oversight

Defense Inventory: Inadequate Controls Over Air Force Suspended Stocks

Published by the Government Accountability Office on 1997-12-22.

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

                  United States General Accounting Office

GAO               Report to Congressional Requesters




December 1997
                  DEFENSE
                  INVENTORY
                  Inadequate Controls
                  Over Air Force
                  Suspended Stocks




GAO/NSIAD-98-29
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-276807

             December 22, 1997

             The Honorable J. Dennis Hastert
             Chairman
             The Honorable Thomas M. Barrett
             Ranking Minority Member
             Subcommittee on National Security,
               International Affairs, and Criminal Justice
             Committee on Government Reform and Oversight
             House of Representatives

             This report is one in a series of reports on the Department of Defense’s
             (DOD) secondary inventory management.1 Over the past several years, we
             have issued a number of testimonies and reports that cite the management
             of defense inventory as a high-risk area.2 As requested, this review
             assesses selected aspects of the Air Force’s logistics system for managing
             inventory in a suspended status, that is, inventory that cannot be issued
             because its condition is unknown or in dispute. Specifically, this report
             addresses the (1) reported quantity and value of suspended inventory,
             (2) weaknesses in managing suspended inventory and their potential effect
             on logistics support costs and readiness, and (3) reasons why suspended
             inventory is not well managed. The scope and methodology of our work
             are described in appendix I.


             At the end of fiscal year 1996, the Air Force reported that it was managing
Background   inventory valued at $29.3 billion.3 DOD uses a coding system to categorize
             the condition of its inventory. These codes are intended to indicate
             whether stored inventory is (1) issuable without qualification, (2) in need
             of repair, (3) usable for only a limited time, or (4) unrepairable and ready
             for disposal. DOD’s inventory management goal is to achieve a
             cost-effective system that provides the inventory needed to maintain
             readiness. When items in DOD’s inventory cannot be readily placed in one
             of these categories, DOD uses other condition codes to indicate suspended

             1
              See Related GAO Products at the end of this report.
             2
              In 1990, we began a special effort to review and report on the federal program areas designated as
             high risk because of their vulnerabilities to waste, fraud, and abuse. This effort, which was supported
             by the Senate Committee on Governmental Affairs and the House Committee on Government Reform
             and Oversight, focused on problems that were costing the government billions of dollars. We identified
             DOD’s secondary inventory management as a high-risk area at that time because of the high levels of
             unneeded inventory and the lack of adequate systems for determining inventory requirements.
             3
              Although we and others have previously questioned the accuracy of DOD’s and the Air Force’s
             inventory reports, we cite them in this report to help reflect the magnitude of the inventory involved.



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                                        inventory. Because these codes do not indicate an item’s usability, item
                                        managers must direct that the item be inspected or tested to determine its
                                        usability. The primary suspended inventory condition codes are as follows:

                                    •   J — inventory at storage warehouses that is awaiting inspection to
                                        determine its condition (hereafter referred to as material in inventory),
                                    •   K — inventory returned from customers or users to storage warehouses
                                        and awaiting condition classification (hereafter referred to as customer
                                        returns),
                                    •   L — inventory held at storage warehouses pending litigation or negotiation
                                        with contractors or common carriers (hereafter referred to as inventory in
                                        litigation),
                                    •   Q — quality-deficient inventory returned by customers or users due to
                                        technical deficiencies (hereafter referred to as quality-deficient inventory),
                                        and
                                    •   R — inventory returned by salvage activities that do not have the
                                        capability to determine the material condition (hereafter referred to as
                                        reclaimed inventory).

                                        Appendix II contains a detailed explanation of DOD’s supply condition
                                        codes.

                                        Inventory categorized as suspended is not available for use until it has
                                        been tested to determine whether it is usable. In some instances, inventory
                                        in this category that has been found to be usable can meet customer
                                        needs, thus contributing to overall military capability. DOD recognizes that
                                        inventory in a suspended status for long periods can adversely affect the
                                        availability of resources and the effectiveness and economy of supply
                                        operations. To minimize the amount of items in suspended inventory, DOD
                                        set standards for the amount of time inventory should remain categorized
                                        as suspended. These standards consider the reason for suspending the
                                        inventory and the difficulty of determining the usability of the items. The
                                        time standards by suspension category are shown in table 1.

Table 1: DOD Time Standards for
Resolving the Status of Suspended       Suspension code                                        Number of days
Inventory                               Material in inventory (J)                              90
                                        Customer returns (K)                                   10
                                                                    a
                                        Inventory in litigation (L)                            No specific time limit
                                        Quality-deficient inventory (Q)a                       No specific time limit
                                        Reclaimed inventory (R)                                180
                                        a
                                         Although no specific time limits have been set for inventory in litigation (L) and quality-deficient
                                        inventory (Q), DOD regulations emphasize that suspensions should not last indefinitely.




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                   A number of organizations are involved in the management and control of
                   suspended inventory. The Air Force Materiel Command (AFMC) administers
                   the Air Force supply system and provides suspended inventory
                   management policies and procedures. AFMC has five Air Logistics Centers
                   (ALC) that are located in different regions throughout the United States.4
                   Within each ALC, item managers are responsible for maintaining the
                   records for suspended inventory, initiating efforts to determine the
                   usability of suspended inventory, deciding whether to procure items in
                   addition to those in suspended status, and deciding whether suspended
                   items should be returned to inventory or disposed. Suspended inventory is
                   stored at warehouses operated and managed by the Defense Logistics
                   Agency (DLA). These storage activities receive, store, and issue inventory
                   and maintain inventory records.5 Once the usability of suspended
                   inventory has been determined, storage activities reclassify the inventory
                   as ready for issue, in need of repair, or ready for disposal.


