oversight

Defense Inventory: Navy's Procedures for Controlling In-Transit Items Are Not Being Followed

Published by the Government Accountability Office on 1999-03-31.

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

                  United States General Accounting Office

GAO               Report to Congressional Requesters




March 1999
                  DEFENSE
                  INVENTORY
                  Navy’s Procedures for
                  Controlling In-Transit
                  Items Are Not Being
                  Followed




GAO/NSIAD-99-61
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division

                   B-279507

                   March 31, 1999

                   The Honorable Richard Durbin
                   The Honorable Tom Harkin
                   United States Senate

                   The Honorable Peter DeFazio
                   The Honorable Carolyn B. Maloney
                   House of Representatives

                   In February 1998, we reported that the Department of Defense (DOD) did
                   not have receipts for about 60 percent of its 21 million shipments to end
                   users in fiscal year 1997.1 Among the DOD components, the Navy was
                   responsible for almost one-half of DOD’s 12.4 million unacknowledged
                   receipts. As agreed with your offices, we reviewed selected aspects of the
                   Navy’s management procedures for controlling items in transit. More
                   specifically, we (1) identified the reported value and types of inventory in
                   transit within and between storage and repair activities, vendors, and end
                   users that were unaccounted for (or lost) and (2) assessed the Navy’s
                   adherence to procedures for controlling such in-transit inventory.

                   This report is one in a series addressing defense inventory management as
                   a high-risk area in the federal government because of vulnerabilities to
                   fraud, waste, and abuse.2 Excess property that is in transit between the
                   military services and disposal offices is the topic of a separate report we
                   will issue later this year.


                   The Navy has not effectively controlled its in-transit inventory and places
Results in Brief   enormous amounts of inventory at risk of undetected theft or
                   misplacement. For fiscal years 1996-98, the Navy reported that it had lost
                   over $3 billion in in-transit inventory, including some classified and
                   sensitive items such as aircraft guided-missile launchers, military night
                   vision devices, and communications equipment. The Navy’s Inventory
                   Control Point (NAVICP) at Philadelphia, which manages the largest portion
                   of the Navy’s inventory, reported the largest losses—$2.5 billion, or


                   1
                    Department of Defense: In-Transit Inventory (GAO/NSIAD-98-80R, Feb. 27, 1998).
                   2
                    In 1990, we began a special effort to review and report on the federal program areas we identified as
                   high risk because of vulnerabilities to waste, fraud, abuse, and mismanagement. This effort, which was
                   supported by the Senate Committee on Government Affairs and the House Committee on Government
                   Reform, brought a much needed focus on the problems that were costing the government billions of
                   dollars. We identified inventory management as high risk in our 1999, 1997, 1995, and 1992 high-risk
                   reports. A list of related GAO products is at the end of this report.



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    84 percent of the Navy’s in-transit losses. However, our work showed that
    a few of the items reported as lost by NAVICP Philadelphia had in fact been
    accounted for in inventory records.

    Navy activities involved in issuing and receiving inventory items have not
    always followed the Navy’s control procedures to ensure that in-transit
    items are accounted for. Specifically,

•   Navy units have not always reported to NAVICP Philadelphia that they
    received requested items.
•   Ineffective accounting systems have been used to monitor receipts of
    items redistributed between storage activities, shipped to and from repair
    facilities, and shipped from end users.
•   NAVICP Philadelphia and its shipping and receiving activities have not
    adequately investigated unreported receipts of items redistributed
    between storage activities, shipped to and from repair facilities, and
    shipped from end users.
•   NAVICP Philadelphia has not monitored receipts of items it purchased from
    commercial sources. As early as 1990, we reported that there were
    indications of inadequate internal controls over procured assets.
•   Naval Supply Systems Command and NAVICP Philadelphia oversight of
    in-transit inventory has not been adequate. Although Navy officials have
    initiated actions intended to correct the problems we cited, the Navy has
    not established any performance measures, milestones, or timetable for
    reducing the vulnerability of in-transit inventory to theft or loss. Further,
    the Navy has not identified management of in-transit inventory as a
    significant weakness in its assessments of internal controls, as provided in
    the Federal Managers’ Financial Integrity Act of 1982.

    When considered as a whole, weaknesses in monitoring and controlling its
    in-transit inventory have undermined the Navy’s ability to measure
    progress toward achieving the goal set out in DOD’s Performance Plan for
    fiscal year 1999, which responded to requirements of the Government
    Performance and Results Act. For example, in its plan, DOD sets a goal of
    achieving 90-percent visibility over its inventory by 2000.

