United States General Accounting Office GAO Report to the Secretary of Defense August 1997 DEFENSE INFRASTRUCTURE Inventory Control Point Consolidation Savings Would Be Substantial GAO/NSIAD-97-157 United States GAO General Accounting Office Washington, D.C. 20548 National Security and International Affairs Division B-276977 August 13, 1997 The Honorable William S. Cohen The Secretary of Defense Dear Mr. Secretary: The National Defense Authorization Act for Fiscal Year 1996 directed you to review the Defense Logistics Agency’s (DLA) management of all Department of Defense (DOD) inventory control points (ICP) and to report the results to the congressional defense committees and the Comptroller General of the United States. Your report identified large savings as well as potential risks associated with consolidating ICPs under DLA. We reviewed the report and are providing our observations on the estimated consolidation savings. Your report, along with our observations, may be useful to the National Defense Panel (NDP) and others as they assess matters raised by the Quadrennial Defense Review (QDR) relating to DOD’s logistics infrastructure. The Office of the Secretary of Defense (OSD) used conservative Results in Brief assumptions and cost factors in estimating cost savings from consolidating service ICPs under DLA. Its projected cost savings of $2.2 billion to $3.8 billion cover a 13-year period, fiscal years 1998 to 2010. We believe this approach to be reasonable, given the sensitive nature of the issue, the limited amount of time to perform the review, and the data available. However, the projected cost savings estimates would be at least $1.3 billion to $2.3 billion greater if OSD used base realignment and closure (BRAC) principles, such as estimating steady-state savings over a longer time period and a present value analysis instead of a constant dollar analysis.1 The potential savings would likely be greater yet if the analysis included (1) savings from all business process improvements related to the consolidation and (2) planned future improvements to DOD’s existing material management information systems. ICPsprovide services associated with the acquisition, distribution, Background maintenance, and disposal of consumable and reparable parts,2 and 1 A present value analysis calculates the value of future dollar amounts in terms of present dollars by recognizing the time value of money. In the calculation, the future monetary amounts are “discounted” to the present using the appropriate interest or discount rate. 2 Consumable parts are generally not cost-effective to repair and are thrown away when worn or broken; reparable parts can be repaired at maintenance activities when worn or broken. Page 1 GAO/NSIAD-97-157 Defense Infrastructure B-276977 supplies needed to operate weapon systems and components. DLA manages 5 ICPs at 5 locations, and the services manage 11 ICPs at 13 locations. DLA’s ICPs manage consumable items such as repair parts, personnel support items, fuel, and other bulk items and material. The services’ ICPs manage reparable components, subsystems, and assemblies and selected consumable items. The 16 ICPs employ about 24,000 people and manage parts valued at approximately $69 billion. The number of ICPs is expected to be reduced to 11 ICPs at 13 locations by fiscal year 2003.3 (See app. I for a list of service and DLA ICPs by location and by those that are scheduled for downsizing.) In past reports, we criticized DOD’s logistics system as being cumbersome, inefficient, and costly. Likewise, since at least the 1970s, DOD has recognized and been concerned about overlap and duplication in its logistics system and other inefficiencies. In 1989, OSD proposed a review to consolidate ICPs under a single service or agency manager, but the services strongly opposed the idea because they believed their ability to support weapon systems effectively would be adversely affected. However, in the National Defense Authorization Act for Fiscal Year 1996, Congress required the Secretary of Defense to review the management of all DOD ICPs by DLA, including service-managed reparable items.4 Thus, in April 1996, the Deputy Under Secretary of Defense for Logistics tasked the Logistics Management Institute (LMI) to conduct such a review. On November 19, 1996, OSD reported the results of its review to Congress and provided a copy to the Comptroller General of the United States. The report concluded that cumulative savings during fiscal years 1998 to 2010, ranging from $2.2 billion to $3.8 billion, might accrue if the management of all ICPs were transferred to DLA. The report also noted the services’ concerns regarding the transfer, principally the risk of disrupting the intraservice integration of material and weapon system management. The report noted, however, that actions could be taken to lessen the risks. Given the services’ concerns, the report stated that DOD, through its QDR and other future planning and programming efforts, would examine alternatives that might provide similar savings at less overall risk. 3 DLA’s Defense Fuels Supply Center is collocated with DLA’s headquarters at Fort Belvoir, Virginia, and is not included in these downsizing numbers. 