                   Significant management weaknesses exist in the Air Force’s management
Results in Brief   of inventory that it categorizes as suspended. As a result, the Air Force is
                   vulnerable to incurring unnecessary repair and storage costs and
                   avoidable unit readiness problems. This situation exists largely because
                   management controls are not being implemented effectively or are
                   nonexistent.

                   Among DOD components, the Air Force reported the largest amount of
                   suspended inventory—more than 70 percent of the $3.3 billion of all DOD
                   suspended inventory.6 In April 1997, the Air Force had 403,505 secondary
                   items, valued at $2.4 billion, in a suspended status. The Warner Robins Air
                   Logistics Center had the highest reported value of suspended inventory,
                   accounting for about $1.3 billion (53 percent) of the Air Force’s suspended
                   inventory.

                   We reviewed 1,971 out of 60,575 items in suspension at Warner Robins.
                   The vast majority of the suspended items we reviewed are not being
                   reviewed in a timely manner. Of the 1,820 suspended items we reviewed

                   4
                    In July 1995, the Defense Base Realignment and Closure Commission recommended that two of the
                   five ALCs—Sacramento and San Antonio—be closed or realigned.
                   5
                    DLA bills the Air Force for these functions and the storage space assigned to its items. The storage
                   costs range from $0.75 per square foot to $7.17 per square foot depending on whether the items are in
                   open or covered storage.
                   6
                    We relied on DOD information systems during the conduct of our work. To the extent that DOD had
                   not completed a reliability assessment of the data contained in those systems, analyses in this report
                   are qualified. (See app. I for more details.)



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                      with established standards, 97 percent failed to meet these standards.
                      About 64 percent of the inventory that we reviewed had been in a
                      suspended category for over 1 year, and some had been suspended for
                      over 6 years. Delays in determining the usability of suspended inventory
                      can result in increased logistics support costs and readiness problems.
                      Warner Robins had over 2,000 unfilled customer demands (valued at about
                      $53 million) while similar items were in suspension. Over 500 of these
                      unfilled demands (valued at about $7 million) could have potentially been
                      filled with these items. Two B-52H aircraft had not been fully operational
                      for 175 days and 24 days because two $16,000 data entry keyboards were
                      not available for issue in the Air Force supply system, yet two such
                      keyboards had been maintained in a suspended status for 2 years.

                      Management controls at Warner Robins over items categorized as
                      suspended inventory have broken down and contributed to inventory
                      being in a suspended status beyond established timeframes. Air Force
                      Materiel Command guidance does not comply with DOD policy and
                      safeguard against lengthy suspensions, and Materiel Command and
                      Warner Robins oversight of inventory management has generally been
                      nonexistent. Also, Warner Robins lacks clearly defined suspended
                      inventory management procedures for, and sufficient emphasis on,
                      controlling suspended inventory. Further, management of suspended
                      inventory has not been identified in Air Force assessments of internal
                      controls as a significant weakness, as provided in the Federal Managers’
                      Financial Integrity Act of 1982.


                      DOD reported that about $3.3 billion of secondary items was in a suspended
Reported Value of     status between April and June 1997.7 Figure 1 shows the distribution of the
Suspended Inventory   reported value of suspended inventory among DOD components.
Is Over $3 Billion




                      7
                       We revalued the inventory at the latest acquisition cost by removing surcharges covering the costs to
                      operate the supply system. The $3.3 billion represents the revalued amount by removing the surcharge.



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Figure 1: Reported Value of
Suspended Inventory by DOD
Component                                                            0.4%
                                                                     Marine Corps - $0.01 Billion

                                                                     4.0%
                                                                     DLA - $0.13 Billion


                                                 •
                                                     16.4% •         Army - $0.5 Billion



                                                           •         7.2%
                                                                     Navy - $0.2 Billion



                                         72.0%
                                            •




                                                                     Air Force - $2.4 Billion




                              The Warner Robins ALC accounted for about $1.3 billion (53 percent) of the
                              Air Force’s suspended inventory. Figure 2 summarizes the value of
                              suspended inventory by ALC, and figure 3 shows the value of suspended
                              inventory by condition code at Warner Robins. Appendix III contains
                              additional details on the quantity and value of suspended inventory items.




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Figure 2: Reported Quantity and Value
of Suspended Inventory by ALC (as of
Apr. 1997)

                                                                    •               9.2%
                                                                                    Oklahoma City - $218.6 Million



                                                                        23.9% •     Ogden - $567.3 Million
                                            53.1%
                                               •

                                                                 12.6% •            San Antonio - $298.1 Million




                                                                                    1.3%
                                                                                    Sacramento - $30.4 Million

                                                                                    Warner Robins - $1,260.4 Million




                                        Note: Figures do not add due to rounding.




