oversight

Army Inventories--Inaccuracies, Effects, and Ways to Improve

Published by the Government Accountability Office on 1971-02-26.

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

                                                 3
REPORT TO THE CONGRESS
                      f-44.
                            IIlllllllllllllll~~~l~~~~
                                             llllllilillll
                                                    yJ k




Army Inventories-
Inaccuracies, Effects, And
Ways To Improve 8-146828
Department   of the Army




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES


                           ,.FEB.26,197      1
                   COMPTROLLER     GENERAL     OF      THE    UNITED   STATES
                                 WASHINGTON.    D.C.     20548




     B- 146828




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

              This is our report   on Army    inventories--inaccuracies,
     effects,    and ways to improve.    Our examination         was made
     pursuant     to the Budget and Accounting      Act, 1921 (31 U.S.C.
     53), and the Accounting     and Auditing    Act of 1950 (31 U.S.C.
     67).

            Copies of this report   are being sent to the Director,
     Office  of Management     and Budget; the Secretary  of Defense;
     and the Secretary    of the Army.




                                               Comptroller                General
                                               of the United              States




                         50TH ANNIVERSARY                    1921- 1971
COMPTROLLERGENERAL'S                       ARMY INVENTORIES--INACCURACIES,          EFFECTS,
REPORTTO THE CONGRESS                      AND WAYS TO IMPROVE
                                       1   Department of the Army 20
                                           B-146828


DIGEST
------

WHYTHE REVIEWWASMADE
       To make sound decisions    on the allocation    of Federal resources,         the
       Congress and Federal administrators      must have timely     and accurate       data.
       Data on inventory   levels  is an example.    If the information        is incor-
       rect,  funds may be used for unneeded supplies      at the expense of other
       defense programs,   or, funds could be incorrectly      diverted     from the sup-
       ply area with resulting    impairment   of the Nation's    readiness      position.

       A 1967 General    Accounting   Office    (GAO) report    on Department     of Defense
                                     (B-146828)    described    extensive    inaccuracies
                                      1966, because the inventory         records were
       wrong, $1.8 billion    of adjustments      (up or down) were made--17.6          percent
       of the $10.4 billion     average DOD continental        United States inventory
       for that year.     In other words, DOD thought        that it had $835 million         of
       inventory  that did not exist;       DOD also found $1 billion        of inventory
       that it did not know it had.

       The Army had the highest    adjustment  ratio   within   DOD--23.5 percent,  or
       $375 million of an average inventory      of $1.6 billion.      One major weak-
       ness was the Army's failure     to make regular    physical  inventories.

       DOD, as a result    of the 1967 GAO report,      prescribed     new procedures     to
       improve the accuracy of recorded      inventories.         This review of Army in-
       v~~~~~c~d~~r~s~~~~~t~e~~~~~~~~~~~~~~~              ,th a t GAO w-j 11 be maki ng i n
       all of the services     and the Defense Supply Agency to determine            the
       effectiveness    of DOD's improvements.


FIN?IcGS AND CONCLUSIONS
       The Army is now attempting     to schedule and take physical       inventories   on
       a regular   basis,  and its depots seem to be doing a good job in the
       physical  inventory   program.    Significant    improvement in the accuracy of
       inventory   control  point records,     however, was not achieved.       (See p. 8.)

       Army inventories   in the continental      United States grew to $3 billion      in
       1969.   The adjustment   ratio    also grew--27.7  percent,  or $830 million.
       In other words, the Army thought       it had $439 million   of inventory     in
       1969 that did not exist;      the Army also found $391 million     of inventory
       in 1969 it did not know it had.        (See p. 7.)


Tear Sheet
In Europe, adjustments  of $43 million  were necessary  in 1969--an error
ratio of 58 percent for an average inventory  of $1.1 billion.    (See p. 7.)

Those errors were found through regularly          scheduled physical       inventories.
The records also had to be adjusted        by another      $773 million    because of
special  physical   inventories     during the year.       Thus, the gross adjust-
ments during the year were $1.4 billion.           Similar    to the situation       in
the United States,     the Army thought it had $648 million           of inventory
that did not exist.       The Army also found $768 million         of inventory      that
it did not know it had.         (See pp* 7 and 8.)

Record accuracy was not improved because the Army underestimated                 the
magnitude of the task.        As a result9   resources  provided--personnel           and
automatic    data processing     equipment and programs--were      either    insuffi-
cient   or ineffectively     applied.    (See p. 14.) Factors      contributing        to
that situation      were

  --scheduling   of physical    inventory work       loads at depots without ade-
     quate consideration     of available data       processing and manpower re-
     sources (see pp- 11, 12, 23 and 24);

  --failure      of inventory  control    points  to use statistical         sampling
      techniques    to minimize their     work loads (see p. 27);          and

  --lack    of quality    control over stock     record accuracy at inventory      con-
      trol  points   to reduce daily errors      in recording   inventory transac-
     tions.     (See p. 31.)

Consequently:

  --Inventory    schedules    could   not be adhered     to.       ([See pp* 10 and 11.)

  --Reconciliation      and adjustment of inventory            records   were not     accu-
     rate or timely.      (See p. 14.1

  --Research  necessary   to identify the causes of inventory                errors     could
     not be accomplished.    (See pp. 25 and 26.)

  --Controls    to ensure that records       are kept    accurately       were not fully
     implemented.     (See p. 31.)

The Army Materiel  Command's inventory-monitoring        team and other Army
internal review groups found and reported       on matters   similar  to those
found by GAO. (See p- 33.)
                                                                                                I
Price tagging  the total   adverse effects    of inaccurate   inventory    records
is impossible,   but the cost must be high.       For example, if stock exists
but is not on the inventory     record9  an inventory    manager may decide to
buy unneeded stock.     When the unrecorded    stock is found later     by
      inventory,     the manager may be forced to dispose of excess stock at a
      loss.      Conversely,    if the inventory    manager thinks he has stock,  he
      will not replace it.         When that stock is needed, it cannot be supplied
      to the troops.         GAO has found that such adverse effects     can and do hap-
      pen because of reliance         on inaccurate   data.   (See pp. 8, 21, 22, and 23,)


RECObiWENDATIONSOR SUGGESTIONS

     To improve the accuracy of the Army's                 inventory   records for meaningful
 =J, management and legislative      decisions,            the Secretary    of Defense should                      .r
     require  the Secretary    of the Army to

         --ensure    that scheduling   procedures          for     physical      inventories          are fully
            understood    (see p. 13);

         --adequately     plan the effort, determining the resources                            available     in
            relation    to the job to be done (see pp. 24 and 28);

         --allocate     sufficient     resources    to do the job             (see pp. 24 and 28);

         --clarify   Army depot research procedures,   establishing  firm                            selectl'on
            criteria  and stressing  the need to uncover the underlying                              causes
            (see p. 28);

         --explore  use of statistical          sampling         to select      items     for     research
            (see p. 28);

         --establish  quality        control   procedures         at inventory          control      points
            (see p. 32); and

         --resolve     the many deficiencies   reported  by the Army Materiel                           Command
            inventory-monitoring      team and other internal  review groups.                            (See
            p. 33.) -


AGENCY ACTIONS AND UNRESOLVEDISSUES

      The Army generally     agreed with GAO's findings,      conclusions,   and recom-
      mendations and has-initiated       action on each of the recommendations.
      !See pp. 39 to 47.)      GAO believes    that the Army's actions,    if effective'&
      implemented and pursued on a continuing          basis, will bring about sub-
      stantial   improvements    in inventory    record accuracy.


MATTERS FOR CONSIDERATION BY THE CONGRESS

      GAO is reporting   this matter to the Coniress because of its continuing
      interest  in the adequacy of management control         over mil.jtary inven-
      tories.   Recent and anticipa+ted  budgetary    restraints    require  particular
      emphasis on accurate    data to make meaningful      choices among alternatives.
Tear Sheet
                        Contents
                                                              Page

DIGEST                                                          1

CHAPTER

  1       THE PHYSICAL INVENTORYPROGR!W                         4

  2       CONDITION OF THE INVENTORYRECORDSAND
          WHATITMEANS                                           7

  3       PHYSICAL INVENTORIES--THE PROCESSTO DETER-
          MINE WHAT QUANTITIES EXIST                           10
              Inventory   scheduling                           10
              Inventory   counting                             12
              Conclusions                                      12
              Recommendation                                   13

  4       RECONCILIATIONSAND ADJUSTMENTS--CORRECTING
          TflE RECORDS                                         14
               Depot recondiliations      and adjustments      14
                    CONUSdepots                                14
                    European depot                             15
               Inventory   control   point reconciliations
                  and adjustments                              17
                    Reconciliation    and adjustment delays    17
                    Erroneous adjustments                      19
               Adverse effects                                 21
               Conclusions                                     23
               Recommendations                                 24
  5       RESEARCH--FINDING OUT WHY THE RECORDSWERE
          WRONG                                                25
             Depot research                                    25
              Inventory  control point research                25
             Conclusions                                       27
             Recommendations                                   27
  6       QUALITY CONTROL--THEWAY TO KEEP THE RECORDS
          ACCURATE                         r                   29
             Depot quality    control                          29
             Inventory   control point quality control        31
             Conclusions                                      31
             Recommendations                                  31
CHAPTER                                                         Page
       7   REVIEWINGACTIVITIES                                  33
               Recommendation                                   33

   8       AGENCYCOMMENTS                                       34

   9       SCOPEOF REVIEW                                       36

APPENDIX

       I   Letter of September 14, 1970, from the Deputy
             for Supply, Maintenance and Transportation,
              office of the Assistant   Secretary of the
             Army (Installations    and Logistics)              39

  II       Principal    officials   of the Department of
              Defense and the Department of the Army
              responsible     for administration  of activi-
              ties discussed in this report                     48

                             ABBREVIATIONS

AMC        Army Materiel     Command

ADP        automatic     data processing

CONUS      continental     United   States

DOD        Department     of Defense

GAO        General Accounting       Office
PEW        Procurement     of Equipment and Missiles,    Army
COMPTROLLERGENERAL'S                     ARMY INVENTORIES--INACCURACIES,          EFFECTS,
REPORTTO THE CONGRESS                    AND WAYS TO IMPROVE
                                         Department of the Army
                                         B-146828


DIGEST
------

WHYTHE REVIEWWASMADE
    To make sound decisions    on the allocation    of Federal resources,        the
    Congress and Federal administrators      must have timely and accurate          data.
    Data on inventory   levels is an example.     If the information       is incor-
    rect,  funds may be used for unneeded supplies      at the expense of other
    defense programs, or, funds could be incorrectly        diverted    from the sup-
    ply area with resulting    impairment   of the Nation's    readiness     position.

