oversight

Inventories at Naval Shipyards--Excesses and Improvements Made

Published by the Government Accountability Office on 1971-05-28.

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

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B-   125057
                    COMPTROLLER      GEPIERAL    OF   THE      UNITED    STATES
                                   WASHINGTON.    D.C.      20548




B-125057




To the      President        of the Senate     and the
Speaker       of the      House   of Representatives

           This     is our report        on inventories       at naval              shipyards--
excesses          and improvements            made,     Department                 of the Navy.

         Our review   was made pursuant      to the Budget    and
Accounting     Act, 1921 (31 U.&C.     53), and the Accounting
and Auditing     Act of 1950 (31 U.S.C.    67).

         Copies    of this report            are being    sent to the Direc-
tor, Office     of Management               and Budget;     the Secretary    of
Defense;      and the Secretary              of the Navy.




                                                  Comptroller                  General
                                                  of the United                States




                            50TH   ANNIVERSARY                1921-     1971
I
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             COMPTROLLERGENERAL'S                                 INVENTORIES AT NAVAL SHIPYARDS--EXCESSES
I            REPORTTO THE CONGRESS                                AND IMPROVEMENTS MADE
                                                                  Department  of the Navy  B-125057


              DIGEST
             ------


              WHYTHE REVIEW WAS MADE                         01

                        The inventory        of industrial      materials       on hand in the Nation's          10 na-
                        val shipyards        at the end of calendar           year 1969 was valued         at $110 mil-
                        lion.     Because of the size of this              inventory,        the General   Accounting
                        Office    (GAO) examined        supply   management        practices      at four naval ship-
                        yards--Puget       Sound, PhiEderphia,            Mare Island,         and Pearl Harbor.      In-
                        dustrial     material     inventories     at these four shipyards             were about
                        $59 million,       or 53 percent       of the total        of all shipyards.


    I
    I        FINDINGS AND CONCLUSIONS

                        There was no known shipyard          need for 30 percent      of the          inventory    at
                        the four yards       reviewed.    This excess material--valued                at over $17 mil-
                        lion--had      not been reported     to the naval supply      system          for possible
                        redistribution       to potential    users,  or for disposal,       if        no longer    re-
                        quired.
    I
    I                   Accumulation    of much of this     excess  could be avoided     if the shipyards
    I                   would stop ordering    material      far in advance   of actual    need and estab-
    I
    I                   lish  more realistic   stock    levels   on the basis   of accurate    demand and
    I                   use data.    (See p. 7.)
    I
    I
    I                   The shipyards     did not have an adequate      program  to identify     and dispose
    I                   of, on a regular      basis,  those items no longer     needed.      GAO estimates
    I
    I                   that  disposition     of unneeded    material  at the four shipyards      reviewed
    I                   would eliminate      annual  holding   costs of about $3.4 million.          (See
    I
        I               p. 15.)

                        Shipyards    are not making maximum use of Navy procedures         to reduce      the
                        cost of requisitioning      low-value   items.     GAO estimates that   requisi-
                        tioning   costs   at the four shipyards      could be cut by $1.3 million        an-
                        nually.    (See p. 20.)

                        Internal    audits    and Navy studies    of supply  management    at shipyards
                        identified    similar    weaknesses,   but recommendations      had not been fully
                        implemented      by the shipyards.     (See p. 23.)
                                                                                                         .F
        I
        I     RECOMuENDATIONS
                            OR SUGGESTIONS

                        GAO suggested       that   the   Navy take the necessary     actions    to ensure           that
                        naval shipyards        improve    their  programs to prevent      ,the accumulation            of
         I
             Tear   Sheet
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        I                                                                                  PlAY28,1971
        I                                                          1
    unneeded     material     and to dispose                      of excess         material.           These      actions
    should   include      but not be limited                        to:

      --Requisitioning                  material      on the basis  of when                     it is needed on the
         job so that                material     will   not be held a long                      time before  it is used.

      --Establishing                  stocking   levels           for shop stores               inventories          consistent
         with     lead            times required      to         obtain  material             from supply          sources.

      --Establishing           procedures      to ensure    that demand data are adjusted                                       to
         reflect       material      returned    to inventories    and that    the returned                                    ma-
         terial      is considered          in making subsequent    procurements.

      --Issuing     more specific   guidelines                           for     the   disposition           of    material
          left  over from completed     jobs.

      --Requiring   shipyards    to promptly     identify                              and report     excess            material
         to the supply    system for redistribution                                  to other     Government             custom-
         ers or for disposal     if the material        is                          no longer     needed.

    In regard      to low-value      items,       GAO suggested     that the Secretary         of the
    Navy require      shipyards      to abide by Navy policy             regarding   the bulk issue
    of material      which has a unit           value of $2 or less and to consider              ex-
    tending     the policy      to cover items having           a unit value of perhaps          up to
    $10.    GAO further       suggested      that    the Secretary       of the Navy take the nec-
    essary   action     to ensure      that     recommendations       from internal     audits    and
    studies     are fully     complied      with promptly       or that     reasons  for rejecting
    these recommendations          are approved         by appropriate        command levels.


AGENCY
     ACTIOPJS
           AND UNh?ESOLVED
                -___   ISSliES
    The Navy, concurring     with GAO's suggestions,             stated      that  a reduction
    of about $28 million     in inventories         at the 10 naval shipyards            had been
    made during   the period     January    through    September        1970.     The Navy will
    continue   to emphasize    the reduction        of inventories         at shipyards.       (See
    p. 30.)

    The Navy        cited          a number     of     related        actions       taken       or planned         to

       --improve            requisitioning             of material,

       --develop            revised       stocking        criteria,

      --establish              guidelines        for      placing       material         in     inventory,

       --dispose       of          excess material            and set          up annual        inventory         and reporting
           requirements,               and

      --increase             to     $10   the   unit      value       of material           which     may be bulk            issued.
I




                   The Navy    stated   that     the Inspector     General   would determine      whether
                   shipyards     had satisfactorily        implemented     audit  report    recommendations
                   and that    those which had not been satisfactorily               implemented    must be
I
                   reported    until   corrected.       (See p. 34.)
I



            MATTERS FOR CONSIDERATIONBY THE CONGRESS

                   Recent and anticipated        budgetary  restraints     require  greater   attention     to
                   improving   shipyard   efficiency.      Therefore,     GAO is reporting    its findings
I
                   to inform   the Congress      of the improvements      made in supply    management     at
                   naval shipyards.
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                          Contents
                                                                 Page

DIGEST                                                             1

CHAPTER

   1       INTRODUCTION                                            4
               Types of inventory                                  4

   2       ACCUMULATIONOF EXCESS MATERIAL                          7
               Extent of excess                                    7
               How excess occurs                                   7
               Excessive levels carried   in shop stores          10
               Material   left over from completed jobs           11
               Conclusion                                         12
               Agency comments and our evaluation                 13

   3       NEED FOR SHIPYARDS TO IDENTIFY AND DISPOSE
           OF EXCESS                                              15
               Identification   of excess                         15
               Reducing inventory   holding costs                 17
               Redistribution   of material                       17
               Conclusion                                         18
               Agency comments and our evaluation                 18

   4       REDUCING COSTS BY BULK ISSUE OF LOW-VALUE
           MATERIAL                                               20
               Conclusion                                         21
              Agency comments                                     22

   5       INTERNAL AUDITS AND STUDIES OF SUPPLY MANAGE-
           MENT AT NAVAL SHIPYARDS                                23
               Internal   audits                                  23
               Navy panel                                         24
               Conclusion                                         25
               Agency comments                                    25

   6       SCOPE OF REVIEW                                        26

APPENDIX

   I       Letter     dated February 9, 1971, from the As-
              sistant     Secretary of the Navy (Financial
             Management) to the General Accounting         Of-
              fice                                                29
                                                             Page
APPENDIX

  II       Principal   officials of the Department of De-
              fense and the Department of the Navy respon-
              sible for the administration  of activities
              discussed in this report                        35
COkPTROLLERGENERAL'S                            INVENTORIES AT NAVAL SHIPYARDS--EXCESSES
REPORTTO THE CONGRESS                           AND IMPROVEMENTS MADE
                                                Department  of the Navy  B-125057


 DIGEST
------


WHYTHE REVIEW WASMADE

      The inventory         of industrial       materials       on hand in the Nation's          10 na-
      val shipyards         at the end of calendar            year 1969 was valued        at $110 mil-
      lion.     Because of the size of this                inventory,        the General  Accounting
      Office     (GAO) examined        supply     management       practices      at four naval    ship-
      yards--Puget       Sound,     Philadelphia,         Mare Island,         and Pearl Harbor.      In-
      dustrial     material      inventories       at these four shipyards            were about
      $59 million,       or 53 percent         of the total        of all shipyards.


