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Inventory Management

DAU GLOSSARY DEFINITION

Alternate Definition

Inventory management includes acquisition, transportation, storage, maintenance, and disposal of DoD materiel. Making 'best value' logistics inventory and provider decisions central to total life-cycle systems management. These considerations are equally relevant for Commercial-Off-the-Shelf (COTS) or for military-unique materiel.

General Information

Within a given supply chain, component and materiel inventory levels are key to control of life-cycle costs and system readiness. DoD 4140.01 DoD Supply Chain Materiel Management Policy states that one DoD supply chain materiel management goal is to “…operate as a high-performing and agile supply chain responsive to customer requirements during peacetime and war while balancing risk and total cost.” In terms of inventory management, this suggests tailoring supply support so as to minimize DoD investment while providing inventory where and when needed. This structuring of support should be done within the context of Total Life-Cycle Systems Management (TLCSM), with a primary objective of responsive, consistent, and reliable support to the war fighter. That support should be dictated by performance agreements with customers to the maximum extent. For weapon system materiel, those agreements should be negotiated with weapon system users or their representatives as part of a Performance Based Logistics (PBL) strategy. For other materiel, the agreements should be negotiated between support providers and customer representatives.

Other factors to consider regarding inventory management include, but are not limited to, the following: 

  • Consider all costs associated with inventory management, including acquisition, transportation, storage, maintenance, and disposal in making best value logistics inventory and provider decisions central to total life-cycle systems management. These considerations are equally relevant for COTS or for military unique materiel.
  • Maintain materiel control and visibility of system inventory down to and including retail levels. This involves incorporating commercial and government best business practices to continuously improve DoD supply chain processes and instill user confidence in the materiel management system.  Best practices include:
    • Use PBL strategies and performance agreements between warfighters and Program Managers (PM) and between support providers (organic and/or commercial) and customer representatives to structure supply chain processes and systems to provide optimum inventory management in a flexible and timely manner
    • Focus provisioning processes on satisfying operational customer requirements at the point of need
    • Balance the use of all available logistics resources to accomplish timely delivery of customer-determined materiel and service requirements at the lowest cost
    • Measure total inventory and supply chain performance
    • Make maximum, effective use of competitive, global supply chain capabilities, both commercial and organic
    • As early as possible in the acquisition cycle of a new program, the program manager and product support integrator should work to address inventory logistics requirements and related supply chain costs (i.e., materiel, storage, transportation, etc.)
    • Include all logistics requirements in planning and program baselines and develop them initially without internally or externally imposed financial constraints.
    • Provide for visibility of the quantity, condition, and location of in-storage, in-process, and intransit assets throughout the DoD supply chain and comparable visibility of orders placed on organic and commercial sources of supply.

Inventory Management Processes

Services shall use the Supply Chain Operational Reference (SCOR) processes of Plan, Source, Transform, Order, Fulfill, and Return as a framework for developing, improving, and conducting inventory management activities to satisfy customer support requirements developed collaboratively with the support providers.

  • Under Orchestrate process, describes the activities associated with the integration and enablement of supply chain strategies. These include the creation of and management of business rules, performance management through continuous improvement, managing data, information, and supply chain technology, human resources management, contracts and agreements management, network design, regulatory and compliance management, risk management, Environment, Social, and Governance (ESG) management, enterprise business planning, segmentation creation and management, and circular supply chain management
  • Under the Plan process, describes the activities associated with developing plans to operate the supply chain. Planning is executed for the Order, Source, Transform, Fulfill and Return processes. These include determining requirements, gathering information about available resources, balancing requirements and resources to determine planned capabilities and gaps in demand or resources, and identifying actions to correct these gaps
  • Under the Order process, describes the activities associated with the customer purchase of products and services, including attributes such as locations, payment methods, pricing, fulfillment status, and any other order data
  • Under the Source process, perform inventory sourcing and acquisition and inventory infrastructure management through the context of total life-cycle support management
  • Under the Transform process, describes the activities associated with the scheduling and creation of products (e.g., production, assembly/disassembly, MRO) and services
  • Under the Fulfill process, describes the activities associated with fulfilling customer orders for products, including scheduling order delivery, picking, packing, shipping, assembling, installing, commissioning, and invoicing
  • Under the Return process, administer customer returns of defective materiel, excess materiel, and materiel requiring maintenance, repair, or overhaul

Supply and Demand

Obviously, DoD components must plan for requirements and resource inventory to meet customer demand, and do so by establishing support strategies that effectively and efficiently provide supply chain resources to meet supply chain requirements for future time periods. This includes balancing inventory with customer demand. For items stocked by the Services, balancing encompasses the actions needed for provisioning new materiel, for determining peacetime and wartime replenishment stockage levels, and for retaining material assets.

