oversight

FAA's Ability To Manage Its National Airspace System Inventory Is Limited by Several Gaps in Its Processes That Remain After Adoption of the Agency's Current Inventory Management System

Published by the Department of Transportation, Office of Inspector General on 2021-07-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              FAA’s Ability To Manage Its National
             Airspace System Inventory Is Limited by
            Several Gaps in Its Processes That Remain
             After Adoption of the Agency’s Current
                 Inventory Management System




Report No. FI2021029
July 12, 2021
FAA’s Ability To Manage Its National Airspace System Inventory
Is Limited by Several Gaps in Its Processes That Remain After
Adoption of the Agency’s Current Inventory Management System
Self-initiated

Federal Aviation Administration | FI2021029 | July 12, 2021




What We Looked At
Through its Logistics Center, the Federal Aviation Administration (FAA) maintains, repairs, and
overhauls equipment for the National Airspace System (NAS). The Logistics Center is FAA’s only
centralized distribution center for NAS inventory, valued at $735 million. Each year, it ships and
receives approximately 200,000 parts to FAA field offices and other domestic and international
customers. Previous reviews have found that FAA did not have sufficient controls in place to track and
manage its inventory. Accordingly, we initiated this audit with the following objective: to determine if
FAA has effective oversight controls for managing the NAS inventory, including controls to
appropriately account for excess, obsolete, or unserviceable (EOU) items.

What We Found
FAA lacks sufficient oversight controls for managing its NAS inventory and continues to maintain
excessive quantities of old and unserviceable parts. In part, this is because FAA lost the automatic
functionality for monitoring excess inventory levels after it transitioned to a new inventory
management system. The transition to the new system also impacted FAA’s ability to track EOU
inventory to final disposition and monitor exchange and repair (E&R) parts shipped to and from the
field. Furthermore, FAA must manually recalculate inventory values for most E&R parts and faces
about $1 million in quantity discrepancies. The lack of sufficient controls limits FAA’s ability to
accurately report its inventory values and determine the stock levels it needs to support NAS systems.

Our Recommendations
We made seven recommendations to improve FAA’s ability to manage and provide oversight for the
NAS inventory. FAA concurred with recommendations 1–4, 6, and 7. Thus, we consider these
recommendations resolved but open pending an OIG review and FAA’s completion of planned
actions. FAA partially concurred with recommendation 5 and provided an alternative action but did
not describe the course of action it will take if parts are never returned or the impact of unreturned
parts on its financial statements. Therefore, we consider recommendation 5 open and unresolved. We
request that the Agency reconsider its position on this recommendation and provide us with its
revised response within 30 days of the date of this report in accordance with DOT Order 8000.1C.


All OIG audit reports are available on our website at www.oig.dot.gov.
For inquiries about this report, please contact our Office of Government and Public Affairs at (202) 366-8751.
Contents
     Memorandum                                                                1

     Background                                                                3

     Results in Brief                                                          5

     FAA Lacks Sufficient Oversight Controls for Managing Its NAS Inventory    6

     Conclusion                                                               16

     Recommendations                                                          17

     Agency Comments and OIG Response                                         17

     Actions Required                                                         18

     Exhibit A. Scope and Methodology                                         19

     Exhibit B. Organizations Visited or Contacted                            23

     Exhibit C. List of Acronyms                                              24

     Exhibit D. Overview of the NAS Inventory Managed by the Logistics
        Center                                                                25

     Exhibit E. Major Contributors to This Report                             28

     Appendix. Agency Comments                                                29




FI2021029
           U.S. DEPARTMENT OF TRANSPORTATION
           OFFICE OF INSPECTOR GENERAL




Memorandum
Date:             July 12, 2021

Subject:          ACTION: FAA’s Ability To Manage Its National Airspace System Inventory Is
                  Limited by Several Gaps in Its Processes That Remain After Adoption of the
                  Agency’s Current Inventory Management System | Report No. FI2021029

From:             Barry J. DeWeese
                  Principal Assistant Inspector General for Auditing and Evaluation

To:               Federal Aviation Administrator


                  Through its Logistics Center, the Federal Aviation Administration (FAA) maintains,
                  repairs, and overhauls equipment for the National Airspace System (NAS). The
                  Logistics Center is FAA’s only centralized distribution center for NAS inventory,
                  valued at $735 million. Each year, it ships and receives approximately 200,000 parts,
                  which support over 77,000 systems for FAA field offices and other domestic and
                  international customers. 1

                  When KPMG LLP, an independent public accountant, audited FAA’s financial
                  statements for fiscal years 2016 and 2015 under our oversight, it found that a
                  2016 conversion to a new inventory system was a unique, one-time,
                  implementation outside of normal business processes. As a result, FAA did not
                  have sufficient policies, procedures, and controls in place to address the changes
                  resulting from the implementation. 2 More recently, a 2019 Office of Inspector
                  General (OIG) report found internal control weaknesses in the NAS inventory
                  management. Specifically, we found that FAA does not have a detailed aging
                  report for tracking the age of its inventory, which might include items that are




1 Major customers are FAA’s Air Traffic Organization (ATO) Technical Operations, Air Traffic Program Management
Office, and Mike Monroney Aeronautical Center (MMAC); the Departments of Defense and Homeland Security; U.S.
Forest Service; and a few international government entities. FAA accounts for 60 percent of the Center’s business.
2 Quality Control Review of Audited Consolidated Financial Statements for Fiscal Years 2016 and 2015 (OIG Report No.

QC-2017-011), November 14, 2016. OIG reports are available on our website: https://www.oig.dot.gov/.


FI2021029                                                                                                          1
                 30 or more years old. As a result, we reported that it was difficult to determine if
                 FAA was overstating or understating the value of the NAS inventory. 3

                 Accordingly, our objective for this self-initiated audit was to determine if FAA has
                 effective oversight controls for managing the NAS inventory, including controls
                 to appropriately account for excess, obsolete, or unserviceable items.

                 To conduct our work, we interviewed FAA employees at the Logistics Center and
                 headquarters personnel on policy and procedures for managing NAS inventory,
                 including excess, obsolete, or unserviceable (EOU) items. During an August 2020
                 site visit to FAA’s Logistics Center in Oklahoma, we used statistical sampling and
                 performed tests to locate NAS inventory and assess the completeness of FAA’s
                 inventory record. Additionally, we visited the Thomas Road Warehouse 4 to review
                 FAA’s procedures for managing EOU inventory from receipt to final disposition.

                 We conducted this audit in accordance with generally accepted Government
                 auditing standards. Exhibit A details our scope and methodology. Exhibit B lists
                 the entities we visited or contacted.

                 We appreciate the courtesies and cooperation of Department of Transportation
                 (DOT) representatives during this audit. If you have any questions concerning this
                 report, please call me at (202) 366-1302 or Dory Dillard-Christian, Program
                 Director, at (202) 570-6381.


                 cc:      The Secretary
                          DOT Audit Liaison, M-1
                          FAA Audit Liaison, AAE-100




3 FAA Needs to Improve Oversight and Enhance Transparency in Its Franchise Fund (OIG Report No. FI2020012),
December 11, 2019. OIG recommended that FAA develop and implement a process to maintain detailed records of
the age and cost of inventory items as a way to identify obsolete items and prevent unnecessary storage and
maintenance costs or purchase of assets already on hand. FAA partially concurred, indicating it would develop a
process to annually revalidate and document the rationale to retain, maintain, and store replacement parts for the
systems that support the NAS. This recommendation is resolved but open pending completion of corrective actions
that meet the intent of this recommendation.
4 Located elsewhere in Oklahoma City, this warehouse serves as a centralized location for the receipt of excess,

obsolete, or unserviceable (EOU) property, including NAS inventory.


