Follow-Up Review of the Effectiveness and Economy of the Air Force's Physical Inventory Program for Supplies and Equipment Stocked at Air Force Air Materiel Areas

Published by the Government Accountability Office on 1971-09-28.

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

                                                      -   I


                                     UNITED STATESGENERALA~CWNT
                                            WASHINGTON DC. 20

    DEFENSE   DIVISION   d   ’ 3 ’


                Dear Mr. Secretary:
                      The General Accoynting Office has petiormed a limited~follow-up
                examination into the.ef.@@x&x~qegs and economy of the Air Force's
                physical inventory progmn fpr supplies and equipsnent stocked at
                Air Force air materiel areas* Our field work, which was completed
                in July 1971, was performed at the Oklahcum City, Sacramento, and
                San Antonio Air Materiel Areas; and the Air Force Logistics Command.
                        In a prior report to the Congress entitled,      "Improved Inventory
                Controls Needed for the Departments of the Amy, Navy, Air Force, and
                the Defense Supply Agency" (B-146828, dated November 14, lg67), we
                reported that inventory record6 throughout the Department of Derense
                were generally unreliable.         We pointed out that the failure   of supply
                personnel to properly research and reconcile physical inventory differ-
                ences and to make required adjustments to stock records were major
                recurring     causes of inventory record errors.      In Hay 1968, the Air
                Force Auditor General*s office reported that physical inventories
                taken at the Air Force's five air materiel areas did not improve the
                validity     of i?WentOq     reCOrd6 because of faulty physical inVent0I-y
                reconciliation        and ad$&ment practices.

                       Our fouiow=qpLQe~vi~di6closed
                            ------                      that the problem6 previously
                cited still      exist. Inventory record inaccuracies are frequently
                not corrected by physical inventories because of the repeated fail-
                ure of supply personnel to accurately count stock and to make Fe-
                quired adjustments to inventory records.       Details of our ftidings

                       Air materiel areas are required to physically inventory all
                active investment items (high-dollar   value items or reparable items
                with a large 6tOCk turnover) on a regularly Scheduled quarterly
                basis.    During the quarter ending September jC9 1970, the three
                air materiel areas included in our review physically    inventoried
                4,598 items of this nature.

                                           50TH ANNIVERSARY 1921- 1971

       Based on our analysis of a randomly selected statistical    sample,
we estimate that 3,219 of the items required inventory record adJust-
ment. We found that 49 percent of the required adjustments were
either not made or were made incorrectly     due to iuaceurate physical
counts or erroneous reconciliation     of major stock differences.    The
inaccurate counts and erroneous reconciliations      occurred because
warehousemen and inventory managers did not comply w5th prescribed
procedures.    Warehousemen did not identify    stock received and
issued during the physical inventory cycle for items being inven-
toried.    Tnventory managers frequently made incorrect assumptions
as to the causes of major stock differences In order to reconcile
the differences and avoid ma,jor physical tiventory adjustments.
These conditions are illustrated    below.

            On August 7, 1970, au inventory record cut-off balance
     of 606 units of F'SN &2C-Kl~-5lBALS     was established for
     physical inventory comparison purposes at the San Antonio
     Air Materfel Area. On August 14, 1970, a physioal count
     showed 1,148 uuits on hand. As a result, the inventory
     record balance for this item was increased by 542 units.
     Our research showed that 522 units were issued after the
     inventory cut-off date and prior to the count date.
     Therefore, the 522 units should have been added to the
     couut quantity.    Also, 1,148 units received after the
     cut-off date were included In the physical couut and should,
     therefore, have been deducted from the couut quantity.     Thus,
     the adjusted couut quantity should have been 522 units, and
     the inventory record balance should have been decreased by
     84 units rather than increased by 542 units.
           In July 1970, a physical inventory of FSN 284o-g5+828~
     at the Oklahma City Air Materiel Area revealed a stock shortage
     of 418 units valued at $64,372. The inventory manager's re-
     search of this shortage disclosed that the inventory record
     balance for this item was decreased by 1,134 units and subse-
     quently increased by 403 units on the same day in October 1969
     as a result of a stock issue and stock denial, respectively.
     The inventory manager assumed that the stock denial of 403
     units was erroneous and that 1,134 units were actually issued.
     As a result a shortage of 403 units was considered reconciled
     and a physical inventory loss adjustmen% of 15 units valued
     at @,a0 was made to the inventory record.     Our research of
     shipment records showed that the inventory manager's assmp-
     tion was incorrect.   We found that ouly 73l units were actually
.   l   .