4 The July 1990 ICP Consolidation Study (Defense Management Report Decision 926) directed the services to transfer service-managed consumables to DLA. This effort began in August 1991 and is scheduled to be completed by January 1998. Page 2 GAO/NSIAD-97-157 Defense Infrastructure B-276977 LMI developed a scenario for consolidating the service ICPs under a single Approach and manager within DLA and identified the associated potential costs, benefits, Methodology Used in and risks. LMI recognized that if the proposed consolidation were to occur, the Review the implementation might differ from its scenario, and the major personnel reductions and site consolidations envisioned in the review would likely have to undergo a process similar to that recently used for BRAC actions. Therefore, LMI considered its analysis conceptual in nature because it did not address specifics, such as which ICPs to close and which to retain. The analysis was intended to indicate only whether the consolidation has merit. Under LMI’s scenario, the consolidation would take place during fiscal years 1998-2010, reduce the number of ICPs5 to either six or three,6 and affect at least 12,000 people. Figure 1 is a chronology of LMI’s scenario, the actions projected to occur, and the associated range of savings. 5 DLA’s Defense Fuels Supply Center was not part of OSD’s review and was therefore not included in LMI’s analysis. 6 Using these two options, LMI provided a range of the potential savings. The use of six ICP locations represents the low end of LMI’s cost savings and reflects conservative assumptions, and the use of three represents the high end to reflect relatively aggressive assumptions. Page 3 GAO/NSIAD-97-157 Defense Infrastructure B-276977 Figure 1: LMI’s Consolidation Scenario Fiscal year 2010 No actions would be scheduled during this period of steady-state savings; the movement of ICP personnel would be completed by fiscal year 2008. 2009 $0.7 billion to $1.2 billion saved 2008 DLA would reduce the number of ICPs and standardize systems and procedures. Remaining business process improvements would be implemented. $0.9 billion to $1.6 billion saved 2004 2003 Under DLA management, service ICPs would continue with the same service people, policies, systems, and procedures (i.e., transfer in place). DLA could elect to consolidate support functions regionally or at a single site to reduce the number of personnel required. Some business process improvements would be implemented. $0.6 billion to $1.0 billion saved 1999 1998 A 1-year period of decision-making and pre-implementation planning. No savings Note: The total savings from fiscal year 1998 to 2010 is $2.2 billion to $3.8 billion. To identify the cost savings of its scenario, LMI considered three areas through which savings were possible: (1) a transfer in place, (2) site consolidation, and (3) business process improvements. (See app. II for a list of the business improvements identified by LMI.) LMIdeveloped the cost savings for the transfer in place and site consolidations using the services’ and DLA’s ICP and supporting Page 4 GAO/NSIAD-97-157 Defense Infrastructure B-276977 headquarters cost data. For the business process improvements, however, LMI could not obtain complete data from the services for all 16 improvements, but was able to price 4 individual initiatives that would result from the transfer. To develop the potential cost savings in these areas, LMI used cost factors and made assumptions that were conservative in nature. According to an LMI official, the team’s conservative approach was designed to avoid overstating the anticipated cost savings. After examining the report on consolidation, we believe OSD’s approach Savings Estimates was reasonable, given the sensitive nature of the issue, the limited amount Associated With of time to perform the review, and the data available. However, we Consolidation Would concluded that the cost savings estimates would have been $1.3 billion to $2.3 billion greater if BRAC principles had been used. Also, indications are Be Higher Using that the savings estimates would be even greater if the review included the BRAC Principles savings associated with all 16 business process improvements and likely future improvements to the material management information systems. Full achievement of these additional savings is dependent on the consolidation of the ICPs under a single manager. Adjustments to LMI’s Given the short time frame LMI had to review the ICP consolidation, it Methodology Would Result performed a conceptual analysis to show whether savings were possible. It in Higher Savings did not use the cost of base