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Figure 3: Reported Quantity and Value
of Suspended Inventory Managed by
the Warner Robins ALC (as of                                                        0.03%
Apr. 1997)                                                                          Inventory in litigation (L) - $0.4
                                                                                    Million

                                                                                    1.52%
                                                                                    Quality-deficient inventory (Q) -
                                                                                    $19.2 Million

                                                                                    7.88%
                                                                                    Reclaimed inventory (R) - $99.3
                                                                                    Million


                                                         •       •                  4.32%
                                                                                    Material in inventory (J) - $54.5
                                                                                    Million




                                                             86.24% •               Customer returns (K) - $1,087.0
                                                                                    Million




                                        Note: Figures do not add due to rounding.



                                        Significant management weaknesses exist for inventory categorized as
Ineffective                             suspended. The Air Force is not reviewing the status of these items in a
Management Can                          timely manner and has miscategorized a significant amount of inventory.
Increase Costs and                      As a result, the Air Force is likely incurring unnecessary logistics costs and
                                        missing opportunities to support operational units’ needs in a timely
Reduce Readiness                        manner.

                                        At Warner Robins, a substantial number of items failed to meet time
                                        standards for inspection. As a result, items that may have been needed for
                                        use in the supply system were not being considered for use. We reviewed
                                        1,971 judgmentally selected suspended inventory items, valued at about
                                        $67 million, to determine the length of time the inventory remained in a




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                                       suspended status. Of the 1,820 sample items with standards, valued at
                                       $65.8 million, 1,757 items failed to meet the applicable DOD time standards.
                                       The remaining 151 sample items without time standards remained in
                                       suspension, with times ranging from 22 days to over 8 years. Figure 4
                                       summarizes the number of sample items that met or failed to meet DOD
                                       time standards, and figure 5 shows the time items remained in a
                                       suspended status by suspension category. Appendix III contains specific
                                       details of our analysis.


Figure 4: Our Analysis of Suspended
Inventory That Met or Failed to Meet
DOD Time Standards

                                                          •                     3%
                                                                                Items meeting DOD time
                                                                                standards ($0.8 million)




                                                    97%
                                                      •



                                                                                Items not meeting DOD time
                                                                                standards ($65 million)




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Figure 5: Our Analysis of the Time
Items Remained Suspended             900   Number of items
                                                                                                            826
                                     800

                                     700

                                     600

                                     500
                                                                                                 433
                                     400                                              378


                                     300
                                                                            247

                                     200

                                     100                          73

                                           5          9
                                       0

                                               0-30       31-60     61-90    91-180    181-365    366-730    730 or
                                                                                                             more
                                               Days in suspension




Timely Reviews of                    The Air Force may unnecessarily invest millions of dollars to send some
Suspended Inventory May              inventory for repair when the need may have been met from inventory in
Preclude Unnecessary                 suspension. Since Warner Robins was not making timely reviews of its
                                     inventory in suspension, usable items may have existed in that category
Repairs                              that could have been used to meet supply system demands. Our review
                                     indicated that Warner Robins officials had improperly identified 3,418
                                     customer return items, worth $115 million, as inventory in need of repair.
                                     Because these items were improperly identified as needing repair, Warner
                                     Robins officials did not inspect them to determine their usability, which in
                                     turn meant that the Air Force may have incurred costs to repair other
                                     items when usable items were actually in suspension. We were not able to
                                     determine the value of these unnecessary repair costs.


Suspended Inventory Is               Inventory managers have missed opportunities to fill orders with usable
Often Not Considered as a            items because of the untimely handling of suspended inventory. As a
Way to Satisfy Critical              result, suspended inventory is not available for use when needed by
                                     customers. When demands are made on the supply system and assets are
Operational Unit Demands             not available to fill those demands, backorders result. For the suspended
                                     items in our sample, Warner Robins had over 2,000 concurrent backorders,
                                     worth about $53 million. About 65 percent of these backorders were




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                                           essential to a weapon system’s operation and thus adversely affected the
                                           system’s ability to carry out all or portions of its assigned operational
                                           missions. If the duration of suspensions had been monitored and usability
                                           had been determined within a reasonable amount of time, over 500 of our
                                           sample items, worth about $7 million, could have been used to fill some of
                                           the backorders, as shown in table 2.

Table 2: Number of Unfilled Customer
Orders That Could Have Been Met With                                                                         Suspended items
Suspended Items                                                                                                   available to
                                                                              Suspended           Unfilled      potentially fill
                                           Suspension code                         items           orders              orders
                                           Material in inventory (J)                  332             310                    43
                                           Customer returns (K)                        12             138                    11
                                           Quality-deficient inventory (Q)             42             771                    34
                                           Reclaimed inventory (R)                    639             871                   413
                                           Total                                    1,025           2,090                   501

                                           The following examples show how weaknesses in the management of
                                           suspended inventory can affect access to potentially usable inventory:

                                       •   Warner Robins had four data entry keyboards on backorder—two of
                                           which were classified as mission critical. The keyboards, valued at $16,000
                                           each, are used on B-52H aircraft. Warner Robins inventory records showed
                                           two keyboards (see fig. 6) had been suspended in reclaimed inventory for
                                           over 2 years. In August 1997, two B-52H aircraft were not fully operational
                                           (i.e., unable to fly portions of their missions) due to the unavailability of
                                           these keyboards. One aircraft had been unable to fly portions of its
                                           mission for 175 days and the other for 24 days. At the time of our visit, the
                                           item manager had not taken action to resolve the status of the keyboards.