FINDINGS AND CONCLUSIONS

      There was no known shipyard          need for 30 percent        of the         inventory    at
      the four yards       reviewed.    This excess   material--valued               at over $17 mil-
      lion--had      not been reported     to the naval supply        system         for possible
      redistribution       to potential    users,  or for disposal,         if       no longer    re-
      quired.

      Accumulation    of much of this      excess  could be avoided     if the shipyards
      would stop ordering    material      far in advance    of actual    need and estab-
      lish more realistic    stock    levels    on the basis   of accurate     demand and
      use data.    (See p0 7.)

      The shipyards    did not have an adequate       program  to identify     and dispose
      of, on a regular     basis,  those items no longer      needed.      GAO estimates
      that disposition     of unneeded    material   at the four shipyards      reviewed
      would eliminate     annual  holding    costs of about $3.4 million.          (See
      p. 15.)

      Shipyards      are not making maximum use of Navy procedures           to reduce      the
      cost of     requisitioning      low-value   items.     GAO estimates that   requisi-
      tioning     costs     at the four shipyards      could be cut by $1.3 million        an-
      nually.       (See p. 20.)

      Internal    audits    and Navy studies    of supply  management    at shipyards
      identified    similar    weaknesses,   but recommendations      had not been fully
      implemented      by the shipyards.     (See P. 23.)


RECOMMENDATIONS
              OR SUGGESTIONS

      GAO suggested       that   the   Navy take the necessary     actions           to ensure      that
      naval shipyards        improve    their  programs to prevent      the         accumulation       of
    unneeded     material     and to dispose                       of excess          material.           These      actions
    should   include      but not be limited                         to:

       --Requisitioning                 material      on the basis  of when                       it is needed on the
          job so that               material     will   not be held a long                        time before  it is used.

       --Establishing                 stocking   levels          for shop stores                 inventories           consistent
          with     lead           times required      to        obtain  material               from supply           sources.

       --Establishing           procedures      to ensure    that demand data are adjusted                                         to
          reflect       material      returned    to inventories    and that    the returned                                      ma-
          terial      is considered          in making subsequent    procurements.

       --Issuing        more specific   guidelines                      for     the      disposition           of    material
          left      over from completed     jobs.

       --Requiring   shipyards    to promptly      identify                           and report     excess               material
          to the supply    system for redistribution                                to other     Government                custom-
          ers or for disposal     if the material         is                       no longer     needed.

    In regard      to low-value       items,       GAO suggested      that the Secretary         of the
    Navy require      shipyards      to abide by Navy policy               regarding   the bulk issue
    of material      which has a unit            value of $2 or less and to consider               ex-
    tending     the policy      to cover items having            a unit value of perhaps           up to
    $10.    GAO further       suggested       that    the Secretary        of the Navy take the nec-
    essary   action     to ensure       that     recommendations        from internal     audits    and
    studies     are fully     complied       with promptly       or that reasons      for rejecting
    these recommendations           are approved         by appropriate        command levels.


AGENCYACTIONS AND UNRESOLVED
                           ISSUES

    The Navy, concurring      with GAO's suggestions,          stated     that  a reduction
    of about $28 million      in inventories      at the 10 naval shipyards           had been
    made during    the period     January through    September        1970.    The Navy will
    continue    to emphasize    the reduction     of inventories        at shipyards.       (See
    p. 30.)

    The Navy        cited          a number    of     related        actions       taken          or planned         to

      --improve             requisitioning            of material,

      --develop             revised      stocking        criteria,

      --establish              guidelines       for      placing       material           in      inventory,

      --dispose       of           excess material          and set           up annual           inventory         and reporting
          requirements,                and

      --increase             to     $10 the    unit      value       of material           which        may be bulk            issued.




                                                           2
    The Navy    stated    that     the Inspector General   would determine      whether
    shipyards     had satisfactorily        implemented  audit  report    recommendations
    and that    those which had not been satisfactorily            implemented    must be
    reported    until   corrected.       (See p. 34.)


MATTERS
      FORCONSIDERATION
                    BY THE CONGRESS
    Recent and anticipated           budgetary  restraints    require  greater   attention     to
    improving      shipyard   efficiency.      Therefore,    GAO is reporting    its findings
    to inform      the Congress      of the improvements     made in supply    management     at
    naval    shipyards.
                                    CHAPTER 1


                                  INTRODUCTION

        Naval shipyards       are field    installations          of the Naval
Ship Systems Command.            Their  primary      mission      is to repair,
modernize,      and overhaul      ships  in the active          fleet   and to
perform     ship construction        and conversion.

         A working    capital     fund, referred        to as the Naval In-
dustrial     Fund, has been established              for each shipyard         to
finance     operating      costs.      As a general      principle,        each ship-
yard operating        under the Industrial           Fund is to be reim-
bursed     by its customers,         i.e.,   the operating          commands,    for
cost of goods and services               to maintain     working      capital    in
the Fund.

        Losses from disposal          of excess and surplus       property
held in an industrial           fund are charged       to current    operations
and are to be recovered             in reimbursements      from customers        as
part of services         rendered.       Where the loss is directly          at-
tributabl,e     to a particular        customer    through    such actions       as
inaccurate      specifications        or changes in quantity       require-
ments,      it should    be recovered      as a direct     charge  to that
customer’s      order.       Where the loss cannot be identified            with
a particular       customer,      the item is to be treated        as an over-
head cost.

        Naval supply    centers      are under the command of the Na-
val Supply Systems        Command.       The primary    mission      of these
centers     is to provide      supply    and support    services      to fleet
units    and shore activities.           They are usually       located    near
naval    shipyards,   but,    when they are not,        the supply      depart-
ment of the shipyard        serves      a dual function     of supporting
both the shipyard       and the fleet.

TYPES OF INVENTORY

       The inventories         that were the subject        of our review
were used mainly        for the maintenance         of ships     or for ship
construction       and conversion.          The Navy, for accounting          pur-
poses,     segregated     this    inventory    into   three   accounts;     di-
rect material,        shop stores,       and unassigned     direct    material.



                                          4
      Direct   material    consists  of items     obtained    and             ear-
marked for a specific       customer    pending   issue    to the             job.
Between the time the material         is received     from the               supply
system or manufacturer        and the time it is required                    on the
job,  it   is part   of the   direct material     inventory.

        Shop stores     consist   of items      commonly used in current
operations.        These items usually         are kept near shop opera-
tions.      Shop stores     items   can be standard         issue   items,    in-
surance     items,   and pre-expended        items.      Standard     issue   items
have a recurring        demand and are stocked           on that basis.         In-
surance     items have unpredictable           demand, long procurement
lead time,      and are essential       for maintenance         of indispens-
able equipment       or for the productive          effort     of the ship-
yard.     Pre-expended      items   are   low-cost     items    which are is-
sued in bulk to the users and are considered                    used when is-
sued.     No report     of actual    use is required.

         Unassigned      direct   material       consists      of items    left     over
from completed         jobs.    Unlike     direct      material,     there      is no
specific      customer      for this     material,      but it may be retained
if there      is a probability         of use in the near future.                  The
inventory       of unassigned       direct     material      may contain        items
transferred       from inventories         either      of direct     material       or
shop stores.

        The inventory        of industrial       materials       on hand in the
Nation’s      lb naval     shipyards       at December 31, 1969, amounted
to about $110 million.             Direct      material     amounted      to
$62.8 million,         shops stores        $41.7 million,        and unassigned
direct     material,      $5.5 million.         In 1969 the amount of the
inventories       decreased      about $49.3 million           below 1968 levels.
The largest       decrease     was in direct         material      inventories,
chiefly      due to a decrease        in new construction             assigned      to
naval     shipyards     and increased         emphasis     by the Naval Ship
Systems Command and shipyard                 commanders      on minimizing        in-
vestment      in inventories.         Industrial        material      inventories
at the four        shipyards     we reviewed       were valued        at about
$59 million        at December 31, 1969, as shown in the following
schedule e




                                             5
                                                      Unas -
                                                    signed
                         Direct          Shop       direct
      Shipyard          material       stores      material        Total

    Puget Sound       $ 9,838,OOO   $ 4,758,OOO   $1,041,000    $15,637,000
    Philadelphia       17,564,OOO     3,472,OOO       179,000    21,215,OOO
    Mare Island         8,503,OOO     6,788,OOO       311,000    15,602,OOO
    Pearl    Harbor     1,692,OOO     2,916,OOO    1,750,OOO      6,358,OOO

1        Total        $37.597,000   $17,934,000   $3,281.000    $58,812,000
I
!          The value   of the above inventory      is based on Navy re-
    ports.    The figures    include  many items at nominal      value,
    generally   1 cent.     Our computations     of excess material     are
    based on acquisition       cost; therefore,    our estimates    of ex-
i   cess material,     as discussed    in chapter    2, exceed the value
i   reported   by the shipyards.