FI2021029                                                                                                            2
Background
                  The Federal Aviation Act of 1958 established FAA and made it responsible for the
                  control and use of navigable airspace within the United States. FAA created the
                  NAS to protect people and property on the ground and to establish a safe and
                  efficient airspace environment for civil, commercial, and military aviation. The
                  NAS includes both domestic and oceanic airspace and is made up of a network of
                  air navigation and air traffic control facilities, airports, and technology, as well as
                  appropriate rules and regulations that are needed to operate the system. FAA
                  shares some NAS components jointly with the military. Each day, FAA provides air
                  traffic services to 2.9 million airline passengers on more than 45,000 flights—
                  5,400 simultaneous flights during peak times—within approximately 30 million
                  square miles of airspace.

                  Located at the Mike Monroney Aeronautical Center (MMAC) in Oklahoma City,
                  FAA’s Logistics Center (the Center) provides supply chain management and
                  logistics support for NAS equipment integral to the Agency’s Next Generation Air
                  Transportation System (NextGen) modernization effort. 5 In 2019, for example, the
                  Center oversaw the repair and testing of over 44,000 parts critical for surveillance,
                  navigation, weather, communications, and landing systems. 6

                  The NAS inventory managed by the Center is stored primarily in the Logistics
                  Support Facility (LSF) warehouse and a few other locations at MMAC. The Center
                  is also responsible for monitoring and tracking parts shipped out and returned
                  from the field. Most of this inventory consists of parts, materials, and supplies
                  that support the NAS; the rest comprises facilities and equipment inventory,
                  managed by the Center but owned by FAA program offices (see exhibit D).

                  FAA classifies NAS inventory as held for sale, held for repair, or raw materials and
                  work in process. 7 As of September 30, 2020, FAA’s total NAS inventory value was
                  approximately $735 million (see figure 1).




5 NextGen is a multi-billion dollar infrastructure project aimed at modernizing our Nation’s aging air traffic system
and includes new air traffic management technologies and procedures; airport infrastructure improvements; and
environmental, safety, and security-related enhancements.
6 The Center was virtually realigned from FAA’s Office of Finance and Management to ATO in June 2018.

Organizationally, the effective date of the transition to ATO was August 30, 2020.
7 For financial statement purposes, facilities and equipment inventory is classified under raw materials and work in

process.


FI2021029                                                                                                               3
                  Figure 1. FAA’s NAS Inventory by Classification, as of September 30,
                  2020

                                       2020 Inventory Value by Classification
                                                 ($ in Thousands)
                                        RMWIP: $39,833



                                                                                       Inventory Held for Sale (HFS)

                                                     HFS: $264,559                     Inventory Held for Repair (HFR)
                                     HFR: $431,067
                                                                                       Raw Materials and Work in
                                                                                       Process Inventory (RMWIP)




                  Source: FAA Financial Statements (note 5), as outlined in FAA’s Performance and
                  Accountability Report for 2020

                  Within the overall inventory classifications, NAS inventory is further categorized
                  according to operational condition and group. Operational conditions include
                  serviceable parts that are ready for shipment to NAS customers and repairable or
                  nonoperational parts that require technical evaluation and service before they
                  can be sold to customers. Groups generally include parts suitable for exchange
                  and repair (E&R); 8 expendables, which are small-dollar items that are consumed
                  during use and used routinely in any job; and parts that are considered excess or
                  beyond economical repair and are no longer required to meet FAA’s mission. FAA
                  transfers this last group of parts to the Thomas Road Warehouse as EOU
                  inventory.

                  Most of the NAS inventory at the LSF warehouse consists of serviceable or
                  repairable E&R parts, and management of these parts plays a significant role in
                  the Center’s mission. To track its inventory, FAA uses two automated
                  management systems—the Logistics Center Support System (LCSS) and
                  Warehouse Management System (WMS). LCSS records official quantities for
                  financial reporting purposes; WMS documents inventory quantities and storage
                  locations. LCSS has been in place since April 2016, when FAA’s Logistics Center




8An E&R inventory part is one that can be returned to the Logistics Center for replacement or repair. An E&R part in a
serviceable condition is generally ready for shipment to the field. An E&R part in a repairable condition must be fixed
before it can be put into service.


FI2021029                                                                                                                4
                 replaced its previous system, the Logistics Inventory System (LIS), 9 and retained
                 WMS. 10




Results in Brief
                 FAA lacks sufficient oversight controls for managing its
                 NAS inventory.

                 The Agency does not assess inventory age and, as such, has continued to
                 maintain excessive quantities of old and unserviceable parts without adequately
                 considering future demand and customer need. In part, this is because FAA lost
                 the automatic functionality for monitoring excess inventory levels after it
                 transitioned to the LCSS inventory management system. While the Agency plans
                 to add this functionality to LCSS, it has not established an interim process for
                 determining where excess inventory levels are occurring. Thus, we found that
                 FAA’s overall NAS inventory value has increased by more than 13 percent since
                 fiscal year 2017, and inventory held for repair has increased by almost 20 percent.
                 In addition, the LCSS transition has impacted FAA’s ability to track EOU inventory
                 to final disposition and monitor E&R parts shipped to and from the field. While
                 FAA policy requires inventory accountability and detailed inventory records, at
                 the time of our audit, the Agency reported that more than 10,000 E&R parts—
                 with a value of over $38 million—had not been returned to the LSF warehouse
                 within 30 days, as required. Furthermore, due to the lack of planning and process
                 integration that occurred when the Agency implemented LCSS, FAA must
                 manually recalculate inventory values for most E&R parts on a monthly basis, and
                 approximately $1 million in quantity discrepancies exist between LCSS and WMS.
                 The lack of sufficient controls limits FAA’s ability to accurately report its inventory
                 values and determine the stock levels it needs to support NAS systems.

                 We are making recommendations to help FAA improve its ability to manage and
                 provide oversight for the NAS inventory, including EOU items designated for
                 final disposition.




9 According to FAA officials, the Agency replaced LIS with LCSS due to “system obsolescence, economics, and data
capabilities for managing supply and inventory.” FAA implemented LCSS for about $82 million.
10 According to officials at FAA’s Logistics Center, at the time of the conversion, WMS remained in place due to

complex re-engineering and configuration requirements.


FI2021029                                                                                                          5
FAA Lacks Sufficient Oversight Controls for
Managing Its NAS Inventory
                  Specifically, FAA does not assess inventory age and, as such, continues to
                  maintain excessive quantities of old and unserviceable parts. The Agency also
                  lacks a process for tracking EOU inventory and has not recovered thousands of
                  repairable parts from the field. Furthermore, FAA’s inventory valuation system is
                  not updated automatically, and the Agency does not document its manual
                  process for calculating inventory value. Finally, FAA has not accounted for
                  approximately $1 million in discrepancies within its inventory management
                  systems.



             FAA Does Not Assess Inventory Age and
             Maintains Excessive Quantities of Broken
             Parts
                  FAA’s Inventory Management Guide 11 states that proper inventory accountability
                  requires the Agency’s components to maintain detailed records, whether the
                  items are produced or acquired. Maintaining detailed records of the age of
                  inventory items is a way to identify obsolete items and prevent unnecessary
                  storage and maintenance costs or the purchase of assets already on hand. 12

                  Yet during our 2019 audit of FAA’s Franchise Fund, Agency officials stated that
                  tracking inventory age would be extremely difficult because the Agency’s systems
                  were not designed to respond to such requests. While they acknowledged that
                  NAS inventory items could be 30 or more years old, they stated that an aged
                  inventory report would not add significant value to their current processes or be
                  worth the cost required to implement it. FAA officials added that the primary
                  driver of inventory stock levels was not age but the availability of parts for active
                  NAS systems. Additionally, FAA asserted that they had processes in place for
                  handling excess inventory.