     A 1967 General Accounting         Office    (GAO) report  on Department     of Defense
     (DOD) inventory      controls    (B-146828)    described  extensive    inaccuracies
     in inventory     records.     In 1966, because the inventory        records were
     wrong, $1.8 billion        of adjustments     (up or down} were made--17.6        percent
     of the $10.4 billion        average DOD continental      United States inventory
     for that year.       In other words, DOD thought that it had $835 million               of
     inventory    that did not exist;        DOD also found $1 billion      of inventory
     that it did not know it had.

     The Army had the highest adjustment  ratio within     DOD--23.5 percent,  or
     $375 million of an average inventory   of $1.6 billion.      One major weak-
     ness was the Army's failure  to make regular  physical    inventories.

     DOD, as a result      of the 1967 GAO report,    prescribed   new procedures   to
     improve the accuracy of recorded inventories.            This review of Army in-
     ventory    procedures   is the first   follow-up  that GAO will be making in
     all of the services       and the Defense Supply Agency to determine       the
     effectiveness      of DOD's improvements.


FIN?INm, AND CONCLUSIONS
     The Army is now attempting     to schedule and take physical       inventories   on
     a regular   basis,  and its depots seem to be doing a good job in the
     physical  inventory   program.    Significant    improvement in the accuracy of
     inventory   control  point records,     however, was not achieved.       (See p. 8.)

     Army inventories   in the continental     United States grew to $3 billion      in
     1969.   The adjustment   ratio   also grew--27.7  percent,  or $830 million.
     In other words, the Army thought it had $439 million        of inventory     in
     1969 that did not exist;      the Army also found $391 million    of inventory
     in 1969 it did not know it had.       (See p. 7.)
In Europe, adjustments   of $643 million were necessary  in 1969--an error
ratio  of 58 percent for an average inventory  of $1.1 billion.   (See p. 7.)

Those errors   were found through regularly        scheduled physical       inventories.
The records also had to be adjusted        by another      $773 million    because of
special  physical   inventories     during the year.      Thus, the gross adjust-
ments during the year were $1.4 billion.           Similar    to the situation       in
the United States,     the Army thought    it had $648 million        of inventory
that did not exist.       The Army also found $768 million         of inventory      that
it did not know it had.         (See pp. 7 and 8.)

Record accuracy was not improved because the Army underestimated                 the
magnitude of the task.        As a result,   resources  provided--personnel           and
automatic    data processing     equipment and programs--were      either    insuffi-
cient or ineffectively       applied.    (See p. 14.) Factors      contributing        to
that situation    were

  --scheduling   of physical    inventory work loads at depots without ade-
     quate consideration     of available data processing and manpower re-
     sources (see pp. 11, 12, 23 and 24);

  --failure      of inventory   control      points  to use statistical        sampling
      techniques    to minimize   their      work loads (see p. 27);         and

  --lack     of quality    control over stock       record accuracy at inventory      con-
      trol   points   to reduce daily errors        in recording   inventory transac-
      tions.     (See p. 31.)

Consequently:

  --Inventory    schedules    could       not be adhered   to.       (See pp. 10 and 11.)

  --Reconciliation      and adjustment of inventory              records   were not     accu-
     rate or timely.      (See p. 14.1

  --Research  necessary   to identify the causes of inventory                  errors     could
     not be accomplished.    (See pp. 25 and 26.)

  --Controls    to ensure that records          are kept   accurately      were not fully
     implemented.    (See p. 31.)

The Army Materiel  Command's inventory-monitoring        team and other Army
internal review groups found and reported       on matters   similar  to those
found by GAO. (See p. 33.)

Price tagging the total   adverse effects    of inaccurate   inventory    records
is impossible,  but the cost must be high.       For example, if stock exists
but is not on the inventory    record,  an inventory    manager may decide to
buy unneeded stock.    When the unrecorded    stock is found later     by




                                      2
    inventory,     the manager may be forced to dispose of excess stock at a
    loss.      Conversely,    if the inventory     manager thinks he has stock,  he
    will not replace it.         When that stock is needed, it cannot be supplied
    to the troops.         GAO has found that such adverse effects      can and do hap-
    pen because of rel$atce         6n'in&dctirate   data.   (See pp. 8, 21, 22, and Z!ZL)


RECOMMENDATIONSOR SUGGESTIONS

    To improve the accurzicj of the Army'j                inventory   records for meaningful
    management ,and legislative       decisions,          the Secretary'   of Defense should
    require    the Secretary    of the Army to                _
                             .a
       --ensure    that scheduling    procedures          for     physical      inventories           are fully
          understood    (see p. 13);

       --adequately     'plan the effort, determining the resources                            available     in
          relation    to the job to be done (see pp. 24 and 28);

       --allocate     sufficient   resources      to do the job              (see pp. 24 and 28);

       --clarify   Army depot research procedures,   establishing  firm                             selection
          criteria  and stressing  the need to uncover the underlying                               causes
          (see p. 28);
                                                                                                                  ..__
       --explore  use of statistical           sampling         to select      items     for     research
          (see p. 28);

       --establish  quality  control      procedures             at inventory          control      points
          (see p. 32); and _

       --resolve     the many deficiencies   reported   by the Army Materiel                           Command
          inventory-monitoring      team and other internal   review groups.                            (See
          p. 33.9 .


AGENCY ACTIONS AND UNRESOLVEDI$SUES

     The Army generally     agreed with GAO's findings,      conclusions,    and recom-
     mendations and has initiated       action on each of the recommendations.
     (See pp. 39 to 47.)      GAO believes    that the Army's actions,     if effectively
     implemented and pursued on a continuing          basis, will   bring about sub-
     stantial   improvements 'in inventory      record accuracy.


MATTERS FOR CONSIDERATION BY- THE CONGRESS

     GAO is reporting   this matter to the Congress because of its continuing
     interest  in the adequacy of management control      over military inven-
     tories.   Recent and anticipated  budgetary  restraints    require particular
     emphasis on accurate data to make meaningful      choices among alternatives,
                                      CIJAPTER1

                    THE PHYSICAL INVENTORY--PROGRAM

         Managing the far-flung      Army supply system which pro-
vides support to troops throughout            the world is a gigantic
and costly task involving       thousands of items and billions            of
dollars.     To  do this job   effectively       and  economically,    deci-
sionmakers must have up-to-date,           accurate,     and reliable   data;
they must know what stock they have, where the stock is lo-
cated, and the condition       of the stock.         This means that they
must have accurate inventory         records.      Essential    to this is
a sound and workable physical          inventory     program.
       What represents a sound and workable physical inventory
program? In simple terms, we think that it includes:

       --Adequate planning and scheduling of physical      inven-
          tories which, as a minimum, should include determi-
          nations of anticipated   work loads and resources
          needed and available   to do the job.

       --Proper     identification         and accurate        counting     of stock.

       --Control     over transactions          affecting       stock quantities
          during    counts.

       --Timely and accurate            reconciliation         and adjustment          of
          records.
       --Research       to find      out why the records         were wrong.

       --Elimination       of the underlying         causes for       record     er-
          rors.

       --Keeping       the records      accurate    after     correction.
       --Reviewing     the program to provide               timely   reporting     of
          deficiencies    to top management.

        As of December 31, 1969, the Army was managing 816,000
items--357,000   items it stocked and 459,000 items it did not



                                          4
stock.   For Continental    United States (CONUS)lalone, the
value of stocked inventory      was $10.4 billion.   Because the
357,000 stocked items are located in various depots through-
out the world, millions     of individual  pieces must be stored,
accounted for,  and   inve$ntoried.'
       To cope with this colossal      task, Army Materiel   Command
(AMC) was designated     as the -agency to manage the CONUSphys-
ical inventory  program.     The principal     AMC inventory  activi-
ties that carry out the.physical       inventory   program are its
seven inventory   control points and 19 depots.

       Because these activities     are independent of each other
and responsible   .only to AMC,  a  high   degree of coordination
is necessary in carrying     out the inventory     program.   For
example,   in February  1969  each  of  the  seven  inventory   con-
trol points had stock stored in 12 or more of the 19 depots.
       To assist in its overall     review of the physical        inven-
tory program, AMC established      an inventory-monitoring        team.
This team was directed     by AMC to review resources,        schedules,
and overall   program status so that top management would have
timely information   on obstacles     to the physical     inventory
program.    The team visited   various depots and inventory          con-
trol points and made significant        recommendations for correc-
tive action.

        The Army also has inventory   control   agencies overseas.
In Europe it is the Theater Army Support Command. It has
one inventory   control point that stores stock in eight major
depots.    Seven are under the control    of the inventory   con-
trol point.

         The inventory     control.points   are responsible    for sys-
temwide control       of designated categories     of similar    stock
items.      They determine availability      for issue, facilitate
distribution,       and provide the overall management for stock
under their control.          Thus, their primary responsibility       in
the physical      inventory    program is maintenance of accurate
inventory     records.      They must know, at any point in time,
what stock is available         and where the stock is located.

1Includes   major   items--tanks,    trucks,   trailers,    etc.

                                     5
        The depots are responsible   for      storing and protecting
stock and for maintaining    records of       storage locations.
Thus, their primary responsibilities          in the physical     inven-
tory program are to know where stock          is located,   to have ac-
curate records on the stock, and to         take physical     inven-
tories.
         Accurate records at both inventory         control points and
depots are vital.        If the inventory    control    point records
are inaccurate,     the control point cannot meet its responsi-
bilities    for directing     the worldwide distribution      of stock
to the troops.      If the depot records are inaccurate,          the de-
pot cannot meet its responsibilities           for locating   stock and
filling    orders of the inventory      control points.




                                                                                ~
                                                                               ,‘.
                                                                              : .:
                                                                            . . .




                                     6
                                 CHAPTER2

      CONDITION OF THE INVENTORYRECORDSAND WHAT IT MIUNS

        Managing Army inventories       involves critical       day-to-day
decisions    concerning such vital       matters as what to stock,
what to buy, what to repair,         and what to dispose of.           These
decisions    affect   funds requested.and       appropriated      which
have a direct bearing on allocation            of Federal resources.
If funds are unnecessarily        diverted     to stockage of supplies
because of reliance       on bad data, other Defense programs may
suffer.     Conversely,    if funds are diverted        incorrectly     from
the supply area because of bad data, our Nation's                 readiness
position    may be Smpaired.

        Each supply management decision         is based in some way on
stock quantities        shown in inventory    records.      In the past,
we found that these records were seriously              inaccurate.    This
situation    still    exists.     In 1966, 23.5 percent ($375 million)
of the $1.6 billion1          of average Army inventories       in CONUS
required adjustment because the inventory             records were
wrong.     In 1969 the inventories        grew to $3 billion.1       The
adjustment ratio which was 27.7 percent,            or $830 million
also grew.       In other words, the Army thought that it had
$439 million       of inventory     that did not exist;     the Army also
found $391 million        of inventory    that it did not know it had.

