oversight

Federal Property Disposal: Information on DOD's Personal Property Disposal Process

Published by the Government Accountability Office on 1997-07-08.

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

                     United States General Accounting Office

GAO                  Briefing Report to Congressional
                     Requesters



July 1997
                     FEDERAL PROPERTY
                     DISPOSAL
                     Information on DOD’s
                     Personal Property
                     Disposal Process




GAO/NSIAD-97-155BR
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division

                   B-276848

                   July 8, 1997

                   The Honorable John R. Kasich
                   Chairman, Committee on the Budget
                   House of Representatives

                   The Honorable Collin C. Peterson
                   The Honorable Peter A. DeFazio
                   House of Representatives

                   In response to your request, we obtained information on the Department
                   of Defense’s (DOD) personal property disposal process. Our specific
                   objectives were to determine (1) the way the disposal process works,
                   (2) DOD’s rate of return when it sells this property and the private sector’s
                   rate of return on certain sales, and (3) the best business practices and
                   innovative techniques DOD is using or considering for use in disposing of
                   unwanted personal property. On March 25, 1997, we briefed your staff on
                   the information we have obtained. This report documents the information
                   presented at that briefing.


                   The Federal Property and Administrative Services Act of 1949
Background         (P.L. 81-152), as amended, placed responsibility for the disposition of
                   government real and personal property with the General Services
                   Administration (GSA). GSA delegated disposal of DOD personal property to
                   the Secretary of Defense, who in turn delegated it to the Defense Logistics
                   Agency (DLA). Under DLA, the Defense Reutilization and Marketing Service
                   (DRMS) carries out the disposal function. Personal property not disposed of
                   by DRMS, for example, nuclear devices and cryptographic equipment, which
                   are disposed of by the military services themselves, are not discussed in
                   this report.

                   DRMS has about 170 Defense Reutilization and Marketing Offices (DRMO)
                   worldwide that receive and dispose of personal property for DOD activities.
                   In fiscal year 1996, DRMS disposed of millions of items with a reported
                   acquisition value (the amount originally paid for the item or most recently
                   paid for a like item) of almost $24 billion.


                   The DOD disposal process, which is governed by numerous laws and
Results in Brief   regulations, starts when DOD activities turn in items to the DRMOs for
                   disposal. Upon receipt, DRMO personnel inspect the items for condition,




                   Page 1                               GAO/NSIAD-97-155BR Federal Property Disposal
B-276848




acquisition value, and special handling requirements such as those for
pilferable or militarily sensitive items. Items are accumulated for 14 to
28 days and then processed together. DRMS’ disposition priorities are to
(1) reutilize property within DOD, transfer items to other federal agencies
and organizations with equivalent priority for the purpose of obtaining
excess property and (2) donate the remaining items to eligible entities
such as state and local governments, among many others. Items that
remain after these priorities have been served are sold to the general
public or disposed of, primarily through service contracts.

DRMS’ overall rate of return on the reported acquisition value of all usable
property it sold in fiscal year 1996 was 1.97 percent. When compared with
the private sector’s rate of return for similar items, DRMS’ rates are low.
Airline companies, for example, report receiving 40 to 50 percent of the
manufacturer’s list price for aircraft parts.1 There are many reasons for
DRMS’ lower rate of return. For example, many of the aircraft parts it
disposes of only have military application, and those with commercial
application are not certified by the Federal Aviation Administration, a
requirement for commercial use. Another factor lowering DRMS’ rate of
return is that the best items are reutilized, transferred, or donated, leaving
the least marketable items available for sale. The volume and types of
items DRMS disposes of annually (about 4 million line items) also make it
difficult for DRMS to develop expertise or to tailor disposal strategies for
individual items like the private sector does. Moreover, the quantities,
constant influx of items, and time limits on the various phases of the
process drive DRMS’ emphasis on moving items through the process quickly
to make room for incoming items.

DOD is seeking to improve its process by using more commercial practices
and making greater use of the private sector in disposing of property.
Among the key initiatives it is employing or considering include
contracting with private auctioneering companies to conduct property
sales, using the Internet to advertise available property, selling the
property to private contractors that will then dispose of it and share the
proceeds with DOD, and restructuring DRMS’ organization to operate and
compete more like a private enterprise.




1
 Commercial Practices: Opportunities Exist to Enhance DOD’s Sales of Surplus Aircraft Parts
(GAO/NSIAD-94-189, Sept. 23, 1994).



