STATEMENT OF RICHARD A. DAVIS, ASSOCIATE DIRECTOR, ARMY GROUP, GENERAL ACCOUNTING OFFICE

Mr. DAVIS. Thank you, Mr. Chairman.

First, I would like to thank you for those kind words about GAO and the work that we have done.

I have given the committee a chart which we think accurately describes the Army system in very general terms, and maybe I can just take a few minutes to explain it.

Mr. HUTTO. If you would, yes.

Mr. Davis. Above the wavy line is basically what is referred to as the wholesale system. The key element of the wholesale system is the inventory control point or what the Army generally refers to as the buying commands. The buying commands are responsible for managing the inventory within the Army. They establish the requirements and they determine when assets should be bought, maintenance requirements, and what overhaul programs are needed.

The items that they buy are stored in the supply depots that are located around the United States. When units have need for certain items, they submit requisitions to the inventory control points and the inventory control points will prepare a material release order which is really a direction to the depot to release the item or items to the user.

When those items are released to the user, whoever they may be, to the corps level, the director of logistics, direct support units, etc. the item is no longer visible to the inventory control point.

In other words, visibility of assets on the inventory control points' records is limited to what is in the depots at the wholesale level.

Issues issued from the depot to the installation level, what the Army refers to as the retail level, are received by the director of logistics (DOL) which basically takes care of corps level assets or direct support units (DSU) which take care of division level assets. There are billions of dollars of assets that are located at these installations around the country and overseas which are not visible to the inventory control points, and, in fact, these assets are not visible between locations in the field.

In other words, units over in Europe, have no idea what is available, at the units in United States, whether it be Fort Hood or Fort Stewart or wherever.

That, in a very general way, is a description of the differences between the Army's wholesale supply system and the retail supply system.

Mr. HUTTO. OK. Mr. Davis, how many of the supply depots do you have?

Mr. DAVIS. There must be about a dozen or so. Twelve to fifteen of them, I think.

Mr. HUTTO. Are they regional in character? Is that-

Mr. DAVIS. Right. There are three major ones. One on the East Coast, New Cumberland; one on the West Coast, Sharpe Army Depot; and one in Texas, Red River; and they are the ones that maintain most of the supplies.

In addition, there are other depots around that do maintenance functions. For example, there is one in Corpus Christi, TX, that has a primary mission to overhaul Army aviation assets. The Army also has one at Anniston, AL which has overhaul responsibility for the Army's tanks. They are all spread throughout the United States.

Mr. HUTTO. Do any members have any questions about the chart before we go on?

[No response.]

Mr. HUTTO. OK. Well, then, you may proceed with your testimony, Mr. Davis.

Mr. DAVIS. You had earlier asked me, Mr. Chairman, to define some terms for you. Do you still want me to do that?

Mr. HUTTO. Yes, it might be well if you would.

Mr. DAVIS. You asked me to describe consumables versus reparable items.

Consumable items are basically those type of items which, when you use it, you dispose of it and you do not repair it. Things like tires, POL, etc. Reparable items are exactly what the name implies. Those are assets that once they break down, they can be fixed.

Then, there are end items versus secondary items. End items are things like tanks, trucks, helicopters, Bradley fighting vehicles and so forth. Secondary items are generally the sub-assemblies that go in to make up those end items, piece parts, assemblies, engines, transmissions, differentials and things of that nature.

Another set of items you asked me to describe are applicable and inapplicable. Applicable items are those items that the Army stratifies against what they refer to as their AFAO, which is the approved force acquisition objective.

In other words, it is the quantity that the Army says is the approved requirement for any particular item, and then they stratify all their assets against those requirements. It could be operating stocks, war reserve stocks, lead time assets, production lead time assets, and so forth.

Inapplicable is a term that the Army uses to describe the quantity of assets over and above their AFÃO. Items in the inapplicable category would include contingency retentions, economic retentions, and potential excess items. The Army does not buy items to fill those levels, but as things happen in the supply system such as an item may be phased out or demands are reduced, assets are stratified against those levels.

Basically, these are levels or ceilings that the Army has established for which they can protect assets, but they do not buy to fill those levels or ceilings.

Mr. HUTTO. All right, sir. We will be happy to admit your statement for the record.

Mr. BILBRAY. Mr. Chairman, I am a little confused on that last answer. Would you be a little more simplistic than that?

I did not quite understand what the last item was.

Mr. DAVIS. OK. It is called inapplicable.

Mr. BILBRAY. All right. I understand what it is called.

Mr. DAVIS. This is a term which describes a set of categories against which the Army stratifies assets.

For example, if their approved force acquisition objective is a hundred, and they have assets on hand and due in over a hundred, let us say 120, then those extra twenty assets are above the AFAO. The extra assets could be put in to one of the retention levels.

For example, the Army-

Mr. BILBRAY. In other words, is it simply surplus of any particular item?

Mr. DAVIS. There is no forecasted demand for it at this particular time, but the Army may decide, for a number of reasons, that it would be better to keep the item than to dispose of it at this particular time.

Mr. BILBRAY. I see. An M-1 carbine is left over that you were not using in ROTC or something like that, and you have 10,000 of those, that would be in that category, is that correct?

Mr. DAVIS. It could be.

Mr. BILBRAY. All right. I understand.

Mr. HUTTO. All right, sir. We would like for you to summarize, if you would, and we would be happy to put your entire statement into the record.

Mr. DAVIS. Thank you, sir.