    To improve controls over the Navy’s in-transit inventory, we are
    recommending that the Secretary of the Navy ensure that (1) receipts of
    in-transit shipments are adequately accounted for and monitored;
    (2) records of inventory receipts are routinely updated; (3) in-transit
    inventory problems are included in assessments related to the Federal
    Managers’ Financial Integrity Act; and (4) performance measures,



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                 milestones, and timetables are established to help monitor progress in
                 reducing Navy inventory’s vulnerability to loss.


                 As of September 30, 1997, the Navy reported that the value of its inventory
Background       was $16.8 billion.3 The Naval Supply Systems Command (NAVSUP)
                 administers the Navy supply system and provides in-transit inventory
                 management policies and procedures. The Command, through its NAVICP,4
                 initiates purchases and directs inventory movement for its customers.
                 Until the inventory reaches its intended destination, NAVICP refers to it as in
                 transit. The major categories of in-transit inventory are as follows:

             •   Warehoused material—material redistributed between storage activities,
                 broken items shipped from Navy consolidation points to a commercial or
                 other military service repair facility, and material returned from a
                 commercial or other military service repair facility or an end user.
             •   Purchased material—new material shipped from a commercial source to a
                 storage activity.
             •   End-user material—material ordered from a storage activity or
                 commercial source by a unit that expects to use it.

                 The Navy is required to use a variety of inventory tracking procedures to
                 monitor shipment and receipt of in-transit items. Although the specific
                 procedures for each major category have some differences, they all have
                 three common control elements. First, the recipient of the material is
                 responsible for notifying the NAVICP once the item has been received. This
                 notification is an internal control designed to account for all in-transit
                 assets. Second, if within 45 days of shipment NAVICP has not been notified
                 that a shipment has arrived, it is required to follow up with the intended
                 recipient. The rationale behind this requirement is that until receipt is
                 confirmed, the exact status of the shipment is uncertain and therefore
                 vulnerable to fraud, waste, and abuse. Third, the Navy is required to
                 oversee in-transit inventory to assess the effectiveness of policies and
                 procedures governing that inventory. Appendix II contains additional


                 3
                  This amount includes three categories of items that are valued differently. Serviceable items are
                 valued at the latest acquisition cost; the value for items requiring repair are reduced by the cost of
                 repair; and excess, obsolete, and unserviceable items—reutilization/disposal inventory—are valued at
                 salvage prices (2.7 percent of latest acquisition cost for fiscal year 1997). However, the standard price
                 (i.e., latest acquisition cost and a surcharge covering the costs to operate the supply system) is used
                 throughout DOD in its logistics systems. Therefore, throughout the remainder of this report, the
                 standard price is the value associated with in-transit inventory.
                 4
                 NAVSUP has one Inventory Control Point that has offices in two cities—Philadelphia and
                 Mechanicsburg, Pennsylvania.



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                         details on the receipt acknowledgment and follow-up procedures for
                         in-transit items.

                         Implementing inventory controls is a shared responsibility of the NAVICP
                         and shipping and receiving activities, which include Defense Logistics
                         Agency (DLA)5 and Navy-managed activities, and repair facilities.


                         The Navy reported that it was unable to account for substantial amounts
Accountability Is Lost   of in-transit inventory. This inventory is vulnerable to theft or loss and
for Substantial          could cause managers to implement inefficient, ineffective decisions and
Amounts of In-Transit    practices regarding purchases. Between October 1995 and
                         September 1998, the Navy reported that it wrote off as lost in-transit
Inventory                inventory valued at over $3 billion. Our analysis of financial reports
                         showed that NAVICP Philadelphia was responsible for about $2.5 billion, or
                         84 percent, of these losses.6 Figure 1 summarizes the value of in-transit
                         inventory losses by inventory control point.




                         5
                          The Defense Logistics Agency operates and manages storage activities. It receives, stores, and issues
                         inventory and maintains inventory records.
                         6
                         Between October 1995 and September 1998, NAVICP Philadelphia reported $32.4 billion in
                         warehoused material had been in transit at one time or another during the period.



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Figure 1: Reported Value of
Navy-Owned In-transit Inventory
Losses by Inventory Control Point                                                           Other DOD components ($324
                                                                                            million)


                                                 • 11%          •                           6%
                                                                                            Mechanicsburg ($175 million)




                                                          84% •                             Philadelphia ($2,544 million)




                                    Note: Numbers do not add due to rounding.