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Figure 6: Data Entry Keyboard in R
Condition at the Warner Robins
Warehouse




                                     •   Warner Robins had 11 signal converters on backorder—all of which were
                                         classified as mission critical. The converters, valued at $36,000 each, are
                                         used on the B-52H aircraft. Warner Robins inventory records showed three
                                         converters (see fig. 7) had been in reclaimed inventory for 2 years, from
                                         June 1995 to June 1997. In June 1997, two B-52H aircraft were not
                                         operational (i.e., grounded and unable to fly any portion of their missions)
                                         due to the unavailability of these converters. One aircraft had been
                                         grounded for 33 days and the other for 6 days. After we brought this
                                         matter to the attention of Warner Robins officials, they informed us that
                                         testing would be performed on the three converters in reclaimed inventory
                                         to determine their potential use in satisfying backorders.




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Figure 7: Signal Converter in R
Condition at the Warner Robins
Warehouse




Maintaining Unneeded              Inventory that cannot be applied to any foreseeable need is declared
Inventory Increases               excess and subject to disposal action. Warner Robins reported over
Storage Costs                     5,300 items on hand, worth over $184 million, as excess for the sample
                                  items we reviewed. Prompt disposal of such unneeded items can reduce
                                  suspended inventory and reduce inventory holding costs. Maintaining
                                  inventory that is not needed is expensive and does not contribute to an
                                  effective, efficient, and responsive supply system. DLA and private industry
                                  organizations have previously estimated that holding costs ranged from
                                  less than 1 to 15 percent or higher of an item’s inventory value. Although it
                                  is difficult to determine the precise costs to manage and maintain excess
                                  stocks, our review indicates that these costs would be millions of dollars
                                  each year.


                                  AFMC and the Warner Robins ALC lack adequate internal management
Weak Management                   controls over suspended inventory. A number of factors contributed to
Controls Exist for                delays in resolving the status of suspended inventory and prolonged
Inventory in                      inventory suspensions. First, AFMC guidance hampers the proper
                                  identification, timely inspection, and prompt reclassification of suspended
Suspended Categories              inventory. Second, Warner Robins lacks local policies and procedures that
                                  prescribe levels of responsibility and accountability for managing



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                           suspended material. Third, AFMC and Warner Robins do not provide
                           adequate oversight and monitoring of suspended inventory.


AFMC Guidance Results in   AFMC supplemental guidance enabled $846 million of inventory in need of
Improper Classifications   repair stored at Warner Robins to be improperly assigned to the customer
and Untimely Resolution    returns suspension code, thus overstating the magnitude of the Air Force’s
                           and Warner Robins’ suspended inventory. Although our review was limited
                           to Warner Robins, the remaining four ALC’s are also required to comply
                           with the supplemental policy. Consequently, the magnitude of the
                           suspended inventories at the other ALCs may also be overstated.

                           According to DOD policy, material returned in an unknown condition by a
                           customer should be assigned to customer returns and reclassified within
                           10 days. AFMC supplemental guidance, on the other hand, states that
                           two-level maintenance items returned for repair should be assigned to this
                           same category.8 When we informed AFMC officials that both customer
                           returns and repair items were commingled in the customer returns
                           suspension code, one official acknowledged that items not in need of
                           repair may not receive management attention. When we brought this same
                           matter to the attention of Warner Robins officials, they told us that, in
                           complying with the supplemental guidance, they assumed all items
                           (including $115 million worth of items in an unknown condition that were
                           returns from customers) were in need of repair, and thus made no
                           attempts to inspect and reclassify them. At Warner Robins, none of the
                           31 customer returns we reviewed met the 10-day DOD time standard; in
                           fact, 17 of the customer returns had been suspended for over 1 year.


Waiver Guidance Raises     DOD policy for managing reclaimed inventory states that these items
Questions                  should be reclassified in 180 days. AFMC supplemental guidance waives the
                           standard because of a shortage of repair funds that hindered item
                           managers’ ability to schedule reclaimed inventory for inspection within the
                           180-day limit. However, waiving the standard exacerbates existing
                           problems with lengthy suspensions. At Warner Robins, 99 percent of the
                           990 reclaimed inventory items we sampled remained suspended more than
                           180 days, and 62 percent of the inventory had been suspended over
                           2 years. Table 3 shows the number of reclaimed inventory items that had
                           been suspended for more than 2 years.

                           8
                            The Air Force has a three-level (organizational, intermediate, and depot) and a two-level
                           (organizational and depot) maintenance concept to repair component parts. Under the two-level
                           maintenance concept, broken parts that were previously repaired at the intermediate base
                           maintenance level are now repaired at the depot level.



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Table 3: Number of Sample Items in
Reclaimed Inventory for Over 2 Years   Years in suspension                                           Number of items
                                       2 to 3                                                                     597
                                       3 to 4                                                                      10
                                       4 to 5                                                                       4
                                       Total                                                                      611



Warner Robins Lacks                    Warner Robins lacks specific procedures for resolving the status of items,
Suspended Inventory                    assigning responsibility for carrying out these procedures, and prescribing
Procedures                             related accountability. Air Force policy indicates that ALCs are responsible
                                       for preparing comprehensive, explicit instructions essential to effectively
                                       manage inventory.