Page 2                                         GAO/NSIAD-97-155BR Federal Property Disposal
                  B-276848




                  We interviewed DLA and DRMS officials and reviewed documentary
Scope and         information provided by them on the DOD personal property disposal
Methodology       process and on the initiatives underway or planned to use best commercial
                  practices and innovative techniques to improve DOD’s property disposal
                  operations. We also obtained quantitative data and statistics, produced by
                  DOD systems, on disposal operations and the rate of return achieved on
                  property sales. We did not independently verify the reliability of that data.
                  In addition, we used information on rates of return for aircraft parts
                  obtained from private sector airline officials during a prior GAO evaluation
                  since aircraft parts represent a significant percentage of the acquisition
                  value of DOD’s personal property sales.

                  We conducted our work from November 1996 through March 1997 in
                  accordance with generally accepted government auditing standards.


                  In its comments on a draft of this report, DOD agreed with the information
Agency Comments   presented. We also made the suggested clarification changes referred to in
                  its response where appropriate in the report. DOD’s comments are included
                  as appendix I.


                  We are sending copies of this report to the Chairmen, Senate Committee
                  on Armed Services, House Committee on National Security, and Senate
                  and House Committees on Appropriations; the Secretary of Defense; the
                  Administrator of the General Services Administration; the Director of the
                  Defense Logistics Agency; the Commander of the Defense Reutilization
                  and Marketing Service; and the Director, Office of Management and
                  Budget. Copies will also be made available to others upon request.

                  If you or your staff have any questions concerning this report, please
                  contact me on (202) 512-8412 or my Assistant Director, Kenneth R.
                  Knouse, Jr., on (202) 512-9280. The major contributors to this report are
                  listed in appendix II.




                  David R. Warren, Director
                  Defense Management Issues




                  Page 3                              GAO/NSIAD-97-155BR Federal Property Disposal
Contents



Letter                                                                                              1


Briefing Section I                                                                                  6
                        How It Works                                                                6
DOD’s Disposal
Process
Briefing Section II                                                                                12
                        Average Dispositions                                                       12
DRMS’ Disposal          Disposition by Reported Acquisition Value                                  13
Statistics
Briefing Section III                                                                               14
                        Overall Rate of Return                                                     14
Rate of Return on       Higher Rate of Return Overseas During FY 1996                              15
Sales                   Airlines’ Proceeds for Aircraft Parts Are Higher Than DOD’s                16
                        Some Reasons DOD Has Lower Rates of Return Than the Private                18
                          Sector

Briefing Section IV                                                                                19
                        DOD Recognizes Improvement Needed                                          19
DRMS’ Improvement       DRMS’ Vision for the Future                                                20
Efforts                 Key Initiatives                                                            21

Appendix I                                                                                         28

Comments From the
Department of
Defense
Appendix II                                                                                        29

Major Contributors to
This Report




                        Page 4                            GAO/NSIAD-97-155BR Federal Property Disposal
Contents




Abbreviations

DLA        Defense Logistics Agency
DOD        Department of Defense
DRMO       Defense Reutilization and Marketing Office
DRMS       Defense Reutilization and Marketing Service
FMS        Foreign Military Sales
GAO        U.S. General Accounting Office
GSA        General Services Administration


Page 5                            GAO/NSIAD-97-155BR Federal Property Disposal
Briefing Section I

DOD’s Disposal Process




      GAO            How It Works

               Excess Property a                                       Surplus Property b
           Property          Federal             Donation              Sales                  Blue                Sales
         accumulation         cycle               cycle              preparation              light          inspection/award
          14-28 days         21 days             21 days             10-42 days              special           and removal
       Start                                                                                                Finish

       Period 1          Period 2          Period 3              Period 4                 Period 5          Period 6
                                                                                          (3 days)


                     Excess property sent to Defense
                     Reutilization and Marketing Offices
                        Items inspected, demilitarization (rendering an item militarily
                        unusable) and condition codes verified, and type of sale
                        determined (i.e., international, local, or retail).
                        Items requiring special handling such as hazardous material
                        and hazardous waste, precious metals, and items requiring
                        demilitarization are identified in order to apply extra controls.

                                       a
                                        Property not needed by DOD activities is considered to be excess and is available for
                                       reutilization by other DOD activities, transfer to other federal agencies, and transfer to
                                       organizations that have been given priority equal to that of the federal government for the purpose
                                       of obtaining excess personal property.
                                       b
                                        Property not needed by the federal government or organizations with equal priority is considered
                                       surplus and is available for donation to eligible organizations or for sale.