realignment actions (COBRA) model, which was used during the four BRAC rounds since 1988 to evaluate the cost of Estimates stationing alternatives. Although LMI was not required to use the model, COBRA was the proven, standard means for analyzing proposed consolidations. We recognize the difficulty in using the COBRA model because it requires the collection of a large amount of data and numerous assumptions, such as which sites to retain and which to close. Had LMI used some of the BRAC principles that were used in the COBRA model, such as a longer period of steady-state savings and a present value analysis in arriving at its cost savings estimates, the combined effect would have resulted in larger estimated savings.7 More importantly, using these BRAC principles provides a way of showing cost savings estimates that are consistent with how DOD projected costs and savings in previous BRAC rounds.8 7 In a present value analysis cost savings estimates are decreased, but if the time period is also extended, the net effect is an increase in the cost savings estimates. 8 We recognize that BRAC legislation expired on December 31, 1995. However, the use of these principles is an approved and established procedure DOD has used in the past to examine closure and realignment actions. Page 5 GAO/NSIAD-97-157 Defense Infrastructure B-276977 To illustrate, BRAC legislation required that consolidations be completed in no more than 6 years and that DOD project savings over a 20-year period, thus ensuring at least 14 years of steady-state savings. BRAC also required the use of a present value analysis to reflect the value of money over time. LMI projected cost savings over a 13-year period (i.e., fiscal years 1998-2010), which included an 11-year implementation period and 2 years of steady-state savings. Its analysis also did not consider the time value of money. An LMI official told us that, given more time, it would have considered using a present value analysis and a longer time period. We adjusted LMI’s cost savings estimates by applying these two BRAC principles without changing LMI’s scenario or assumptions. Specifically, we extended LMI’s ending time frame from fiscal year 2010 to 2022 to allow 14 years of steady-state savings and performed a present value analysis on LMI’s cost savings estimates, using a rate of 4 percent.9 Table 1 shows the results of our adjustments. Table 1: Projected Cost Savings Estimates Dollars in billions Consolidation Discount Years of period—fiscal rate steady-state Projected cost Projected by years (percent) savings savings LMI 1998 to 2010 None 2 $2.2 to $3.8 GAO 1998 to 2022a 4.00 14 $3.5 to $6.1 a To ensure 14 years of steady-state savings without changing LMI’s assumptions, we had to extend the time period. LMI’s analysis could be adjusted in many ways if the scenario assumptions were changed. We could have used a 20-year period (fiscal years 1998-2017), which would include 14 years of steady-state savings. Although we believe this alternative calculation would generate savings similar to or greater than those from our analysis, we would have had to make numerous assumptions about LMI’s consolidation scenario. For example, by achieving consolidation within the first 6 years (i.e., between fiscal year 1998 and 2003, or sooner), DOD could increase the potential cost 9 Since the costs and savings were in constant dollars (i.e., excluded inflation), we used a real discount rate of 4 percent (i.e., a nominal interest rate of 6.9 percent minus a projected inflation rate of 2.9 percent) for our present value analysis. For the nominal interest, we used the yield on U.S. Treasury bonds for the period of our analysis, and for the projected inflation rate, we used the average of inflation forecasts from two major economic forecasting firms. Page 6 GAO/NSIAD-97-157 Defense Infrastructure B-276977 savings even more. We have previously reported on the effect of implementing BRAC actions sooner and the resulting increase in savings.10 Some Potential Savings The savings identified in LMI’s analysis do not include potential savings Are Not Included in from all 16 business process improvements and a DOD-wide material Savings Estimates management information system. We were unable to quantify these associated costs and savings, but we believe their inclusion into LMI’s analysis would increase LMI’s cost savings estimates. Business Process Although LMI identified 16 business process improvements from which Improvements savings could be anticipated, it estimated costs and savings for only 4. These four, however, account for a significant portion of the overall estimated savings—ranging between $1.5 billion and $2.7 billion. Nevertheless, the additional 12 could also result in savings. According to LMI officials, these business process improvements are a sample of improvements that DLA could make as a single manager for all DOD ICPs, to include improving the contracting