                                       Warner Robins item managers and DLA warehouse personnel did not agree
                                       as to who within their organizations is responsible for resolving suspended
                                       inventory. Item managers told us that warehouse personnel are
                                       responsible for taking the necessary actions to monitor reclassification of
                                       suspended inventory because those personnel have physical possession of
                                       the material. Warehouse personnel told us that item managers must direct
                                       disposition of suspended material. Consequently, neither level assumed
                                       responsibility. When we pointed out the need for clearly defined
                                       responsibilities to Warner Robins top management officials, they told us
                                       that item managers are responsible for resolving suspended inventory
                                       issues and indicated that Warner Robins would begin drafting suspended
                                       inventory regulations for its item managers.


Suspended Inventory                    DOD policy requires periodic reviews of suspended inventory items to
Reclassification Efforts               ensure that their usability is determined in a timely manner. However, this
Are Not Monitored                      requirement is not carried out. For the majority of our sample items, the
                                       item managers could not tell us why the items had been suspended or who
                                       had directed suspension and could not easily determine how long the
                                       items had been suspended. Warner Robins officials told us they do not
                                       monitor the age of suspended inventory, even though DOD policy requires
                                       that monitoring be done to keep within prescribed time limits. Warner
                                       Robins officials stated that they did not regularly compile data on the
                                       quantity, value, or length of time material is suspended or report such data
                                       to AFMC because resolving suspended items’ status was not a high priority.
                                       Further, AFMC officials told us that they have not monitored suspended
                                       inventory management since the late 1980s.




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                                              Adequate management oversight could have highlighted prolonged
                                              suspensions and indicated the necessity for routine monitoring of the
                                              quantity, value, and length of time items are suspended. If Warner Robins
                                              had monitored the duration of some suspensions, their usability could
                                              have been resolved within a reasonable time. For example:

                                          •   In May 1986, in anticipation of a patent infringement litigation, an item
                                              manager was instructed to retain records and files involving a supplier of
                                              M-16 rifle conversion kits for 20 years. At the time of our visit, one M-16
                                              rifle conversion kit (see fig. 8) had been suspended for almost 9 years. An
                                              additional 985 kits were being held in an issuable condition, according to
                                              the item manager. Subsequent to our visit, we were informed that the item
                                              manager misinterpreted the retention instructions. Rather than just
                                              retaining the records and files, the item manager had also been
                                              unnecessarily holding all 986 kits. The item manager informed us that all
                                              986 kits are excess and initiated action to dispose of them.


Figure 8: Conversion Kit in L Condition
at the Warner Robins Warehouse




                                          •   According to warehouse records, one electron tube worth $2,400 had been
                                              suspended in litigation for 362 days. The item manager did not know why



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                                 the item was suspended, who suspended the item, or when the item was
                                 placed in suspension. However, Warner Robins warehouse records
                                 showed that the tube had been returned by a customer because it was not
                                 the item requested from supply. When warehouse personnel realized that
                                 the serviceable item was being erroneously held in litigation, they
                                 reclassified the electron tube to an issuable condition.
                             •   Four digital computers for the F-4G aircraft had been suspended in
                                 reclaimed inventory for over 4 years. According to the item manager, there
                                 has been little or no demand for the computers, valued at $73,300 each,
                                 because in 1996 the F-4G aircraft was taken out of service. As a result of
                                 our findings, the item manager informed us that the digital computers
                                 would be recommended for disposal.


Suspended Inventory              The Federal Managers’ Financial Integrity Act of 1982 requires agency
Management Weaknesses            heads to assess their internal controls annually and report their findings to
Have Not Been Identified         the President and the Congress. The Air Force provides its assessments to
                                 DOD for inclusion in the Secretary of Defense’s report to the Congress.
in Financial Integrity Act
Assessments                      We reviewed internal control assessments by Warner Robins, AFMC, and
                                 the Air Force to determine if the Air Force had reported suspended
                                 inventory management by ALCs as a material weakness and found that it
                                 had not. One criterion for determining whether an internal control
                                 weakness is material is if it significantly weakens safeguards against
                                 waste. The problems we identified demonstrate that suspended inventory
                                 management is vulnerable to waste and warrants special emphasis in
                                 future Financial Integrity Act assessments.


                                 The management of DOD’s inventory of spare parts and other secondary
Conclusions                      items has been considered a high-risk area for several years. Therefore,
                                 DOD’s reported $3.3 billion suspended inventory is a problem that warrants
                                 management attention. In terms of reported dollar value of suspended
                                 inventory, the Air Force represents the biggest problem among the
                                 services; within the Air Force, the Warner Robins ALC accounts for the
                                 largest share. At Warner Robins, we found significant weaknesses in its
                                 management of suspended inventory. Since there are standard policies for
                                 managing suspended inventory items across the ALCs and the weaknesses
                                 in the process contribute to some of the problems we identified, other ALCs
                                 may have similar problems. Air Force and DOD officials have generally
                                 stated, and our review confirmed, that ineffective management and delays




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                  in determining the usability of suspended inventory can result in increased
                  logistics and support costs and affect readiness.