      In Europe, adjustments      of $643 million     were necessary
in 1969 because of incorrect        records found through regular
scheduled physical    inventories--     an error ratio of 58 percent
for an average inventory      of $1.1 billion.*       The records also
had to be adjusted by another $773 million          because of spe-
cial inventories   during the year.        Thus, the gross adjust-
ments during the year were ‘$1.4 billion--exceeding           the
average inventory   value by $.3 billion.         Similar to the


1Excludes      major   items,   such as tanks,   trucks,   and trailers,
2
    Includes   major   items,   such as tanks,   trucks,   and trailers,




                                       7
situations    in CONUS, the Army thought it had $648 million
of inventory     that did not exist; the Army also found $768
million    of inventory  that it did not know it had.

       If the stock exists but is not on the inventory       record,
an inventory      manager may decide to buy unneeded stock.
When the unrecorded stock is found by inventory,        the mana-
ger may be forced to dispose of excess stock at a loss.
Conversely,     if the inventory   manager thinks that he has the
stock, he will not replace it.        When the stock is needed,
it cannot be supplied.       For an urgent troop requirement,
this can be costly.       To meet such needs, the inventory    man-
ager may be forced to take special measures, such as canni-
balizing    items for parts or making small quantity     purchases.

       The Army has had to make extensive use of special and
costly procedures to get urgently       needed supplies to the
troops for several years.        These have included "Red Ball,!'
a special processing     system for Vietnam; "Fast Fix," a spe-
cial processing    system for&rope;     and "Quick Fix,"' a special
processing   system for the United States.        Better records
should enable a reduction      in the need for such special sys-
terns.

       Inaccurate  inventory records may not be the only cause
of the Army's supply problems, but there seems to be a cor-
relation    between lack of improvement in inventory records
and a lack of improvement in supply effectiveness.

      For example, in 1966 the Army could fill       only 68 per-
cent of its orders on time.    In 1969 it could      fill only 61
percent of its orders on time.
      The new procedures prescribed       by the Army, since the
1967 General Accounting Office report,         to improve record ac-
curacy are generally    adequate.     The Army is also now sched-
uling and taking physical     inventories     on a regular basis
and its depots generally     seem to be doing a good job in the
physical  inventory  program.     Despite these achievements,
however, significant    improvement in the accuracy of inven-
tory control point records has not resulted.           These are the
records used to make critical      day-to-day    supply decisions.
Those improvements which were made by the Army and the
reasons why the Army was not able to substantially  improve
the accuracy Of its inventory records are discussed in the
following  chapters.
                              CHAPTER3

             PHYSICAL INVENTORIES--THE PROCESSTO

                 DETERMINEWHAT QUANTITIES EXIST

     A sure way of determining       what quantities    exist is to
schedule physical inventories       and to correctly    count all
stock on hand.

      In 1966 one major weakness was the Army's failure          to
accomplish regular periodic    physical  inventories.      Although
the Army is now scheduling    and taking physical     inventories
on a regular basis , proper scheduling of physical        invento-
ries is still  a problem, and more emphasis must be given to
greater accuracy in counting.

INVENTORYSCHEDULING
       Prescribed     scheduling procedures are generally      adequate.
Quarterly,      depots advise each inventory    control point of the
number of items that they can inventory         for the control
point in the next quarter.         Reported depot inventory     capa-
bility    for each inventory     control point is based on the num-
ber of items stored for the inventory         control point in re-
lation to the total number of items stored for all.             The
inventory     control points are responsible      for scheduling    in-
ventories     in accordance with the depots' reported capabili-
ties.
       Many CONUSinventory     control points, however, were not
following   procedures.    As shown below, the depots were ei-
ther overscheduled     or underscheduled   during the first three
quarters of 1969.




                                  10
                                 Percent of scheduled
                                 inventories     to depot
                                   capability     in 1969
              Depot              1st          2d        3d
             (note a>          quarter     quarter    quarter

      Anniston                   147.4       27.8      173.8
      Atlanta                    110.0       67.7      108.7
      Charleston                  97.6       12.6       62.3
      Granite City                15.8       48.4       83.0
      Letterkenny                 91.7       66.5       53.4
      Lexington-Blue Grass        47.9       61.9       64.7
      New Cumberland              34.3       53.4      118.7
      Pueblo                      58.5       80.6       98.8
      Red River                   84.1       60.9      135.9
      Sacramento                  67.9       42.4       79.5
      Savanna                                97.7       72.8
      Seneca                      85.4       79.1      167.6
      Sharpe                      50.6       24.1      200.8
      Sierra                      50.0       72.4      120.7
      Tobyhanna                   54.8       54.3       65.6
      Tooele                      94.8       66.4       76,l
      Uinatilla                   14.3       56.9

aAmmunition items were not considered.   Also,        depots were
 not shown where information was incomplete.
     Generally,  the overscheduling    or underscheduling   was
caused by the failure  of inventory    control points to adhere
to reported depot capabilities,     because they did not provide
the automatic data processing     (ADP) support needed or did
not have a proper understanding     of the procedures.    For ex-
ample:
     --The AMC inventory-monitoring        team reported that one
        inventory   control point did not give adequate ADP
        support to the physical     inventory   program.  Therefore,
        the inventory    control point was extremely slow in
        starting  the 1969 program and subsequently      had to
        initiate  crash programs.

     --In its analysis of inventory     control points that did
        not schedule properly,   the team stated that some mis-
        understood the scheduling procedures and that addi-
        tional guidance was needed for preparing      inventory
         schedules.
                                 11
      A feast-or-famine       situation--where         depots are given ei-
ther too few items to count or too many--is not conducive
to efficient    and effective      physical      inventories.    It results
in the constant need for reassignment of depot personnel and
rescheduling    of inventories.         Further,     there is a chain re-
action effect on inventory          control point workloads--too        few
completed inventories       to reconcile      or too many.

INVENTORYCOUNTING

       Count procedures are generally    adequate, but more em-
phasis should be given to increased accuracy.           Our tests--
including    counting of stock at four selected -depots during
physical   inventories-- showed the following    first-count      error
rates by counters.

            Depot               Items        Errors      Percent

       Atlanta                     639          28          0.4
       Red River                1,432          140          9.6
       Tooele                      351          42         12.0
       Kaiserslautern              224          32         14.3

      Under present procedures,      first    counts are compared
with the quantities     on a depot's records,        If first   counts
do not agree with the records--adjusted          for stock changes
during the inventory--    additional     counts are taken until a
count agrees with the adjusted record or two counts agree.
Thus9 good first    counts are essential;       otherwise,    unneces-
sary additional    counts increase the cost of physical          inven-
tories and divert needed resources elsewhere.              Most count
errors can be attributed     to human error.

CONCLUSIONS

      We believe that the Army needs to improve its schedul-
ing of physical    inventories and to give more emphasis to
accurate counting.
      Good planning for physical     inventories      is essential.
Depots must carefully    analyze their capability          and advise
the inventory   control points;   the inventory       control points
must schedule inventories     in accordance with        these capabili-
ties; and depots must provide the necessary           resources to

                                   12
meet these schedules.    The failure     to fully    carry out these
respective  roles hampers, if not defeats,        this essential
phase in the physical  inventory     program.

       Good counts are also essential;     counters   must be
trained and carefully   supervised.

RECOMMENDATION
      The Army's prescribed  procedures for scheduling  and
taking inventories   are generally  adequate. More aggressive
action is needed, however, to ensure that the established
procedures are followed to achieve the goals of adequate
scheduling and accurate counts.

       We propose that the Secretary of Defense require the
Secretary of the Army to take appropriate     action to provide
greater assurance that scheduling procedures are properly
understood so that available    resources are not misused be-
cause of over and under scheduling of inventories.       Addi-
tionally,   we believe that there may be a need for continued
or increased emphasis on training     and supervision  of inven-       -
tory counters.




                                                                                                .,

                                                                                                -1

                                                                               .(        ‘.,’

                                                                           /        ‘.




                                  13
                                CHAPTER4

                RECONCILIATIONS AND ADJUSTMENTS--

                       CORRECTINGTHR RECORDS

       Counting the inventory          is not enough--and really       does
no good --unless      the inventory      records are then adjusted to
agree with the physical         inventory.       This is the next step
in the physical       inventory     program.     This phase of the work
must be as well planned as the scheduling of physical                   in-
ventories--otherwise,         sufficient     resources to do,the job
may not be available        when the physical        inventories    are com-
pleted,     Here is where the Army encountered some of its
most serious problems in its 1969 physical                inventory   pro-
gram.
        Reconciliation      and adjustment procedures appeared ade-
quate, but the Army did not provide sufficient                resources to
do the job.       Available    resources--personnel,       ADP equipment,
and ADP programs-- were either not sufficient              or not effec-
tively    applied.     As a result,    Army inventory      activities,
particularly       the inventory    control points, were unable to
cope with the work load.           Consequently,     inventory     reconcil-
iations     and adjustments were untimely,         inaccurate,       or in-
complete.

DEPOTRECONCILIATIONS AND ADJUSTMENTS

       Generally,     the CONUSdepots that we visited        were not
encountering      significant    problems in reconciling     physical
counts with record balances and in adjusting            the records.
By contrast,      the   European  depot  had  many problems.    Records
for many items were incorrectly          adjusted.   However, this
depot, unlike those in CONUS, relied primarily             on manual
controls   because of inadequate ADP equipment.
CONUSdepots

       According to Army procedures,     counts and depot records
are reconciled   after consideration     of material  receipts, is-
sues, and other transactions     occurring    during a document
control period.     This is done to ensure that indicated


                                    14
differences  disclosed by the counts are actual differences.
Through this process the depots determine the necessary ad-
justments to their records.                            . . -1

      With exception of a few minor errors, our test of se-
lected items at three CONUSdepots showed that procedures
were adequately followed and that adjustment of records was
proper.                      .                     r..% -
                               -
European depot

        Tests similar     to those made at the CONUSdepots were
also performed at Kaiserslautern.             The tests showed a num-
ber of invalid      adjustments      and inadequate support for others.
Generally these conditions           were caused by the use of manual
control     procedures --needed because of insufficient          ADP capa-
bility--without       clearly    defining   the responsibilities    of the
storage, inventory        control,     and ADP personnel.

       For example, after adjusting       physical    counts for receipt
and issue transactions,      inventory    personnel forwarded the
adjusted count data, together with the transaction              data, to
ADP. ADP personnel,     unaware    of  the  adjustments     already    made
to the counts, assumed these to be the actual counts and
changed them again for the in-process          transactions     before
making the adjustments     to the inventory       records.     After we
brought this matter to the attention          of depot officials,
they identified    1,387 items that had been incorrectly            ad-
justed in 1969. The depot again counted these items to
correct   the records.   It discovered       $547,000 worth of items
not recorded and $1 million       worth of items recorded but not
existing.