                                       Page 6                                          GAO/NSIAD-97-155BR Federal Property Disposal
                Briefing Section I
                DOD’s Disposal Process




GAO   How It Works (Cont.)


      Items are accumulated for 14 to 28 days.
        Items collected during period are processed
        together.
        All customers may screen and tag items at
        anytime during the process, but items may only
        be issued and removed in accordance with
        established priorities.

       Federal requisition and removal




                Page 7                   GAO/NSIAD-97-155BR Federal Property Disposal
                    Briefing Section I
                    DOD’s Disposal Process




GAO
       How It Works (Cont.)

      Military services, federal agencies, and other entities
      given priority equal to DOD, such as certain law
      enforcement organizations and nonprofit humanitarian
      relief agencies, are given 14 days to requisition and 14
      days to remove items unless otherwise agreed with the
      DRMO.

 Donee requisition and removal
       Approved donees are given 14 days to requisition
      remaining items and 14 days to remove them unless
      otherwise agreed with the DRMO.
       Donees include state and local governments, boy and
      girl scouts, museums, and others.




                    Page 8                   GAO/NSIAD-97-155BR Federal Property Disposal
                 Briefing Section I
                 DOD’s Disposal Process




GAO   How It Works (Cont.)


  Once federal and other organizations and donees have
  made selections, remaining items are prepared for
  sale.

3-day "blue light" special
  Items previously tagged (i.e., marked by a qualified
  organization whose intention is to take the items) but
  not taken within the prescribed timeframe are available
  during this 3-day period for removal and use by other
  qualified organizations.

Items inspected, winning bids awarded, and
items removed




                 Page 9                   GAO/NSIAD-97-155BR Federal Property Disposal
                    Briefing Section I
                    DOD’s Disposal Process




GAO    How It Works (Cont.)


  Three types of sales
  International sales--items with global appeal such
  as machine tools (i.e., potential buyers throughout
  the United States and overseas) or property that
  requires additional controls such as hazardous
  materials.
      Catalog published when 200 to 400 items are
      accumulated (buyers submit sealed bids).
      Items remain at the DRMO.
      High bidder for items requiring extra controls or
      demilitarization undergoes clearance process
      before award.




                    Page 10                  GAO/NSIAD-97-155BR Federal Property Disposal
                 Briefing Section I
                 DOD’s Disposal Process




GAO   How It Works (Cont.)

       Local sales--items that do not meet international
       appeal criteria
        Catalog sales (buyers submit sealed bids and have
        10 calendar days to pay for and remove items)
        Auction at the DRMO (buyers submit bids on the
        spot and have 5 working days to pay for and remove
        items)
       Retail sales--40 DRMOs with retail stores
        Items with commercial appeal, such as computers,
        furniture, clothing, shoes, etc.
        Items must be paid for and removed the same day.




                 Page 11                  GAO/NSIAD-97-155BR Federal Property Disposal
Briefing Section II

DRMS’ Disposal Statistics




      GAO             Average Dispositions, FY 1992-96


                       30.7%                                                                   31.3%




                                                      4.5%

                                                                                                                                4.5%

                                                             8.1%
                                                                                                                                   5.2%




                                                         11.0%

                                                                      35.9%
                                                                                                                           23.0%

               45.7%


                 By reported acquisition value                                                By line item
                                                  a             b
                                   Reutilization        T/D/F       Sales      Scrap        Other




                                        a
                                        Some property declared excess by one activity within DOD is reutilized by other DOD activities.
                                        b
                                         Includes personal property (1) transferred (2.1%) to other federal agencies or organizations
                                        given priority equal to that of the federal government, (2) donated (2.1%) to eligible organizations,
                                        and (3) sold (.3%) to foreign military sales customers—the system through which
                                        government-to-government sales of military equipment are made.


                                        Note: Totals for line item dispositions do not add due to rounding.