                  At Warner Robins, (1) item managers generally were not complying with
                  DOD standards for determining the usability of suspended inventory items,
                  (2) about 64 percent of the items we sampled had been in the suspended
                  category for more than 1 year and some longer than 6 years, (3) item
                  managers were following AFMC guidance that does not comply with DOD
                  and Air Force policy, (4) written procedures for controlling suspended
                  inventory were lacking, and (5) management oversight of suspended
                  inventory was limited. Further, neither Warner Robins nor the Air Force
                  has identified suspended inventory as a material management weakness
                  under the Federal Managers’ Financial Integrity Act.


                  To improve the management of suspended items, we recommend that the
Recommendations   Secretary of Defense direct the Secretary of the Air Force to ensure that,
                  at Warner Robins (1) suspended inventory is properly identified,
                  monitored, inspected, and classified within established DOD timeframes
                  and (2) suspended items receive adequate visibility at all management
                  levels, up to and including the service headquarters, through targeting
                  suspended inventory problems as an issue for review in the Federal
                  Managers’ Financial Integrity Act assessments.

                  Also, we recommend that the Secretary of the Air Force direct Warner
                  Robins ALC to establish explicit guidance on responsibility and
                  accountability for resolving suspended inventory status, carry out
                  necessary actions, and follow up to make sure that the actions have been
                  promptly and correctly taken. Finally, we recommend that the Secretary
                  conduct assessments of suspended inventory practices at the four other
                  ALCs to determine the need for similar remedial actions and direct any
                  affected ALC to take such actions.


                  In written comments on a draft of this report, DOD agreed with our
Agency Comments   recommendations (see app. IV). DOD stated that on November 13, 1997, Air
                  Force Headquarters provided guidance to the Air Force Materiel
                  Command requesting a plan to correct deficiencies in managing suspended
                  stock and initiate aggressive corrective actions. The plan is due to the Air
                  Force by mid-December 1997.




                  Page 17                                      GAO/NSIAD-98-29 Defense Inventory
B-276807




We are sending copies of this report to other appropriate congressional
committees, the Secretaries of Defense and the Air Force, and the Director
of the Office of Management and Budget.

Please contact me at (202) 512-8412 if you have any questions concerning
this report. Major contributors to this report are listed in appendix V.




David R. Warren, Director
Defense Management Issues




Page 18                                     GAO/NSIAD-98-29 Defense Inventory
Page 19   GAO/NSIAD-98-29 Defense Inventory
Contents



Letter                                                                                           1


Appendix I                                                                                      22

Scope and
Methodology
Appendix II                                                                                     24

Supply Condition
Codes
Appendix III                                                                                    25

Additional
Information on
Suspended Material
and DOD Time
Standards
Appendix IV                                                                                     27

Comments From the
Department of
Defense
Appendix V                                                                                      28

Major Contributors to
This Report
Related GAO Products                                                                            32


Tables                  Table 1: DOD Time Standards for Resolving the Status of                  2
                          Suspended Inventory
                        Table 2: Number of Unfilled Customer Orders That Could Have             10
                          Been Met With Suspended Items
                        Table 3: Number of Sample Items in Reclaimed Inventory for              14
                          Over 2 Years




                        Page 20                                   GAO/NSIAD-98-29 Defense Inventory
          Contents




          Table III.1: Reported Quantity and Value of Suspended Material           25
            by ALC
          Table III.2: Reported Quantity and Value of Suspended Inventory          25
            Managed by the Warner Robins ALC
          Table III.3: Our Analysis of Sample Items that Met or Failed to          25
            Meet DOD Time Standards
          Table III.4: Our Analysis of the Time Items Remained in a                26
            Suspended Status

Figures   Figure 1: Reported Value of Suspended Inventory by DOD                    5
            Component
          Figure 2: Reported Quantity and Value of Suspended Inventory by           6
            ALC
          Figure 3: Reported Quantity and Value of Suspended Inventory              7
            Managed by the Warner Robins ALC
          Figure 4: Our Analysis of Suspended Inventory That Met or Failed          8
            to Meet DOD Time Standards
          Figure 5: Our Analysis of the Time Items Remained Suspended               9
          Figure 6: Data Entry Keyboard in R Condition at the Warner               11
            Robins Warehouse
          Figure 7: Signal Converter in R Condition at the Warner Robins           12
            Warehouse
          Figure 8: Conversion Kit in L Condition at the Warner Robins             15
            Warehouse




          Abbreviations

          AFMC       Air Force Materiel Command
          ALC        Air Logistics Center
          DLA        Defense Logistics Agency
          DOD        Department of Defense


          Page 21                                    GAO/NSIAD-98-29 Defense Inventory
Appendix I

Scope and Methodology


             To quantify the number and value of the Department of Defense’s (DOD)
             suspended inventory, we obtained computerized inventory records of
             inventory between April 1997 and June 1997 in suspended condition codes
             at all military services and Defense Logistics Agency (DLA) inventory
             control points. We removed surcharges covering the costs to operate the
             supply system, and we revalued the suspended inventory at the latest
             acquisition cost. These databases generate the records, statistics, and
             reports that DOD uses to manage its inventories, make decisions, and
             determine requirements. We did not independently verify the accuracy of
             the military services’ and DLA’s inventory databases from which we
             obtained data. Therefore, our report notes that these data are reported
             values.