                  However, during this current audit we found that tracking inventory age would
                  not require the Agency to implement a new system. In fact, FAA could use its
                  existing LSF warehouse codes to assess the approximate ages of the E&R
                  inventory items stored at the LSF warehouse. Each E&R inventory part is assigned



11FAA Order 4600.27C, Personal Property Management, September 4, 2015.
12When we asked if FAA could identify the associated carrying costs for inventory within the LSF warehouse, Agency
officials informed us that inventory carrying costs are distributed across the operating budgets for the Franchise Fund
and the MMAC Office of Facility Management on the appropriations side.


FI2021029                                                                                                             6
                 an LSF number 13 when it is received and placed in storage (see figure 2). Since
                 LSF numbers are assigned chronologically, the oldest numbers are more likely to
                 be associated with excess or obsolete items. We judgmentally selected 20 of the
                 oldest LSF numbers currently in use, found their associated part numbers, and
                 asked FAA to determine the dates of their last activity. None of the 20 parts had
                 been active since 2009, and 10 of the 20 had not been used since 2001. 14

                 Figure 2. Storage Aisle, Logistics Support Facility Warehouse




                 Source: OIG photo, August 2020

                 Further, year after year, FAA continues to accumulate excess NAS inventory parts
                 held for repair. Between 2017 and 2020, the value of FAA’s held-for-repair
                 inventory steadily increased from approximately $359 million to more than
                 $431 million, an overall increase of about $72 million (see table 1).




13 WMS generates LSF numbers in numerical order at the time parts are received and then assigns them to
appropriate LSF warehouse locations.
14 According to FAA, customer order data prior to 2001 are not available.




FI2021029                                                                                                 7
Table 1. Comparison of NAS Inventory Values From 2017 to 2020 (in Thousands)
                                                                                            Overall
                                           Raw                           Percentage         Percentage
 As of         Inventory    Inventory      Materials                     Increase in Held   Increase in NAS
 September     Held for     Held for       and Work in    Total          for Repair         Inventory Since
 30th          Sale         Repair         Process        Inventory      Inventory          2017

 2017          $241,215     $359,421       $48,427        $649,063       _                  _

 2018          $249,399     $366,620       $47,189        $663,208       2.0%               2.2%

 2019          $254,558     $394,302       $41,663        $690,523       9.7%               6.4%

 2020          $264,559     $431,067       $39,833        $735,459       19.9%              13.3%

Source: FAA Financial Statements (note 5) as outlined in FAA’s Performance and Accountability
Reports from 2017 to 2020

                 According to the Inventory Management Guide, when FAA is considering which
                 stock levels to maintain, it should account for demand, safety requirements, and
                 economic order quantity benefits. 15 Moreover, the guide directs FAA to eliminate
                 stocks of items that are no longer needed due to normal attrition. For example,
                 whenever NAS equipment is permanently removed from service, there is no need
                 to retain its supporting inventory. FAA’s Inventory Management Guide gives the
                 Agency’s inventory managers the responsibility of determining and monitoring
                 demand, optimizing stock availability, and obtaining accurate and current data to
                 assess customer needs and identify unusual stock situations.

                 In response to our 2019 audit, FAA reported it had developed a process to
                 identify obsolete or unused items in the LSF warehouse 16 in order to limit
                 unnecessary storage and maintenance costs. The plan included a standard
                 operating procedure for identifying inactive or decommissioned NAS systems
                 and comparing part numbers to help FAA remove the old parts stored for these
                 systems. To test FAA’s new process and determine whether FAA was storing
                 excess inventory, we statistically sampled 68 E&R part numbers for items stored
                 in the LSF warehouse as of August 10, 2020. We asked FAA to determine whether
                 the parts were still required. In turn, an FAA program manager conducted a
                 review to determine if the NAS systems associated with these part numbers are
                 still active. FAA reported that, based on this analysis, the associated systems were
                 still active, and thus all parts were still required and were not excess.




15 Economic order quantity is a mathematically proven method for arriving at the lowest total cost for ordering and
holding inventory to meet expected supply requirements.
16 OIG recommended in 2019 that FAA develop and implement a process to maintain detailed records of the age and

costs of inventory items to prevent unnecessary storage, maintenance, and acquisition costs. FAA Needs to Improve
Oversight and Enhance Transparency in Its Franchise Fund (OIG Report No. FI2020012), December 11, 2019.


FI2021029                                                                                                         8
               While FAA’s process does identify specific part numbers associated with
               decommissioned systems, we found that the new process does not identify
               excessive inventory quantities or the demand for “repairable” parts held in stock
               for future use. We identified several examples in which the quantity of repairable
               parts listed under a specific part number greatly eclipsed the actual quantity of
               serviceable (able to be used) parts in the LSF warehouse. For example, according
               to the Agency’s inventory, FAA has 1,041 units of a single part on hand. However,
               based on our review, only 2 units were serviceable and 1,039 were repairable
               (broken and required repair before use). See table 2 for additional examples.

     Table 2. Comparisons of Serviceable and Repairable E&R Parts to Total
     Quantity On Hand
                     Part              Total S & R*     Serviceable   Repairable     Repairable     Total S & R*
      Part #         Description          Quantity            Units        Units         Value             Value
      014158437      Circuit card                590             10         580    $6,761,744.40   $6,884,251.70
                     assembly
      013016093      Network,                    449              5         444    $2,364,619.68   $2,392,919.68
                     circuit
                     protection
      001233952      Transmitting               1,041             2        1,039   $2,178,086.87   $2,184,902.87
                     set, radio
      013691353      UHF/AM                     1,290            10        1,280   $6,940,800.00   $7,002,545.40
                     transmitter
                     radio
      012941423      Circuit card                796              3         793    $2,221,541.92   $2,230,838.92
                     assembly
      014768617      Keyboard,                   719              8         711     $703,228.77     $713,417.89
                     data entry

     Note: * S = Serviceable. R = Repairable.

     Source: FAA’s LCSS inventory report as of August 10, 2020

               FAA officials acknowledged this is an issue and agreed that they do not need to
               maintain that many unserviceable or broken parts. The director of FAA’s Logistics
               Center attributed the buildup to the 2016 inventory system conversion from LIS
               to LCSS. The previous inventory management system, LIS, was able to
               automatically generate an excess report based on part number demand, which
               helped FAA determine when it was accumulating too many units for a specific
               part. According to FAA, this automated process used repair lead times and safety
               stock levels to determine required inventory levels, compare demand to parts on
               hand, and generate a report listing excess or unnecessary parts. At the time of
               our audit, LCSS did not have the ability to automatically generate such reports.
               While FAA has future plans to upgrade LCSS and implement this automated



FI2021029                                                                                                 9
                  functionality, it has not established an interim process for determining where
                  excess inventory levels are occurring. 17



             FAA Does Not Track Excess, Obsolete, or
             Unserviceable NAS Inventory Items to
             Final Disposal
                  The Government Accountability Office’s (GAO) best practices for inventory
                  management 18 state that proper accountability requires agencies to maintain
                  detailed records and document that inventory in financial management records
                  and reports. Physical controls and accountability reduce the risk of undetected
                  theft and loss. They also improve visibility, accountability, and storage and
                  control of excess or obsolete stock.

                  FAA has not established a comprehensive process or mechanism to properly
                  account for EOU items in the NAS inventory when those items are transferred to
                  the Thomas Road Warehouse for final disposal. More specifically, once EOU items
                  leave the LSF warehouse, FAA stops maintaining the related inventory records. As
                  a result, FAA cannot track EOU parts in the NAS inventory, leaving them
                  vulnerable to waste or theft.