       In addition,  control  over receipts       and issues was
lacking.    Personnel reconciling      the counts with the records
did not know whether transactions         entered on the records
during the period of the inventory         had been recorded at the
stock location.     Normally,   inventory     stack cards--cards
placed at storage locations       to enable the recording      of re-
ceipts and issues occurring       during the inventory--should
provide the needed information.          In many instances,    how-
ever, the stack cards were either not prepared or-not prop-
erly annotated by storage personnel for receipts            and issues.
Without positive    knowledge that the stock has been placed


                                   15
at or removed from a location   at the time of physical  count,
inventory  control personnel must make assumptions on what
they think might have happened.    Incorrect assumptions cause
incorrect  record adjustments.

      The Army has plans for providing    additional ADP support
for its European inventory    activities,  and once this support
is available,    some of the problems discussed should be min-
imized.    Until that time, however, manual procedures will be
necessary and these procedures should be clarified.




                              16
INVENTORYCONTROLPOINT
RECONCILIATIONS AND ADJUSTMENTS

        After the depots adjust their records,              it is up to the
inventory     control points to finish         this phase of the physi-
cal inventory       program.     The inventory      control points must
reconcile      their records with the corrected            depot balances
and make the necessary adjustments.               It is essential     that
the inventory       control points be ready for the reconcilia-
tion and adjustment task and that they complete it promptly
and accurately,         Inventory   control point records are the
official     records that the inventory         managers must rely upon
to decide on a day-to-day          basis what to stock, buy, repair,
or dispose of.         Untimely or inaccurate        reconciliation    ac-
tions perpetuate        the unreliability      of the data that the in-
ventory managers depend upon. And, good decisions                   do not
come from unreliable         data.

       Generally the inventory    control points that we vis- '
ited --in CONUSand in Europe --had not fully        implemented the
prescribed    procedures nor provided the needed resources to
ensure that the reconciliations       and adjustments were timely
or accurate.      Also similar conditions.were    found by the AMC
inventory-monitoring      team at other CONUSinventory      control
points.

Reconciliation     and adjustment      delays

       At the beginning of the month after the completion of
 the depot reconciliation          and adjustment process, the depot
and inventory       control    points establish      a 30-day document
control period.         Document control was established           to ensure
that all in-process         transactions--at      the depot and at the
inventory      control   points-- are considered        in the reconcilia-
tion: and adjustment of inventory            control    point records.
Depending on the count dates, count results                 are available
from.1 to 30 days prior to the establishment                 of the 30-day
depot/inventory        control   point control      period.    Therefore,
there is a built-in         delay of 30 to 60 days (1 to 30 days
for counts plus the 30-day control             period) before inventory
managers could have knowledge of the actual stocks in exis-
tence.     This delay --because the depots* records are adjusted
first --is minor in comparison with delays experienced by
inventory      control   points in attempting        to carry out their
responsibilities.

                                     17
       For example, on the basis of our test of selected in-
 ventory lots (groupings       of up to 5,000 items) at one CONUS
 inventory    control   point, we found that there was an average
 delay of 133 days from receipt         of depot inventory   data to
 the adjustment of the records.          This delay, together with
 the built-in     delay of 30 to 60 days, results       in an average
 period of about 6 months from physical count at the depots
 to adjustment of the inventory         control point records.     The
 delays at this inventory       control   point were caused primarily
by inadequate ADP support.         The inventory    control  point
failed     to program its computer to enable it to process ad-
justments     automatically.     Therefore extensive     and time-
 consuming manual effort       was required for its reconciliation
 and adjustment process.

        Our review at the other CONUSinventory             control   point
also showed long delays in reconciliations.                In addition,
this inventory      control    point failed     to process millions      of
dollars    of inventory      adjustments.      At this inventory     con-
trol point,     inventory     adjustments in excess of $25,000 were
removed from the reconciliation            process and set aside for
further    investigation.        As a result,    many of these adjust-
ments were not processed.           For   example,   our review of four
selected inventory        lots showed a total of 132 unprocessed
adjustments     totaling     over $12 million.
      The AMC inventory-monitoring          team also found, at
another CONUSinventory      control    point, that suitable       .JDP
programs to support the inventory           activities   were not in
existence  or fully   operational     until     10 months after the
start of the 1969 physical       inventory      program.   At that time,
only 36 of 207 inventory      lots had been reconciled        and the
records had been adjusted.

        The team concluded that the computer had not been used
effectively.        This ineffective     use caused excessive manual
effort,     slippage of the inventory       program, and inaccurate
records.       Similar critical      comments were made by the team
concerning the operations          of other inventory  control points
that it visited.

      In Europe, the period between the count and adjustment
of inventory   control  point records was even longer than at
the CONUSinventory     control points.  For example,


                                   18
inventories  taken in March 1969 and earlier  at one depot
were not reconciled  and adjusted by the inventory  control
point until  October 1969-- 7 months or more after the count.
Erroneous   adjustments

       In addition     to making untimely reconciliations    and ad-
justments,    inventory    control   points  made incorrect adjust-
ments because certain       controls   either did not exist or were
improperly    applied.     Although our tests were limited--pri-
marily because of voluminous data on each adjustment--we
believe this problem shows a need for greater concentration
of effort   for accuracy at these and other inventory        control
points.
       Neither of the two CONUSinventory         control-points       that
we visited     were determining    whether items inventoried-at          the
depots were the same as those scheduled by the inventory
control    points,    As a result,   one inventory     control    point
erroneously     adjusted its inventory     records by' several'million
dollars.     The AMC inventory-monitoring       team-estimated       that,
for one depot alone, 6,000 items valued at $10 million                were
erroneously     dropped from this inventory       control   point's     rec-
ords.    The inventory    control   point subsequently      had to re-
verse all of the erroneous adjustments.
      This happened because the inventory        control    point in-
cluded special control      items in the inventory      lots scheduled
for inventory   by statistical    sampling.     Special control
items are not to be inventoried       by this method--they       must
be counted on a loo-percent      basis.    The depot properly      ex-
cluded these items from the lots.         When the depot results
were reconciled   by the inventory      control  point computer,
however, the ADP program caused the inventory           control   point
records for the special control       items to be adjusted to zero
because the depot did not report balances for these items.
Balances-were not reported because the items were not in-
ventoried.

     At the CONUSinventory   control points, our review               of a
number of completed adjustments showed that:

      --At one inventory   control point--due  to slippage            in
         implementing  the program for mechanized


                                      19
       reconciliation     --the adjustments were being manually
       computed.       We'reviewed 20 adjustments and found six
       to be incorrect --a 30-percent        error rate.     In addi-
       tion, we found that one adjustment had not been re-
       corded because the analyst had missed it.             No veri-
       fication     of this work was performed.       Officials   said
       that they had not reviewed the adjustments but had
       relied upon the ability        and experience of their peo-
       ple.     Moreover,    work load  assignments were not
       clearly     defined and in some instances officials        had
       to analyze the handwriting        on adjustment documents
       to determine who had prepared them.

     --At the other inventory     control    point, the adjustments
        were being mechanically    computed.      We reviewed 100
        adjustments and found 19 to be incorrect.            These
        errors resulted    because transaction      processing,    at
        either the depot or the inventory        control point, was
        not performed as expected.       Although errors may be
        reduced by mechanized processing,        errors still    can
        be made and some review of the completed actions is
        necessary.    Three errors were obvious and would have
        been detected if reviewed.

      We did not test the European inventory control point's
adjustments.   Its own review, however, showed many adjust-
ments were erroneous.
ADVERSEEFFECTS

      Putting a price tag on the total       adverse effects   from
outdated and inaccurate      inventory  records is impossible.
Sheer volume prevents it, since thousands of items, trans-
actions,    and decisions   must be reviewed.     What value should
be placed on not being able to supply troops on time or on
the harmful effects      on morale when supply personnel at all
echelons lack confidence       in the supply system?

      At one inventory      control point, we selected one of the
many inventory     lots which had not been reconciled         and ad-
justed timely.       To determine adverse effects     because of the
delay, we screened this inventory         lot to identify     those
 items that had a zero balance at the inventory           control   point
even though stocks were on hand at the depot.             Nineteen items
met this criteria.
      We reviewed the files   for these 19 items to determine
whether procurement actions had been initiated     because the
inventory   control  point did not know it had the s'tock.   Pro-
curement action was initiated     for three of the 19 items dur-
ing the 8% to 87-day period taken to reconcile      and adjust
its records.     We selected one of these procurement actions
for further   review and found that:
      --Prior    to the physical     inventory,  the inventory        con-
         trol point's     stock record showed a zero balance.             On
         June 2, 1969, the depot, on the basis of its inven-
         tory 9 reported on hand quantities       of 541 units.          Un-
         aware of the units stored at the depot because the
         inventory    control   point did not adjust its record
         until   August 21, 1969, the inventory       control      point
         inventory    manager, on 3une 21, 1969, took action to
         buy 1,451 units at‘a coat of about $3,600.              After    the
         units were recorded,       the manager attempted to cancel
         the procurement action,        but the contract     had been
         awarded.     The items found by physical        inventory     plus
         the quantity     purchased resulted    in excess stock.
        We also reviewed these 19 items to determine whether
there were any on back order during the period that recon-
ciliation     and adjustment was delayed. Seven items had


                                    21
outstanding   back orders.    We selected    one of these for    fur-
ther review   and found that:
      --Prior     to the physical  inventory,   the inventory    con-
         trol point's    stock record showed a zero balance.         On
         June 2, 1969, a depot, on the basis of its inventory,
         reported on hand quantities       of 387 units.    On Au-
         gust 21, 1969, when the records were finally         adjusted,
         the inventory     control point released 12 back orders
         for filling,    including  four high-priority    orders.
         Since these orders were received during the period
         January 11 to July 9, some could have been filled           as
         much as 80 days earlier.       The latest order received
         could have been filled     43 days earlier.

        Our tests of 51 items at the other CONUSinventory          con-
trol point disclosed       similar  adverse effects    due to recon-
ciliation    delays,   incorrect   adjustments  and   unprocessed  ad-
justments.      In reviewing the files     for these items, we found
three instances of unnecessary procurements and 13 instances
of delays in supplying troops.          Examples follow.

      --Prior    to physical  inventory,   the inventory     control
         point's   stock record showed a zero balance.         On Jan-
         uary 14, 1970, the inventory      control point should
         have adjusted its record for 1,867 units reported by
         a depot, but, because of the $25,000 adjustment policy
         mentioned on page 18, the inventory       control point did
         not process the adjustment.       On January 27, 1970,the
         inventory    control point ordered 1,457 units at a to-
         tal cost of $115,686.      In this instance,     the inven-
         tory manager, upon being informed by us of the ex-
         istence of stock at the depot, was able to cancel
         the procurement action.