                                    The Navy’s in-transit inventory losses may be greater than the Navy
                                    recognizes because of uncertainties about the status of shipments to end
                                    users that did not have a corresponding notification of receipt. Figure 1
                                    does not include any unaccounted for shipments to end users. For
                                    example, as we reported in February 1998, DOD did not have receipts for
                                    about 60 percent of its 21 million shipments to end users in fiscal
                                    year 1997. Among the DOD components, the Navy was responsible for over
                                    one-third of DOD’s 21 million shipments and almost one-half of DOD’s
                                    12.4 million unacknowledged receipts (valued at $11.7 billion).

                                    Our review of 30,314 lost warehoused shipments (representing 132,793
                                    items worth $753 million) at NAVICP Philadelphia in fiscal year 1997 showed
                                    that over 8,000 shipments contained military technology that needed to be
                                    protected.

                                    Classified and sensitive items7 included aircraft-guided missile launchers,
                                    military night vision devices, and communications equipment. Moreover,


                                    7
                                     Classified items require the highest degree of protection in the interest of national security. Sensitive
                                    items, that is, those items that are of high value, highly technical, or hazardous in nature and small
                                    arms, ammunition, explosives, and demolition material, require a high degree of protection and control
                                    due to statutory requirements or regulations.



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                                       some shipments reported as lost included pilferable items such as radio
                                       sets and radar transmitters that have a ready resale value or civilian
                                       application and are therefore especially subject to theft. Although not
                                       categorized by DOD as pilferable, the lost items also included such items as
                                       video recorders and generators. Figure 2 summarizes the items lost in
                                       transit by security classification and figure 3 shows the items’ value.


Figure 2: Our Analysis of the Number
of Lost Warehoused Items Managed by
                                                                                8.41%
NAVICP Philadelphia                                                             Unknown-11,174

                                                                                Classified-20,797


                                                    •      15.66% •
                                                                                0.03%
                                                                                Sensitive-36




                                                  74.86%
                                                      •




                                                                                1.04%
                                                                                Pilferable-1,381

                                                                                Unclassified-99,405




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Figure 3: Our Analysis of the Value of
Warehoused Material Losses Managed
                                                                                     0.84%
by NAVICP Philadelphia                                                               Unknown-$6.3 million




                                                                     44.03% •        Classified-$331.4 million
                                             53.66%
                                                 •




                                                                                     0.02%
                                                                                     Sensitive-$0.119 million

                                                                                     1.46%
                                                                                     Pilferable-$11.0 million

                                                                                     Unclassified-$403.9 million




                                         Note: Numbers do not add due to rounding.


                                         Naval Supply Systems Command and NAVICP Philadelphia officials pointed
                                         out that in-transit losses for high-dollar items have declined from
                                         $1.2 billion to $600 million over the past 3 fiscal years but acknowledged
                                         that in-transit inventory continues to be a primary concern. According to
                                         these officials, in some instances the reported in-transit inventory losses
                                         might have resulted from accounting adjustments and, as such, were not
                                         real losses. They further stated that in most cases, the reported losses
                                         occurred because activities involved in the movement, repair, and storage
                                         of in-transit items did not (1) notify NAVICP Philadelphia that they shipped
                                         or received items as required by Navy regulations or (2) respond to
                                         follow-up inquiries made by NAVICP Philadelphia. However, as we note in
                                         the following section, our review of lost in-transit sample items revealed
                                         that the failure to comply with procedures for controlling in-transit



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                         inventory did not stop with the issuing, shipping, and receiving activities
                         and did not result from accounting adjustments as Navy officials asserted.


                         As a result of several significant control weaknesses, the Navy’s in-transit
Procedures and           inventory is highly vulnerable to fraud, waste, and abuse. First, end users
Systems for              have not routinely reported receipt of items to the NAVICP. Second, the
Controlling In-Transit   integrated accounting and logistics systems that tie the Navy’s accounting
                         systems to its in-transit inventory tracking systems have not been
Inventory Are            effective. Third, NAVICP Philadelphia and its issuing activities, intended
Ineffective or Not       recipients, and commercial carriers have not adequately investigated cases
                         in which warehoused material was not acknowledged as received. Fourth,
Followed                 NAVICP Philadelphia has not monitored the receipt of purchased material
                         from commercial sources. Fifth, NAVSUP and NAVICP Philadelphia have not
                         provided adequate oversight and monitoring of in-transit inventory.


End Users’ Receipts of   End users have not routinely reported receipt of items to NAVICP
Material Were Not        Philadelphia. For a 1-year period ending in May 1998, NAVICP Philadelphia
Routinely Reported       closed the records for over $743 million in shipments that did not have a
                         notification of receipt and had been outstanding for over 90 days. The
                         NAVICP transfers accountability of material when it issues a release order to
                         a DOD storage activity to ship the material and then to customers when
                         they receive the material. End users are required by DOD policy to record
                         receipts of material and notify the appropriate inventory control point
                         within 5 calendar days (either electronically or by mail).