                  Figure 3. Bins Holding Circuit Boards Scrapped for Their Precious
                  Metals, Thomas Road Warehouse




                  Source: OIG photo, August 2020

                  EOU items may include receiver-transmitters, monitors, radio test sets, and power
                  meters. Such items hold a salvage value, even if they are no longer recorded as



17 FAA has provided an LCSS program increment schedule that includes planned system updates through December
31, 2025.
18 GAO, Best Practices in Achieving Consistent, Accurate Physical Counts of Inventory and Related Property (GAO-02-

447G), March 1, 2002.


FI2021029                                                                                                        10
                  inventory in FAA’s financial statements. Many of these inventory parts could be
                  scrapped onsite at the Thomas Road Warehouse for their precious metals,
                  including material from computer circuit boards (see figure 3). FAA could also
                  donate EOU items to the Federal Prison Industries (FPI) for recycling purposes or
                  sell them via the General Services Administration (GSA). According to FAA, the
                  Agency generates minimal revenue from GSA auction sales of NAS inventory.
                  Overall, FAA reported a total value of $8.3 million in EOU NAS inventory for fiscal
                  year 2019 and $2.6 million for fiscal year 2020. 19

                  During our audit, we judgmentally selected and attempted to locate 22 excessed
                  NAS inventory parts that had been sent to the Thomas Road Warehouse for final
                  disposition. Initially, FAA was unable to locate six of the 22 parts, including four
                  15-inch display monitors with a carrying amount (original item cost) of $27,064.
                  However, FAA did locate all six parts after our site visit. According to FAA, two of
                  the parts were at the Thomas Road Warehouse and had been missed by FAA
                  representatives assisting the audit team. However, these representatives found
                  that the four display monitors had never been shipped to this warehouse. FAA
                  officials found them at the LSF warehouse, even though they had been
                  designated as EOU inventory.

                  To facilitate their work, FAA’s property disposal officers and managers rely on a
                  web application called Utilization, Screening, and Disposition Web (USDWeb).
                  Staff at the Thomas Road Warehouse use USDWeb to track EOU inventory
                  throughout the disposal process. 20 However, USDWeb does not interface with
                  LCSS; 21 as a result, Thomas Road Warehouse staff cannot generate automated
                  receipts for EOU items. Instead, they have established a sorting/disposition
                  workaround procedure for items that arrive onsite. However, that process only
                  tracks parts identified for resale; other parts are simply stored in the warehouse.
                  FAA also generates an annual LCSS report that lists all the inventory items
                  scrapped during the previous year. However, this process is not exact and
                  represents FAA’s efforts to estimate for reporting purposes—using manufacturer
                  part numbers—whether parts were scrapped or donated to FPI.

                  According to FAA officials, the Agency plans to develop and implement an
                  interface to connect LCSS to USDWeb between January 2022 and September



19 The totals represent the carrying amount of the inventory items prior to their identification as EOU inventory and
do not represent the salvage value.
20 The Thomas Road Warehouse also services FAA by overseeing the recycling, resale via GSA, or disposal of

accountable property at MMAC. Staff track property such as computers and monitors via FAA’s Automated Inventory
Tracking System (AITS), which interfaces with USDWeb. We performed floor-to-record USDWeb testing to verify the
accuracy of 35 excessed inventory items held for sale. We found five discrepancies, including mislabeled vouchers and
previously sold items still on the shelf. These items, including laptops and desktop computers, are not considered NAS
inventory and therefore were outside of our scope.
21 FAA’s previous inventory management system, LIS, interfaced with USDWeb and allowed FAA to electronically track

EOU inventory received at the Thomas Road Warehouse.


FI2021029                                                                                                         11
                 2025. The interface will feed data on NAS inventory received at the Thomas Road
                 Warehouse into the USDWeb system and permit FAA staff to track each
                 individual part. In the interim, FAA stated that it has improved the current
                 workaround procedure to require individual EOU parts to be scanned into a
                 records database using a barcode system, which will enable Thomas Road
                 Warehouse staff to track parts from receipt to final disposition.



             FAA Does Not Always Recover Repairable
             Parts From the Field
                 FAA requires technicians in the field 22 to return NAS inventory parts in need of
                 repair (core due-ins) 23 to the LSF warehouse no more than 30 calendar days after
                 the Agency ships out a serviceable replacement part. 24 According to FAA work
                 instructions, 25 staff can use a management report called the Advance Due-in
                 Report to coordinate the return of repairable parts from the field, as well as
                 determine how long a part has been at a site, how many parts are due from the
                 field, and which sites have not yet returned their repairable parts. Agency officials
                 also use the report to extend the due-in date under special circumstances,
                 research potential processing errors, and contact technicians to retrieve
                 outstanding parts.

                 However, FAA has not implemented an effective oversight process for monitoring
                 and verifying the return of core due-ins from the field. We found that a
                 significant number of customers do not return these parts within 30 calendar
                 days, and many items remain unreturned for several years. Furthermore, FAA
                 cannot determine with accuracy the exact quantity of core due-ins that remain
                 with its customers. According to FAA officials, there are multiple reasons for this
                 uncertainty. First, following the “problematic implementation” of LCSS, there were
                 periods when system issues forced parts to be shipped to the field or received in
                 the LSF warehouse outside the LCSS system. Second, FAA acknowledged that the
                 Advance Due-in Report is unreliable and includes significant inaccuracies. For
                 example, a customer may have returned repairable parts on a separate purchase
                 order (PO) that was not “matched” to the correct PO upon receipt at the
                 warehouse, leaving an open core due-in where one does not exist.




22 Core due-ins currently exist for FAA, the Departments of Defense and Homeland Security, and a few international
government entities.
23 A core due-in is a nonworking NAS inventory part that has the same manufacturer part number as the replacement

item FAA sends out to the customer.
24 Operating Business Rules, FAA Technical Operation Services / Air Traffic Organization and FAA Logistics Center

(AJW/AML), revision 3.0, Document #AMLBR-001, October 1, 2019.
25 FAA Work Instruction (WI-IM-023), ADI/DI/DO Report, Center of Excellence for Inventory Management, revision 8,

August 20, 2009. Reference Section J, Due-In Facility, Evaluation Criteria, p. 16.


FI2021029                                                                                                      12
                    According to FAA, as of September 1, 2020, more than 10,000 core due-ins, with
                    an inventory value of over $38 million, had not been returned within the required
                    30 days. When parts are not returned in a timely manner, they are not available
                    to fill future orders promptly. Moreover, when FAA transitioned from LIS to LCSS,
                    it lost the ability to automatically charge its customers the full serviceable value
                    for any parts that were not returned from the field. As table 3 shows, those
                    unreturned items have an estimated “billable” value of almost $61 million.

                    Table 3. Number, Value and Potential Revenue for Unreturned
                    Core Due-Ins from the Field, as of September 1, 2020
                                                       Number of      Inventory Value      Billable Value
                                                       Unreturned       of Unreturned     of Unreturned
                     Length of Time Overdue               Due-Ins             Due-Ins            Due-Ins

                     More than 30 days to less               4,052         $14,900,465      $23,840,744
                     than a year

                     1 year to less than 2 years             2,035           7,942,256       12,707,610

                     2 years to less than 3 years            1,683           6,716,021       10,745,634

                     3 or more years                         2,418           8,556,558       13,690,493

                     Totals                                  10,188        $38,115,300      $60,984,479

                    Source: OIG analysis based on FAA’s Advance Due-in Report

                    According to FAA, the Agency began a cleanup effort in late spring of 2020 and is
                    currently working to isolate and address the data inaccuracies in the Advance
                    Due-in Report. Once those issues are addressed, FAA plans to follow up with its
                    customers about the status of the unreturned repairable parts. The Agency states
                    that its planned completion date for this initiative is September 30, 2021. If FAA
                    does not properly manage its core due-ins and charge full price for unreturned
                    items, it will be unable to account for all of its E&R parts or recover the costs
                    associated with those parts.