      --On October 24, 1969, the inventory      control point
         improperly    reduced its recorded balance from 130 to
        zero for an item because of the procedural      deficiency
        discussed on page 19. On October 30, a high-priority
        requisition     for 22 units was back ordered because the
         inventory   control  point thought it had no stock.     The
        back order was released for filling      on November 19,
        when the improper adjustment to the record was cor-
        rected.     There was an unnecessary delay of 19 days in
        supplying    troops.
                                  22
       Although these examples may not seem too significant
in and of themselves,      it must be remembered that inventory
managers are making these kinds of judgments each and every
day--before    inventories    are taken, while inventories     are
being taken, while waiting for the reconciliation           and ad-
justment process to be completed, and after the records have
theoretically     been corrected.      When this type of continuous
decisionmaking     is considered    in the light of the condition
of the Army's inventory       records--27.7    percent wrong for
CONUSin 1969--the overall         adverse effect has to be sub-
stantial.
       Further,    adverse effects    are not always related to
specific    stock items.     For example, the AMC inventory-
monitoring      team noted that one inventory    control     point dis-
patched search teams of as many as seven people intermit-
tently to visit      depots to locate quantities     of stock to sat-
isfy urgent requirements.          The team summed up this other
type of effect very well.          The team said that it was ironic
that many of the items the search team physically             located
were on depot records and would have also been on the in-
ventory control      point's  records if the inventory       control
point had properly       completed inventor,y reconciliation        and
adjustment processes.        Also the team believed     that the dol-
lars and manhours expended on the search teams would have
provided greater benefits        if they were used properly       to im-
prove inventory      control point record accuracy.
      And, what of the cost of maintaining   inventory records
that are not reliable?    We could not determine the cost of
these operations,   and the Army was unable to tell us what
it was. But, it must be a sizable amount. This too is an
adverse effect --adverse because the money was spent to
achieve something of value, but the value was not received.
CONCLUSIONS

        The Army encountered some'of its more serious problems
in attempting      to reconcile   and adjust its inventory    records.
On the basis of the problems noted, we believe that Army
management has underestimated         the complexity  and scope of
the reconciliation       and adjustment task.     Consequently am-
bitious    physical   inventory   programs are established    without
sufficient    consideration     of the resources available    to

                                   23
accomplish   the resulting   reconciliation       and adjustment   work
load.

      Resulting  delays and inaccuracies   in adjustments led
to improper management actions--ordering     unneeded stock
and denying, for a time, delivery     of needed items to the
troops-- and other costs.   Though not precisely    measurable,
the cost of not being ready is high.

RECOMMENDATIONS

      We proposed that the Secretary          of Defense require   the
Secretary of the Army to:

       -Determine the capability    of its inventory       activities
        to carry out the annual inventory       program prior to
        scheduling  and taking physical     inventories.       This de-
        termination   should include not only the determination
        of the number of physical    inventories      that can be
        taken by the depots but the number of reconciliation
        and adjustment actions that should be expected by
        the depots and inventory    control points as a result
        of physical   inventories.

     --Either    allocate new resources or redirect  present
        resources as necessary to ensure timely and accurate
        accomplishment of reconciliation   and adjustment ac-
        tions.




                                 24
                              CHAPTER5

      RESEARCH--FINDING OUT WHY THE RECORDSWEREWRONG

        Lessons can be learned from past mistakes,       but only if
the underlying       causes of the mistakes are identified.       Once
identified,      reasons for recurring     errors can be eliminated
and accuracy can be improved.          Finding out what went wrong,
and why, must be an integral        part of a sound and workable
physical     inventory    program.

      The Army has prescribed  procedures for accomplishing
this task, but the depots and inventory     control  points were
unable to do the job.    This was primarily    due to a lack of
adequate guidance for the depots and a lack of sufficient
resources for the inventory   control  points,
DEPOT RESEARCH

        Although procedures require depot research,          criteria
for selecting      inventory discrepancies    for research are not
specified     for uniform use. Further,      the Army has made no
provision     for tabulating  and analyzing results       of depot re-
search to enable the identification         and correction      of under-
lying causes of recurring       errors.    As a result    the selection
criteria     employed and the depth of research performed varied
considerably.

        For example, one CONUSdepot was researching        inventory
discrepancies    in excess of $200, another was researching          dis-
crepancies    in excess of $100 or 10 percent of the quantity
on record, and the third was researching      discrepancies      with
the highest value first    and continuing  downward as time per-
mitted.     The European depot had no selection    criteria     since
it was unable to perform research because of insufficient
personnel and time.
      Only one CONUSdepot, at its own initiative,            was attempt-
ing to tabulate  and analyze research results.

INVENTORYCONTROLPOINT RESEARCH

      Although prescribed      inventory   control   point research
procedures were generally        adequate, inventory     control

                                    25
points--primarily because of insufficient  resources--were
unable to do the research necessary to determine what went
wrong and why.

       Inventory    control points are generally      required to re-
search all inventory       adjustments    in excess of $5,000.     Also
they are to record the causes of adjustments and to initiate
corrective     actions to eliminate     these causes.     The inventory
control    points we visited     did not follow this criteria      and
did not get the needed research done. For example:

      --One CONUSinventory        control   point adopted a more
         stringent    research criteria     than required   ($2,500
         rather than $5,000).       As of February 1970, it had not
         researched any adjustments       for either the 1968 or
         1969 inventories.      Officials     said that they were un-
         able to do the research because of large workloads,
         limited    numbers of personnel,      and lack of ADP capa-
         bility    at the depots.

      --At the other CONUSinventory           control    point, proce-
         dures provided for researching          only loss adjustments
         of $5,000 or more. Although this reduced the number
         of items to be researched;the           control   point was
         still   unable to do the job.        Under this criteria
         5,775 adjustments required research in 1969. As of
        December 31, 1969, only 1,010 adjustments had been
         reviewed--most       of these were reviewed to reverse in-
         correct previous adjustments that had come to the
        control    point's     attention.    No attempt was made to
         tabulate   and analyze the underlying         causes of the
        recurring     errors.      Officials  said that they did not
        have -sufficient       staff to keep up with their work load.

     --The European inventory     control point procedures gen-
        erally provided for research of loss adjustments         in
        excess of $5,000 and gain adjustments      in excess of
        $100,000.   Under this criteria    17,805 adjustments
        during 1969 required research.      As of January 1970,
        13,651 of these adjustments had been researched,        but
        only to the extent that a justification      code (showing
        what had happened) had been assigned to each item.
        Although this research effort     appeared impressive in
        relation  to the accomplishments    of the CONUSinven-
        tory control points,   the European inventory    control

                                  26
         point did not analyze what had happened to identify
         and correct basic underlying      reasons for recurring-
         type errors.   Identifying    what happened--such    as er-
         roneous adjustment,duplicate      posting,   and documenta-
         tion not posted--is     not enough.    To stop this from
         happening again the control      point sh,ould have found
         out why there had been erroneous adjustments,        why
         there had been duplicate     posting,    and why documenta-
         tion had not been posted.

     Other CONUSinventory      control points had problems keep-
ing abreast of their research work load.      For example, the
AMC monitoring   team found that one had requested authority
to waive research of its 1968 backlog of 4,311 adjustments.
The team found also that another had experienced difficulty
in accomplishing    its research because of the lack of adequate
ADP support.
CONCLUSIONS

       Inventory records cannot be maintained   accurately    if no
one knows what causes them to become incorrect.       Finding out
what happened to cause an error is just the first       step.
Finding out why it happened is what is really     needed to ini-
tiate corrective    and preventive action.

        The purpose of research procedures is to gain this type
of knowledge, but this is not being done, The lack of clear
guidance concerning what is uniformly            required and the lack
of sufficient      resources to do the job are the basic deter-
rents to the accomplishment of this essential              phase of the
Army's physical       inventory    program.    In regard to resources,
it appears that the present research selection              criteria  may
be too restrictive        and that the resulting       work loads may be
too high in relation        to available    resources.     The use of
statistical-sampling         techniques may offer opportunities       for
reducing work loads and providing           the means for more in-
depth analysis       of the reasons why errors occur.
RECOMMENDATIONS

      To ensure that research is done so that recurring            er-
rors can be prevented,   we recommend that the Secretary           of
Defense require the Secretary of the Army to:

                                    27
--Clarify   its depot research procedures by establishing
   firm selection  criteria    and stressing the need to un-
   cover the underlying,    rather than surface, causes.
--Take action similar    to that recommended in chapter 4.
   In other words, ascertain    the anticipated    research
   work load as a part of the overall      planning for the
   annual inventory  program and provide the resources
   needed to do the job.

--Explore   the use of statistical-sampling      techniques
   to select items for research rather than selecting
   the items solely on the basis of a fixed-dollar
   value.   This would result     in reduced work loads and
   more comprehensive data on why things go wrong.




                          28
                              CHAPTER6

   QUALITY CONTROL--THEWAY TO KEEP THFi RECORDSACCURATE

       The stock is counted, the records are adjusted,          and
the causes of errors are researched,       but this is not all
there is to a sound and workable physical        inventory    pro-
gram. The records must be maintained accurately            or errors,
new or recurring     ones,can creep in and make the records un-
reliable   again.     If this happens, the decisionmaker      is no
better off than he was before the records were corrected.
He will still     have to depend on unreliable     data and his
decisions may be wrong.

      The answer is an adequate        quality   control   system that:
      --Periodically       tests the accuracy of the data recorded
         daily in depot stock locator records and inventory
         control     point stock balance records.

      --Evaluates    and corrects,  on a continuous basis, the
         underlying   causes of errors in recorded data that
         are disclosed   by daily quality  control  tests.

      The Army has established     a quality   control   system to
ensure that stock locator records at depots are accurately
maintained on a daily basis.        Similar quality    control checks
have not been established     for stock balance records main-
tained by inventory   control    points despite the importance
of these records in day-to-day       management,
DEPOT QUALITY CONTROL

      The Army depot quality    control     system provides for
daily checking of the accuracy of supply data recorded in
stock locator records.     Errors are investigated        by a qual-
ity control group on a continuous basis in an effort            to
prevent their recurrence    bjT identifying      and correcting    the
underlying   causes.

       Depots perform periodic    location    surveys to measure
locator   record accuracy,   to correct    location     errors,   and to
assess the effectiveness     of the quality      control    system.


                                  29
A location   survey consists of a comparison of item identifi-
cation and location   data as shown on stock locator records
with the actual physical    identification and location of
item assets.

      A complete survey of all records and stock locations
is required each year.    Another survey is made during the
year, but only on a statistical-sampling   basis.   If this
sampling survey fails   to meet prescribed accuracy levels
(98.4 percent for 1969 and 95 percent for future years)
another complete survey is required.

      The table below shows the results    of   the earliest and
the latest   1969 surveys available  to us at    the four depots
that we visited   during our review.    Shown   also are the re-
sults of our independent surveys at these       depots.

