gov/products/GAO-05-927]. 

[47] LMI is a private, not-for-profit corporation that provides 
management consulting, research, and analysis to governments and other 
nonprofit organizations across a range of public policy issues. 

[48] LMI, Economic Retention in the Department of Defense: A Risk 
Perspective (July 2007) and Economic Retention within the Department 
of Defense (December 2003). 

[49] An enterprise resource-planning system is an automated 
information system using commercial off-the-shelf software and 
consisting of multiple, integrated functional modules that perform a 
variety of business-related tasks such as accounting; inventory 
forecasting, purchasing, management, and distribution; and scheduling 
work. DLA's enterprise resource-planning system is called the 
Enterprise Business System. 

[50] LMI, Mathematical Methodology for Retention Levels at the Defense 
Logistics Agency (April 2009). 

[51] DLA's mathematical methodology computes economic retention by 
logical commodity groups while relying on characteristics of 
individual items. Consequently, items within the same group may have 
different quantities of economic retention, even though the same 
mathematical formula computes those quantities. 

[52] See appendix I for a brief overview of the Comprehensive 
Inventory Management Improvement Plan and [hyperlink, 
http://www.gao.gov/products/GAO-12-493] for our assessment of the 
implementation of the plan. 

[53] See appendix I for a brief overview of the Comprehensive 
Inventory Management Improvement Plan and [hyperlink, 
http://www.gao.gov/products/GAO-12-493] for our assessment of the 
implementation of the plan. 

[54] DOD also has included the department-wide percentage of on-order 
excess inventory as a key measure in the department's Strategic 
Management Plan for Fiscal Years 2014-2015. 

[55] Although end of fiscal year 2013 data show that DLA is under the 
goal, inventory levels fluctuate and it will not be clear whether DLA 
actually achieves the goal until end of 2014 data are reported. 

[56] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[57] See [hyperlink, http://www.gao.gov/products/GAO-13-228], 
[hyperlink, http://www.gao.gov/products/GAO-05-927], and [hyperlink, 
http://www.gao.gov/products/GAO/GGD/AIMD-99-69]. 

[58] DLA holds several performance-management meetings to review a 
suite of metrics that address a wide spectrum of DLA's operations and 
cover a number of metric areas, such as customer service, cost, and 
internal efficiency. However, DLA headquarters senior management does 
not regularly review metrics associated with on-order excess 
inventory. See appendix II for an overview of DLA's performance 
metrics framework. 

[59] DOD Instruction 4140.01, DOD Supply Chain Materiel Management 
Policy. 

[60] When we use the term "collaborative forecasting" we are referring 
specifically to the demand data exchange program operated by DLA. 
There are other types of collaborative forecasting that are used by 
DLA and the services, such as special program requirements. Special 
program requirements are nonrepetitive requirements for spare parts 
that cannot be forecast based on demand data and are submitted to DLA 
by the military services. 

[61] According to DLA, using historical demand to predict the annual 
forecast for these items rather than using customer input through 
collaborative forecasting would have resulted in an annual forecast 
value of about $378 million versus $730 million. 

[62] See appendix I for a brief overview of the Comprehensive 
Inventory Management Improvement Plan and [hyperlink, 
http://www.gao.gov/products/GAO-12-493] for our assessment of the 
implementation of the plan. 

[63] If collaborative forecasting is not used to determine the amount 
of an item needed at a specified time, then DLA uses a number of other 
approaches to determine the amount of inventory needed. For items that 
are forecastable--items with regular and frequent demand patterns--DLA 
uses a mature enterprise resource-planning system as its demand 
forecasting solution. This approach relies on historical demand to 
project future needs. See appendix IX for an overview of DLA's 
approaches to planning amounts of needed inventory. 

[64] Currently, this comparison for collaborative forecasts is made 
based on assessing the forecasted demand that was projected 1 month in 
advance. Ideally this comparison would be made by assessing the 
forecasted demand one lead time in advance; however, DLA does not 
currently maintain the necessary data to make this assessment. DLA's 
average lead time for an item is approximately 6 months. At the end of 
January 2012, DLA staff developed a system change request to make 
improvements in how these data are collected and managed; according to 
DLA officials, the change is not yet implemented in the DLA enterprise 
resource-planning system. 

[65] As part of the Comprehensive Inventory Management Improvement 
Plan, the Office of the Deputy Assistant Secretary of Defense for 
Supply Chain Integration commissioned a study on forecasting across 
the department that concluded in part that DLA and the military 
services should use forecast value-add metrics to establish controls 
around the proper use of collaborative forecasting. A forecast value-
add metric, such as the one discussed here, measures the added benefit 
of collaborative forecasting against a traditionally determined 
forecast using historical demand. The study noted that such a metric 
would add transparency to the forecast creation cycle and provide the 
capability to identify processes that do not add value to the 
forecasting process. 

[66] Absolute percent error forecast is weighted by dollar value of 
the forecast. 

[67] DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel 
Management Procedures: Metrics and Inventory Stratification Reporting. 