               FAA Does Not Formally Document Its
               Manual Process for Calculating E&R
               Inventory Values
                    GAO standards 26 direct agency management to implement internal controls and
                    to use policies and procedures to document internal control responsibilities.
                    Procedures may include schedules for performing control activities and following


26   GAO, Standards for Internal Control in the Federal Government (GAO-14-704G), September 10, 2014.


FI2021029                                                                                                   13
                  up with corrective actions when deficiencies in the controls are identified. In
                  addition, management must communicate the policies and procedures so that
                  personnel can implement the control activities for their assigned responsibilities.

                  According to Agency officials, difficulties associated with the conversion from LIS
                  to LCSS prompted FAA to develop a manual process for calculating inventory
                  part values, including end-of-the-month calculations. 27 At the end of every
                  month, an Access database programmer pulls inventory value and cost data for
                  the previous 36-months from LCSS. The data include information specific to E&R
                  repair orders and commercial vendors, as well as the master inventory file. A
                  financial analyst reviews the data, recalculates the overall repair costs for E&R
                  inventory within the database, and establishes a new standard repair cost for
                  each part. The financial analyst then uses the new repair costs to recalculate the
                  serviceable value for the E&R parts. An FAA program manager confirmed that the
                  process is not sufficiently documented and that the Agency lacks a signed and
                  approved document to implement this process.

                  The absence of a signed policy or work instruction documenting the process,
                  could result in a lack of segregation of duties by limiting the number of FAA
                  representatives who can consistently perform each step involved in the monthly
                  cost calculations. Additionally, management may be unable to monitor staff and
                  staff actions. As a result, E&R inventory values could be incomplete or inaccurate
                  and lead to an overstatement or an understatement of the overall inventory
                  value. Finally, in the event of staff turnover, FAA faces the risk that new staff will
                  be unable to replicate the current process without documented, approved
                  instructions.

                  In response to our finding, FAA agreed to prepare a policy statement informing
                  staff about how to use the workaround process until it can configure LCSS to
                  update inventory value costs on a monthly basis. FAA also agreed to prepare a
                  formal, signed work instruction that identifies key roles, processes, and
                  procedures for monthly E&R inventory value calculations.



             FAA’s Inventory Management Systems
             Have Part Quantity Discrepancies
                  GAO standards 28 require management to design controls over information
                  technology (IT) to support the completeness, accuracy, and validity of




27 Under the LIS inventory system, inventory part values were adjusted automatically, based on activity such as repair
costs.
28 GAO, Standards for Internal Control in the Federal Government (GAO-14-704G), September 10, 2014.




FI2021029                                                                                                           14
                  information processing and business process controls over interface and output
                  of data.

                  We found that the two primary systems FAA uses to manage and report on the
                  NAS inventory—LCSS and WMS—do not always record the same inventory
                  quantities. An FAA official informed us that the quantity discrepancies are directly
                  related to the transition from LIS to LCSS, and specific process issues tied to
                  communicating part quantity information between the systems. To address this
                  problem, FAA staff developed workarounds to help them track and monitor the
                  difference in inventory quantities reported by both systems on a monthly basis.
                  Yet FAA has made little effort to find a permanent fix for the issue. When we
                  asked about reconciling the discrepancies based on the monthly reviews, FAA
                  officials stated that corrections occur as part of normal business operations,
                  particularly during the inventory counting process. For example, if LCSS shows
                  that a customer-ordered part is in stock, staff pull up the relevant record in WMS,
                  which identifies all the locations and quantities for that part. 29 If WMS does not
                  list a quantity and location for the part, an inventory manager decreases the
                  quantity listed in LCSS. However, after 5 years, these discrepancies still exist. FAA
                  officials told us that while they actively monitor the quantity discrepancies on a
                  monthly basis, they do not reconcile them due to the time commitment
                  reconciliation requires, the inability of the two systems to interface with each
                  other, and the significance (materiality or overall impact) of the discrepancy value.
                  Thus, the listed LCSS quantity that drives FAA’s financial reporting for E&R
                  inventory could be lower or higher than the actual inventory quantity reported by
                  WMS. As a result, at any given point in time, FAA may understate or overstate the
                  overall NAS inventory value. For example, FAA understated the NAS inventory
                  value by $661,000 on June 30, 2020, and reported an overstatement of $25,271
                  on August 31, 2020.

                  At the audit team’s request, FAA provided three separate discrepancy reports
                  covering June 30, 2020, to August 31, 2020. We used FAA’s methodology to
                  verify the accuracy of its discrepancy calculations and to perform our own
                  discrepancy analysis, using LCSS and WMS data as of August 10, 2020 (see table
                  4). While some reported quantities varied from report to report, other quantity
                  discrepancies remained consistent for several part numbers—across all four
                  discrepancy reports that we reviewed. Moreover, during our onsite testing, we
                  found that 4 of the 86 part numbers in our sample showed a discrepancy
                  between LCSS and WMS, and we were able to link each part number back to the
                  August 10, 2020, discrepancy analysis.




29 We found that WMS has a process for tracking E&R NAS inventory stored in the LSF warehouse. We statistically
selected and performed existing testing on 86 part numbers, a total of 1,961 parts valued at $34 million. We located
all the parts; only one part location was misidentified.


FI2021029                                                                                                          15
Table 4. Inventory Part and Value Discrepancies
                                       Inventory Part   Inventory Part           Net LCSS
 Analysis            Discrepancy       Numbers With     Quantity Discrepancies   Inventory Value
 Conducted by        Report Date       Discrepancies    Between LCSS & WMS       Discrepancy

 FAA                 June 30, 2020     2,865            23,447                   ($660,798)

 FAA                 July 31, 2020     2,930            26,111                   $111,691

 OIG                 August 10, 2020   2,943            21,930                   ($1,085,651)

 FAA                 August 31, 2020   2,862            20,429                   $25,271

Source: OIG analysis of FAA data

                 According to Agency officials, after the inventory system conversion, the
                 discrepancy amount was very high (approximately $21 million), but it has now
                 decreased to about $1 million per month. FAA plans to replace WMS between
                 January 2022 and September 2025. In the interim, FAA has committed to
                 assigning a team to reduce the discrepancies between the two systems.




Conclusion
                 Each day, FAA is responsible for thousands of flights and each year, the NAS
                 services more than 16 million flights across the country. The Logistics Center
                 plays a key role in the efficiency of the NAS and the effective operation of its
                 systems. With more than 1 million parts in its inventory, valued at approximately
                 $735 million, the Center must strive to achieve a sufficient level of oversight and
                 accountability in its processes for inventory storage and servicing, shipping and
                 tracking of parts, and accurately reporting the quantities and value of its NAS
                 inventory. By focusing on accountability, the Center can ensure the timely
                 provision of services and support for NAS systems and FAA’s modernization
                 activities while maximizing the efficiency of its inventory related processes.




FI2021029                                                                                          16
Recommendations
            To improve FAA’s ability to manage and provide oversight for the National
            Airspace System (NAS) inventory, we recommend that the Federal Aviation
            Administrator:

               1. Revise FAA’s process for identifying excess, obsolete, or unserviceable
                  inventory to include consideration for the quantity of repairable parts on
                  hand, and the expected future demand for those parts.

               2. Develop and implement an interim process for receiving, sorting, and
                  disposing of excess, obsolete, or unserviceable inventory items at the
                  Thomas Road Warehouse that includes the tracking of individual
                  inventory parts from receipt through to final disposition.