                         We judgmentally selected for review 92 reported end-user shipments
                         (valued at $5.2 million) whose receipt, according to NAVICP Philadelphia
                         records, had not been acknowledged. We sought to determine whether
                         those shipments had in fact been received and reported to NAVICP
                         Philadelphia. According to NAVICP Philadelphia officials, 51 of the 92
                         shipments (valued at over $566,000) were to storage activities and had
                         been incorrectly shown as end-user shipments. Thus, the records of the
                         shipments should not have been closed by the NAVICP Philadelphia
                         automated tracking system for end-user receipts. We then reviewed the
                         status of these 51 shipments in the warehoused material receipt tracking
                         system. NAVICP Philadelphia and the intended recipient were unable to
                         provide evidence that four shipments had been delivered or received. The
                         remaining 47 shipments had been received.




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                                Of the remaining 41 shipments (valued at $4.7 million), we determined that
                                28 (valued at $3.3 million) had in fact been received and accounted for, but
                                the receipt acknowledgments had not been sent to NAVICP Philadelphia.
                                According to one Defense Automated Addressing System (DAAS)8 Office
                                official, the end users’ receipt acknowledgment codes were obsolete.
                                Consequently, DAAS did not forward the acknowledgments to NAVICP
                                Philadelphia. When we informed end-user officials that their
                                acknowledgment codes were obsolete, they said that the Navy had not yet
                                changed its reporting systems and procedures to conform with DOD’s
                                changes in the codes. Our review also showed other shortcomings in the
                                execution of in-transit control policies and procedures for the remaining
                                13 shipments. For example:

                            •   One shipment valued at $606,330 was assumed by NAVICP Philadelphia to
                                have been received by the end user but was never shipped by the depot.
                            •   Twelve shipments valued at $737,986 had been received by the end user
                                but were not reported to NAVICP Philadelphia. End-user officials said that
                                their automated logistics system is not designed to acknowledge material
                                receipt. However, DOD policy states that if the reporting activity cannot
                                transmit receipt electronically, it should prepare a manual material receipt
                                acknowledgment and mail the form directly to the inventory control point.


Integrated Accounting and       Because of poorly integrated accounting and logistics systems, the Navy
Logistics Systems Were          may have written off as lost millions of dollars of warehoused material
Not Always Effective            shipments that had actually been received and accounted for by NAVICP
                                Philadelphia and in DAAS historical records. Navy policy for following up
                                on in-transit material states that the NAVICP should search its internal files
                                for delinquent receipts of warehoused material shipments. Delinquent
                                shipments, according to Navy policy, should be written off as inventory
                                losses if their receipts remain unconfirmed after 6 months or 11 months,
                                depending on their value. According to Navy policy, shipments of
                                consumable items, depot-level reparable items, and appropriated
                                purchases9 valued at less than $2,500, $15,000, and $20,000, respectively,
                                should be written off as inventory losses if their receipts remain
                                unconfirmed after 6 months. All other shipments require external

                                8
                                 The DAAS Office is the single most comprehensive source in DOD for identifying the movement of
                                in-transit material. It receives a vast amount of shipping and receiving data and passes this information
                                to the appropriate inventory control point.
                                9
                                 Consumable items are individual parts or assemblies that are disposed of when replaced. Depot-level
                                reparable items are components or assemblies that are returned to the supply system to be repaired
                                when replaced. Appropriated purchases are centrally purchased items that customers receive without
                                charge from their respective supply systems.



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                          follow-up and should be written off as lost if their receipts remain
                          unconfirmed after 11 months.

                          At NAVICP Philadelphia, 15 (16 percent) of the 94 warehoused shipments
                          that we sampled were written off as lost despite the fact that their receipts
                          were recorded in NAVICP Philadelphia’s internal files and DAAS historical
                          records 6 months to 1 year in advance of the date they were written off.
                          These discrepancies reduce the reliability of inventory financial reports,
                          which thus obscure true inventory losses, such as those resulting from
                          theft or loss, and misstate the number of items on hand.

