Army Inventory: Unfilled War Reserve Requirements Could Be Met With Items From Other Inventory (Letter Report, 08/25/94, GAO/NSIAD-94-207). After the Defense Department (DOD) Comptroller told the Army that it could use inventory not needed for peacetime missions to satisfy unfilled war reserve requirements, the Army estimated that it could reduce its unfilled war reserve requirements by nearly $187 million at its five inventory control points. GAO found that this estimate was understated and that the Army could actually meet $497 million of its unfilled war reserve requirements by using such inventory. Although GAO tried to reconcile the difference between the Army's and GAO's estimates, computer programming errors prevented Army officials from reconstructing the methodology used to arrive at their estimate. Army officials agreed that GAO's approach was correct. DOD officials said that before the Army could transfer this inventory to the war reserve category, DOD would have to change its policy to allow the Army to exceed the $2.9 billion ceiling on protected war reserve inventory. --------------------------- Indexing Terms ----------------------------- REPORTNUM: NSIAD-94-207 TITLE: Army Inventory: Unfilled War Reserve Requirements Could Be Met With Items From Other Inventory DATE: 08/25/94 SUBJECT: Army procurement Military inventories Military appropriations Property and supply management Inventory control systems Military cost control Army supplies Procurement policies Combat readiness Ground warfare ************************************************************************** * This file contains an ASCII representation of the text of a GAO * * report. Delineations within the text indicating chapter titles, * * headings, and bullets are preserved. 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We are unable to accept electronic orders * * for printed documents at this time. * ************************************************************************** Cover ================================================================ COVER Report to the Chairman, Subcommittee on Readiness, Committee on Armed Services, House of Representatives August 1994 ARMY INVENTORY - UNFILLED WAR RESERVE REQUIREMENTS COULD BE MET WITH ITEMS FROM OTHER INVENTORY GAO/NSIAD-94-207 Army Inventory Abbreviations =============================================================== ABBREV DOD - Department of Defense Letter =============================================================== LETTER B-257583 August 25, 1994 The Honorable Earl Hutto Chairman, Subcommittee on Readiness Committee on Armed Services House of Representatives Dear Mr. Chairman: This report responds to your request that we determine whether the Army has inventory items that could be used to meet unfilled war reserve requirements. More specifically, your concerns focused on the Department of Defense (DOD) policy that restricted the services to filling war reserve requirements with assets procured with funds specifically appropriated for that purpose. As a result of this policy, situations could arise where assets available to fill a war reserve requirement are not applied against the unfilled requirements because they were not bought with funds appropriated for that purpose. BACKGROUND ------------------------------------------------------------ Letter :1 The Department of Army, in April 1992, instructed its inventory control points that the DOD Comptroller had issued policy guidance limiting the protectable level\1 of the war reserve requirement to those assets acquired with direct war reserve appropriations. In February 1994, the DOD Comptroller changed the policy and advised the Army that it could use inventory items not needed for peacetime operations to satisfy unfilled war reserve requirements so long as the total amount of protected war reserve inventory did not exceed $2.9 billion--the cumulative amount Congress had previously appropriated for buying war reserve inventory. As of May 1994, the Army had war reserve requirements valued at about $3.6 billion. Of that total, the Army inventory control points reported having protected war reserve inventory valued at $1.3 billion and unfilled war reserve requirements of $2.3 billion. According to Army officials, the $1.3 billion of protected war reserve inventory does not include about $1.5 billion worth of items owned by the Army but managed by the Defense Logistics Agency and the Surgeon General, thus making the Army's total protected war reserve inventory about $2.8 billion. As a result, under current DOD policy with its $2.9 billion ceiling, the Army could only transfer an additional $100 million of inventory to that category. -------------------- \1 Assets designated as protectable war reserve assets can be issued for peacetime operating purposes. However, in such cases, the item has to be replaced. If the war reserve item is not a protected asset, it does not have to be replaced when it is issued for peacetime operating purposes. RESULTS IN BRIEF ------------------------------------------------------------ Letter :2 After the DOD Comptroller advised the Army that it could use inventory items not needed for peacetime operating purposes to satisfy unfilled war reserve requirements, the Army estimated that it could reduce its unfilled war reserve requirements by about $186.6 million at its five inventory control points.