I
i
!
                                      CHAPTER 2


                     ACCUMULATION OF EXCESS MATERIAL

        There are many reasons            for the accumulation            of excess
material,       such as recording         of inaccurate       demand data,         an-
ticipated       use that did.not        materialize,       a shipyard       practice
of ordering        material    to cover unforeseen          requirements,          and
changes in scope of work and material                   specifications.            In
our opinion,         the shipyard      practice      of ordering      material       far
in advance of actual           need is one of the more significant
factors      contributing      to the accumulation          of excess material,
since     adjustments       to reflect      subsequent     changes      in work re-
quirements       cannot be made if material             is already        on hand.

EXTENT OF EXCESS

        To determine      whether   on-hand quantities      were needed,
we reviewed      a statistical      random sample of items         from each
of the three      types of inventories--direct          material,      shop
stores,    and material        left over from completed       jobs.     The
percent     of excess in our samples was projected              to all    items
in each type of inventory.             The methods used in computing
excess are described           in chapter    6.  We found that over
$17 million     worth of material         was excess.    The graph on the
following     page shows the value         of the excess material,          by
type of inventory,          held at the four shipyards.

HOW EXCESS OCCURS

       We believe      that the ordering              of material      far in advance
of actual     need contributes           to the accumulation             of unneeded
stock.     For example,          the Mare Island          and Puget Sound Naval
Shipyards     followed      a practice        of obtaining        nearly      all     mate-
rial   for shipwork        prior     to arrival         of the ship.        Since the
ships may be in port for periods                   up to 15 months,           the mate-
rial    is retained      in storage        until      required.       Up to the time
the material       is actually         needed,      there    are changes in scope
of work and in material              specifications.            Early    delivery        in-
creases    the exposure          of material        to these changes and
thereby    increases       the probability            that the material           will
never be used for the purpose                  intended.




                                              7
                                                                           EXCESS                MATERIAL                    AT         SHIPYARDS
                                                                                                                                                                                                         Hill8oos of
    Uillbn.   of                                                                                                                                                                                           Dollars
      DCJIOIS
                                                                                                                                                                                                                4.4
          4.1



                                               DIRECT      MATERIAL

                    -a                        UNASSIGNED             MATERIAL’                                                                                                                                  4.0
         4.1J-

                                               SHOP STORES MATERIAL
                                              (Including lnsvrmce Items)


                                                                                                                                                                                                                3.6
         3.r 5-




         3.: 2-                                                                                                                                                                                                 3.2




         2., 8-                                                                                                                                                                                                 2.8




         2. 4-                                                                                                                                                                                                  2.4




         2.' O-                                                                                                                                                                                                 2.0




         1.1S-                                                                                                                                                                                                  1.6




         1.: 2-                                                                                                                                                                                                 1.2




          .8                                                                                                                                                                                                     .8




         .4




          0
                                PUGET         SOUND                            PHILADELPHIA                                         MARE ISLAND                          PEARL      HARBOR
               *   Based         on    cost   of   rtems    with          exc&tion          of    amount        show          forMare      Islund.        The   amount     show           for More     Islmd

                   representsthe              ocquir4m             cost       of     705   line    items,       an     odditronal        962     line   items   corned     at   nominal        value       we

                   not     included.




!                                                                                                           8
         In addition      to changes in material         specification           and
work scope,       material      becomes excess because of anticipated
use that does not materialize                and because of unrealistic
shop store       stock    levels.     Also,    such shipyard       practices
as ordering       more than enough material           to meet requirements,
failure     to adjust       shop store     demand records       for material
returned      to inventory,        and failure     to consider       available
leftover      material      in making subsequent        procurements         all   con-
tribute     to excess.

       We recognize   that conditions        are constantly     changing,
and many unknowns exist         in the environment       in which ship-
yards operate.      We believe,     however,    that more effective
supply   management practices        at naval   shipyards    could reduce
excess material.

         We did not attempt       to determine          the   amount of excess
resulting       from each individual       factor.           Considered    alone,
each factor        may not have a significant             effect     on the accumu-
lation     of excess;     considered    together,          the factors     have a
definite      effect   on material    becoming          excess.

         Navy officials         told us the practice              of obtaining      early
delivery      was established            to ensure availability            of material
to meet production           schedules         and to avoid having           a higher
priority      need override           the shipyard        requisitions.         Al though
we agree with         the shipyards’           desire     to meet production
schedules,      we find      little        support    for the above-stated            con-
cern over the ability               of the supply         system to meet shipyards’
needs.       We found the supply              system,     in general,      to be re-
sponsive      to the shipyards’             needs.      For example,       about 84 per-
cent of the requisitions                 submitted      to the supply        system by
the Mare Island          Shipyard        during     October     1969 were filled
within     15 days of the stated               required      delivery     date.      Analy-
sis of nine items received                  late    showed that only one had
contributed       to a job delay.

         In July    1968 the Pearl Harbor Naval Shipyard             began
requisitioning        material   on the basis     of anticipated         lead
time and in accordance          with when the material          would be re-
quired      for productive     work.     Direct  material     inventory       at
Pearl Harbor was reduced           from $5.6 to $1.7 million           during
calendar       year 1969 partly      as result   of this    change.        Our
review      did not disclose     any significant       adverse    effect      on
the ability        of the shipyard     to return    the ships     to the fleet


                                             9
promptly.      We believe    the success    experienced     by the Pearl
Harbor Shipyard       in reducing    its inventory     shows that obtain-
ing material     on the basis     of when actually      required  is a
workable    system.

EXCESSIVE      LEVELS CARRIED         IN SHOP STORES

         The Navy provides     guidelines     for the quantity    of in-
dividual     items which a shipyard        should carry   in production
shops.      These guidelines      are broad and give shipyards        wide
latitude     in determining      on-hand   levels  of material.      Simply
stated,     a level    is expressed     in days of supply     and provides
for current      operating    needs plus the time needed to replen-
ish stocks.

       Navy guidelines      suggest    that a maximum of 90 days’           sup-
ply of stock be maintained          in shop stores        for those common-
use items    stocked    by supply     centers    located     adjacent  to
shipyards.      Three of the four shipyards            that we reviewed
were located     near supply     centers,     the one exception       being
the Philadelphia       Naval Shipyard.

       Our review        of the stocking       policy    in shop stores         showed
considerable        variance       in the level     of items    stocked.        These
levels    varied     from 90 days at Puget Sound and Pearl                  Harbor
to anywhere       from 240 to 480 days at Philadelphia.                    Mare
Island    also used the go-day level,               but this    was doubled       to
180 days’      stocking      criteria    for quality       assurance     items.

        Using the shipyards         ’ criteria        at the three        shipyards
adjacent     to supply      centers,       we found that        the actual       on-
hand quantities         greatly     exceeded       the recommended         days of
supply.      At the Philadelphia             shipyard    we used the 90 to 180-
day stock      level    established        by the Naval Ship and Supply
Systems     Commands because the stocking                level      of 240 to 480
days used by Philadelphia              was acknowledged           to be too high
by a responsible         shipyard      official.        Our tests       of actual      lead
times    required     to obtain      replenishment         stocks     indicated      that
a 180-day      stocking     level    was reasonable.           Our comparisons
showed that more than $7.5 million                    of the $12 million          on-
hand shop stores         inventory      at the four shipyards              was excess
to the established          stocking       levels.

       We found      also that  shipyards had large               quantities  of
insurance-type         items on hand in shop stores.                To be properly


                                            10
classed     as insurance        stock,     the item must have a long lead
time,    must have nonrecurring             use, and must be required       to
accomplish       the shipyard’s         mission.      The four shipyards    were
holding     large    quantities        of insurance     stock valued   at about
$1.3 million        which did not meet these criteria.               Many had
patterns      of recurring       use or short       lead times.     For other
items    there was no actual            need, and they were considered         ex-
cess.