               3. Implement an oversight process for core due-ins that includes continuous
                  tracking as well as following up on any core due-ins that are not returned
                  within 30 days.

               4. Evaluate and revise the Advance Due-In Report to maximize its
                  effectiveness in accurately tracking actual due-ins from the field.

               5. Research, identify, and account for the due-ins identified in the Advance
                  Due-in Report and request that parts be returned. If unreturned, bill NAS
                  customers accordingly. Implementation of this recommendation could put
                  over $38 million in funds to better use.

               6. Document and implement FAA’s process for conducting monthly
                  exchange and repair inventory value calculations.

               7. Develop and implement a plan to continuously track, reconcile, and
                  reduce the inventory quantity discrepancies that currently exist between
                  the Logistics Center Support System and the Warehouse Management
                  System.




Agency Comments and OIG Response
            We provided FAA with our draft report on May 13, 2021, and received its
            response on June 17, 2021, which is included as an appendix to this report. FAA
            concurred with recommendations 2, 6, and 7, and in response to our reported
            findings, provided support for their implementation. FAA requested closure
            within 30 days after OIG issues its final report. Accordingly, pending review of the
            documentation received, we consider these recommendations resolved, but
            open. FAA concurred with recommendations 1, 3, and 4 and provided

FI2021029                                                                                    17
            appropriate actions and completion dates. Therefore, we consider these
            recommendations resolved but open pending completion of the planned actions.

            FAA partially concurred with recommendation 5—to research, identify, and
            account for the due-ins identified in the Advance Due-in Report and request that
            customers return parts or receive a bill for the cost of unreturned items. However,
            the Agency does not agree with our determination that implementation of this
            recommendation could put over $38 million in funds to better use. FAA stated
            that the $38 million represents the inventory value of the assets due-in, and
            funding beyond the already advanced repair price is unavailable for billing. This
            response suggests that Agency officials may not fully understand what our
            recommendation represents. The funds put to better use determination is an
            estimate of the dollars that could be used more efficiently if management
            implements our recommendation. When parts are not returned in a timely
            manner, they are not available to fill future orders. Moreover, as FAA
            acknowledges, the Agency was billing customers for unreturned core due-ins
            before the implementation of LCSS; we recommend that FAA return to that
            practice. Unfortunately, FAA does not plan to do so, citing development costs for
            software modification. Instead, FAA plans to research, identify, and account for
            the due-ins identified in the Advance Due-In Report and request that those parts
            be returned. However, FAA did not describe the course of action it would take if
            parts are never returned or the impact of unreturned parts on its financial
            statements—the intent of the recommendation. Therefore, we consider
            recommendation 5 to be open and unresolved and request that the Agency
            reconsider its position.




Actions Required
            We consider recommendations 2, 6 and 7 resolved and open, pending OIG
            review of documentation received. We consider recommendations 1, 3 and 4
            resolved but open pending completion of planned actions. We consider
            recommendation 5 open and unresolved. We request that the Agency reconsider
            its position on recommendation 5 and provide us with its revised response within
            30 days of the date of this report in accordance with DOT Order 8000.1C.




FI2021029                                                                                   18
Exhibit A. Scope and Methodology
            We conducted this performance audit between February 2020 and May 2021 in
            accordance with generally accepted Government auditing standards as
            prescribed by the Comptroller General of the United States. 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.

            To determine if FAA has effective oversight controls for managing the NAS
            inventory, including controls to appropriately account for excess, obsolete, or
            unserviceable items, we (1) interviewed Agency employees at the Logistics Center
            and FAA Headquarters on policy and procedures for managing NAS inventory,
            (2) assessed FAA’s process for controlling exchange and repair part inventory
            levels, (3) evaluated FAA’s approach to tracking excess, obsolete, or unserviceable
            inventory, (4) analyzed FAA’s process for managing repairable parts due to be
            returned from the field, (5) compared the inventory data listed in LCSS and WMS,
            and 6) reviewed FAA’s process for calculating inventory values.

            To further address our objective, we tested a statistical sample of exchange and
            repair parts with no activity in the past 4 years. More specifically, FAA’s Lead
            Financial Analyst sent us a file with 2,694 exchange and repair records listing on-
            hand quantities as of June 30, 2020. This became our universe, which we stratified
            into 2 strata and selected a statistical sample as follows:

               •   Stratum 1 was a census of two records with an on-hand value greater
                   than $6 million.

               •   Stratum 2 was a sample of 66 of 2,692 records with an on-hand value less
                   than or equal to $6 million. We selected this sample with probability
                   proportional to size with replacement where size was a record’s value on-
                   hand.

            Our total sample size was 68, but 2 records in Stratum 2 were selected twice due
            to our “with replacement” sampling methodology. This reduced our actual
            sample size from 68 to 66 or 2.4 percent of the 2,694 records in the universe. The
            value of this sample was $33,770,175.83 or 30.3 percent of the total universe
            value of $111,313,593.26.

            During an August 2020 site visit to FAA’s Logistics Center in Oklahoma City, OK,
            FAA gave us a file with the Master Inventory with 97,883 records, as of August 10,
            2020. We extracted 6,885 E&R records with a quantity greater than zero. From



Exhibit A. Scope and Methodology                                                            19
            this universe, we selected a simple random sample of 67 (1 percent) of the 6,885
            records in the universe to test the reliability of FAA’s Master Inventory file. We
            performed existence testing on the first 20 of the 67 E&R part numbers in the
            sample. Thus, for testing purposes, if combined with the sample of 66 exchange
            and repair parts with no activity in the past 4 years, we performed existence
            testing on a total of 86 E&R parts. We located all 1,961 parts under review, with
            an inventory value of just over $34 million. We noted just one exception: an
            inventory part valued at approximately $958 had been moved out of the LSF to
            another location, and Agency staff did not update WMS to reflect this move.
            During the course of our audit, FAA corrected the error and updated the location
            in WMS.

            While in Oklahoma City, we also visited the Thomas Road Warehouse to review
            FAA’s procedures for managing EOU inventory from receipt to final disposition.
            Initially, we received a file with 554 EOU inventory parts from FAA’s Lead Financial
            Analyst. This became our universe, which we stratified into 3 strata based on a
            part’s total cost and selected a statistical sample as follows:

               •       Stratum 1 was a census of all four inventory parts that had a total cost
                       greater than $95,000.

               •       Stratum 2 was a sample of 61 of 517 parts with total cost greater than $0
                       and less than or equal to $95,000. The sample in this stratum was selected
                       with probability proportional to size with replacement where size was a
                       part’s total cost.

               •       Stratum 3 was a simple random sample of 4 of 33 parts with a total cost
                       recorded as $0.

            Our total sample size was 69, but three parts in Stratum 2 were selected twice
            due to our “with replacement” sampling methodology. This reduced our actual
            total sample size from 69 to 66 or 11.9 percent of the 554 parts in the universe.
            The sample had a total cost of $5,958,235.50 or 81.8 percent of the total universe
            value of $7,285,314.84. While onsite, we found out that several of the items in our
            sample had already been scrapped or picked up by FPI. In response, we
            formulated a judgmental sample for testing, and considered only the EOU
            inventory items that had been sent to the Thomas Road Warehouse between
            April 2020 and June 2020 but were not yet picked up by FPI.

            To test the facilities and equipment (F&E) inventory, we received a file with
            144 records from FAA’s Supervisory Systems Accountant. We stratified this
            universe into 2 strata based on amount and selected a statistical sample as
            follows:

                   •    Stratum 1 was a census of all six records that had an amount greater
                        than $190,000.


Exhibit A. Scope and Methodology                                                                  20
                   •    Stratum 2 was a sample of 45 of 138 records with an amount less than or
                        equal to $190,000. The sample in this stratum was selected with
                        probability proportional to size with replacement where size was a
                        record’s amount.