I appreciate the opportunity to be here today to discuss the needed improvements in the Army's inventory management system. This subject is likely to take on added importance in the years ahead as the services are faced with decreased budgets requiring that they do more with less.

The Army Supply System is divided into two major elements, basically the way we just described on that chart. The problem that arises is that as a result of a lack of linkage between the various supply levels there are the accumulation of excess items and units, shortages of same items at other units, and procurement of the same items at the NICPS, which are the buying commands.

This lack of communication can affect readiness. Additionally, inventory for which they are no current demands accumulates at the wholesale level depots. Our recently completed and on-going work has repeatedly demonstrated these conditions.

In 1987, we reported that excesses at the DOL level had increased from $85 million in 1984 to a $155 million in 1986, an increase of about 83 percent. Our analysis of these excesses at selected installations showed that many of them were not being reported to the NICPs for redistribution to other installations where there were corresponding shortages.

At the same time, the NICPs either had procured or were in the process of procuring these same items to fill shortages at the installation level.

In one of our on-going assignments, which focuses on excesses at the DSU level, we are finding that the same types of problems are occurring at this level but at a greater magnitude. Preliminary information based on our work at one installation showed that the DSUS for two collocated divisions had excess items valued at $40 million.

Excess items at one division's DSU could have been redistributed to fill shortages at the other divisions DSUs. However, because there is no linkage between the two divisions' supply systems,

there was no systematic means to redistribute the excess items from one division to the other.

Specifically, of the thirty-seven excess items we selected, we determined that in thirteen cases there was a need for the same items in the other division. In one case, the division had an excess quantity of six of an item on hand, while the other division was awaiting receipt of fourteen of the same item from the NICP.

If redistribution had been practiced, the six excess items could have been transferred to the other division and the due-in quantity could have been reduced by the same number.

Also, we determined that of sixty-six excess items we selected on a judgmental basis at two divisions, forty-six of the items valued at $4.5 million were being procured by the NICP. When the NICP is not aware of the excesses that can be redistributed to the other locations having the need for the item, readiness can suffer.

On the basis of our sample of excess items, we determined that eleven of the forty-six items being procured by the NICP had high priority requisitions outstanding at retail level installations. This is an indication that equipment was not mission capable because it lacked necessary parts.

To illustrate, two M-1 tanks in Germany were not mission capable because they lacked a part, even though that part was excess to the needs of the division at Fort Hood where we were conducting our review.

There is no single cause which results in excess items and items for which there are no current demand. Likewise, there is no single solution. The problem has many causes which collectively generate vast amounts of items in these categories.

Past Army studies have identified a host of problems throughout the supply system. Some of the more frequently cited problems included provisioning of items based on over-estimation of part failure rates; configuration changes which result in already purchased items becoming excess while outdated items continue to be purchased; and requisition errors that result in the release of overstated quantities of materials that are later returned to the supply system.

Another cause of excess inventory is related to the Army's policy of buying items before they are needed. These purchases are referred to as "premature buys." Our work at two NICPs showed that the Army had purchased about $93 million of spare repair parts before they were needed.

Another principal cause of excesses, particularly at the installation level, has to do with the reluctance of some field commanders to turn in excess items once they have them in their possession.

They seem to believe that they might need the items some day. While it is not possible to quantify the effect that this attitude has had on the excess problem, it was readily apparent through our discussions with command officials at the installations we visited. For example, the division officials at one location told us that their reason for retaining excess items was that the unit had to be ready to deploy at a moment's notice and they might need the items. The same division went so far as to issue policy guidance that authorized its units to retain a 1-year stock of items, even though these items would not qualify to be stocked based on

demand history. This practice is contrary to department policy, which prohibits units from retaining stock not otherwise authorized.

The Army is well aware of these problems and has on-going or planned initiatives to address them. The Army and we recognize that it is not possible to completely eliminate the problem of excess and no demand items. Therefore, for these type of items, the objectives should be to use them in a most beneficial manner.

However, to the extent that the causes of excess and no demand items can be eliminated, the supply system will become more efficient and effective and finite resources can be conserved and devoted to other priorities.

One of the Army's on-going initiatives is to develop a system that will provide corps level visibility of inventory items maintained by units in the corps. This system will allow the corps to identify excess items in their units and redistribute them among other division units. The system referred to as the standard Army retail supply system (SARSS) is expected to be fully implemented in the mid-1990s.

We support the Army's efforts to identify excesses at the retail and wholesale supply levels and to eliminate the causes of excesses. However, the full benefits of the Army's actions will not be realized until it develops a supply system that enables the managers at the wholesale level to have total visibility of the inventory down to and including the direct support level.

The technology for such a system has been proven by the Air Force which has worldwide visibility of reparable items down to the base level. It is equally important that managers of the wholesale system also have the authority to redistribute excesses from locations where they exist to locations where they are needed.

Achieving these objectives will enhance the responsiveness of the supply system, improve operational readiness and reduce costs. Giving visibility and redistribution authority to managers at the wholesale level is not intended to imply that the wholesale level managers would arbitrarily redistribute excesses. Wholesale level managers should redistribute items only after consulting with the possessing command because there may be valid reasons why the command needs to retain excesses over and above its authorized level.

Also, with increased visibility, wholesale level managers would be in a position to make more informed procurement decisions because they would know the asset positions of items at the installation levels. At present, these assets are not considered in procurement decisions because managers have no assurance that assets can be redistributed.

Mr. Chairman, that completes my statement, and I would be pleased to respond to any questions you would have.