methodology and process, deleting inactive parts, and improving material acquisitions and inventory storage. According to an LMI official, LMI estimated savings for only four improvements because of the lack of data, time constraints, and limited resources. Service officials stated that the savings associated with these four process improvements duplicate ongoing service efforts and should not be considered in this analysis. However, they did not provide data to support their statements.11 We believe that even greater savings could be achieved if the business process improvements were implemented by a single manager across service lines for all of DOD’s ICPs. DOD-wide Material At the time of LMI’s analysis, DOD was planning to implement the Material Management Information Management Standard System to be used at its ICPs.12 In July 1995, DOD System estimated it would spend about $5.3 billion to develop, deploy, and maintain the system at its ICPs, and it expected the effort to produce as much as $15 billion in savings over a 15-year period. According to an LMI official, Material Management Steering Group officials told the LMI team 10 Military Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996). 11 Only the Navy provided documentation; however, most of its process improvements were conceptual and would be limited to the Navy. 12 This system was intended to be independent from over 500 existing systems to carry out wholesale logistics operations. The systems cost billions of dollars in maintenance and increasingly result in unnecessary requisitions and excess inventory. Page 7 GAO/NSIAD-97-157 Defense Infrastructure B-276977 not to consider using these numbers because of the questionable costs and savings estimates. We later reported that DOD had underestimated the costs and overestimated the savings.13 Because of difficulty in developing the system, the strategy to develop and implement a standard material management system was abandoned. According to a former senior official involved in the development of the system, progress was marred by incompatible service goals that could be overcome if the ICPs were consolidated under a single organization such as DLA. DOD officials told us that they did not believe a standard system would work, considering the differences in how each service does business. However, LMI and several military officials said that a standard database that could be shared was needed. Although the costs and savings associated with a standard system are not easily quantifiable, we believe that successful implementation of a standard system or database would be more likely and savings would be achievable under a single organization. The National Defense Authorization Act for Fiscal Year 1997 established QDR Consideration of the QDR to examine defense requirements and strategy and develop a ICP Consolidation revised defense program through 2005. The act also established an NDP to review the QDR’s work and provide you with recommendations for improvements to the QDR’s review, which it did on May 15, 1997. In addition, the NDP will report to you on additional matters by December 1, 1997. DOD established a QDR Infrastructure Panel Logistics Task Force to examine DOD’s infrastructure issues, including ICP consolidation alternatives. The Logistics Task Force considered six alternatives (see app. III for a list of all six alternatives) and decided against consolidating service ICPs and reparable inventory under DLA, even though the savings estimates were much greater than any other alternative. Instead, the task force recommended establishing one ICP per service with multiple locations. Only the recommended alternative was forwarded to the NDP for its consideration. In the NDP’s May 15, 1997, report, the NDP reported on the QDR’s changes and reductions to DOD’s infrastructure but did not specifically address ICP consolidation. According to an NDP staff member, DOD infrastructure issues 13 Defense IRM: Critical Risks Facing New Materiel Management Strategy (GAO/AIMD-96-109, Sept. 6, 1996). Page 8 GAO/NSIAD-97-157 Defense Infrastructure B-276977 are still being considered by the Panel, but it is uncertain whether ICP infrastructure will be addressed in the NDP’s December 1, 1997, report. Although substantial savings are possible by consolidating the services’ Recommendation ICPs under DLA, the services have resisted such proposals, citing potential risks that could affect operational effectiveness. Given this situation, we recommend that you ask the NDP to examine the savings and risks associated with ICP consolidation under DLA. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement on actions taken on this recommendation to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of the report and to the Senate and House Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of the report. DOD generally concurred with our findings, but stated that without Agency Comments addressing the risks associated with the consolidation, our cost savings and Our Evaluation projections would not be very meaningful. (See app. IV for a reproduction of DOD’s comments.) We agree with DOD that the risks cannot be ignored. However, as indicated in the OSD report, these potential risks can be mitigated. Given these circumstances, we believe that the NDP should examine both the savings and risks associated with the consolidation of ICPs under DLA. Although this recommendation was not in the draft report DOD reviewed, our subsequent review of the QDR and NDP reports prompted us to add this recommendation. During our review, we evaluated matters related to the cost of the Scope and proposed transfer of service-managed ICPs to DLA. We did not address the Methodology risks associated with the proposed transfer, nor did we examine any of DOD’s ongoing initiatives in the logistics infrastructure area. However, we did obtain some information on pertinent matters considered by the Logistics Infrastructure Panel of the QDR. To obtain an overall service perspective on the cost aspects of the report, we held discussions with cognizant officials from OSD; the Joint Chiefs of Staff; and headquarters and installations of the Army, Navy, Marine Corps, Air Force, and Defense Logistics Agency, and reviewed documents Page 9 GAO/NSIAD-97-157 Defense Infrastructure B-276977 provided by the services. Locations visited included the Communications and Electronics Command, Fort Monmouth, New Jersey; the Naval Inventory Control Point and Naval Supply Systems Command, Mechanicsburg, Pennsylvania; Naval Sea Systems Command, Washington D.C.; Air Force Materiel Command, Dayton, Ohio; and Oklahoma City Air Logistics Center, Oklahoma City, Oklahoma. To understand the report’s methodology for estimating costs, we talked with OSD and LMI officials, reviewed LMI-prepared data14 and spreadsheets, and randomly checked LMI’s calculations. To estimate additional potential cost savings, we adjusted LMI’s data to include a longer time period of steady-state savings and a present value analysis. We conducted our review between December 1996 and June 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services and the House Committee on National Security. We will make copies available to others on request. Please contact me on (202) 512-8412 if you or your staff have any questions about this report. Major contributors to this report were George Jahnigen, Kevin Perkins, and David Epstein. Sincerely yours, David R. Warren, Director Defense Management Issues 14 Most of the information we used had been summarized in an LMI-prepared draft (Consolidation of DOD Inventory Control Points Under the Defense Logistics Agency: An Analysis of the Risks and Benefits, Jan. 28, 1997). Page 10 GAO/NSIAD-97-157 Defense Infrastructure Page 11 GAO/NSIAD-97-157 Defense Infrastructure Contents Letter 1 Appendix I 14 DOD’s Inventory Control Points Appendix II 15 Business Process Improvements Under DLA’s Management of ICPs Appendix III 16 ICP Consolidation Alternatives Considered by the Quadrennial Defense Review Appendix IV 17 Comments From the Department of Defense Table Table 1: Projected Cost Savings Estimates 6 Figure Figure 1: LMI’s Consolidation Scenario 4 Page 12 GAO/NSIAD-97-157 Defense Infrastructure Contents Abbreviations BRAC base realignment and closure COBRA cost of base realignment actions DLA Defense Logistics Agency DOD Department of Defense ICP inventory control point LMI Logistics Management Institute NDP National Defense Panel OSD Office of the Secretary of Defense QDR Quadrennial Defense Review Page 13 GAO/NSIAD-97-157 Defense Infrastructure Appendix I DOD’s Inventory Control Points 9 3 8 11 4 9 1 13 10 10 5 7 2 12 6 15 16 14 1 Defense Supply Center Columbus, Columbus, Ohio NO 10 Naval Inventory Control Point, Mechanicsburg, Pa. and 2 Defense Supply Center Richmond, Richmond, Va. NO Philadelphia, Pa. NO 3 Defense Industrial Supply Center, Philadelphia, Pa. YESa 11 Ogden Air Logistics Center, Ogden, Utah NO 4 Defense Personnel Support Center, Philadelphia, Pa. YESa 12 Oklahoma City Air Logistics Center, Oklahoma City, Okla. NO 5 Defense Fuels Supply Center, Fort Belvoir, Va.b NO 13 Sacramento Air Logistics Center, Sacramento, Calif. YES 6 Army Missile Command, Huntsville, Ala. NO 14 San Antonio Air Logistics Center, San Antonio, Tex. YES 7 Aviation and Troop Command, St. Louis, Mo. YES 15 Warner Robins Air Logistics Center, Warner Robins, Ga. NO 8 Communications and Electronics Command, 16 Marine Corps Logistics Base, Albany, Ga. NO Fort Monmouth, N.J. NO 9 Tank and Automotive Command & Armament and Army Defense Logistics Agency Chemical Acquisition and Logistics Activity, Warren, Mich. and Rock Island, Ill. NO Air Force Navy Marine Corps Slated for BRAC downsizing YES NO a These two activities are being combined as a result of a 1995 base realignment and closure (BRAC) action. b This activity was not part