National Audit Office report published on Defence Inventory Management

Delivery to the frontline is still being put at risk by longstanding weaknesses in inventory management, despite the Ministry of Defence (MoD) taking steps to improve, according to a new National Audit Office (NAO) report. 

In its latest report – Defence Inventory Management – the NAO found that, in response to increasing global instability including the war in Ukraine and the COVID-19 pandemic, the MoD has changed its strategic objectives for inventory management to balance cost reduction alongside effectiveness and resilience. However, historical issues¹ such as aging IT systems and disposal management remain. Overall, the NAO concludes that the MoD’s approach is not yet set up to provide value for money.

The MoD manages an £11.8 billion portfolio of inventory, which includes guided weapons; missiles and bombs; capital spares, such as spare parts for vehicles; and raw materials and consumables, such as boots. The MoD spent £1.5 billion buying inventory in 2022-23, and currently has a stock of 640,000 types of inventory and more than 740 million individual items.

However, the MoD's inventory management is dispersed amongst many different organisations, with different policies and ways of working. This creates a complex landscape with inefficient working practices and makes it challenging for the MoD to achieve its strategic objectives. The MoD set up the Defence Support in 2019 to establish common standards across the MoD, but challenges remain in doing so, as it cannot direct other defence organisations and must instead rely on influencing to achieve its aims.

The MoD has been slow to upgrade its legacy IT estate – including two 40-year-old core inventory systems – and its inventory data have limitations that undermine its ability to make effective decisions.

The MoD is currently rolling out a series of transformation programmes to overcome its weaknesses across its Support activities, including inventory management. This includes a £2.5 billion pan-defence transformation programme, which will update its legacy IT systems and implement standardised processes across the MoD. However, the MoD’s ability to refine and deliver this programme faces risks because it does not currently have in place all the staff it needs for the programme.

Under-resourcing was cited by MoD staff as creating challenges to better inventory management, which were exacerbated by inefficient working practices and IT systems. The MoD does not have a comprehensive understanding of the Support workforce in terms of the roles it requires and where it has gaps. Without this, the MoD cannot understand what risks it currently holds in its staffing of the Support function.

The MoD has worked to reduce over-purchasing.⁴ Previously, the Department encouraged over-purchasing, with the Armed Forces only charged for commodities when they were used, and not when they were purchased. Since the NAO’s last report in 2012, the MoD has implemented a new financial framework which sees payment on purchase. ³ Some challenges remain:  the MoD told the NAO there is a risk that its financial framework does not incentivise keeping its war reserve commodities up to date, as it does not provide financial cover where these items expire.

The MoD does not consistently dispose of inventory that it no longer requires, and this has resulted in large build-ups of excess and obsolete stock in warehouses. At present, more than 105,500m³ of items stored in central warehouses are not currently fit for use. The MoD has set up three projects to identify and dispose of its surplus inventory, but only one has become part of its business as usual approach.

The MoD outsourced aspects of its inventory management, which led to improvements, including rationalising and modernising parts of its estate and organisation. However, the MoD did not factor in specific medical needs in its Logistics and Commodities Services Transformation contract. This has led to the Armed Forces facing issues such as a lack of availability of medical items, resulting in a need to source missing items from elsewhere. In some instances, units have carried increased operational risk because they have had to proceed without the capability to test for and treat certain medical conditions. In 2019 the MoD and Team Leidos began implementing improvement initiatives but these did not deliver sufficient change to fully address these issues. In June 2023, the MoD approved a proposal from its contractor – Team Leidos – to specifically address medical support and increase the number of its staff with medical expertise in 2024.

Among its recommendations, the NAO urges the MoD to define the levels of inventory needed to support its new strategic aims, and to develop an understanding of what arrangements are needed to support these and the barriers to achieving them.

In addition, it calls on the MoD to identify and prioritise the resources it needs to ensure its transformation programmes can be implemented successfully to deliver the available financial and operational benefits.

Gareth Davies, the head of the NAO, said:

“It is vitally important that the UK armed forces have the inventory they need, amid growing global instability and given the plans for an increased deployed presence set out in the Government’s Integrated Review.

“The Ministry of Defence has taken steps to improve its inventory management, and these have resulted in improvements in logistics and commodity procurement and reductions in over-purchasing. However, long-standing weaknesses with its inventory management remain, primarily from legacy IT systems.

“The MoD must ensure it prioritises the resources it needs for its transformation programmes, otherwise its ability to build resilience and deploy the people and equipment it needs in the right places will be frustrated.”

ENDS

Notes for Editors

1. To overcome its historical weaknesses, and support the delivery of the Defence Support Strategy, the MoD is implementing several transformation and change initiatives, including two transformation programmes. Business Modernisation for Support (BMfS) is a £2.5 billion pan-Defence business change programme which aims to upgrade Support’s legacy IT estate and implement a set of standardised processes based on industry best practice.
2. Each Command operates its own core inventory management system, two of which are nearly 40 years old.
3. Comptroller and Auditor General, Managing the Defence Inventory, Session 2012-13, HC 745, National Audit Office, June 2012.
4. The amount of Raw Material and Consumables (RMC) the MoD purchases annually has fallen from £2.1 billion in March 2011 to £1.1 billion in March 2023, with its RMC holdings falling from a net value of £7.7 billion to £4.1 billion in the same period.