            Our total sample size was 51, but 11 records in Stratum 2 were selected twice due
            to our “with replacement” sampling methodology, which reduced our actual total
            sample size from 51 to 40 or 27.8 percent of the 144 records in the universe. This
            sample was valued at $4,153,074.69 or 74.9 percent of the $5,541,540.39 in the
            universe. With the assistance of an FAA representative, we located all parts
            associated with 38 of the 40 records while we were onsite. We did not
            immediately locate parts associated with two records, but FAA representatives
            identified the part locations during a secondary review and provided
            photographic evidence in support.

            Lastly, we used statistical sampling to determine if FAA still needed the E&R parts
            in its inventory. Using the FAA-provided Master Inventory file with 97,883 records,
            as of August 10, 2020, as our universe, we stratified it into 2 strata based on the
            aggregated unit cost. We then selected a statistical sample as follows:

               •       Stratum 1 was a sample of 66 of 6,746 records with an aggregated unit
                       cost greater than $0. We selected this sample with probability
                       proportional to size with replacement where size was aggregated unit
                       cost.

               •       Stratum 2 was a simple random sample of 2 of 99 records with an
                       aggregated unit cost equal to $0.

            Our total sample size was 68 or 1 percent of the 6,845 records in the universe,
            valued at $81,008,059.80 or 15.2 percent of the $532,651,537.29 in the universe.
            We tested this sample by asking FAA to use its current standard operating
            procedures (SOP) for determining excess inventory to research each part number.
            To further determine if FAA still needed E&R parts in its inventory, we
            judgmentally selected 20 E&R part numbers with the oldest LSF numbers, found
            in FAA’s inventory as of August 10, 2020. We tested the date of last activity and
            also asked FAA to use its SOP to determine if parts were still required to support
            the Agency’s mission.

            We computed sample size for all statistical samples to allow for projections with
            90 percent confidence and a precision no greater than +/- 10 percent. We used
            this sampling methodology because it is widely accepted in the accounting world
            and because computations are transparent and easy to follow since they do not
            require specialized software. We accounted for all those sample items that were
            selected twice in our computations. However, based on our overall findings and
            results, we did not make projections.



Exhibit A. Scope and Methodology                                                               21
                  To determine the number of repairable parts unreturned from the field, we used
                  FAA’s Advance Due-in Report as of September 1, 2020, which we received from
                  FAA’s Lead Financial Analyst. We filtered the file based on customer due-ins and
                  removed due-ins associated with Customs and Border Protection (CBP), since the
                  CBP property managed by the Logistics Center is not owned by FAA. We then
                  totaled the current values for the due-in parts as follows: (a) more than 30 days
                  to less than a year, (b) 1 year to less than 2 years, (c) 2 years to less than 3 years,
                  and (d) more than 3 years. We applied the fiscal year 2021 cost recovery rate 30 to
                  determine an approximate overall billable value for the due-ins.

                  To assess the inventory part and value discrepancies between LCSS and WMS, we
                  obtained LCSS to WMS discrepancy files from FAA’s Lead Financial Analyst dated
                  June 30, 2020, July 31, 2020, August 10, 2020, and August 31, 2020. We reviewed
                  FAA’s methodology for identifying and calculating the discrepancy amounts. We
                  also confirmed that FAA’s reports identified 4 of the 86 part numbers with LCSS
                  to WMS discrepancies we found during our onsite testing in August 2020.




30FAA sets the cost recovery rate for E&R parts at the beginning of each fiscal year and generally does not adjust it
throughout the fiscal year. FAA reported the cost recovery rate for fiscal year 2021 as 60.06 percent. The amount does
not fluctuate significantly from year to year.


Exhibit A. Scope and Methodology                                                                                   22
Exhibit B. Organizations Visited or Contacted

          FAA Facilities
             FAA Headquarters, Washington, D.C.

             FAA Logistics Center, Oklahoma City, OK

             Thomas Road Warehouse, Oklahoma City, OK




Exhibit B. Organizations Visited or Contacted           23
Exhibit C. List of Acronyms
             ATO              Air Traffic Organization
             DOT              Department of Transportation
             EOU              Excess, Obsolete, or Unserviceable
             E&R              Exchange and Repair
             FAA              Federal Aviation Administration
             F&E              Facilities and Equipment
             FPI              Federal Prison Industries
             GAO              Government Accountability Office
             GSA              General Services Administration
             HFR              Held for Repair
             HFS              Held for Sale
             LCSS             Logistics Center Support System
             LIS              Logistics Inventory System
             LSF              Logistics Support Facility
             MMAC             Mike Monroney Aeronautical Center
             NAS              National Airspace System
             NextGen          Next Generation Air Transportation System
             OIG              Office of Inspector General
             PO               Purchase Order
             RMWIP            Raw Materials and Work in Process
             USDWeb           Utilization, Screening, and Disposition Web
             WMS              Warehouse Management System




Exhibit C. List of Acronyms                                                 24
Exhibit D. Overview of the NAS Inventory
Managed by the Logistics Center
                 The parts managed by the Logistics Center support multiple interconnected
                 systems that are integral to effective communications, radar, navigation, weather,
                 and landing within the NAS. For example, a ground-based navigation system
                 helps to improve the accuracy of an aircraft’s position when it is in the vicinity of
                 an airport. An instrument landing system allows aircraft to approach a runway at
                 night or in bad weather. Air traffic controllers use en route radar to monitor air
                 traffic. To ensure the safety of the NAS and the traveling public, the parts
                 associated with these systems must function at an optimal level and in a state of
                 good repair. Such parts, as well as small dollar items used in day–to-day
                 operations, comprise the NAS Inventory.

                 The Logistics Center operates FAA’s only centralized parts and equipment
                 distribution center and also performs maintenance, repair, and overhaul of NAS
                 equipment. The inventory is primarily categorized as held for sale, held for
                 repair, 31 or raw materials and work in process 32 and is further broken down by
                 accounting groups, condition codes, and valuation methods.



             NAS Inventory Accounting Groups
                      •   Expendables and Direct Ship Parts: Small-dollar inventory parts, required
                          for day-to-day operations that are (1) consumed in use or (2) reparable
                          but not managed as reparable parts. Direct ship parts are parts shipped
                          directly from the vendor to the field.

                      •   E&R Commercial and In-House Parts: Serviceable and broken but
                          reparable parts that are returned to the Center for replacement and repair
                          (see figure 2).

                      •   Benchstock Direct and Benchstock Indirect: Expendable material used
                          routinely to complete repairs.




31Held for repair inventory includes core due-ins from the field and repairable cores due from FAA shops.
32Raw materials and work in process inventory includes parts currently under repair at FAA shops or at commercial
vendors.


Exhibit D. Overview of the NAS Inventory Managed by the Logistics Center                                            25
Figure 4: Examples of Exchange and Repair NAS Inventory Items




                                                                      Above: Electrical cabinet (left) and
                                                                      a Flasher tester (right) used to
                                                                      support navigation.

                                                                      Below: Various parts stored in the
                                                                      LSF warehouse (left) and a broken
                                                                      radar test set identifed as beyond
                                                                      economical repair and sent to the
                                                                      Thomas Road Warehouse for
                                                                      disposal (right).

                                                                      Source: OIG photos, August 2020




         Condition Codes for NAS Inventory
                •   Serviceable: A part in a serviceable condition, ready for shipment to
                    customer or reserved for a shop order.

                •   Repairable: A part in a non-serviceable condition, in need of repair.

                •   Pre-Serviceable: A serviceable part that needs to be tuned, calibrated,
                    charged, etc., before being placed in service.

                •   Failed Test: A part that is tested and found to be broken, in a non-
                    serviceable condition.