        At Pearl    Harbor we estimated           that    17 percent     of the
items held as insurance             stock were available         at either       the
nearby    supply    center      or were included        in other     shipyard
stocks.      Shipyard     officials      stated     that supply      system stock
could not be relied           upon to pass inspections.              Shipyard      of -
ficials    advised     us that      they were aware that         these items
should    not have been classed           as insurance       items but,        to en-
sure that material          is available       in an inspected        condition,
the instructions        were not followed.             Our review     covering       over
1,600 items      received       and inspected       by the shipyard        showed a
rejection     rate of only 6 percent.              We believe      that    this    in-
dicates    that a substantial           degree of reliance         can be placed
on supply     system stocks.

MATERIAL     LEFT OVER FROM COMPLETED JOBS

        The inventory        designated       as unassigned        direct     material
comprises       items left       over from completed          jobs.       According
to Navy guidelines          9 leftover       material     may be held as unas-
signed     direct     material      inventory      if there     is a high proba-
bility     of use for the items            in the near future.             In our
opinion,       shipyards      are not following          Navy criteria        as to
what materials          should be in this          inventory.       As a result,        un-
assigned      direct     material      has become a “dumping”             category     for
items    left     over from completed           jobs.

       Shipyards       were holding       excess unassigned       direct     mate-
rial   valued     at about $4 million.            To arrive    at this     esti-
mate, we selected          random samples       for each shipyard’s          inven-
tory and obtained          the views of responsible           shipyard     offi-
cials    concerning       whether     there was a high probability             of use
in the near future.            We then projected         the excess      in our
sample to the total           number of items        in the inventory.           We
adjusted     the shipyardsP         reported    value    of this    material      to
represent      acquisition       cost.
       According     to Naval Ship Systems Comand instruction
4490.8,    materials      which have a high probability             of being
required    in the near future         may be held as unassigned           di-
rect material.         The instruction      lists     seven criteria      as
mandatory     prerequisites      for holding       these items.       A sum-
mary of some of these criteria            follows.

       1.   The decision   to hold leftover     material       as unassigned
            must be made only by authorized        individuals      who, by
            inspection   or technical   knowledge,      can determine      if
            the item has a probability      for use in the near fu-
            ture.

       2. Decisions      to retain  these items         must be based on a
          probable,      though not necessarily          specific,  require-
          ment .

       3.   Material    refained     will  be subject  to continuing      re-
            view to determine        if there  are specific    requirements
            for individual       items.

       4.   The unassigned     material  category      must not be used
            as a device    for deferring     losses    on material for
            which there    is no foreseeable       need.

       We found that       these criteria       had not been met by the
shipyards.         For example,     Pearl   Harbor removed excess mate-
rial   from direct      material     inventory    and held it as unas-
signed     material.      Pearl Harbor was holding           this   material
even though they advised            us that nearly      a11 of it was ex-
cess to present        and future      needs.    Simi larly,      Puget Sound
was holding       about $1.4 million        worth of unassigned         material
which was excess to its           requirements,

CONCLUSION

        We believe    there    are opportunities        to improve      supply
management      at naval    shipyards      which would result        in more
effective     and efficient       operations.        To accomplish      this,
shipyards     need to implement        basic    supply   management prac-
tices     and more rigorous       command surveill      ante is needed.
Shipyards     must periodically        redetermine      the I.evels    of stock
on hand using valid         and realistic       factors    and, on the basis
of these determinations,           take action       to dispose    of excess
material.


                                        12
        In our opinion,       Navy guidelines          need to be more spe-
cific,    especially      in defining       what constitutes        foreseeable
need.     We recognize       that   this    is subjective        and there     is
some merit      to holding      material      if there     is a probable      fu-
ture need.        We believe,     however,       that   shipyards     have taken
too liberal       a view of what constitutes              need and are not
following     the spirit       of Navy guidelines;           thus,  material      is
being held which otherwise              should     have been disposed        of.

       We proposed      that the Secretary     of the Navy take action
to ensure that naval         shipyards  improve    their  programs   to
prevent    accumulation      of unneeded material.       These programs
should   include:

       --Requisitioning   material    on the basis      of           when it is
          needed on the job so that material       will              not be held
          a long time before    it is used.

       --Establishing         stocking     levels   for shop stores         inven-
          tories     consistent      with    lead times     required     to obtain
          material      from supply       sources.     These levels        should
          then become the basis            for periodically        determining
          excesses.

       --Establishing       procedures     to ensure that demand data
          are adjusted      to reflect     material     returned   to inven-
          tories     and that   the returned      material     is considered
          in making subsequent         procurements.

       --Issuing     more specific        guidelines   for      the disposition
           of material   left   over      from completed        jobs.

AGENCY COMMENTS AND OUR  EVALUATION
                     --1__-
       The Assistant       Secretary    of the Navy (Financial          Manage-
ment) replied      to our draft      report    by letter     dated Febru-
ary 9, 1971.       (See app. I.)        He stated     that    there had been
continued     emphasis     on the reduction       of Navy Industrial        Fund
inventories.       During    the period      January    through    September
1970, inventories       were reduced        by $28 million,       and this
trend    in reducing     inventories      is expected      to continue,

       The Navy concurred      fully      with   the objectives      of the
suggestion   related   to the requisitioning            of material.       The
Assistant   Secretary    stated      that    the problem     was a very
complex  one requiring    resolution      of many factors,       including
some not mentioned     in this    report.    The Navy cited         the fol-
lowing  efforts  being made to improve        material     requisition-
ing O It has

       --   issued     an improved    priority      system   for   ordering     mate-
            rials    in naval    shipyards,

       --directed       the development          of procedures     for   the   order-
          ing of      materials,

       --refined    the material     status    reporting     system so that
          it can be updated      automatically       to reflect    changes
          in production   schedules O

        The Navy is in the process       of developing             revised    stock-
ing criteria.       These new criteria     are designed              to give ade-
quate consideration       to the lead times required                 to obtain
material      and to the adjustment    of demand data.

       The Navy, in commenting         on our report,       concurred     in
the need for more specific          guidelines       for the disposition
of material      left  over from completed         jobs.    The Assistant
Secretary     advised   us that firm      guidelines     for placing      mate-
rials    in the direct     material    account     had been issued.

       The Navy’s     response   did not mention          that guidelines
had also been established          for material      left     over from com-
pleted    jobs.    In subsequent      discussions      with Navy officials
and through     reviewing     the new instructions,           it is apparent
that   the guidelines      do cover material       left      over from com-
pleted    jobs as well     as direct     material.




                                           14
                                    CHAPTER 3


    NEED FOR SHIPYARDS          TO IDENTIFY      AND DISPOSE       OF EXCESS

        Although     significant      quantiiies    of material  were ex-
cess to the needs of the shipyards,               they did not have ef-
fective      programs     to identify     and dispose   of unneeded items.

          There is reluctance            on the part       of shipyard  management
,Jfficials        to dispose       of unneeded material          either through
 redistribution           to other users       or through      sale as scrap.
This reluctance             stems from a desire          to hold down overhead
 fates.       Any losses        incurred    through      the disposal   of mate-
 rial     are assumed by the shipyards                and are reflected      in
lIverhead       rates D Overhead rates             can be an indication        of
 ,shipyard      efficiency.          Since there      is competition    for work,
 :?ach shipyard         understandably        prefers      to keep overhead      to a
:ninimum.

       Significant      savings   can be realized        through    disposi-
 tion of unneeded material.           We estimate      that,     if excess ma-
terial     at the four shipyards       we reviewed       was disposed        of,
about $3.4 million        worth of annual      holding       costs  incurred
;>y the shipyards       would be eliminated.         Furthermore,        since
a portion       of this  material    could be used by others,            savings
could   also result      through   reductions     in purchases        of iden-
tical    items.

 LDENTIFICATION
.-I__-______          OF EXCESS

        At the shipyards      we visited    there    was no adequate    pro-
gram to i.dentify       excess material.       To keep inventory     within
itcceptable   quantities,      periodic    computations    are required
and those items       determined     not to be needed should      be purged
from on-hand quantities.