                                  Location surveys
                          By   the depot                By CA0
                            Accu-           Accu-            Accu-
     Depot        Month     racy     Month racy      Month   racy

Atlanta            Mar.     80.2%     Nov.   86.0%    Oct.    87.5%
Tooele             Mar.     97.9      Oct.   93.8     Oct.    90.7
Red River          &Y       94.5      Oct.   98.4     Oct.    97.9
Kaiserslautern     Jan.     88.7      Nov.   91.7     Dec.    91.0

       Our resultsweresimilar      to those of the depots, which
indicated   that procedures were adequate and reliable        as a
means to measure quality      control   effectiveness  and locator
record accuracy.      Only one depot achieved the 98.4-percent
accuracy goal for 1969, although another depot came close.
Two depots met the 95-percent        accuracy level required for
future years, and one almost reached it.

       To determine remaining obstacles      in achieving desired
accuracy goals, we reviewed depot quality          control evalua-
tion reports and discussed the problems with depot officials.
Apparently,    these are 'speople problems."       For example, at
one COWS depot, 58 percent of all errors found by quality
control checks in 1969 were location        errors--errors   made by
warehousemen;      Because of these errors,     the depot was giving



                                 30
training    to its warehouse personnel.    Similar problems,in-
eluding personnel shortages,     were noted at the other depots
we visited.

INVENTORY   CONTROL POINT    QUALITY       CONTROL

        Stock balance records at inventory    control points must
be accurately     maintained on a day-to-day   basis if proper
management decisions       are to be made on such vital  matters
as what to buy, what to repair,       and what to dispose of or
redistribute.

       Despite the fact that vital   day-to-day     management de-
cisions are dependent on the accuracy of stock balance rec-
ords, the Army has not prescribed     quality    control  proce-
dures for inventory    control points to make daily checks on
the accuracy of data being recorded and to investigate           and
correct basic causes of errors disclosed        by such checks.

        Inventory     control point records and depot records are
compared annually by means of locator record audits to as-
certain their compatibility.            These audits consist of match-
ing supply data which are common t.o both sets of records.
The accuracy goals for location           record audits are the same
as for depot location         record surveys--98.4      percent for 1969
and 95 percent for future years.             Results of locator record
audits taken in 1969 for the inventory             control   points that
we visited      (comparing their records with those of all the
depots where their stock was stored) showed that there were
significant      differences     between the records of the inventory
control points and the records of their depots.                For ex-
ample:

                                                     Results of
       Inventory   control   point            locator record audits
   Army Tank-Automotive   Command                      60.4%
     " Aviation   Systems    *'                        63.6
     " Materiel   Command, Europe.                     85.8
      In view of the relatively           high accuracy levels of the
depots (see p. 30) compared to            the results    of the locator
record audits of the inventory            control   points,   it appears
that the depot records, because            of daily quality      control

                                     31
checks, are more accurate       than those of the inventory       con-
trol points.

CONCLUSIONS

        The results    of depot location   surveys indicate    that
depot quality      control   procedures have been fairly    effective.
Continued attention        to the problems disclosed by their
quality    control   procedures should enable depots to achieve
or surpass the future accuracy goal of 95 percent.

       We believe,however,      that the accuracy level sought for
the compatibility       of depot and inventory     control point rec-
ords is not likely       to be achieved until    the inventory     con-
trol points have implemented quality         controls     comparable
with those of the depots and the means to measure their ef-
fectiveness.      Ironically,    it is the inventory      control point
records that must be correct if proper management decisions
are to be made--yet there is less scrutiny           of the data being
recorded daily in these records than there is at the depots.

RECOMMENDATIONS

       We proposed that the Secretary of Defense require the
Secretary of the Army to establish      quality   control proce-
dures at inventory    control points comparable with those in
effect at depots to ensure that transactions        are processed
timely and correctly    and thus provide the needed assurance
that data is recorded accurately     at inventory    control
points.




                                  32
                             CHAPTER7

                      REVIEWING ACTIVITIES

      To be sure that programs are progressing           as intended,
management must have timely reports on deficiencies,             made
by persons independent of the operations          involved.     During
1969 various Army review groups issued reports on the physi-
cal inventory     program.     The largest number were by the AMC
inventory-monitoring        team. It visited   six of the seven
CONUSinventory       control   points and eight of the 19 CONUSde-
pots.

      The reviews of the AMC inventory-monitoring   team were
quite penetrating  and identified  many significant   problems.
Reviewing is not enough, however, problems identified      must
be resolved.

RECOMMENDATION

      We recommend that the Secretary of Defense require  the
Army to resolve the many deficiencies   reported by the AMC
inventory-monitoring   team and other review groups.




                                  33
                              CHAPTER8

                          AGENCYCOMMENTS
        In its September 14, 1970, reply          (see app. I> to our
draft    report, the Army

        --concurred   in our findings,

        --concurred   in our recommendations,           and

        --concurred   in our conclusions,    except for the nature
           of our overall  conclusion   that the Army's progress
           since 1966 has been limited.

As a result,  the Army has initiated           action     on each of the
recommendations made. (See pp* 39         to     47.)


      Regarding the Army's nonconcurrence with the nature of
our overall   conclusion.     it contends that GAO's comparison
of gross adjustment ratios for 1966 and 1969 is not a valid
basis for an overall      assessment of progress since adjust-
ment ratios are dependent not only on the accuracy of in-
ventory records but also on the number of inventories          taken.
The Army contends that the 1966 and 1969 ratios are not
comparable since the number of inventories       taken in 1969
were greater than in 1966. The Army cited the following
examples of gross adjustment ratios for the years it consid-
ered comparable:      1968, 31.5 percent; 1969, 27.7 percent;
and 1970 (projected),      25.3 percent.   The Army further    com-
mented that the 1969 ratio used in the report excluded Pro-
curement of Equipment and Missiles,       Army (PEMA), principal
items (tanks, trucks,      etc.) which account for about 70 per-
cent of depot inventories --in terms of dollars--and        that the
adjustment ratio was lower when such items were included.

       Admittedly,     the comparison of the Army's gross adjust-
ment ratios for 1966 and 1969 is not a precise measurement,
primarily     because it cannot be determined how much higher
the 1966 ratio would have been if more inventories            had been
taken.     It clearly     demonstrated,    however, that the inventory
records were significantly         incorrect   in 1966 and were sig-
nificantly     incorrect    in 1969. In contrast      to the Army's


                                 34
1969 ratio of 27.7 percent, the Navy and Air Force experi-
enced adjustment ratios of 5 and 6.6 percent, respectively.

       Also we agree that the Army's adjustment ratio for
1969 would have been lower (19.8 percent instead of 27.7 per-
cent) had PEMAprincipal       items been included in the computa-
tion base for the adjustment ratio.        Our prior review dis-
closed, however, that the Army's inventory        record problems
were largely confined to stock fund and PEMA secondary items.
The 1969 ratio for CONUSused in the report excluded PEMA
principal   items solely to make it comparable with the 1966
ratio for CONUSalso used in the report.          The 1966 data and
ratio computation,    furnished    to us by the Army at the time
of our prior review, did not include PEMAprincipal          items.
       The comparison of 1966 and 1969 ratios alone would not
be a sufficient    basis for making an overall   assessment of
progress.     But, this.was not our only basis.     We fully rec-
ognize that some improvements have been made, and we have
included comment on them throughout     the report.    These im-
provements include such things as:
      --Prescribed  procedures that     are now generally  sound.
      --Taking physical   inventories    on a regular basis,
      --Intensive   reviews by the AMC inventory  monitoring
         team.
      --An apparently    good job now being done by the depots.
       The fact remains, however, that the inventory        records,
maintained by the inventory      control points and used for day-
to-day management decisions,       continue to be significantly
incorrect     because Army inventory     control points fail to prop-
erly schedule inventories,      to make timely and accurate rec-
onciliations,     to make timely and accurate adjustments,        to do
the necessary research to find out why errors are caused
so they can be corrected,      and to establish     sound quality   con-
trol over the recordkeeping,

       We believe that actions initiated   by the Army to cor-
rect the conditions    cited in this report will,     if effec-
tively   implemented and pursued on a continuing      basis, bring
about substantial    improvements in inventory    record accuracy.



                                  35
                               CHAPTER9

                           SCOPEOF REVIEW

       Cur audit, completed in March 1970, included a review
of the regulations,      procedures,    and practices       for the Army's
physical   inventory    program.     And, to the extent deemed ap-
propriate,    we tested    these  procedures   and practices       at se-
lected inventory     control points and depots.           We reviewed
inventory   reports , prior audit reports,        statistical      data,
and other records.       We also interviewed      officials     who were
knowledgeable    regarding     the matters under review.
      Our work was done at the following          installations:

     Army Materiel   Command, Headquarters,    Washington, D.C.
     Army Aviation   Systems Command, St. Louis, Missouri
     Army Tank-Automotive   Command, Warren, Michigan
     Atlanta Army Depot, Forest Park, Georgia
     Red River Army Depot, Texarkana, Texas
     Tooele Army Depot, Tooele, Utah
     Theater Army Support Command, Headquarters,       Worms,
       Germany
     Army Materiel' Command, Europe, Headquarters,
        Zweibrucken, Germany
     Kaiserslautern   Army Depot, Kaiserslautern,    Germany
     Germersheim Army Depot, Germersheim, Germany
     Army Aviation Maintenance Center, Sandhofen, Germany




                                   36
                       .:,,
                  .,          ,-
                              1




                       ,.,I,.
                                      ;
                              -..I
                                   -.I.

             -.           _,i:




APPENDIXES




37
                                                                                            APPENDIX I
                                                                                                Page 1

                                DEPARTMENT  OF THE ARMY
                          OFFICE OF THE ASSISTANT  SECRETARY
                                               WASHINGTON.        D.C.




                                                                         14   SEP   1970

Mr. C. M. Bailey
Director,   Defense Division
US General Accounting     Office
Washington,   D.C.  20310


Dear Mr.        Bailey:

This is in response to your letior    of 3 July 1970, to the Secretary          of
Defense requesting    comments on your draft report    titled:     "Army Inven-
tories--Inaccuracies,    Effects and Ways to Improve."         (OSD Case 83142).

The inclosed     statement,   providing     the Department of the Army position
on each finding      and recommendation       agrees in many of the detailed
recommendations      on ways to improve record keeping.              The Army recognizes
the opportunities      for improving     inventory      record accuracy and the en-
closure outlines      progress being made in this direction.              However, the
general tone of this draft        report    together     with the selective     use of
calendar year 1969 and fiscal         year 1969 inventory         data tend to misrep-
resent Army improvements       in physical       inventory    control.