                •   Survey Repairable and Survey Serviceable: Parts identified as excess or
                    survey to prevent them from being used on a shop order or sent to a
                    commercial vendor for repair.




Exhibit D. Overview of the NAS Inventory Managed by the Logistics Center                           26
             Excess, Obsolete and Unserviceable
             Inventory
                  EOU inventory comprises items determined to be beyond economical repair,
                  unusable, or no longer required to support the NAS. EOU inventory parts are
                  transferred to the Thomas Road Warehouse for disposal. For financial statement
                  purposes, FAA expects this inventory to have no net realizable value and
                  recognizes a loss for the carrying amount (or original item cost). The EOU
                  carrying amount was $3.1 million in fiscal year 2020, $8.3 million in fiscal year
                  2019, and $6.9 million in fiscal year 2018.



             Facilities and Equipment Inventory
                  The Center has custodial responsibility for non-NAS F&E inventory resulting from
                  a 2006 OIG audit that cited issues with FAA’s oversight, reporting, and
                  classification of inventory. 33 In response, FAA transferred a significant amount of
                  operating materials and supplies inventory to the Center. FAA’s program offices
                  retain ownership and they—not the Center—drive demand for these items. The
                  Agency’s Office of Finance and Management continues to track and monitor the
                  level of available F&E inventory. According to an FAA systems accountant, F&E
                  initially accounted for approximately $150 million of FAA’s reported inventory,
                  but that amount has significantly decreased since 2006 and is now about
                  $5.5 million.




33Quality Control Review of Audited Financial Statements for Fiscal Years 2006 and 2005, Federal Aviation
Administration (OIG Report No. QC-2007-009), November 14, 2006.


Exhibit D. Overview of the NAS Inventory Managed by the Logistics Center                                    27
Exhibit E. Major Contributors to This Report

             DORY DILLARD-CHRISTIAN            PROGRAM DIRECTOR
             BRIAN FRIST                       PROJECT MANAGER
             ZACHARY SCOTT                     SENIOR AUDITOR
             MICHELLE STARKEY                  SENIOR AUDITOR
             CHRISTINA BURGESS                 SENIOR ANALYST
             SETH KAUFMAN                      DEPUTY CHIEF COUNSEL
             GEORGE ZIPF                       SUPERVISORY MATHEMATICAL
                                               STATISTICIAN
             MAKESI ORMOND                     STATISTICIAN
             WILLIAM SAVAGE                    INFORMATION TECHNOLOGY
                                               SPECIALIST
             JANE LUSAKA                       SENIOR WRITER-EDITOR




Exhibit E. Major Contributors to this Report                              28
Appendix. Agency Comments

                      Federal Aviation
                      Administration

  Memorandum
 Date:      June 17, 2021
 To:        Louis C. King, Assistant Inspector General for Financial Audits

 From:      H. Clayton Foushee, Director, Office of Audit and Evaluation, AAE-1
 Subject:   Federal Aviation Administration’s (FAA) Response to Office of Inspector General
            (OIG) Draft Report: National Airspace System Current Inventory Management
            System


 The FAA Logistics Center transitioned in April 2016 from the Logistics Inventory System to the
 Logistics Center Support System (LCSS) to manage the National Airspace System (NAS)
 operational inventory. The inventory supports more than 77,000 aeronautical systems across the
 United States and for international customers. The Logistics Center has continued to provide
 critical supply chain management and parts delivery to the NAS.

 The FAA provides the following comments on the OIG draft:
          •    The draft report states that the FAA lacks sufficient oversight controls for
               managing its NAS inventory. The FAA has numerous processes and controls in
               place to ensure accountability and valuation for NAS inventory, such as tiered
               oversight and segregation of duties in key inventory shipping, receipting, and
               repair. Documented standard operating procedures include daily/phased
               physical inventory counts, continuous financial reconciliations, routine
               operational and financial briefings to product divisions and management. The
               FAA implements these processes and manual workarounds across the Logistics
               Center to address various LCSS system gaps and to ensure controls are in place
               to manage the NAS inventory. In addition, the FAA financial statements have
               had no material weaknesses in terms of accountability and inventory valuation.
               FAA has addressed LCSS issues identified in prior audits.
            •    The draft report states that the FAA does not track inventory age and, as such,
                 has continued to maintain excessive quantities of old and unserviceable parts.
                 FAA tracks parts based on their serviceability because inventory age does not
                 indicate whether a part is serviceable. The FAA maintains the inventory based
                 on supportability requirements for fielded NAS systems. Since implementation

Appendix. Agency Comments                                                                      29
                  of LCSS in April 2016, the FAA has excessed $50.5 million from the NAS
                  inventory. The FAA has performed excess activity every year since the
                  implementation of LCSS at approximately the same level as pre-LCSS activity.
            •     The draft report states that FAA’s overall NAS inventory value has increased
                  by more than 13 percent since fiscal year 2017, and inventory held for repair
                  has increased by almost 20 percent due to not establishing an interim process
                  for determining where excess inventory levels are occurring. The OIG’s
                  assumption on the dollar value of inventory growth since 2017 is misleading.
                  Inventory growth has been primarily due to donated assets from facilities and
                  equipment capital investment programs, decommissioned sites in the field, and
                  inventory re-valuation based on purchases and repairs.
            •     Recommendation 5 in the draft report states that the Logistics Center should bill
                  NAS customers accordingly for due-in repairable assets that are not returned to
                  the Logistics Center, suggesting that implementation could put $38 million in
                  funds to better use. The $38 million represents the inventory value of the assets
                  that are currently due-in to the Logistics Center and not the repair prices. FAA
                  customer advances were not taken on the full retail price of the assets – only the
                  repair prices were advanced, as customers specified at the time of the order
                  these would be repairs, not initial issues. Therefore, funding beyond repair
                  price is unavailable for billing. In addition, external customers are billed full
                  serviceable prices at the time of order and credited the core cost once the
                  repairable is returned. For internal customers, FAA is focused on ensuring
                  assets are returned to the inventory to support the NAS versus billing
                  customers. The Logistics Center is currently working with its internal FAA
                  customers to validate which assets may have been returned but were not
                  properly documented. The Logistics Center will then work with the field to
                  have assets returned, which will better support the NAS than billing field
                  offices. Furthermore, because the functionality is not part of the software
                  package, modifying the software to add the billing functionality would incur
                  significant development costs and costs at each upgrade.

 Upon review of the draft report, the FAA concurs with recommendations 1 – 4, and 6 – 7 as
 written. The FAA plans to implement recommendation 1 by September 30, 2024. The FAA
 implemented recommendations 2, 6, and 7, and on April 14, 2021, provided supporting
 documentation to OIG and requested closure within 30 days after OIG issues its final report.
 The FAA plans to implement recommendations 3 and 4 by September 30, 2021.

 The FAA partially concurs with recommendation 5 to “research, identify, and account for the
 due-ins identified in the Advance Due-in Report and request that parts be returned. If
 unreturned, bill NAS customers accordingly. Implementation of this recommendation could put
 over $38 million in funds to better use.” As discussed above, FAA does not agree to bill NAS
 customers. As an alternative action, FAA will research, identify, and account for the due-ins
 identified in the Advance Due-In Report and request the parts be returned. FAA plans to
 complete these alternative actions to implement the recommendation by September 30, 2021. In
 addition, for the reasons stated above, FAA does not agree that implementation of this
 recommendation could put over $38 million to better use.

Appendix. Agency Comments                                                                         30
 We appreciate this opportunity to offer additional perspective on the OIG draft report. Please
 contact H. Clayton Foushee at Clay.Foushee@faa.gov if you have any questions or require
 additional information about these comments.




Appendix. Agency Comments                                                                         31
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