         The shipyards      we reviewed     followed       a practice      of not
identifying        unneeded direct      material     until    all     shipwork   was
completed       or even much later.         For instance,         the Philadel-
phia Naval Shipyard          did not transfer        material       left   over
f’rom the repair        of an aircraft      carrier     to the unassigned
direct      material    account   until    8 months after         the repairs
had been completed.            The Puget Sound Naval Shipyard                was
still     accounting     for material     left    over from the overhaul


                                           15
 of a submarine      5 months after     the work was completed.        As
 long as prompt action         is not taken to identify     material
 left  over after     completion     of a job order,    the shipyards
 will  obviously     not be able to make the most efficient           use
 of their   material    resources.

         Two of the shipyards           prepared        a computer     listing       of
 excess    shop stores         on tile basis      of predetermined            stocking
 levels.       However,      the excesses       were not disposed             of because
 the yards did not want to reflect                    the inventory         losses       in
 their    overhead      rates.      The other       two shipyards        had not re-
 cently    reviewed       shop stores’       active      items    to determine          ex-
 cess on hand.          For example,       Puget Sound procedures                required
 a quarterly      listing       of excess items,           but this    listing       iden-
 tified    only items        that had no use rather             than those held in
 a quantity      over shipyard         stocking      criteria.       The Philadel-
 phia Naval Shipyard            was able to produce            an excess material
 listing     for management purposes,              but we were told            that     this
 had been done only once prior                to our request         for this        list-
 ing .

         Shipyards       were not returning          or reporting        most of the
  excess material          to the supply       system,       primarily    because
‘credit    usually       was not given       and losses         incurred    would be
 charged     to overhead.           We found that        the shipyards       did,    on
 a periodic       basis,      inquire    whether     the system would buy the
 excess material          from the shipyards.              If the system was in a
 “buy position,”          the shipyards        would return          the material     and
 receive     credit.        We were told       that    in most cases the supply
 system was not in a buy position                   and would not allow           credit.
 We were advised          that,     because of lack of credit             from the
 supply    system,       shipyards      hold material         to avoid recognition
 of losses      in their       overhead     accounts.

         The shipyards      have been        disposing       of some excess         mate-
rial    but,  in   relation     to the       current      inventory    value,       a
significant      amount of excess            is still       being retained.

       At Puget Sound, shop stores’        insurance     inventory        val-
ued at $861,000     was excess.      Reviews of shop store          insurance
items had been conducted       by the shipyard       in 1968 and 1969.
The purpose     of these reviews     was to identify       opportunities
to (1) reduce the cost to the Government             of storing,        record-
keeping,    and processing    materia 1 for which a need d id not
exist    and (2) reduce    the amount of capital       required       in the


                                             16
shipyard     Naval Industrial        Fund.   The reported           reduction     of
insurance      inventories     was $1,161,000      for 1968         and $345,000
for 1969.       We found that      the shipyard      had not        really    reduced
the inventory        by the amount claimed,        but had        only trans-
ferred    most     of the material     to other    inventory          accounts.
The actual       reduction    of shipyard    inventories          from the 1968
and 1969 reviews          was only about $104,000         and     $26,000
(0.43 percent        and 0.14 percent)     ) respectively.

REDUCING IKVENTORY
                 -.--- HOLDING COSTS

       We believe       that    the naval     shipyards   could realize     a
substantial       reduction       in operating      costs if disposal     of ex-
cess material         was accomplished.          Although   it is not possible
to state      precisely      the amount of savings        possible,    such sav-
ings can be substantial.               The $17 million      worth of material
estimated       to be excess at the four shipyards              costs  approxi-
mately     $3.4 million       annually     to hold.

       Inventory       holding    costs,   which include          such factors        as
obsol.escence,       interest     on capital,       deterioration        or its
prevention,       handling,     and storage       facilities,        generally      run
from 20 to 25 percent           of the average          inventory     value.     A
representative         of the Naval Supply          Systems Command estimated
the Navy’s      inventory      holding    cost,     on the basis       of similar
cost factors,        to be about 23 percent             of inventory      value.
If we use the lesser           20 percent      figure,        the cost to hold the
$17 million       worth of excess is about $3.4 million                   annually.

-REDISTRIBUTION     OF MATERIAL
              ~-111_11--
       Inquiries       at   the Ships Parts      Control     Center,     Mechanics-
burg,    Pennsylvania,          and naval  supply    centers     located    near
shipyards       included      in our review    indicated      that a substan-
tial   demand exists          for items   being needlessly         held at the
shipyards     e

        Analysis     of a sample of 64 excess      line     items   showed
that during      the last   year the Ships Parts         Control    Center
had requests       for 85 percent    of the identical         items  from its
customers.       Our review    at the Puget Sound Naval Supply             Cen-
ter showed that during         a lo-month  period      the supply      center
had requests       for much of the same material          which was being
carried     by the Puget Sound Naval Shipyard            but not needed by
them B About       $288,000  worth of this    excess material          could


                                           17
have been used by the supply          center   to satisfy its custom-
ers ’ needs.    Similarly,      excess material    valued at $549,000
held by Mare Island        Naval Shipyard    could have been used to
satisfy   needs at the nearby        Oakland Naval Supply Center.

         In addition      to putting      this   excess material     to use
outside     the shipyard)       we found that there was a need within
the shipyard        for this    material.        For example,    at Mare Island
we noted that         seven of the 23 items           in our sample of direct
shipwork     material      were no longer        needed on the job for which
they were originally           ordered.        These items,    however,   were
needed for a subsequent             job and, because they had not been
identified      as excess,      procurements        of $117,600   were made
for duplicate        material     to be used on the subsequent          job.

CONCLUSION
~XI_
        We concl.ude     that   shipyards    are incurring     excessive
holding    costs    as well     as depriving    other    customers    of the
use of this      material.

       In our opinion,       command levels    must emphasize    to ship-
yards    that the reduction      of overall    operating  costs    take
precedence     over the desire      to hold down overhead     rates.    To
accomplish      this,    command levels   must have adequate     data on
shipyard     operations.

       We suggested    that   the Secretary     of the Navy require
shipyards   to promptly     identify     and report   excess material
to the supply     system for redistribution         to other  Government
customers   or for disposal        if the material    is no longer
needed.

        We suggested  also that the Secretary       of the Navy ini-
tiate    operational  standards   and a reporting     system to ade-
quately    measure the action   of shipyards      to keep inventories
to a minimum.

AGENCY COMMENTS AND_----
--                    OUR EVALUATION
                           _-. ----

        The Assistant    Secretary  of the Navy stated         that new
Ilrocedures    had been implemented     which ensured      expeditious
disposition     of excess material,     established     inventory      ac-
counts,     and required   annual inventory      and reporting      for this
account.
        The new procedures         were contained     in an instruction
issued      late   in December 1970.        We reviewed     this   instruction
and found that,         although    the Assistant     Secretary’s       reply
did not mention         that   the material     in the shop stores         and
unassigned       inventory     accounts   would also be considered,            the
instruction        did make provisions       for this   inventory.




                                        19
                                          CHAPTER 4


           REDUCING COSTS BY BULK ISSUE OF LOW-VALUE MATERIAL

           Using current        Navy policy        for the issue of material
    can save about $1.3 million.                 Items,      commonly used by a
    shop in its      current     operation,        which have a unit       value    of
    less than $2 are to be issued                differently      from other     items.
    Low-value     items     are placed       in bins in the working         area and
    are available       without     requisition.           These items are consid-
    ered expended when issued             to the bins rather          than when ac-
    tually    used.     Thus 9 these bins have come to be known as
    pre-expended      bins.

              The operation       of pre-expended       bins is based on the
    premise      that   there     is a need for high-use,          low-priced       items
    to be readily         available       in the production      areas and that
    the cost of operating              bins for such material         is insignifi-
    cant when compared to the paper work and labor                       hours saved
    by expediting         the issue of material.            This policy       was based
    on an estimate          that    it costs more than $2 to process              a req-
    uisition.         The objective         is to achieve    maximum use of pre-
    expended bins for items with a unit                  value   of less than $2.

          As shown below,  none           of     the   four    shipyards        were   making
    maximum use of pre-expended                bins.
I
i
                                                      Number of                Potential
                                                    issues    $2 or          savings      from
                            Number of                   less not               additional
       -Shipyard         -annual  issues
                                    ---             prelexpended
                                                      -                    pre-expending
                                                                            --

    Puget Sound                 480,800                 153,900             $     307,800
    Pearl    Harbor             498,500                 305,300                   610,600
    Mare Island                 283,500                   56,300                  112,600
    Philadelphia            -   324,000                 155,500                   311,000

         Total              Jl586,m                     671,000
                                                        -.---

           Shipyard     officials     advised     us that reluctance        to in-
    crease    overhead      budgets   to provide        for increased    use of
    pre-expended      bins was the primary            reason   that this    policy
    had not been followed           more extensively.          Under accounting
    procedures      in existence      at the time of our review,            the use


                                               20
of pre-expended      bins converted     direct     material      costs   to
overhead   costs 0 Even though total           costs were reduced,          a
conflict   with shipyard       management’s     objective     of keeping
overhead   rates    down resulted.      We found,       however,     that pre-
expending    all  issues    with a value     of $2 or less at Puget
Sound would increase        the hourly    overhead      rate by only
1.4 cents even if no offsetting           reduction       in overhead      was
obtained   through     decreased   work load.