                          We informed NAVICP Philadelphia officials that their internal and DAAS
                          history files contained receipts for 15 warehoused shipments that were
                          written off as lost. They said that in 11 cases, they had not accurately
                          identified these receipts because the Navy’s general ledger system, which
                          ties its accounting systems to its logistics and other key management
                          systems and is used to identify the receipt of shipments, did not update
                          both accounting and logistics records with the in-transit inventory
                          receipts. In the other four cases, the receiving activities did not correctly
                          enter receipt data into the logistics system; thus, the NAVICP’s integrated
                          systems showed that the items were not received. NAVSUP officials said that
                          until the planned resystemization of its databases is complete, NAVICP
                          Philadelphia would need to rely on the Navy’s general ledger system to
                          identify the receipt of shipments. Our prior reports have pointed out
                          deficiencies in DOD’s existing accounting and related systems, including its
                          logistics systems.10


NAVICP’s External         Although Navy policy requires external follow-up of unconfirmed receipts
Follow-Up/Resolution of   of warehoused material over a certain dollar threshold, NAVICP Philadelphia
Warehoused Material Was   has not adequately followed up or resolved such receipts. According to
                          Navy policy, the NAVICP should first seek proof of shipment from the
Not Adequate              issuing activity on shipments of consumable items, depot-level reparable
                          items, and appropriated purchases valued at more than $2,500, $15,000,
                          and $20,000, respectively, within 45 days from the date the material was
                          issued. After obtaining that information, the NAVICP should seek proof of
                          delivery from the shipping carrier. Navy policy, however, does not set a
                          specific time limit for replies from issuing activities, shipping carriers, and
                          intended recipients.



                          10
                           High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997) and Inventory
                          Management: Vulnerability of Sensitive Defense Material to Theft (GAO/NSIAD-97-175, Sept. 19, 1997).



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We sampled 17 warehoused shipments (valued at $2.3 million) that
required external follow-up. For these shipments, NAVICP Philadelphia
officials explained that commercial carriers, storage activities, and repair
contractors did not respond to their follow-up requests and the shipments
were later written off as lost. However, our review showed that 2 of the 17
shipments (valued at $215,760) were erroneously written off as lost but in
reality had been acknowledged as received and accounted for in NAVICP
inventory records. For the remaining 15 shipments (valued at $2,085,200),
NAVICP did not follow up when receipts were not returned. Specifically, in
6 of the 15 shipments (valued at $910,600) NAVICP Philadelphia did not
adequately follow up for proof of shipment, delivery, or receipt with the
appropriate activities. For three other shipments (valued at $479,040), the
carriers did not respond to NAVICP’s requests for proof of delivery, and
NAVICP did not initiate claims against the carriers. For five shipments
(valued at $647,230), the storage or repair activity did not respond to
NAVICP’s requests for proof of receipt. NAVICP Philadelphia officials could
not explain what happened to the remaining shipment (valued at
$48,330) and could not provide documentation that they had followed up
on the shipment to account for its loss.

The following two examples illustrate how the inadequate follow-up and
resolution of overdue shipments results in reported in-transit losses of
material.

In September 1996, the Defense Distribution Depot in Norfolk, Virginia,
issued 24 generators (valued at $212,640) to a commercial carrier for
shipment to a commercial repair contractor. According to NAVICP
Philadelphia officials, the repair contractor did not acknowledge receipt of
the material. Over 90 days later, in December 1996, the NAVICP requested
proof of issuance from the Norfolk depot, which the depot provided in
January 1997. In February 1997, the NAVICP sought proof of delivery from
the carrier, which did not confirm delivery. NAVICP officials said they did
not initiate a claim against the carrier. The material was later written off as
an in-transit loss.

In October 1995, the Norfolk depot reportedly issued 29 aircraft
guided-missile launchers (valued at over $181,830) to the Fleet and
Industrial Supply Center in San Diego, California. According to NAVICP
Philadelphia officials, the Center did not acknowledge receiving the
equipment. In February 1996, NAVICP sought proof of issuance from the
Norfolk depot, which it provided in April 1996. NAVICP Philadelphia officials




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                         said that they then unsuccessfully sought proof of receipt from the Center
                         from April to October 1996, when the items were written off as lost.


Purchased Material       NAVICP Philadelphia has not monitored the receipt of purchased material
Receipts Were Not        from commercial sources. Under Navy policy, NAVICP must follow up with
Monitored                the appropriate depot on receipts for purchased material 45 days from the
                         date of the shipment, and the depot must respond to NAVICP on the status
                         of the shipments. However, NAVICP Philadelphia officials told us that they
                         neither monitor shipments nor follow up on delinquent receipts. These
                         officials said they were unaware that NAVICP was required to initiate
                         follow-up on delinquent receipts. During our review, NAVICP Philadelphia
                         reported that in-transit purchased material totaled over $75 million, of
                         which $4.8 million in material had been in transit for over 1 year.