\2 Our review showed that the Army's estimate of $186.6 million was understated and that it could meet $497 million of its unfilled war reserve requirements by using inventory items not needed for operating purposes. We attempted to reconcile the difference between the Army's estimate and our estimate. However, according to Army officials, computer programming errors precluded them from reconstructing the methodology used to arrive at their estimate. Army officials reviewed our methodology and agreed that our approach was correct. DOD officials said that before the Army could transfer this inventory to the war reserve category, DOD would have to change its policy to allow the Army to exceed the $2.9 billion ceiling on protected war reserve inventory. -------------------- \2 See appendix I for a breakdown of the $186 million by inventory control point. THE ARMY CAN REDUCE ITS UNFILLED WAR RESERVE REQUIREMENTS ------------------------------------------------------------ Letter :3 Based on the change in DOD policy, which allowed the Army to use assets not specifically acquired with appropriated war reserve funds to satisfy its unfilled war reserve requirements, the Army estimated that it could fill about $186.6 million of its unfilled requirements. However, the Army's estimate of how much it can reduce its war reserve requirements with such assets is too low. Our review showed that the Army can reduce its unfilled war reserve requirements by $497 million by using available inventory that is not needed for operating purposes. Table 1 shows, on an Army-wide basis, the number of items and the value of the war reserve requirements that could be fully or partially filled by using on-hand and due-in assets. Table 1 War Reserve Requirements Fully or Partially Filled By Using Assets Excess to the Operating Needs at the Five Inventory Control Points (Dollars in millions) Number of Number of Inventory line line control point items Value items Value ---------------- --------- --------- --------- --------- Armament, 1,259 $96.8 685 $6.2 Munitions and Chemical Command Aviation and 1,288 169.1 162 9.5 Troop Support Command Communications- 795 39.0 455 11.8 Electronics Command Missile Command 445 32.6 248 9.4 Tank-Automotive 912 117.7 344 4.9 Command ============================================================ Total 4,699 $455.2 1,894 $41.8 ------------------------------------------------------------ Our estimate of the war reserve requirements that can be fully or partially satisfied with assets not needed for peacetime operations is conservative. We only considered inventory in a serviceable, ready-to-issue condition and inventory due-in from contracts. If unserviceable inventory had been considered, the value of unfilled war reserve requirements that could be fully or partially satisfied would have been increased by millions, if not hundreds of millions of dollars. However, to achieve the increased fill rate, the Army would have to establish repair programs for the items in an unserviceable condition. In view of the continued downsizing of the Army and the uncertainties about the threat and the types of future conflicts, it may not be a prudent use of resources to repair items just to increase the war reserve fill rates. MATTERS FOR CONGRESSIONAL CONSIDERATION ------------------------------------------------------------ Letter :4 Because there is clearly a hesitancy on DOD's part to proceed in reclassifying any of the peacetime inventory in the absence of a clearer statement of approval by Congress, Congress may wish to eliminate the section of the law that concerns DOD or provide other clarifying guidance on this matter. RECOMMENDATIONS ------------------------------------------------------------ Letter :5 We recommend that the Secretary of Defense direct the DOD Comptroller to reevaluate the policy that limits the amount of protected war reserve inventory that the Army can maintain. Otherwise, inventory not needed for peacetime operations could not be transferred to the war reserve category. However, as pointed out in a prior report,\3 before the Army is allowed to transfer the unneeded inventory to war reserves, it needs to assure itself that the computed war reserve requirements represent valid requirements and that future funding requests reflect the reduced need for war reserve appropriations. -------------------- \3 Army Inventory: Current Operating and War Reserve Requirements Can Be Reduced (GAO/NSIAD-93-119, Apr. 1993). AGENCY COMMENTS AND OUR RESPONSE ------------------------------------------------------------ Letter :6 In commenting on a draft of this report, DOD agreed with the recommendations but asserted that before it could change the policy that limits the amount of war reserve inventory that the Army maintains, Congress would have to modify section 8007 of Public Law 103-139. This section of the law provides that except in amounts equal to the amounts appropriated to working capital funds in the act, no obligations may be made against a working capital fund to procure or increase the value of war reserve material inventory, unless the Secretary of Defense has notified Congress prior to such obligation. DOD said that its concern about section 8007 is that inventory that was purchased with war reserve appropriations to support a war reserve requirement may no longer be considered as war reserve material because the item may not now have a war reserve requirement. Thus, if inventory not needed for peacetime operating purposes were now reclassified to fill valid, unmet war reserve requirements, the value of that inventory and the value of war reserve inventory purchased with