                                        Page 12                                          GAO/NSIAD-97-155BR Federal Property Disposal
                                Briefing Section II
                                DRMS’ Disposal Statistics




  GAO           Disposition by Reported Acquisition
                Value, FY 1992-96
                                                      b
Dollars in          FY 1992            FY 1993                 FY 1994                FY 1995                 FY 1996
millions

Reutilization      1,600   7%        1,770      5%           2,146      8%         2,295        9%        2,848      12%

Transfers           540    2%          532      2%             532      2%            575       2%          465        2%

Donations           502    2%           610      2%            648      2%           551       2%           592        2%

Sales              5,100 22%         9,100     26%           8,722     34%         9,189      38%         8,459      35%

FMS                  99 <1%               18   <1%              84     <1%             42     <1%           133       1%

Scrap              9,882 43%        14,553     42%         13,557      53%        11,372      48%        11,099      47%

Other a           5,744 24%          7,878     23%             344      1%            318       1%           305       1%

Total             23,467 100%       34,461 100%            26,033 100%            24,342 100%            23,901 100%




                                a
                                 According to DRMS personnel, the “other” category was significantly larger in fiscal years 1992
                                and 1993 than in subsequent years because it was used as a “catch all” category.
                                b
                                 Fiscal year 1993 disposals were larger than other years because of DOD base closures and
                                drawdowns (force reductions).




                                Page 13                                        GAO/NSIAD-97-155BR Federal Property Disposal
Briefing Section III

Rate of Return on Sales




      GAO              Overall Rate of Return


                       Rate of return is the proceeds from the
                       sale of usable items divided by the
                       reported acquisition value of usable
                       property sold.

                           FY 1994--1.83%
                           FY 1995--2.28%
                           FY 1996--1.97%

                       DRMS' overall rate of return is based on
                       all usable items sold.




                                Page 14           GAO/NSIAD-97-155BR Federal Property Disposal
                Briefing Section III
                Rate of Return on Sales




GAO   Higher Rate of Return Overseas During
      FY 1996
       Continental U.S.--1.77%
       Europe--6.98%
       Pacific--2.88% (not as high as Europe due to
       (1) bilateral agreements that give the host country
       first opportunity to buy the items, (2) a smaller
       customer base, and (3) higher shipping costs due to
       longer distances)

      Reasons for Better Overseas Rates of Return:
         Fewer transfer and donation customers
         Better items available for sale




                Page 15                   GAO/NSIAD-97-155BR Federal Property Disposal
               Briefing Section III
               Rate of Return on Sales




GAO   Airlines' Proceeds for Aircraft Parts Are
      Higher Than DOD's


        United often receives about 50% of
        manufacturers' list price.
        Delta generally receives 40% to 50%
        of manufacturers' list price.
        DOD receives less than 1% of
        reported acquisition value on aircraft
        parts sales.




               Page 16                   GAO/NSIAD-97-155BR Federal Property Disposal
                 Briefing Section III
                 Rate of Return on Sales




GAO   Airlines' Proceeds for Aircraft Parts Are
      Higher Than DOD's (Cont.)
      Reasons for lower rate of return on aircraft parts
        DOD surplus aircraft parts are not certified by the
        Federal Aviation Administration for use on
        commercial aircraft.
        Limited pursuit by DOD of best practices such as
        (1) identifying highly marketable commercial-type
        parts and their civil applications, (2) keeping
        parts separately at the time of sale or grouping
        like parts together, and (3) using active
        marketing techniques.
        DOD staff lack expertise in identifying parts with
        commercial applicability.




                 Page 17                   GAO/NSIAD-97-155BR Federal Property Disposal
                           Briefing Section III
                           Rate of Return on Sales




GAO      Some Reasons DOD Has Lower Rates of
         Return Than the Private Sector
 DOD                                                 Private sector
Emphasizes moving items quickly and                  Emphasizes maximizing return
complying with laws
Handles huge quantities, types, and                  Handles few quantities, types, and
conditions of items                                  conditions of items

Cannot develop disposal expertise for 7              Can develop disposal expertise for fewer
million active line items                            items

Has rigid disposal system defined by laws            Can tailor disposal strategy on an
and regulations; all items treated the               individual item basis
same

Best items are taken through transfers               Best items are not taken through
and donations                                        transfers and donations

Sells items that are usually not new                 Sells items that often were overbought or
                                                     did not sell well (i.e., new items)




                           Page 18                               GAO/NSIAD-97-155BR Federal Property Disposal
Briefing Section IV

DRMS’ Improvement Efforts




      GAO             DOD Recognizes Improvement
                      Needed
                      DRMS has a vision for the future.
                      DRMS is reengineering the disposal
                      process and implementing initiatives for
                      improvement.




                               Page 19          GAO/NSIAD-97-155BR Federal Property Disposal
                  Briefing Section IV
                  DRMS’ Improvement Efforts




GAO   DRMS' Vision for the Future

       Disposal operations will cost less and provide more
       value to the taxpayer.
       Private sector will be used to help if it makes good
       business sense.
       Military services and customers will choose and pay for
       the type and level of services and products they require.
       DRMS will transmit information electronically about
       property instead of physically moving property.
        Accountability maintained through centralized information
        system.
        DRMS and customers will use information technology.
       DRMS will become an administrator of contracts.