                         We judgmentally selected and reviewed records for 28 shipments (valued
                         at about $1 million) with outstanding purchased material balances over
                         1 year old and found the following:

                     •   Eight shipments (valued at $172,099) had been sent from commercial
                         vendors to end users over 1 year earlier, but NAVICP Philadelphia officials
                         had not attempted to follow up on delinquent receipt notifications to
                         determine whether the shipments had been received.
                     •   NAVICP Philadelphia’s automated records indicated that six shipments of
                         purchased material (valued at $343,679) were in transit, but in fact there
                         were no such shipments. Instead, expenses of $343,679 had been incurred
                         to terminate the six contracts erroneously processed as outstanding
                         purchased material. According to Navy officials, the Defense Finance
                         Accounting Service disbursement system does not distinguish between
                         material and termination settlement payments, both of which accrue
                         purchased material.
                     •   One shipment (valued at $26,566) reflected outstanding purchased
                         material in NAVICP Philadelphia’s automated financial records, but the
                         amount was in fact for internally generated progress payment expenditure
                         corrections.
                     •   NAVICP Philadelphia’s automated records indicated that two shipments of
                         purchased material (valued at $38,750) were in transit, but in actuality
                         $38,750 was the difference between the estimated and final contract cost
                         of the two shipments.
                     •   Eleven shipments (valued at $438,395) were received, but one of NAVICP
                         Philadelphia’s automated inventory records was not updated to reflect the
                         status of these shipments. According to NAVICP Philadelphia officials,



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                          receipts for the shipments were processed in their automated contract
                          status file but were not reflected in the procurement obligation status file.
                          Consequently, the established procurement remained on the NAVICP’s file
                          as outstanding purchased material. No effort had been made to reconcile
                          these 11 inconsistencies.

                          In May 1990, we reported discrepancies between NAVICP Philadelphia’s
                          purchased material shipment records and receipt records, a condition that
                          may adversely affect procurement decisions.11 We further reported that
                          these discrepancies indicated inadequate internal controls over procured
                          assets and did not provide NAVICP Philadelphia with reasonable assurance
                          that its procurement system was adequately protected from waste, fraud,
                          and abuse. In addition, the NAVICP Philadelphia, in its fiscal years 1995-98
                          management control reviews, cited ongoing problems with the systems
                          used to track purchased material.


In-Transit Inventory      NAVSUP  and NAVICP Philadelphia have not always monitored warehoused
Receipt and Follow-Up     material receipt and follow-up efforts as required by Navy policy. The
Efforts Were Not Always   policy requires periodic reviews of in-transit inventory losses to highlight
                          breakdowns in the physical distribution process and assist the NAVICP in
Monitored                 monitoring its performance. These reviews are also designed to give
                          NAVSUP a means of assessing the effectiveness of its policies and
                          procedures for governing in-transit inventory. Although NAVICP
                          Philadelphia compiles summary data on in-transit inventory losses, its
                          officials responsible for inventory accuracy acknowledged that they do not
                          compile data that identifies the predominant causes, sources, and
                          magnitude of in-transit inventory losses, even though the compilation of
                          such information is required by Navy policy. The lack of this information
                          impede’s the Navy’s ability to determine which activities are responsible
                          for lost or misplaced items. NAVSUP officials acknowledged that they had
                          not actively monitored in-transit inventory receipt and follow-up efforts
                          but had recently begun to review both systems and processes to correct
                          weaknesses.

                          The Federal Managers’ Financial Integrity Act of 1982 requires that agency
                          heads provide an annual statement to the President and Congress on
                          whether their agency’s internal control systems comply with the internal
                          control objectives of the act. If the agency head decides that agency
                          systems do not comply, a report identifying material weaknesses involved

                          11
                           Navy Supply: Procurement Leadtime Forecasting Needs Improvement (GAO/NSIAD-90-78, May 18,
                          1990).



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                           and the plans and schedules for correcting the weaknesses must be
                           submitted with the statement. The statement is also to include a report on
                           whether the agency’s accounting system conforms to the Comptroller
                           General’s standards. However, the Navy did not identify significant
                           weaknesses in internal controls over NAVICP’s in-transit inventory in its
                           Financial Integrity Act statements over the past 3 years, despite the fact
                           that it had written off as lost inventory valued at more than $3 billion.
                           Moreover, the Navy has not established any performance measures,
                           milestones, or timetables for reducing the risk of its in-transit inventory to
                           undetected theft or misplacement.