             With the use of the inventory records, we identified the Air Force and
             Warner Robins Air Logistics Center (ALC) as the DOD component and its
             inventory control activity with the highest reported dollar value of
             suspended items. At Warner Robins, we reviewed a judgmental sample of
             1,971 suspended items (valued at $67 million and representing 101
             different inventory numbers). We excluded depot-level repairables
             suspended in the repair cycle process (M condition) from our review
             because this status is a normal condition for this type of material and the
             items are routinely considered as assets in the requirement computations
             of the inventory control activities. We also excluded suspended
             ammunition (N condition) because this inventory is held for emergency
             combat use.

             We reviewed policies and procedures and obtained other relevant data
             related to suspended inventory management from officials at the DLA
             Headquarters, Alexandria, Virginia; Air Force Materiel Command,
             Wright-Patterson Air Force Base, Ohio; and Warner Robins ALC and
             Defense Distribution Depot, Georgia.

             To determine the age of our sample items, we held discussions with item
             managers and reviewed storage activity data and inventory records. To
             learn whether issues associated with suspended items were promptly
             resolved and the reasons for delays in resolving the inventory status of
             suspended items, we reviewed Air Force and Warner Robins implementing
             guidance and assessments of internal controls. Such information provided
             the basis for conclusions regarding the management of suspended
             inventory. To determine if the Air Force had emphasized suspended
             inventory management as part of its assessment of internal controls, we
             reviewed assessments from Warner Robins for fiscal years 1993-97, Air



             Page 22                                       GAO/NSIAD-98-29 Defense Inventory
Appendix I
Scope and Methodology




Force Materiel Command for fiscal years 1995-96, and the Air Force
Headquarters for fiscal years 1993-96.

To assess the accuracy of data maintained for our sample items, we
reviewed the results of several recent Warner Robins inventory accuracy
assessments. To ensure the accuracy of inventory records for our sample
items, we obtained additional evidence from Warner Robins item
managers and warehouse personnel. Consequently, we are confident that
our findings represent material conditions for the items we reviewed.

We performed our review between April and October 1997 in accordance
with generally accepted government auditing standards.




Page 23                                    GAO/NSIAD-98-29 Defense Inventory
Appendix II

Supply Condition Codes



Code          Title                           Definition
A             Serviceable (issuable           New, used, repaired, or reconditioned materiel that is serviceable and issuable to all
              without qualification)          customers without limitation or restriction.
B             Serviceable (issuable with      New, used, repaired, or reconditioned materiel that is serviceable and issuable for its
              qualification)                  intended purpose but is restricted from issue to specific units, activities, or
                                              geographical areas by reason of its limited usefulness or short service life expectancy.
C             Serviceable (priority issue)    Items that are serviceable and issuable to selected customers but must be issued
                                              before supply condition codes A and B materiel to avoid loss as a usable asset.
D             Serviceable                     Serviceable materiel that requires test, alteration, modification, technical data marking,
              (test/modification)             conversion, or disassembly, not including items that must be inspected or tested
                                              immediately before issue.
E             Unserviceable (limited          Materiel that involves only limited expense or effort to restore to serviceable condition
              restoration)                    and is accomplished in the storage activity in which the stock is located. The materiel
                                              may be issued to support ammunition requisitions coded to indicate acceptability of
                                              usable stock.
F             Unserviceable (reparable)       Economically reparable materiel that requires repair, overhaul, or reconditioning,
                                              including reparable items that are radioactively contaminated.
G             Unserviceable (incomplete) Materiel requiring additional parts or components to complete before issue.
H             Unserviceable (condemned) Materiel that has been determined to be unserviceable and does not meet repair criteria.
J             Suspended (in stock)            Materiel in stock that has been suspended from issue, pending condition classification
                                              or analysis, when the true condition is not known.
K             Suspended (returns)             Materiel returned from customers or users and awaiting condition classification.
L             Suspended (litigation)          Materiel held pending litigation or negotiation with contractors or common carriers.
M             Suspended (in work)             Materiel that has been identified on an inventory control record but turned over to a
                                              maintenance facility or contractor for processing.
N             Suspended (ammunition           Ammunition stocks suspended from issue except for emergency combat use.
              suitable for emergency
              combat use only)
P             Unserviceable (reclamation) Materiel that is determined to be unserviceable and uneconomically reparable, as a
                                          result of physical inspections, teardown, or engineering decision, but contains
                                          serviceable components or assemblies to be reclaimed.
Q             Suspended (quality-             Quality-deficient exhibits returned by customers or users as directed by the Integrated
              deficient exhibits)             Materiel Manager, due to technical deficiencies reported by Quality Deficiency Reports.
                                              (This code is for intra-Air Force use only.)
R             Suspended (reclaimed            Assets turned in by reclamation activities that do not have the capability (e.g., skills,
              items awaiting condition        personnel, or test equipment) to determine materiel condition. Actual condition will be
              determination)                  determined before induction into maintenance activities for repair or modification.
S             Unserviceable (scrap)           Materiel that has no value except for its basic materiel content.
                                             Note: Condition codes I, O, and T through Z are not assigned and reserved for future DOD
                                             assignment.

                                             Source: DOD.




                                             Page 24                                                   GAO/NSIAD-98-29 Defense Inventory
Appendix III

Additional Information on Suspended
Material and DOD Time Standards

                                          Table III.1 shows the reported quantity and value of suspended inventory
                                          items by ALC, and table III.2 shows this information specifically for Warner
                                          Robins ALC. Table III.3 shows the number of items in our sample that met
                                          or failed to meet DOD time standards, and table III.4 shows the number of
                                          items that were in a suspended status at the time of our review and the
                                          amount of time that the items were suspended.