[68] DOD Manual 4140.01, Volume 2, DOD Supply Chain Materiel 
Management Procedures: Demand and Supply Planning. 

[69] See [hyperlink, http://www.gao.gov/products/GAO-13-228], 
[hyperlink, http://www.gao.gov/products/GAO-05-927], and Government 
Operations: Internal Control Management and Evaluation Tool, 
[hyperlink, http://www.gao.gov/products/GAO-01-1008G] (Washington, 
D.C.: August 2001). 

[70] Customer-service metrics measure things like the availability of 
parts or the number of backorders. Cost metrics can measure agency 
cash flow, sales versus purchases, or cost-efficiency measures such as 
on-order excess. Finally, internal efficiency metrics assess things 
like the number of purchase requests and the administrative lead time 
required to make an award. 

[71] DOD Instruction 4140.01, Supply Chain Materiel Management Policy 
(December 2011), and DOD Manual 4140.01, Volume 10, DOD Supply Chain 
Materiel Management Procedures: Metrics and Inventory Stratification 
Reporting (February 2014). 

[72] One of the supply chains that we did not review, industrial 
hardware, has a materiel availability goal of 93%. 

[73] A working capital fund relies on sales revenue rather than direct 
appropriations to finance its continuing operations and is intended to 
(1) generate sufficient resources to cover the full costs of its 
operations and (2) operate on a break-even basis over time--that is, 
neither make a gain nor incur a loss. Customers use appropriated funds 
to finance orders placed with the working capital fund and a working 
capital fund uses obligation authority to procure additional spare 
parts in advance of a customer placing an order. The net operating 
result is the overall gains and losses to the working capital fund 
from sales, while the cash plan performance measures increases or 
decreases to the cash flow of the working capital fund. 

[74] A purchase request is a requisition for an item that has not yet 
been placed on order. 

[75] Automated awards are those awards that do not require manual 
efforts on the part of DLA supply managers to award. A higher 
percentage of automated awards generally implies a lower 
administrative workload. Similarly, items on a long-term contract--
here meaning between 3 and 5 years--generally have a lower 
administrative lead time and result in decreased administrative 
workload. 

[76] A performance-based agreement is a contract between DLA and one 
of the military services that establishes a framework for the 
coordination and alignment of resources to support that service's 
mission. In addition to specifying each organization's roles and 
responsibilities, these agreements also include the metrics and goals 
that DLA and the service have agreed to use to assess supply-chain 
performance. 

[77] DLA and the military services are required to stratify and report 
inventory data biannually as of March 31 and September 30 and use the 
stratification data to assess the ability of the inventory to meet the 
stated requirement and ensure that surplus inventories are kept only 
if warranted. Secondary inventory data are stratified by item, each of 
which is assigned a unique stock number. DLA may have in its inventory 
multiple quantities (parts) of each unique item. DOD Manual 4140.01, 
Volume 10, DOD Supply Chain Materiel Management Procedures: Metrics 
and Inventory Stratification Reporting, and Volume 6, DOD Supply Chain 
Materiel Management Procedures: Materiel Returns, Retention, and 
Disposition (Feb. 10, 2014). 

[78] Unless otherwise stated, all dollar figured in this report are in 
nominal terms. 

[79] GAO, Managing For Results: Data-Driven Performance Reviews Show 
Promise But Agencies Should Explore How to Involve Other Relevant 
Agencies, [hyperlink, http://www.gao.gov/products/GAO-13-228] 
(Washington, D.C.: Feb. 27, 2013); Managing For Results: Enhancing 
Agency Use of Performance Information for Management Decision Making, 
[hyperlink, http://www.gao.gov/products/GAO-05-927] (Washington, D.C.: 
Sept. 9, 2005); and Agency Performance Plans: Examples of Practices 
That Can Improve Usefulness to Decisionmakers, [hyperlink, 
http://www.gao.gov/products/GAO/GGD/AIMD-99-69] (Washington, D.C.: 
Feb. 26, 1999). 

[80] DOD Manual 4140.01, Volume 6, DOD Supply Chain Materiel 
Management Procedures: Materiel Returns, Retention, and Disposition. 

[81] DOD Manual 4140.01, Volume 10, DOD Supply Chain Materiel 
Management Procedures: Metrics and Inventory Stratification Reporting 
and Volume 2, DOD Supply Chain Materiel Management Procedures: Demand 
and Supply Planning (Feb. 10, 2014). 

[82] See [hyperlink, http://www.gao.gov/products/GAO-13-228], 
[hyperlink, http://www.gao.gov/products/GAO-05-927], and GAO, 
Government Operations: Internal Control Management and Evaluation 
Tool, [hyperlink, http://www.gao.gov/products/GAO-01-1008G] 
(Washington, D.C.: August 2001). 