appropriated war reserve funds would exceed the total of all funds appropriated for war reserves. Therefore, DOD might not be in compliance with section 8007's mandate not to obligate to "increase the value of war reserve inventory." We do not believe that Congress has to modify section 8007 in order for DOD to implement our recommendations, because the section authorizes the Secretary of Defense to increase the value of war reserve inventory as long as Congress is notified prior to the increase. Moreover, we do not believe that a reclassification of inventory constitutes an obligation. DOD further stated that the section 8007 provision is also supported by DOD Inspector General report 91-056, Final Quick Reaction Report on Budgeting for War Reserve Stocks in the Defense Logistics Agency. We do not believe that the Inspector General's report cited in DOD's comments is applicable to the issues identified in our report. It discusses situations at the Defense Logistics Agency where the agency would not issue on-hand inventory because it was categorized as "protected war reserve stock" and at the same time, there was a need for peacetime operating stock. As a result, the agency was requesting additional funds to buy inventory to meet its peacetime operating deficits. As discussed in our report, the inventory that we are recommending be transferred to war reserves is inventory that is not needed to meet operating requirements. In other words, it is inventory that remains after all the operating requirements have been filled. DOD's comments are shown in appendix II. SCOPE AND METHODOLOGY ------------------------------------------------------------ Letter :7 To determine the number of items and dollar value of the war reserve requirements that could be filled by stock that was excess to operating needs, we identified those items at the five Army inventory control points that had a war reserve requirement. Our next step was to determine what portion of the war reserve requirement had assets applied to it. This is referred to as funded war reserves. The balance of the requirement not funded represented the potential for which assets could be applied. Our next step was to identify those inventory items in a serviceable condition that are not needed to meet peacetime operating requirements. We then matched these inventory items to the unfunded (unfilled) war reserve requirement. The extent to which there was a match between the inventory items not needed for peacetime operating purposes and the unfunded war reserve requirement represented the magnitude by which the Army's war reserve requirements could be reduced. Our overall approach and methodology is very conservative in that we only considered inventory items that were in a serviceable, ready-to-issue condition and items due-in on contracts. We did not consider inventory that was in an unserviceable condition or inventory that was due-in from Army field units or repair facilities. Therefore, our estimate of the number and dollar value of inventory items that could be used to fully or partially satisfy an unfilled war reserve requirement is considerably less than the true inventory position of the item. Before applying our methodology to the Army's inventory data files, we had Army officials review and comment on it. They generally agreed with our approach and made certain suggestions that we incorporated into the methodology. We performed our review between December 1993 and May 1994 in accordance with generally accepted government auditing standards. ---------------------------------------------------------- Letter :7.1 We are sending copies of this report to the Chairmen and Ranking Minority Members, Senate and House Committees on Appropriations and on Armed Services, Senate Committee on Governmental Affairs, and House Committee on Government Operations; the Director, Office of Management and Budget; and the Secretaries of Defense and the Army. Please contact me at (202) 512-5140 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix III. Sincerely yours, Mark E. Gebicke Director, Military Operations and Capabilities Issues BREAKDOWN OF ARMY'S ESTIMATED REDUCED UNFILLED WAR RESERVE REQUIREMENTS BY INVENTORY CONTROL POINT =========================================================== Appendix I (Dollars in millions) Inventor y control Number of Number of Number of point line items Value line items Value line items Value -------- ---------- ---------- ---------- ---------- ---------- ---------- Armament 3,988 $616.2 1,861 $402.4 1,429 $35.6 , Munitio ns and Chemica l Command Aviation 2,713 1,706.3 501 1,210.2 846 30.9 and Troop Support Command Communic 3,710 279.6 1,026 178.5 1,278 25.2 ations- Electro nics Command Missile 2,475 304.0 477 215.4 1,005 17.3 Command Tank- 2,306 715.7 950 340.6 512 78.0 Automot ive Command ================================================================================ Total 15,192 $3,621.8 4,815 $2,347.1 5,070 $186.6 -------------------------------------------------------------------------------- (See figure in printed edition.)Appendix II COMMENTS FROM THE DEPARTMENT OF DEFENSE =========================================================== Appendix I (See figure in printed edition.) Now on p. 3. Now on p. 4. MAJOR CONTRIBUTORS TO THIS REPORT ========================================================= Appendix III NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION, WASHINGTON, D.C. Norman J. Rabkin Robert J. Lane KANSAS CITY REGIONAL OFFICE Leonard C. Hill Robert C. Sommer