       Some shipyards  have expressed    an interest  in pre-
expending   items up to $10.    At three   of the shipyards,   we
found that the shop stores’     issue work load could be re-
duced by 74 percent    on the average    as shown in the table
below,

                                                                    Percent   of
                                          Number of issues            regular
                       Number of              $10 or less               issue
  .-Sh>yard          annual  issues       not pre-expended--         work load

Puge t Sound                480,800             360,600                   75
Mare Island                 283,500             171,200                   60
Philadelphia                324,000             272,200                   84

     Total              -.1,088,300             804,000
                                                _-                        74

       At  Puget Sound we estimated    that pre-expending       issues
valued   at $10 or less would increase      the hourly     overhead
rate by only 14 cents even if no offsetting          reduction     in
overhead    was obtained through    the decrease   in work load.

CONCLUSION
--
        We believe       that Navy policy         regarding      the issue of low-
value     items    is essentially         sound.     In our opinion,        an over-
all    reduction       in total     costs    should    be the prime consider-
ation,      regardless      of the method used to account              for such
costs,      and shipyards       should     not incur     additional      issue
costs     simply     to maintain       lower overhead       rates.     Command
levels      must reinforce        this    policy.

       We suggested   that the Secretary      of the Navy require
shipyards   to pre-expend    shop stores    material    valued at $2
or less per issue and consider       increasing      the use of pre-
expended bins to issues      valued  at over $2.


                                        21
AGENCY COMMENTS

        The Assistant       Secretary     of the Navy stated          that   ship-
yards have been authorized             to pre-expend       material       up to a
unit    value    of $10.      He stated     also that    instructions        had
been issued        which contained       effective    guidelines        for maxi-
mizing     the use of pre-expended           bins.    Those items which
require      special    handling,     such as pilferable         material,
will    not be bulk issued.
                                        CHAPTER 5


                       INTERNAL AUDITS          AND STUDIES         OF

                  SUPPLY MANAGEMENT AT NAVAL SHIPYARDS

        The Naval Audit         Service      conducts        periodic        and contin-
uing audits         at naval    shipyards.           Special      studies       and proj-
ects pertaining          to supply      management         at shipyards            and other
industrial        fund activities        have been performed                 by the Navy
and within        some of the shipyards              included       in our review.
We found,       in general,       that    the internal          audit      activities
succeeded       in identifying         supply      management         deficiencies
similar       to those shown in this             report.        Although        internal
audits      and special      studies      identified         the problems           and rec-
ommended corrective            action,      we found that           the recommenda-
tions      had not been fully          implemented         by the shipyards.                In
our opinion,          the weaknesses        that we found would have been
minimized       or eliminated        had the suggested              corrective         action
been taken.

INTERNAL      AUDITS

        The Naval Audit         Service,       in a report          dated January
1968, stated       that Puget Sound shop store                    inventories          ex-
ceeded authorized          stock     levels.         The Naval Audit            Service
concluded     that reducing          these inventories               to authorized
levels    would permit         substantial         curtailment          of replenish-
ment orders       and reduction         in inventory           investment.           It rec-
ommended that the shipyard                perform       quarterly         reviews      of all
shop store      items    in excess of authorized                  stock      levels      and
reduce    stocks     to the prescribed             levels.         In reply       to this
recommendation,        the shipyard          stated       that    shop store         demand
history    cards were reviewed              quarterly        and items         showing      no
use for the past year were considered                        for possible           excess-
ing.     Our review      showed that a quarterly                  listing       of excess
items    was required,         but this      listing        only identified            items
having    no use rather         than those held in quantities                       over
shipyard     stocking      criteria.

       A Naval Audit      Service    report     dated September        1968,
covering     supply   management     aspects      at Pearl    Harbor,    recom-
mended the reduction         of material       excesses     in direct    material
inventories.        As corrective      action,      Pearl   Harbor stated
that   it was reducing       excesses      in its    direct   material

                                               23
account    by transferring      them to the unassigned      material     ac-
count.     In our opinion,      the action     taken was not responsive,
since   the material       was merely  transferred    to another     inven-
tory   account   which was also excess.

        The Naval Audit         Service,      in its January          1968 report      on
Puget Sound, stated           that pre-expended            bins had not been
sufficiently         used for low-value,           fast-turnover        items.     They
estimated       that    shop stores      issuing       costs     could be reduced
an estimated         $170,000    annually       through      increased     use of
pre-expended         bins.    Puget Sound replied              that a special      re-
view of all        shop stores      items with a unit             cost of $2 or
less was being made to supplement                    the continuing        program
already      in effect.       The shipyard         did expand its use of pre-
expended bins.            As mentioned       on page 20, we found that
further      use of pre-expended           bins could be achieved.

NAVY PANEL

        A Secretary       of the Navy Ad Hoc Panel on Industrial
Fund Management,          in a report          dated February         1969, stated
that    industrial      fund activities,             particularly        shipyards,
were obtaining        material        for new construction             long before         it
was required.         This report           stated    that,      under existing        ac-
counting      procedures,        industrial        fund activities          had little
incentive       to return      excess material            to the supply        system.
The Panel recommended              that the Navy study the economic                    im-
pact of long-term           contracting         for bulk-type         material      under
which delivery        and payment would be phased over the entire
construction       period      of a particular            ship.      The Panel rec-
ommended also that activities                   be directed        to stress     programs
for disposal       of excess material.

       Final    implementing         actions    taken on the Panel recom-
mendations      were described          in a report     dated July 1, 1970.
This final      report      noted that progress         billing        over the en-
tire   construction         period     had been instituted.              The feasi-
bility    of phasing        delivery      and providing        incentive      for re-
turn of excess material              is still    being    studied.         Finally,
the report      stated      that a policy      had been put into            effect
which required         taking     periodic    physical       inventories.




                                             24
CONCLUSION

     The problems       which we identified         were similar      to those
previously   identified      by the Naval Audit         Service    and the
Navy Ad Hoc Panel.         However,   as illustrated        in this     report,
only partial    corrective     action   was taken.

        We proposed   that   the Secretary    of the           Navy take action
to ensure that recommendations          from internal             audits  and
studies    be fully   complied   with promptly     or          that reasons    for
rejecting     these recommendations       be approved           by appropriate
command levels.

AGENCY COMMENTS

       The Assistant        Secretary       of the Navy, in commenting             on
our draft      report,     stated    that positive        action     had been
taken to implement           the recommendations          resulting       from in-
ternal    reviews.        He stated     also that     for the past 18 months
the Inspector        General,     during      the inspection        of each ship-
yard y  reviewed       the   implementation       of  each     audit    report   rec-
ommendation,

       The Inspector     General’s   report    will    include    those in-
stances   where action     by the shipyards         has not been consid-
ered satisfactory.        On the basis      of this    report,    shipyards
will   be directed     to take corrective      action     and must period-
ically   report    the progress    of the action       being   taken.




                                           25
                                           CHAPTER 6


                                       SCOPE OF REVIEW
   .u
                 We examined into certain     aspects of supply management
           at naval shipyards     and into the effectiveness      of supply
       i   support provided     to shipyards by the supply system.         Our
           work included    the review of pertinent     inventory    records and
           discussions   with responsible    officials    at shipyards,    at
           supply centers,     and at the Naval Ship and Supply Systems
           Commands.
   n              Our work was performed from October          1969 through     Au-
           gust   1970 at the following  locations:

                  Shipyards:
                       Puget Sound, Bremerton,        Washington
                       Philadelphia,    Philadelphia,      Pennsylvania
                       Mare Island,    Vallejo,   California
                       Pearl Harbor, Honolulu,        Hawaii
                  Supply Centers:
                       Puget Sound, Bremerton,        Washington
                       Oakland, Oakland, California
                       Pearl Harbor, Honolulu,        Hawaii
                  Inventory    Control Point:
                       Ships Parts Control      Center, Mechanicsburg,        Penn-
                          sylvania

                 We used automatic  data processing    equipment to select
  !        items of inventory   at random for review.     The dates on
 I"
,,i#
."         which we selected  our samples fell    between September 1969
*/*        and March 1970, depending on the availability      of data proc-
  I
           essing equipment at the various    shipyards.