Where feasible, Readiness-Based Sparing (RBS) - an inventory requirements determination methodology that produces an inventory investment solution that meets end item performance requirements at minimum cost - should be used to determine organic weapon system support provisioning requirements. When it is not feasible to use RBS models and processes, demand-based requirements determination methodologies may be used.

Demand Forecasting 

Per a General Accounting Office (GAO) report issued in May 2017, DoD’s ability to match supply inventories with requirements has been a continuing challenge due, in part, to difficulties in accurately forecasting demand. The military departments and DLA have accumulated and retained billions of dollars in spare parts inventories that are excess to requirements. Key factors include:

  • Inaccurate demand forecasting
  • Ineffective or inefficient inventory management practices
  • A lack of goals and metrics for assessing and tracking the cost efficiency of inventory management

GAO added supply chain management to the High-Risk List in 1990. According to the GAO, this began with “…inventory management-because of inefficient and ineffective management practices leading to excess inventory”. As stated within the GAO’s 2019 High-Risk report, “We are removing DOD Supply Chain Management from the High-Risk List because, since 2017, DOD has addressed the remaining two criteria (monitoring and demonstrated progress) for asset visibility and materiel distribution by addressing the seven actions and outcomes identified in our 2017 High-Risk Report”.

Product Support Managers (PSM) and life cycle logisticians should check with their respective organizations for the demand forecasting and inventory/supply chain management tools available to their program via enterprise resource programs, or other local resources and capabilities. Myriad germane tools are discussed within the DAU IPS Element Guidebook and available at the DAU Tools Site.

Stockage 

The DoD and Services categorize stockage requirements and associated levels of inventory as either retail (local), or wholesale assets which, regardless of where positioned, are always managed under wholesale inventory policies.

Based on the type of item (reparable or consumable), the supply performance goal (weapon system readiness or time to fill a demand), and the expected customer demand, wholesale and retail stockage inventory requirements will use readiness-based, demand-based, limited-demand, or non-demand-based methodologies.

Aside from provisioning determinations tied to system user requirements, inventory management implies myriad other considerations, each critical to system availability. Some additional inventory management concerns are akin to overall supply chain risk management, and include -

  • Physical security
  • Accountability
  • Shelf-life and Perishability
  • Environmental conditions
  • Obsolescence
  • Pilfering
  • Sabotage
  • Packaging
  • Weather damage
  • Hazardous substances
  • Asset visibility, serno tracking, IUID/RFID
  • Asset disposal or disposition
  • Counterfeiting

Measurements

Inventory management is a function of individual item or system support goals, established to ensure optimal pairing of available resources to meet weapon system and equipment performance objectives and personnel readiness objectives at the least cost. Establishing these goals is required regardless of the source or method of support, e.g., organic, inter-governmental, private contractor, or partnership. Such goals should be based on the performance agreements negotiated with customers or, where no agreement exists, on the enterprise metrics that the Service has adopted for supply support, all intended to improve supply planning, asset allocation, and the contribution of limited inventories and limited procurement, repair, and distribution resources in support of both peacetime and wartime activities.

Inventory management activities, e.g., wholesale Inventory Control Points (ICPs) and retail supply activities, use inventory performance goals as an integral part of the process to compute and manage stockage requirements and asset allocation, based on the following:

  • For items that are essential to weapon system performance, the inventory performance goals relate to the readiness goal of the weapon system throughout its life cycle, e.g., operational availability, or mission capable rates. The Services should set weapon system readiness goals with weapon system managers or operational commands.
  • For items that are non-essential to weapon systems or are non-weapon system items, inventory performance goals typically relate to the time to fill a customer's order, whether that order is a requisition placed on an ICP or a demand request placed on a retail supply activity. Those time goals may be established by organizational, commodity, equipment, or weapon system groupings for application to individual item requirements computations.
  • For items being supported through contractual arrangements providing direct materiel support from commercial sources to DoD operational or using activities, contracted support goals, which the commercial sources can use to size their supporting inventories, should be goals that program managers or materiel managers have negotiated with those customers.