[83] See GAO, Defense Inventory: Defense Logistics Agency Needs to 
Expand on Efforts to More Effectively Manage Spare Parts, [hyperlink, 
http://www.gao.gov/products/GAO-10-469] (Washington, D.C.: May 11, 
2010); Defense Inventory: Army Needs to Evaluate Impact of Recent 
Actions to Improve Demand Forecasts for Spare Parts, [hyperlink, 
http://www.gao.gov/products/GAO-09-199] (Washington, D.C.: Jan. 12, 
2009); Defense Inventory: Management Actions Needed to Improve the 
Cost Efficiency of Navy's Spare Parts Inventory, [hyperlink, 
http://www.gao.gov/products/GAO-09-103] (Washington, D.C.: Dec. 12, 
2008); and Defense Inventory: Opportunities Exist to Save Billons by 
Reducing Air Force's Unneeded Spare Parts Inventory, [hyperlink, 
http://www.gao.gov/products/GAO-07-232] (Washington, D.C.: Apr. 27, 
2007). 

[84] See GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-13-283] (Washington, D.C.: February 
2013); Opportunities to Reduce Potential Duplication in Government 
Programs, Save Tax Dollars, and Enhance Revenue, [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: Mar. 1, 
2011); High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February 
2011); High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January 
2009); High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-07-310] (Washington, D.C.: January 
2007). 

[85] See appendix I for a brief overview of the Comprehensive 
Inventory Management Improvement Plan and [hyperlink, 
http://www.gao.gov/products/GAO-12-493] for our assessment of the 
implementation of the plan. 

[86] Accenture, Sustainment Lifecycle Phase Forecasting and the Impact 
on Business Outcomes (July 2013). 

[87] Examples of the characteristics examined include the number of 
quarters with no demand over the last 5 years and the coefficient of 
variation between quarters of demand. DLA uses the coefficient of 
variation to describe the amount of variation seen in an item's demand 
history. A low coefficient of variation implies relatively steady 
demand, while a high coefficient implies a more variable demand. 

[88] These groups of items are segmented by supply chain and by dollar 
amount. 

[89] Retail sites are sites that provide support to a service 
maintenance facility, such as an Air Force Air Logistics Complex or an 
Army industrial depot. 

[90] DORRA is a DLA organization that performs research and analysis 
to inform decision-and policy-making. 

[91] See appendix I for a brief overview of the Comprehensive 
Inventory Management Improvement Plan and [hyperlink, 
http://www.gao.gov/products/GAO-12-493] for our assessment of the 
implementation of the plan. 

[92] GAO, Defense Inventory: Opportunities Exist to Improve Management 
of DOD's Acquisition Lead Times for Spare Parts, [hyperlink, 
http://www.gao.gov/products/GAO-07-281] (Washington, D.C.: Mar. 2, 
2007); and RAND National Defense Research Institute, Integrating the 
Department of Defense Supply Chain (2012). 

[93] If the acquisition lead time is understated, then supply planners 
will not purchase enough of an item, and there will be a risk for 
backorders. If the acquisition lead time is overstated, the planners 
may purchase more equipment than necessary, potentially leading to 
excess. 

[94] Acquisition Lead time variance is a measure of the difference 
between the acquisition lead time recorded in a system of record and 
the observed acquisition lead time, and can be calculated for both the 
administrative and production lead times. For example, if an item has 
a recorded administrative lead time of 100 days and an observed 
administrative lead time of 75 days, then the lead time variance is 25 
days. The Office of the Secretary of Defense goal for lead time 
variance is +/-30 days. 

[95] The reviews were associated with actions taken as a part of the 
implementation of the Comprehensive Inventory Management Improvement 
Plan. 

[96] According to DLA officials, while a number of changes were 
considered, certain steps of the acquisition process could not be 
changed due to statutory reasons, such as complying with the Federal 
Acquisition Regulation. 

[97] Automated awards are those awards that do not require manual 
efforts on the part of DLA supply managers to award. A higher 
percentage of automated awards generally implies a lower 
administrative workload. 

[98] Despite the potential advantages of long-term contracts, 
officials told us that they do not expect the supply chains to place 
all their items onto long-term contracts because such contracts do not 
always make financial sense, either for DLA or for the business making 
the item. 

[99] "Recently active" in this case means items that have seen a 
demand in the last 2 years. 

[100] According to DLA officials, phase 1 will result in less materiel 
needing to be moved across the distribution network, which will result 
in reduced transportation costs for DLA. According to the DLA 
officials, these reduced transportation costs will result in lower 
rates charged to its customers--the military services. 

[101] Consumable items are normally expended or intended to be used up 
beyond recovery. 

[102] Some of this DLA-managed inventory is held and owned by DLA, and 
some by the services. 

[103] Officials said that the Navy's participation has been limited 
due to implementation challenges associated with its Enterprise 
Resource Planning System and the Marine Corps has not yet started to 
participate, but is interested in participating. 

[104] The wholesale level is the highest level of organized supply 
and, as such, procures, repairs, and maintains stocks to resupply the 
retail levels of supply. The retail level of inventory is at the 
consumer level (directly supporting customers) or at the intermediate 
level (supporting a geographical area). 

[End of section] 

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