It is important       to note that,      during the period covered, Army inventory
managers had responsibility           for supply system inventories       valued at $10
billion.     Yetthe audit report         on "Army Inventories"    presents    performance
data on $3 billion        of inventories      which under selective    management prin-
ciples do not receive the same intensive              management devoted to high
 investment    inventories.       The data presented      in the enclosure    serves to
present a more current         and representative      picture  of progress     toward
reducing Army inventory         inaccuracies.       It is suggested that data in
 this letter     and the enclosure be considered          for use in preparing      the
 final   GAO report     on this subject..

This reply         is made on behalf            of the Secretary              of Defense.




1 Incl
Army POSitiOn             Statement   Deputy         f




                                                             39
APPENDIX I
    Page 2

                               DEPARTMENT OF THE ARMY POSITION

                                                    ON

 GAO           Draft           Report              GAO Code 62209,              dated           3 July       1970

           Army Inventories       --    Inaccuracies,    Effects    and Ways to Improve

                                            (OSD Case 83142)



 I.       POSITION SUMMARIES.

         A.    GAO Position      Summary.

              The Army inventory       procedures     are basically        sound, but inventory
 records   are generally     inaccurate,     as they were in 1966.              Army has made
 limited   progress   since the 1966 GAO review because inventory                   control    points
 and depots were unable to accomplish             the necessary       inventory     actions.      The
 major deficiencies      were found at inventory          control     points.      Army did not
 provide   adequate resources       to inventory      control     points    and depots.      The
 GAO review was made in the first           three quarters        of FY 70 and covered three
 CONUS depots and two CONUS inventory             control     points,    in addition      to review
 of two depots,     one depot activity,        and an inventory         control    point accomplished
 in LJSAREUR.

         B.    Army Position      Summary.

               The Army concurs in the findings.               The Army concurs in the conclu-
 sions except for the nature            of the overall       conclusion   that the Army's
 progress    since 1966 has been limited           because the Army's resources       were
 either   insufficient        or inadequately     applied.       This conclusion  is discussed
 in paragraph       III   below,     The Army concurs in the recommendations.           Each
 reconnnendation        is discussed    in paragraph     IV.

 II.     BACKGROUND FOR ARMY POSITION.

           Prior    to the GAO review of DOD physical             inventory     controls     in 1966,
 the Army was taking only a limited                 number of inventories.          As a result      of
 the GAO report,          DOD established      a study group which resulted            in the publi-
 cation     of DOD1 4140.35,        Physical     Inventory    Control    of DOD Supply System
 Materiel,       in January 1969.          The Army implementation        of DOD1 4140.35 is
 AR 740-26,        Physical    Inventory     Control,    3 November 1969 with a 1 January 1970
 effective       date.      The major provisions        of AR 740-26 were implemented            by Army
 Materiel       Command (AMC) and U. S. Army, Europe (USAREUR) prior                     to 1 October
 1969.      Implementation        was completed       by AMC by 1 January 1970 and USAREUR by
 30 June 1970.          In 1967 and 1968, AMC accomplished              a physical     inventory     of
 every item in AMC stocks.               In 1969, statistical         sampling   techniques      were used




                                                    40
                                                                      APPENDIX I
                                                                          Page 3

for all items except high value or controlled  inventory items.   In 1968 and
1969, USAREURimplemented Project Aim (Accelerated    Inventory Method) and the
Theater-Wide Reconciliation of Recorded Balances Program to reconcile   depot
records and ICP records.

III..   ARMY POSITION ON GAO CONCLUSIONS.

         The Army concurs in the conclusions except for the overall conclusion
that the Army has made "only limited progress in gaining control over its
inventories    because inventory control points and depots have been unable to
do the job required,"     because "available resources . . . were either
insufficient    or inadequately applied" since 1966. Significant   progress has
been made since 1966, as indicated by the following:

            1. The GAO concluded    that the Army procedures   are now "generally
sound,"    This is an improvement   over 1966.

           2. The GAO also found that the Army is non taking inventories
on a regular basis, whereas, in 1966, Army was not.   The GAO also concluded
that "depots seem to be doing a good job in the physical inventory program."

              3. In PY 66, the AMC denial rate for Army materiel   release orders
was 4.0%, computed in accordance with DOD1 4140.35.       In FY 67, the rate was
3.7%. In FY 68, it was 3.8%. FY 68 was the beginning of the AMC inventory
actions as a result of the 1966 GAO review.      As a result,  the AMC denial
rate dropped to 2.9% in FY 69 and to 2.5% in FY 70. In the 4th Qtr Fy 70,
the AMC denial rate was 2.3% and in June 1970, the rate was 2.1%. This is
a significant    decrease in denials and the trend is continuing.

          4. Considerable improvement has been made in the control of inven-
tories in USAREURdepots subsequent to the FRELOCperiod.     This is evidenced
by the decrease in materiel release denials from 5.2% at the beginning of
calendar year 1969 to 2.5% at the end of June 1970, and an increase of 3%
(85% to 88%) in the rate of fill  for the six month period ending 30 June 1970.

             5. The GAO report showed a comparison between adjustment rates
in FY 66 and FY 69 indicating      that the adjustment rate had rCcen from 23.5%
to 27.7%. The adjustment rate used was a ratio of the gross physical
inventory adjustments to the average dollar value of inventory recorded as
on hand at the inventory control points, excluding PEMAprincipal          items.
The adjustment rate, calculated       in this manner, is dependent not only upon
the accuracy of inventory records,.but        also upon the number of inventories
taken.    If no inventories    are taken, the adjustment rate will be 0%. Since
the number of annual inventories       increased since 1966, the FY 69 rate is
not comparable to the FY 66 rate.         The adjustment rate computation used
is a valid comparison of accuracy only when the dollar value of items
inventoried     is comparable.   This was true in FY 68, FY 69 and FY 70, but
not before PY 68. In addition,        the FY 69 rate used by GAO excludes PEMA
principal    items which account for about 70% of the AMC depot wholesale




                                         41
APPENDIX I
    Page 4

 inventory  -- in terms of            dollars.  The following               table shows a comparison         of
 adjustment   rates for the           three comparable   years,             as well as a comparison
 of the denial    rate.

                                       ADJUSTMENT RATE                                 DENIAL RATE
                                 Stock Fund and
               -FY               PEMA Secondary        All            Items

                68                   31.5%                         24.6%                     3.8
                69                   27.7%                         19.8%                     2.9
                70                   25.3% 1                       14.1% 2                   2.5

          1Projected          based on 3 Qtrs     actual        of 19.0%.
          2Projected          based on 3 Qtrs     actual        of 10.6%.

               6.      The GAO also noted that the Army was doing                    a good job in
 reviewing     activities,     primarily  through the establishment                   of Inventory
 Monitoring     Teams by AMC.

 IV.     ARMY POSITION ON GAO RECCMMENDATIONS.

          A.    The Army concurs          in the recommendation             to "assure that scheduling
 procedures       are fully       understood     and that the resources              needed to do the job
 are provided."           The recommendation          resulted      from the finding           that the number
 of inventories         scheduled      by CONUS inventory           control     points     is frequently
 considerably        higher or lower than the stated                  depot capability.            It should be
 noted,     however,      that the depot statement             of capability         applies      only to wholesale
 stocks and not to depot retail                 stocks which also must be inventoried                       by the
 depot.      Additionally,         the inventory       control      point must consider            its own
 capability       to process the inventories.                Most depots perform             inventories        for
 several     inventory       control     points    and all     inventory       control     points      deal with
 a number of depots.              This accounts      for some of the difference                 between the
 stated     depot capability          and the final       schedule;         If the sum total           of all
 scheduled      inventories        in a quarter      differs      from the depot capability,                 the
 depot reschedules           the inventory       of retail       stocks,      which is performed           by the
 same depot personnel.               A review of depot capability               reports      for FY 71 indi-
 cates that depots currently                have sufficient         resources      to accomplish          required
 inventory      actions.        In order to assure that CONLJS depots and inventory
 control     points     understand       scheduling      procedures,        the following         actions     have
 been taken or are in process;

               1.      The depot     capability     report        has been revised     to:

                   (a)         Provide    for a submission   of capability           reports     for   all
 four quarters    prior         to the    beginning  of the fiscal   year.           Previously,       depots
 provided  capability           reports     for only the next quarter.

                        (b)    Provide  for a statement   of the number of items which                    must
 be counted,         rather    than just a statement    of the number of items stored,                    as




                                                           42
                                                                              APPENbIX I
                                                                                  Page 5

was done previously.       The PY 71 reports      provided     this.

               (c) Provide for a statement of ammunition capability        in terms
of stock numbers as well as locations.     Previously, capability   reports were
in terms of locations,  but accomplishments were reported in terms of stock
numbers. The June 1970 capability    reports stated capability    in terms of both.

           2. A set of twelve illustrated     DA Pamphlets on the physical
inventory program is in preparation.      The first .two volumes have been sent
to TAG0 for final edit and publication.      Submission of the remaining ten
is scheduled for 1st Qtr FY 71. These pamphlets will emphasize and
illustrate  the scheduling process.

            3. A revision to the inventory portion of TM 743-200-1, Storage
and Materials    Handling, is scheduled to be submitted in August 1970 to TAG0
for publication.     This section includes instructions on scheduling.

        B. The Army concurs in the recommendation to "inquire into the
need for additional     training   and supervision   to improve counter accuracy,
including   the advisability     of performance rating standards for counters."
The DA pamphlets and TM 743-200-1, mentioned in paragraph 1V.A. above, will
assist in training    since both emphasize accuracy in counting and proper
counting methods. A study has recently been made of depot inventory
organizational   structure     and grade structures.    This study is currently
in the final review stage.        The recommendation for establishing
performance rating standards for counters is amplified by the GAO findings
to mean establishment      of a minimum acceptable rate for count errors.       This
system has been studied and is not economically feasible for the following
reasons:

           1. Army inventories    are conducted as open inventories,   that is,
receipts and issues are not stopped during the inventory process.        This
means that a recount may differ    from a first count due to an intervening
receipt or issue.   In-float   documentation would have to be considered before
a counting error could be assessed against a counter.      This would be time
consuming.

             2. AR 740-26 requires a two count method of inventory where
custodial    records are not maintained.     Where custodial records exist, only
one count    is required when the count agrees with the custodial balance,
When the    count does not agree with the balance and in-float     documentation
does not    explain the difference,   recounts are required until:

                 (a)   Two counts agree,    or,

                 (b)   One count and the custodial           balance agree,   or,

                 (c)   Until   the discrepancy     is less than $200.




                                           43
APPENDIX I
   Page 6

           3. Where the one count system is used, a verification  of counter
accuracy would require a sample recount of over 10%. Since two of the AMC
depots had an estimated count inaccuracy of less than 10% according to GAO,
the control would cost more than the current errors.  At the third depot,
count accuracy would have to improve to 98% before the economic break even
point is achieved.