of the Office of the Secretary of Defense’s (OSD) review. Page 14 GAO/NSIAD-97-157 Defense Infrastructure Appendix II Business Process Improvements Under DLA’s Management of ICPs Savings estimated in Business process improvement LMI’s analysis Improved contracting methodology and process: Improves contracting efficiency by emphasizing Yes corporate contracting and reduced acquisition lead times. Deletion of inactive items: Deletes from DOD’s catalog items for which no current applications have Yes been identified, thereby reducing item management costs. Catalog total quality management: Corrects catalog data, which will facilitate correct requirements No computations and decisions to repair or procure.a Improved demilitarization: Corrects coding errors dealing with demilitarization responsibilities and No facilitates timely disposal of excess material. Improved stock positioning: Uses better data on requisitioner locations to reposition stock and No decreases shipping and storage costs and response time. Item reduction and entry control: Reviews items during weapon system design phase to identify all No equivalent items, leading to reductions in items to be managed and inventory investments. Secondary-item provisioning on end-item contracts: Establishes a DOD program to deal with No provisioning line items with end items, thereby reducing procurements and potentially reducing prices as administrative costs are reduced. Source breakout: Strengthens DLA’s program to identify subcontractors and other less costly sources of No supply. Workloading of depot maintenance: Provides maintenance depots with better reparable parts induction No scheduling, resulting in reduced inventories. Integration of initial and replenishment requirements: Integrates requirements procedures used by Yes program managers to combine computation of initial inventory and replenishment levels. Single set of ICP policies and procedures: Eliminates current duplication of policies and procedures Yes among the services and DLA for secondary items, thereby generating personnel savings. Integration of wholesale and retail requirements: Reduces wholesale and retail inventory investment No by using procedures that integrate wholesale and retail responsiveness and inventory costs. Reduction of service-unique catalog data: Eliminates unique service management codes, thus No reducing costs associated with data management. Single design activity for materiel management system: Combines into one DLA activity the activities No of service design agencies that develop and maintain service-unique software for managing secondary items. Single ICP managing items on a weapon system: Realigns item management along weapon system No lines, eliminating file duplication and facilitating computations using weapon system readiness goals. Uniform credit policy for returns: Establishes a single policy for giving credit to organizations returning No materiel, thereby simplifying budgeting and accounting at customer levels and industrial fund accounting. a This process improvement was considered by OSD outside of this review. The decision to consolidate cataloging functions was announced on March 18, 1997. Page 15 GAO/NSIAD-97-157 Defense Infrastructure Appendix III ICP Consolidation Alternatives Considered by the Quadrennial Defense Review Alternative Description Components involved Consolidation of selective Consolidation of selective All DOD components functions ICP functions at a single site within a region. Global Primary Inventory One wholesale manager for Military services Control Activity a common-use reparable item (or for similar common use reparable items). Partnerships Electronic networking and All DOD components tasking to link ICPs and provide for a mechanism for executing partnership (intra- or inter-component). Intra-component Reduction of each DOD All DOD components consolidationa component’s ICPs (e.g., 1 ICP per service and 1 or 2 ICPs for DLA). Single management element Assignment of ICP Military services management to all services, except the Marine Corps, along weapon system lines (e.g., Air Force - aircraft, Navy - ships, and Army - ground equipment). DLA as single managerb Management of all DOD All DOD components ICPs under DLA. a This alternative was selected by the Quadrennial Defense Review and forwarded to the National Defense Panel. b This alternative was reviewed by OSD as required by the National Defense Authorization Act for Fiscal Year 1996. Page 16 GAO/NSIAD-97-157 Defense Infrastructure Appendix IV Comments From the Department of Defense (709232) Page 17 GAO/NSIAD-97-157 Defense Infrastructure Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. 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Defense Infrastructure: Inventory Control Point Consolidation Savings Would Be Substantial
Published by the Government Accountability Office on 1997-08-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)