     issued because the remaining quantity of 403 units could not
     be located in the warehouse. Therefore, we believe that a
     physical inventory loss adjustment of 418 units valued at
     $64,372 should have been made.
      On the basis of our tests, we estimate that the inventory
records for 1,563 items, or 34 percent of the items inventoried,
still  contained stock shortages and averages, valued at about
$8.8 million,   subsequent to physical inventory and 5nventory
record adjustment actions.
      This type of physical inventory involves a complete count of
classified  and pilferable  tyRe items and other items comprising
designated Federal supply classes. Wall-to-wall     physical inven-
tories accounted for 81 percent of all regularly scheduled phys-
ical inventories taken in fiscal year 1970.
       We made a limited evaluation of a wall-to-wall physical inven-
tory taken in May 1970 at the San Antonio Air Haterie Area. This
physical inventory bvolved a count of 19,257 items (radio and
television   communication equipment, sound recording equipment, etc.)
with recorded stock valued at $225 million.
      Our tests showed that required inventory record adjustments
were not made or were made incorrectly   for 16 of 20 randomly se-
lected items due to inaccurate counts (similar to example on page
2) and erroneous reconciliations.    For example, a physical count
of one item disclosed a shortage of 129 units valued at $72,756.
The inventory record for this item was not adjusted because a re-
count supposedly reconciled or eliminated the shortage disclosed
by the first count. However, we found that the recount revealed
a shortage of 190 units valued at $lO7,160.
      With the exception of those Item classifications mentioned in
the above paragraphs, air materiel areas are required to evaluate
the inventory record accuracy for all stocked items on a statis-
tical sampling basis over a 2-year cycle.    l

     For statistical  sampling purposes, items are grouped into
designated inventory lots.   A physical count is made of a repre-
sentative sample of items, normally 7'5, selected from each lot.

If no more than four of the sample items are found to have major errors
(recorded stock locations but no recorded stock quantities,   or vice
versa; and stock differences  valued at $200 or over), all items in
the lot are considered to have acceptable inventory record accuracy
and no further action is required.   If more than four items have major
errors, a physical count is made for either a larger sample of items
or for all items in the lot.
       In fiscal year 190, the three air materiel areas reviewed by us
statistically    evaluated the overall inventory record accuracy for
30 lots, consisting of about 411,000 items. The statistical       sampling
results reported to higher management levels indicated that all 30
lots had acceptable inventory record accuracy. However, oup limited
tests indicate that the reported statistical     sampling accuracy results     .
were of questionable validity.
     At the Sacramento and San Antonio Air Materiel Areas, we found
that the sample selection process was biased by the exclusion of
items with recorded stock locations but no recorded stock quantities.
Also at the San Antonio Air Materiel Area, we found that documents
evidencing recent stock receipts were falsely prepared for the pur-
pose of reconciling major inventory overages for sample items. This
was done to permit the reporting of acceptable sample inventory
accuracy for the effected lot of items, thus avoiding the possible
necessity of having to take a physical count of all items in the
lot (approximately ll,OOO items).
      In addition to performing hundreds of thousands of regularly
scheduled physical inventories annually to maintain accurate inven-
tory records for all stocked items, air materiel areas have also
taken about 5s,OOO special or unscheduled physical inventories
yearly at an estimated annual cost of $2.6 million.   These special
inventories were taken as emergency measures to resolve inventory
errors not previously corrected by regular physical inventories.
       We believe that a substantial number of these special in-
ventories were necessitated by inventory errors which were either
caused by or should have been corrected by prior physical inven-
tories.    In this respect, we found a number of instances in which


items were repeatedly subjected over a short timespan to a mixture
of scheduled and special physical inventories.        These inventorfes
were taken to correct errors, some of which were caused by the
physical inventories themselves.      For example, one item was in-
ventor-fed 26 times (mixture of regular and special) in fiscal year
1970   l Some of these inventories were taken only a few days apart
and resulted in offsetting    gain and loss adjustments, indicating
that the original adjustients     were made in error.

        The occurrence of inaccurate physical counts, erroneous recon-
ciliation    of major inventory differences,    and Invalid physical in-
ventory adjustments were suffictently      frequent, in our optiion, to
impair the effectiveness     and economy of the Air Force's physioal
inventory program. We believe our findings show that prescribed
physical inventory procedures are not well understood or followed
by warehousemen and inventory managers. Also, existing physical
inventory controls do not ensure cqliance         with prescribed proce-
      We believe that improvements in physical inventory controls
will result in a significant     increase in inventory record accuracy
and a substantial reduction in the physical inventory workload. We
are, therefore,    reccenmend3ngthat supply personnel be provided with
more frequent and comprehensive instruction      on physics.1 inventory
procedures and techniques.      Also, we recommend that more rigid
controls  be instituted    to enforce compliance with prescribed pro-
cedures. Finally,      we recommend that increased internal audit
covemge be given to this area.
      These reccxumendations are subject to the provisions of Section
236 of the Legislative   Reorganization Act of 1970. We will appreciate
receiving copies of the statements you furnish the specified committees
in accordance with these provisions.     If you desire, we will be glad
to discuss these matters in greater detail with you or your staff.
     Copies of this letter   are being sent to the Secretary       of
                                           Sinc.erely yours,
                                          gR L        ‘
The Honorable
The Secretary of the Air Force