                   We used various methods to determine the extent of ex-
           cess material.           In cases where levels had not been estab-
            lished--direct        material    and unassigned direct      material--ex-
           cess was determined           through discussion     with shipyard offi-
           cials as to whether a present or future               need existed      for
           the item.        The appropriate      level of stock which should be
           held for the shop stores account was based on shipyard cri-
           teria,     and on-hand quantities         exceeding this level were con-
           sidered to be unneeded.             Our determination     that insurance
           items were excess was based mainly on whether the item was
           properly      classified     according    to Navy criteria.
.




    APPENDIXES




     27
                                                                      APPEKDIX   I



                         DEPARTMENT              OF THE        NAVY
                           OFFICE     OF   THE     SECRETARY
                           WASHINGTON,             D. C   20350




Xr. Charles M. 3siley                                                     9 FEB 1971
Director,   Deferlse 3ivisj:c;i
3. S. General   Acc0uPtit-g Office
\!ashin&xi,   g. 'T. 2054s

Dear I&r. alley:

    The Swr?tsry   oi‘ Defense has asked me IJO reply to ywr le';tei* (>O
1 December 1970 which forwarded the CA% draft report 9n o,~qortuniti2s
to im_orove supply management at naval shiFTjar5.s.

     I am enclosing   the ;!avy reply        -LG    the i'epwt.




                                            29
                                                  Navy    Reply

                                                         to

                          GAO Draft      Report          of   1 December        1970

                                                         on

                    Opportunities            to    Improve        Supply     Yanagement

                                        at    Naval       Shipyards

                                         (OSD Case j/3209)




IO    GAO Findings
      ----   -___-         and -~~
                                Recommendations

       GAO examined      into certain          aspects     of the supply           management          practices
regarding      the inventory        of industrial          materials         on hand at four shipyards:
Puget Sound, Philadelphia,                Mare Island        and Pearl Harbor.                 Industrial
material     inventories       at these shipyards              were about        $59 million,             or 53%
of the $110 million           total     af all    shipyards.         GAO states          that:       (1) there
was no known shipyard            need for 30% of the inventory                     at these four yards;
and (2) this       excess material,            valued    at over $17 million                had not been
reported     to the naval        supply      system for possible              redistribution              or dis-
posal.     GAO estimates         that disposition            of this unneeded              material        would
eliminate      annual    holding      costs of about           $3.4 million;           also,      if the yards
would make maximum use of Navy procedures                         to reduce        the cost of requisi-
tioning    low value items,           requisitioning           costs     at these yards could be
cut by $1.3 million           annually.         GAO states        that internal            audits      and Navy
studies    of supply       management        at shipyards         identified         similar        weaknesses,
but recommendations           had not been fully             implemented         by the shipyards.
GAO makes seven recommendations                   which are discussed              below.

II.     Navy7I,'osition
                 --

        The Navy      concurs  with          Recommendations               2 through   7, and with     the
objectives    of      Recommendation            1.

          The Navy has been working        diligently       to achieve     more               effective     and
efficient       operations     through  improved      supply   management.                    The following
actions,      discussed     in more detail      in connection      with the                 individual
recommendations          of the report,    are considered       indicative                  of those the
Navy has taken or is in the process                 of taking   relative     to               material
management.

            1.   Continued    emphasis    on the                   reduction       of NW (Navy Industrial
Fund) inventories.         As of 30 September                      1970 NIF inventories         at the ten
naval  shipyards     were about    $82 million,                      a reduction       of about   $28 million
since  31 December 1969,         A continuation                      of this     trend   in the reduction           of
NIF inventories      is expected,
                                                                                               Enclosure        (1)
                                                                                            APPEIWIX           I


           2.    Consolidation        of NAVSHIPS policies              and procedures         for the
management     of NIF and NIF related             materials      at the naval        shipyards.
NAVSHTPS Instruction         7600.62     of 28 December          1970 consolidates           into    one
cohesive   instruction        of seventeen        chapters     the total      policy      of NAVSHIPS
for the management        of NIF materials.             Ten existing       instructions          are
canceled   by this     one.      This   directive       provides      the  guidance       to   the
shipyards    to correct       several    of the problems           noted   in the report.

            3. Institution      of a number of                projects      within   the     framework
of the SMP (Shipyard       Management    Program)              for the      improvement        of material
management.    The primary      projects    are:

              SMP Item B3.1,
              LI_--.                  Development       of a single        manual to be used on
              a common basis         by all naval       shipyards       for the internal             manage-
              ment of material.            This will      be in the playscript              format     and
              will    be to a level        of detail      for most functions,             sufficient
              to constitute        desk instructions           for individuals          responsible
              for performing         assigned    duties.         When completed,          this Material
              Management       Manual will      provide      the detailed        instructions          for
              total     management      of NIF materials          and will     provide        a firm
              basis     for auditing       the shipyard        material      management        performance.
              It is planned        that    this Manual will          replace    all material
              instructions       in the shipyards           and provide       one well integrated
              document      for shipyard       material      management.

              SMP Item B3.5.
              -IL--               Standardize       the functions              of Material   Control
              Centers   at the naval      shipyards    to achieve              the most effective
              operation   in this    area.

              SMP Item B3.6
              -----o           Develop    revised               shop stores     stocking    procedures
              for use at all naval    shipyards.                  When completed      this will
              form the shop stores    chapter     in            the Material     Management     Manual.

              SMP Item B3,7.
              11---                 Optimize        utilization         of the     pi-e-expended     bin
              material      through  review        of present       utilization         and present
              policy   and establishment             of revised       definitive        guides   for
              future   utilization.

               SMP
                ._.- .__Item
                         -_-_l_ B3.8.  Establish     and implement    effective      procedures
               for the proper         control     and accountability      of material      removed
               from ships during           overhaul   and conversion.

               SMP Item B3.9
               _---__.-*               Develop     and implement    procedures   which will
               result     in the delivery        of the right    amount of the proper
               material     at   the time     it is required     for the shipwork      being
               performed,      thereby     precluding     the accumulation     of residual
               DMI (Direct       Material     Inventory).

               4.      Issued NAVSHIPS Instruction        4614.1C  of 9 November      1970 on
 priorities         to be used for ordering      material     for shipyard    work that
 defines      the priorities       in terms that    the shipyard     uses to manage the
 shipyard       effort     vice terms related    to ship operational       readiness.


                                                       31
APPENDIX          I


This should    reduce abuses of the priority    system and provide    a base
against  which meaningful    audits of shipyard    performance in this   area
can be evaluated.

         The Naval Ship Systems Command (NAVSHIPS) has and will                         continue      to
institute     corrective     action   as the need indicates             and, as reflected           in
the detailed       comments that follow,          is taking     aggressive       action      with
respect     to the recommendations          contained     in this     report.       However,      all
the actions      that    are taken must of necessity            be tempered       by the fact         that
shipyards     must retain      their  ability       to guarantee      that    scheduled       work can
proceed     in a timely     and orderly       manner.

       --Recommendation  1.    Requisition           material      on the basis       of when it         is
needed on the job so that        lengthy          holding     of   the material       prior  to
actual     use can be avoided.

       Comment:
       __-____

       Concur fully   with the objectives   of the                 recommendation.           This is a
very   complex problem    with many areas requiring                   resolution       far beyond the
data   stated  in the report.    NAVSHIPS efforts                  in this      regard    include:

               1,   Issuance    of the improved      priority    system for ordering
materials        in naval shipyards,       NAVSHIPS Instruction         4614,lC.      The impor-
tance of such a priority             system cannot     be overemphasized         because it is
this    priority      number and not a required          date that    the Supply System
uses as a basis         of furnishing      the material.

             2.  Development      of procedures         for the ordering      of material     (SMP
Item B3.9).      The Boston Naval Shipyard              has been tasked by NAVSHIPS to
develop     such procedures.        Completion      of the task is currently         scheduled
for mid 1971.       The final     product     will,     after   review   by NAVSHIPS and all
the shipyards,      form a part of the Material               Management    Manual.    Consider-
able effort     has already      been expended        in identifying      the problems     in
the material     ordering     process.