       C. The Army concurs in the recommendation            to "re-emphasize the
importance of good storage practices  to facilitate           counts."   The following
actions are in process to accomplish this:

          1.  The illustrated    DA pamphlets, mentioned in paragraph 1V.A.
above, emphasize the relationship    of storage practices  to inventory.

            2. TM 743-200-1,    mentioned   in paragraph      1V.A. above, emphasizes
the relationship  of storage    practices   to inventory.

           3. Poor storage practices were noted by the GAO to be most
prevalent at the Kaiserslautern      Army Depot (KAD), The depot is presently
involved in an extensive warehouse construction       project which, when completed,
will provide covered storage space for those items presently        located in
unimproved outside storage areas. As of 1 July 1970, one warehouse of
180,000 square feet was completed.       Warehousing of the new structure   is in
progress.   Two additional     warehouses with a total of 190,000 square feet are
scheduled for completion not later than 31 December 1970. Completion of the
warehouse construction     project and elimination   of unimproved outside storage
areas will improve the overall storage posture of KAD and facilitate        inven-
tory and issuance of stock.

         D. The Army concurs in the recommendation to "determine the capability
of its inventory activities       to carry out the annual inventory program prior
 to scheduling and taking physical inventories.         This  should include not
only the determination      of the number of physical inventories      that can be
taken by the depots, but the number of reconciliation          and adjustment actions
that should be expected by the depots and inventory control points as a result
of physical inventories."       The determination    of inventory capability     at
inventory    control points is an inherent part of the scheduling process and
accounts, in part, for the differences        between depot capability     and final
schedules.     AR 740-26 currently    requires both depots and inventory control
points to determine manpower and data processing equipment support.              Recon-
ciliation    and adjustment requirements are considered in manpower surveys and
evaluations.      The GAO found excessive time lags in accomplishing adjustments
at inventory control points.        The AMC Inventory Monitoring Team discovered
that the primary reason for this within AK was misinterpretation             as to how
much causative research was required prior to making adjustments and how
much could be done subsequent to making the adjustment.           The following
actions have been taken:

           1.   AMC.




                                            44
                                                                              APPENDIX I
                                                                                  Page 7

               (a) In May 1970, instructions      were furnished to AMC inventory
control points stating     that consideration  of depot and inventory control
point in-float  transactions    for a one month period is mandatory prior
to adjustment processing.      At the conclusion of thirty    days following   the
discovery of a discrepancy between depot and inventory control point
balances, the adjustment must be processed unless previously         resolved.
The remaining causative research is to be accomplished after the adjustment.
This policy will result in more timely processing of adjustments.

               (b) An AMC FY 71 command objective has been established and
published specifying  the percent of items, by quarter, which must have
adjustment actions processed.

              (c) The importance of timely          processing of adjustments was
emphasized at the AMC inventory conference,         mentioned in paragraph 1V.A.
above.'

           2.   USAREUR.
                  (a) The FY 70 Physical Inventory Program directly      addresses
the problem of the extended time period between physical count and recon-
ciliation   by requiring    reconciliation    in the month following the physical
count.    The first   physical count of command assets for CY 70 was scheduled
June 1970. The reconcriliation         of the physical count is scheduled for July        1970.

               (b) Control over transactions      being entered on accountable
records during the reconciliation     period will be implemented effective
June 1970. Full transaction     reconciliation   between depots and USAMATCCMEUR
is scheduled for implementation     during CY 71.

                cc> At the installation    cited in the example, a further  100%
inventory was conducted in May of i970 in order to provide a sound basis for
the regular schedules of the CY 70 Physical Inventory      Program. This inven-
 tory was reconciled to USAMATCCIMEUR   accountable records and adjustments
posted in early June 1970.

        E. The Army concurs in the reconmendation to "either allocate new
resources or redirect       present resources as necessary to assure timely and
accurate accomplishment of reconciliation         and adjustment actions."      Manpower
requirements for the inventory program, including reconciliation             and
adjustment actions,       are considered in manpower surveys and allocations.
The SPEEDEX(depot) and ALPHA (inventory          control point) computer systems,
scheduled to be installed        at AMC depots and NICPs beginning in FY 71, provide
additional     processing capabilities    for inventory actions.    They provide
greater capability      for computer matching and evaluation     of in-float     transactions,
thereby reducing manual effort.         The study of depot inventory organization         and
grade structure,      mentioned in paragraph 1V.B. above, considered the
reconciliation      and adjustment requirements.      A study of the AMC inventory




                                               45
APPmDIX          I
    Page         8

  control point organization and grade structure        will   be conducted and is
  scheduled to be completed by January 1971.

        F. The Army concurs in the recommendation to "clarify        its depot
 research procedures -- establish firm selection criteria       and stress the
 need to uncover the underlying rather than surface causes."         The GAO
 recommended that the Army explore the use of statistical       sampling to
 select items for research.    DOD and Army regulations    currently    provide
 for sampling when the discrepancy is less than $200, but do not provide for
 sampling for larger discrepancies.     Clarification   of depot research procedures
 is dependent upon the development of revised research criteria         which will use
 sampling techniques.   The Army will convene a study group in August 1970 to
 develop revised depot research criteria      and will submit recommendations to
 DOD by October 1970. Based on the results of this study group, depot research
 procedures will be clarified.

         G. The Army concurs in the recommendation to "ascertain           the antici-
 pated research workload as a part of the overall planning for the annual
 inventory program and provide the resources needed to do the job."              As
 in the case of the recommendation on depot research procedures discussed
 in paragraph 1V.F. above, action on this recommendation is dependent upon
 the results of the evaluation of the use of statistical          sampling.    The
 Army study group, mentioned in paragraph IV-F. above, will also recommend a
 revision to inventory control point research criteria.           Based on the results
 of this study group, resource requirements will be determined.             The GAO
 emphasized the importance of causative research as a means of reducing future
 errors D Causative research that does not go back to the last inventory will
 frequently   not find the source of the error and may, therefore,          be wasted
 effort.    The resource requirement for research is dependent upon the number
 of discrepancies    and, according to current DOD and Army regulations,          upon
 the dollar value of the discrepancies.       To justify   allocation    of limited
 resources, the research criteria    must be cost effective.         The use of sampling
 techniques and other alterations     to current criteria,     which will be developed
 by the Army study group, will result     in the determination       of resources which
 ought to be provided for research.

         H. The Army concurs in the recommendation to "explore use of statis-
 tical   sampling to select items for research rather than selecting        the items
 on the basis of dollar value,      This would result in reduced workloads and
 more comprehensive data on why things go wrong."         Current DOD and Army
 regulations    provide for sampling research only when the discrepancy is
 less than $200. The Army study group9 mentioned in paragraphs 1V.F. and G.
 above, will develop a proposal to apply sampling as widely as appropriate.
 Losses and gains should be treated differently       since Reports of Survey may
 be required on losses, but not on gains.      Additionally,     items in lots'counted
 by sampling should not be researched unless the item was counted.

           I.     The Army concurs in the recommendation to "establish quality
 control        procedures at inventory control points comparable to those in




                                           46
                                                                              APPENDIX I
                                                                                  Page 9

effect at depots."   Quality control procedures for AMC inventory            control
points will be developed by January 1971, These procedures will              be used as
models for other commands to use.

      J. The Army concurs in the recommendation to 'kontinuc i.ts emphasis
on depot quality control procedures."  The DA pamphlets mentioned in paragraph
1V.A. above, emphasize quality control procedures.

         K. The Army concurs in the recommendation to "perform a complete
review of Locator record audit procedures, as recommended by the AMC
inventory monitoring       team, prior to attempting another locator record audit."
The report statement that "locator record audits are only to measure the
accuracy of depot records" is not consistent with Army/DOD procedures and
could give rise to misinterpretation             of practices.    Accuracy of depot records
is assured and measured by the results of the location survey.                 Locator
record audits,       however, are intended to accomplish two functions:            (a> to
identify    and.initiate     corrections    to erroneous depot item data, and (b)
identify    and initiate     corrective    action to discrepancies      in the inventory
control point accountable record, i.e.,              a record exists for an item at the
 inventory control point but not at the depot or vice versa.                AMC audit
procedures have been reviewed completely.               Several major deficiencies
discovered in the 1969 audit have been corrected.               The August 1971 audit will
be conducted under completely revised procedures.               A complete revision of the
audit procedures could not be accomplished in time for the August 1970 audit
and a delay in accomplishing the audit would adversely affect the inventory
program.     The corrected procedures which will be used in the August 1970
audit will contribute        significantly      to the inventory program.
        L. The Army concurs in the recommendation to "continue to follow-up
and resolve the many deficiencies    reported by the AMC inventory monitoring
team and other internal   review groups."    Follow-up and resolution     of
deficiencies   is being accomplished and will continue.       The AMC inventory
monitoring   team visits will also continue.     In addition,   inventory monitoring
teams will be established for USAREUR,USARPACand HQ Department of the
Army.




                                              47
APPENDIX II
    Page 1

                  PRINCIPAL OFFICIALS OF

                 THE DEPARTMENTOF DEFENSE
              AND THE DEPARTMENTOFTHE ARMY

       RESPONSIBLEFOR ADMINISTRATION OF ACTIVITIES

                 DISCUSSEDIN THIS REPORT


                                            Tenure of office
                                            From            -To
                    DEPARTMENTOF DEFENSE

SECRETARYOF DEFENSE:
   Melvin R. Laird                   Jan.      1969    Present
   Clark M. Clifford                 Mar.      1968    Jan.    1969
   Robert S. McNamara                Jan.      1961    Feb. 1968

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

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

U.S. EUROPEANCOMMAND:
    Gen. Andrew J. Goodgaster        July      1969    Present
    Gen. Lyman L. Lemnitzer          Nov.      1962    June 1969


                  DEPARTMENTOF THE ARMY

SECRETARYOF THE ARMY:
   Stanley R. Resor                  July      1965    Present




                                48
                                                             APPENDIX II
                                                                 Page 2

                                                  Tenure of office
                                                  From            To
                                                                  -
                             DEPARTMENTOF THE ARMY (continued)
ASSISTANT SECRETARYOF THE ARMY
  (INSTALLATIONS AND ~OasTIcs):
     J. Ronald Fox                             June   1969   Present
    Vincent P. Huggard (acting)                Mar.   1969   June 1969
     Dr. Robert A. Brooks                      Oct.   1965   Feb. 1969
 COMMANDING GENERAL, ARMYMATERIEL
   COMMAND:
     Lt. Gen. Henry A. Miley                   Nov.   1970   Present
     Gen. Ferdinard J. Chesarek                Mar.   1969   Oct. 1970
     Gen. Frank S. Besson, Jr.                 July   1962   Mar. 1969
 COMMANDER IN CHIEF, U.S. ARMY
   EUROPE:
     Gen. J. H. Polk                           June   1967   Present




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


                                        49