Internal Control           The weaknesses in the Navy’s internal controls over in-transit inventory
Weaknesses Undermine       undermine its ability to measure its progress toward achieving the goals
Navy’s Ability to Meet     set out in DOD’s recent Performance Plan, covering fiscal year 1999,
                           prepared in response to the requirements of the Government Performance
Results Act Requirements   and Results Act. DOD’s plan calls for improving asset visibility in such areas
                           as in-transit assets and sets up the goal to achieve 90-percent visibility over
                           material by 2000. Current Navy internal controls over in-transit inventory
                           do not provide a reliable means to establish visibility.12

                           Our review of items that the Navy had reported as being lost in transit
                           indicated that at least some had in fact been acknowledged as received. In
                           other cases, Navy officials wrote off in-transit inventory items because
                           they did not know whether the items had been stolen or otherwise lost. In
                           other words, they did not have adequate visibility over them. The lack of
                           adequate internal controls undermines the Navy’s ability to do its part in
                           helping DOD achieve a 90-percent visibility rate over inventories by 2000
                           and reduce inventories by 2003.13 The lack of controls may also limit the
                           ability of DOD and Navy officials to effectively manage the movement of
                           material and to make sound decisions about redistributing items rather
                           than buying new items or optimizing the positioning of stock.

                           DOD is also required by the Strom Thurmond National Defense
                           Authorization Act for Fiscal Year 1999 to develop a comprehensive plan to
                           ensure visibility over in-transit secondary items. For secondary items, the
                           law requires that DOD’s plan address such issues as the



                           12
                             Asset visibility is intended to provide defense personnel with timely and accurate information on the
                           location, movement, status, and identity of units, personnel, equipment, and supplies across all DOD
                           components.
                           13
                             In its plan, DOD also sets an indicator of reducing secondary item inventories to $48 billion by 2003.



                           Page 14                                                        GAO/NSIAD-99-61 Defense Inventory
                      B-279507




                  •   vulnerability of in-transit items to loss through fraud, waste, and abuse;
                  •   loss of oversight of in-transit items, including items transported by
                      commercial carriers; and
                  •   loss of accountability over in-transit items due to either a delay of delivery
                      of the items or a lack of notification of the delivery.

                      The act called for DOD to submit its plan to Congress by March 1, 1999.
                      However, on March 4, 1999, DOD informed Congress that additional time
                      was necessary to prepare the plan due to, among other things, the broad
                      scope of the requirement and the need to thoroughly study our findings on
                      in-transit inventory. DOD stated that it intended to submit a comprehensive
                      plan to Congress by September 1, 1999.


                      The Navy has not effectively controlled its in-transit inventory, leaving
Conclusions           significant amounts of inventory unaccounted for. Significant weaknesses
                      exist at all levels of the Navy’s in-transit inventory management structure.
                      These weaknesses lead to potential theft or undetected losses of items and
                      demonstrate inefficient and ineffective logistics management practices
                      such as potentially shipping or buying unnecessary inventory. These
                      weaknesses and the problems they create are primarily a result of the
                      failure of the Navy to follow its own policies and procedures regarding
                      controls of in-transit inventory. Further, significant problems exist in data
                      reporting systems.


                      In conjunction with developing a statutorily required, comprehensive plan
Recommendations       to address visibility over in-transit inventory, DOD should take a number of
                      immediate steps to improve controls over the Navy’s in-transit inventory.
                      Specifically, we recommend that the Secretary of Defense direct the
                      Secretary of the Navy to do the following:

                  •   Comply with existing DOD and Navy procedures regarding material receipt
                      acknowledgment of in-transit shipments and reemphasize follow-up
                      procedures on unconfirmed warehoused and purchased material receipts.
                  •   Modify the Navy’s integrated accounting and logistics systems so that they
                      routinely update both financial and inventory records when in-transit
                      inventory items are received. Until the systems are operational, NAVICP
                      Philadelphia should establish routine reconciliation procedures for their
                      supply and financial records to ensure oversight and control over in-transit
                      inventory items.




                      Page 15                                        GAO/NSIAD-99-61 Defense Inventory
                         B-279507




                     •   Specifically target in-transit inventory problems as an issue for review in
                         Federal Managers’ Financial Integrity Act assessments.
                     •   Establish performance measures, milestones, and timetables to help
                         monitor the progress being made to reduce the vulnerability of in-transit
                         inventory to undetected loss or misplacement.


                         In written comments on a draft of this report, DOD agreed with all of our
Agency Comments          recommendations and stated that the Navy had taken immediate steps to
and Our Evaluation       improve in-transit inventory. The Commander, Naval Supply Systems
                         Command, has chartered an Integrated Process Team to review current
                         systems, policies, and processes to investigate material receipt
                         acknowledgment problems and proposed short-term solutions. The
                         Commander has also chartered a team to review in-transit practices of the
                         other services and of commercial activities in order to reengineer the
                         in-transit process. The Naval Inventory Control Point will include in-transit
                         inventory accounting as part of its fiscal year 1999 management control
                         evaluation of internal controls and report material weaknesses to NAVSUP
                         by August 1, 1999. DOD further stated that the Commander, Naval Supply
                         Systems Command, will establish performance measures and a plan of
                         action and milestones to monitor progress being made to reduce the loss
                         or misplacement of shipments.