            3.    Development      of an interface         in the standard           shipyard      MIS
(Management     Information      System) between         the production          work scheduling
programs    used by the shops and the material                  status     reporting       system
such that the required          date for material          identified        to a key operation
on which it is to be used can be updated                   automatically         whenever      a
change in production         schedules      is made,       This will       provide      the Supply
Department     personnel    with the latest         information          on material       require-
ment dates;     thus expediting        or alternative         action      can be taken for
material    in a timely     manner.        Data processing          program    changes were
distributed     to all shipyards         in December 1970 to permit                use of this
capability.

       Recommendation
       __-~                   2.     Establish    stocking      levels  for shop       stores     inven-
tories    consistent       with    leadtimes     required     to obtain    material       from    supply
sources,



                                                    32
                                                                                           APPENDIX         I



        Recommendation      3.  Establish             procedures     to assure    that  demand data
is adjusted      to reflect    material           returned      to inventories      and that  the
returned     material    is considered            in making subsequent         procurements,

       Comment:

        Concur.        Shipyard    Management          Program Item I-B3.6,             assigned      to Puget
Sound Naval Shipyard            and scheduled            for completion        in June 1971,
specifies       an analysis       of stocking          policy.        However,    in view of the
magnitude       of the problem         outlined        in the GAO report,           this     Command will
re-emphasize         the objectives          of Item       I-B3.6     to assure     that     the stocking
policy     developed       from this       study gives adequate             consideration         to the
leadtimes       required      to obtain        material       from supply       sources      and to the
adjustment        of demand data to reflect                  material    returned        to inventories.
When revised         stocking     criteria        are developed         and agreed upon as a result
of this      study,     NAVSHIPS will          direct      all shipyards       to prepare        a plan
incorporating          these criteria,

       &commendation             4.      Issue more specific        guidelines       for   the   disposi-
tion   of material        left        over from completed        jobs.

         Recommendation       5.     Require    shipyards   to promptly     identify    and report
excess material          to the Supply       System for redistribution         to other    Govern-
ment customers         or disposal       if the material      is no longer     needed,   and
initiate      operational       standards     and a reporting     system    which would ade-
quately      measure      the action     of shipyards     to keep inventories        to a minimum.

        Comment:

        Concur.       NAVSHIPS Instruction         7600.62      of 28 December 1970 provides
the procedures           to be used to assure        expeditious      disposition       of excess
materials,        establishes     firm guidelines        for placing      materials       in the DMI
account,     and sets up annual          inventory      and reporting       requirements       for
this    account.         It is expected     that    this instruction        should    substantially
eliminate       the problems      discussed      in the GAO report,

        In addition,        to further      expedite     the disposition      of excess mate-
rials,    NAVSHIPS has initiated             a change to the present          shipyard     MIS
report     on excess material           to permit    print-out      of this   report     on key
operation        closeout     vice job order closure           as at present.        This will
permit     initiation       of disposal      action   on much excess material,            weeks
and months earlier            than at present,       and is expected        to have a major
effect     on reducing        DMI inventories.        Systems analysis        of this     change as
a part of an overall             improvement      of productive      work management       has been
completed.           Programming     of the change will         commence in the near future.

        Recommendation
        ---                      6.    SECNAV require     shipyards    to fully  utilize
current     Navy policy          regarding   the bulk-issue        of material  valued    at $2
or less and consider               extending   policy   to cover items perhaps         up to a
value of $10.




                                                       33
    APPENDIX I

            Comment :

            Concur.        NAVSHIPS has already           taken action         in this area.             SMP Item
    I-B3.7     assigned      to Pearl Harbor          Naval Shipyard,          and scheduled           for
    completion        in early    1971 has as its objective,                 the optimum utilization
    of pre-expended          bin material.           Based on the initial            report       of this
    study3 NJ%VSHIPS Instruction               7600.62      authorized       shipyards        to pre-expend
    material      up to a unit       value of $10.00.              In addition,        this     instruction
    contains      effective      guidelines        for maximizing        the use of pre-expended
    bins.,     This does not mean however,                that     all issues      of material          under
    this unit       value should be handled              by the pre-expended             bin procedures,
    because     some specific         items (e,g.,        pilferable       items)      require       internal
    control     by the specific          shipyard,

i          Recommendation
           .-----                7. SECNAV take the necessary        action   to assure    that
    recommendations       resulting   from internal     audits    and studies    are fully
    complied      with in a timely    manner,   or that    reasons   for rejection     be
    approved      by Command levels.

            Comment:
            --__

            The Navy has and will                 continue         to take action          to ensure         that    the
    findings       and recommendations                in internal           audits      are reviewed,          and where
    applicable,         that positive           action       is taken to implement                the recommenda-
    tions.        Shipyard       management         responses          are critically         reviewed         by appro-
    priate      Headquarters           and higher         level      personnel        to ensure that corrective
    action      is taken or planned.                  In addition,           for the past 18 months as a
    part of the NAVSHTPS Inspector                        General       (triennial)        Command Inspections
    of each shipyard,              the implementation                of each audit         report       recommendation
    since the previous               inspection         is reviewed          by the inspection             team.      When
    implementation             is not considered             to be satisfactory,              an appropriate
    recommendation             is included        in the inspection                report,    which,       when approved,
    becomes a NAVSHIPS final                  directed         action , and requires              periodic        progress
    reports       until     the corrective            action      has been completed.                 Further      progress
    in obtaining          full     compliance        with audit           recommendations           is anticipated
    as each shipyard              Command inspection              is completed.




                                                              34
                                                     APPENDIX II


                  PRINCIPAL OFFICIALS OF
               THE DEPARTMENTOF DEFENSEAND

                THE DEPARTMENTOF THE NAVY

           RESPONSIBLE FOR THE ADMINISTRATION OF

            ACTIVITIES   DISCUSSED IN THIS REPORT


                                            Tenure of office
                                            From             To
                                                             -
                   DEPARTMENT
                           -. OF DEFENSE
                                  --
SECRETARYOF DEFENSE:
   Melvin R. Laird                   Jan.     1969    Present
    Clark M. Clifford                Mar.     1968    Jan.    1969
   Robert S. McNamara                Jan.     1961    Feb. 1968

DEPUTY SECRETARYOF DEFENSE:
   David Packard                     Jan.     1969    Present
    Paul H. Nitze                    July     1967    Jan.    1969

ASSISTANT SECRETARYOF DEFENSE
  (INSTALLATIONS AND LOGISTICS):
     Barry J. Shillito               Feb.     1969    Present
     Thomas D. Morris                Sept.    1967    Jan.    1969


                  DEPARTMENTOF THE NAVY
                                     -
SECRETARYOF THE NAVY:
   John H. Chaffee                   Jan.     1969     Present
   Paul R. Ignatius                  Sept.    1967     Jan.    1969

UNDERSECRETARY OF THE NAVY:
   John W. Warner                    Feb.     1969     Present
    Charles F. Baird                 Aug.     1967     Jan.    1969

ASSISTANT SECRETARYOF TIHE NAVY
  (INSTALLATIONS AND LOGISTICS):
     Frank P. Sanders                Feb.     1969     Present
     Barry J. Shillito               Apr.     1968     Jan.    1969


                              35
APPENDIX II


                                        Tenure of office
                                        From            -To
                  DEPARTMENTOF THE NAVY (continued)

ASSISTANT SECRETARYOF THE NAVY
  (INSTALLATIONS AND LOGISTICS)
  (continued):
     Vacant                          Feb.   1968    Apr.          1968
     Graeme C. Bannerman             Feb.   1965    Feb.          1968

CHIEF OF NAVAL OPERATIONS:
    Adm. Elmo R. Zumwalt, Jr.        July   1970    Present
    Adm. Thomas H. Moorer            Aug.   1967    June 1970

CHIEF, NAVAL MATERIAL COMMAND:
    Vice Adm. J. D. Arnold           Aug.   1970    Present
    Adm. Ignatius J. Galantin        Mar.   1965    July    1970

COMMANDER,NAVAL SHIP SYSTEMS
  COMMAND:
    Rear Adm. N. Sonenshein          Aug.   1969    Present
    Rear Adm. Edward J. Fahy         Feb.   1966    July    1969

COMMANDER,NAVAL SUPPLY SYSTEMS
  COMMAND:
    Rear Adm. Kenneth R. Wheeler     July   1970   Present
    Rear Adm. B. H. Bieri, Jr.       Aug.   1967   June 1970




                                                   U.S.   GAO Wash.,   D.C.

                                36