Table III.1: Reported Quantity and
Value of Suspended Material by ALC        Dollars in millions
(as of Apr. 1997)                         ALC                                          Number of items                       Value
                                          Oklahoma City                                         26,900                       $218.6
                                          Ogden                                                279,300                        567.3
                                          San Antonio                                           31,700                        298.1
                                          Sacramento                                             5,000                         30.4
                                          Warner Robins                                         60,600                      1,260.4
                                          Total                                                403,500                   $2,374.8

Table III.2: Reported Quantity and
Value of Suspended Inventory              Dollars in millions
Managed by the Warner Robins ALC          Suspension code                              Number of items                       Value
(as of Apr. 1997)
                                          Material in inventory (J)                             17,300                        $54.5
                                          Customer returns (K)                                  38,800                      1,087.0
                                          Inventory in litigation (L)                             100                           0.4
                                          Quality-deficient inventory (Q)                         500                          19.2
                                          Reclaimed inventory (R)                                3,900                         99.3
                                          Total                                                 60,600                   $1,260.4



Table III.3: Our Analysis of Sample Items That Met or Failed to Meet DOD Time Standards
                               Time standard        Items meeting standard                     Items not meeting standard
Suspension code                   (in days)             Number                Value              Number                      Value
Material in inventory (J)               90                      59          $671,956                 740              $28,797,864
Customer returns (K)                    10                      0                 0                      31                 687,000
Reclaimed inventory (R)                180                      4             99,883                 986               35,512,041
Total                                                           63          $771,839                1,757             $64,996,905




                                          Page 25                                                GAO/NSIAD-98-29 Defense Inventory
                                           Appendix III
                                           Additional Information on Suspended
                                           Material and DOD Time Standards




Table III.4: Our Analysis of the Time Items Remained in a Suspended Status
                                                               Number of days in suspension
Suspension code                   0-30   31-60       61-90    91-180    181-365       366-730        730 or more          Total
Material in inventory (J)           4       1          54        208        303           103                126           799
Customer returns (K)                0       0           0          5             9            16                1           31
Inventory in litigation (L)         0       0           0          0             1             0              88            89
Quality-deficient inventory (Q)     1       8          19         30             2             2                0           62
Reclaimed inventory (R)             0       0           0          4         63           312                611           990
Total                               5       9          73        247        378           433                826         1,971




                                           Page 26                                            GAO/NSIAD-98-29 Defense Inventory
Appendix IV

Comments From the Department of Defense




              Page 27        GAO/NSIAD-98-29 Defense Inventory
Appendix V

Major Contributors to This Report


                        Charles I. Patton, Jr.
National Security and   Lawson (Rick) Gist, Jr.
International Affairs   James Murphy
Division, Washington,
D.C.
                        Sandra F. Bell
Norfolk Field Office    Dawn R. Godfrey


                        Robert C. Sommer
Kansas City Field
Office




                        Page 28                   GAO/NSIAD-98-29 Defense Inventory
Page 29   GAO/NSIAD-98-29 Defense Inventory
Page 30   GAO/NSIAD-98-29 Defense Inventory
Page 31   GAO/NSIAD-98-29 Defense Inventory
Related GAO Products


              High-Risk Series: Defense Inventory Management (GAO/HR-97-5, Feb. 1997).

              Defense Logistics: Much of the Inventory Exceeds Current Needs
              (GAO/NSIAD-97-71, Feb. 28, 1997).

              Defense Inventory: Spare and Repair Parts Inventory Costs Can Be
              Reduced (GAO/NSIAD-97-47, Jan. 17, 1997).

              Logistics Planning: Opportunities for Enhancing DOD’s Logistics Strategic
              Plan (GAO/NSIAD-97-28, Dec. 18, 1996).

              1997 DOD Budget: Potential Reductions to Operation and Maintenance
              Program (GAO/NSIAD-96-220, Sept. 18, 1996).

              Defense IRM: Critical Risks Facing New Materiel Management Strategy
              (GAO/AIMD-96-109, Sept. 6, 1996).

              Navy Financial Management: Improved Management of Operating
              Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94,
              Aug. 16, 1996).

              Defense Logistics: Requirements Determinations for Aviation Spare Parts
              Need to Be Improved (GAO/NSIAD-96-70, Mar. 19, 1996).

              Defense Inventory: Opportunities to Reduce Warehouse Space
              (GAO/NSIAD-95-64, May 24, 1995).

              Defense Supply: Inventories Contain Nonessential and Excessive
              Insurance Stocks (GAO/NSIAD-95-1, Jan. 20, 1995).

              Army Inventory: Unfilled War Reserve Requirements Could Be Met With
              Items From Other Inventory (GAO/NSIAD-94-207, Aug. 25, 1994).

              Air Force Logistics: Improved Backorder Validation Procedures Will Save
              Millions (GAO/NSIAD-94-103, Apr. 20, 1994).

              Air Force Logistics: Some Progress, but Further Efforts Needed to
              Terminate Excess Orders (GAO/NSIAD-94-3, Oct. 13, 1993).




(709254)      Page 32                                       GAO/NSIAD-98-29 Defense Inventory
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