                  Page 20                     GAO/NSIAD-97-155BR Federal Property Disposal
                 Briefing Section IV
                 DRMS’ Improvement Efforts




GAO   Key Initiatives

       Auctioneering Contracts
        One contract currently ongoing.
        Five contracts previously awarded with only three
        contractors participating in sales.
       Use of the Internet for Advertising
        Customers can get information about available items.
        Bids can be submitted on the Internet (but not
        payment).




                 Page 21                     GAO/NSIAD-97-155BR Federal Property Disposal
                 Briefing Section IV
                 DRMS’ Improvement Efforts




GAO   Key Initiatives (Cont.)

       Recycling Control Point (RCP) Concept
        Property remains at the depots to save labor and
        other costs.
        Screening and sales processes automated.
        Seven depots have implemented this concept.
        Plan to expand to other depots and retail level.
       Financial Advisor contract awarded to assist in
       developing proposals for joint venture
       arrangements with private sector.




                 Page 22                     GAO/NSIAD-97-155BR Federal Property Disposal
                  Briefing Section IV
                  DRMS’ Improvement Efforts




GAO
      Key Initiatives (Cont.)

       Profit-Sharing with Private Sector
        Prototype sales contract for medical, dental, and
        veterinary property awarded in April 1997 to three
        contractors.
          Contractors will pay DRMS 75% of its
          historical rate of return up front.
          Contractors will also pay DRMS a "shared bid
          percentage" (ranging from 22.4% to 33.2% depending
          on geographical area) on all resale proceeds higher
          than the 75% historical rate of return.
        Similar type of contract to be offered for other
        commodities such as laboratory and test equipment, and
        trucks, tractors, and wheeled vehicles.




                  Page 23                     GAO/NSIAD-97-155BR Federal Property Disposal
                 Briefing Section IV
                 DRMS’ Improvement Efforts




GAO   Key Initiatives (Cont.)

       Enterprise Management
        Organizational design concept DOD chose to
        improve efficiency through use of private sector
        business practices and selective outsourcing.
        Concept used by public organizations like
        Minnesota's Department of Administration, which
        separated operations into (1) those inherently
        governmental, (2) utility functions the private
        sector can help with, and (3) those that could be
        done entirely by the private sector if most
        efficient.




                 Page 24                     GAO/NSIAD-97-155BR Federal Property Disposal
                Briefing Section IV
                DRMS’ Improvement Efforts




GAO   Key Initiatives (Cont.)

       DRMS plans to phase in Enterprise
       Management over 3 years.
        Arthur Andersen LLP will help develop
        implementation plan.
        Implementation includes examining
        mission-essential functions and reengineering
        them, if needed, and determining the most
        cost-effective way to do them (in-house or
        outsource).




                Page 25                     GAO/NSIAD-97-155BR Federal Property Disposal
                    Briefing Section IV
                    DRMS’ Improvement Efforts




GAO   Key Initiatives (Cont.)

       Reorganizing into three units
       1. CORPORATE/LEADERSHIP--Includes inherently
          governmental functions, such as senior management and
          legal functions, to be handled by government employees.
       2. UTILITY--Includes reutilization, transfer, and donation
          functions. The government will be the sole provider but
          may use private firms to help. DRMS proposes to provide
          these services on a fee basis.
       3. MARKETPLACE--Includes surplus property sales and
          hazardous waste disposal. DRMS plans to contract with
          the private sector to handle sales. Activities will be able to
          choose whether they want to use DRMS' services for a fee
          or sell the property themselves.




                    Page 26                     GAO/NSIAD-97-155BR Federal Property Disposal
Page 27   GAO/NSIAD-97-155BR Federal Property Disposal
Appendix I

Comments From the Department of Defense




             Page 28      GAO/NSIAD-97-155BR Federal Property Disposal
Appendix II

Major Contributors to This Report


                        Charles I. (Bud) Patton, Jr.
National Security and   Kenneth R. Knouse, Jr.
International Affairs   F. Earl Morrison
Division, Washington,   Yolanda C. ElSerwy
                        Nancy T. Lively
D.C.




(709226)                Page 29                        GAO/NSIAD-97-155BR Federal Property Disposal
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