                         Although DOD agreed with our recommendations, it stated that initial
                         research of the $3 billion in Navy inventory written off as lost supports its
                         belief that most of the material was actually received. A DOD official later
                         said that DOD’s belief was based on its review of 410 lost warehoused
                         material shipments at NAVICP Philadelphia in fiscal year 1997. According to
                         the official, DOD found that 327 (80 percent) of the 410 shipments had been
                         written off as lost even though they had been received.14 However, our
                         review at NAVICP Philadelphia indicated a different relationship between
                         shipments later accounted for and those actually lost. Our review showed
                         that 15 (16 percent) of the 94 warehoused shipments we sampled were
                         written off as lost despite the fact that their receipts were recorded and
                         that the Navy, after further investigation, could not account for the
                         whereabouts of the remaining 79 shipments.

                         Although some of the items reported as lost may actually be in the
                         inventory, DOD does not have an adequate system for determining that on
                         an item-by-item basis. Therefore, we continue to believe a significant

                         14
                          No documentary evidence was available for us to validate this information. We asked the responsible
                         NAVSUP official for information about these 410 shipments and were told that this information was
                         based primarily on telephone calls and e-mail messages by the issuing activities to intended recipients.



                         Page 16                                                       GAO/NSIAD-99-61 Defense Inventory
B-279507




number of items are vulnerable to undetected theft or loss. Moreover, until
this situation is resolved, these discrepancies reduce the reliability of DOD
inventory financial reports, thus obscuring true inventory losses and
misstating the number of items on hand.

We believe that the Navy’s planned and ongoing initiatives to address its
in-transit inventory deficiencies are a step in the right direction. However,
in conjunction with the steps taken to improve controls over the Navy’s
in-transit inventory, DOD needs to develop its plan for in-transit inventory
and bring it to fruition. DOD has recently indicated that it will take an
additional 6 months to develop the statutorily required, comprehensive
plan for its in-transit inventory. Because the act calls for us to review the
DOD plan and implementation, we will continue to monitor DOD’s efforts to
develop its overall plan and be in a position to assess its implementation.

Appendix I contains the scope and methodology for this report, and
appendix II contains additional details on Navy procedures for
acknowledging and following up on receipts of in-transit inventory. DOD’s
written comments on this report are reprinted in their entirety in
appendix III.


As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from its
issue date. At that time, we will send copies of this report to Senator
Daniel K. Inouye, Senator Joseph I. Lieberman, Senator Carl Levin, Senator
Ted Stevens, Senator Fred Thompson, and Senator John Warner and to
Representative Rod R. Blagojevich, Representative Dan Burton,
Representative Jerry Lewis, Representative John P. Murtha,
Representative Christopher Shays, Representative Ike Skelton,
Representative Floyd Spence, and Representative Henry A. Waxman in
their capacities as Chair or Ranking Minority Member, Senate and House
Committees and Subcommittees. We are also sending copies of this report
to The Honorable William S. Cohen, Secretary of Defense; The Honorable
Richard Danzig, Secretary of the Navy; Lieutenant General Henry T.
Glisson, Director, DLA; and The Honorable Jacob J. Lew, Director, Office of
Management and Budget. Copies will also be made available to others
upon request.




Page 17                                        GAO/NSIAD-99-61 Defense Inventory
B-279507




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




David R. Warren, Director
Defense Management Issues




Page 18                                     GAO/NSIAD-99-61 Defense Inventory
Page 19   GAO/NSIAD-99-61 Defense Inventory
Contents



Letter                                                                                           1


Appendix I                                                                                      22
Scope and
Methodology
Appendix II                                                                                     24
Additional Details on
In-Transit Receipt
Acknowledgment and
Follow-Up Procedures
Appendix III                                                                                    28
Comments From the
Department of
Defense
Appendix IV                                                                                     32
Major Contributors to
This Report
Related GAO Products                                                                            33


Figures                 Figure 1: Reported Value of Navy-Owned In-transit Inventory              5
                          Losses by Inventory Control Point
                        Figure 2: Our Analysis of the Number of Lost Warehoused Items            6
                          Managed by NAVICP Philadelphia
                        Figure 3: Our Analysis of the Value of Warehoused Material               7
                          Losses Managed by NAVICP Philadelphia
                        Figure II.1: End-User Material Receipt Acknowledgment and               25
                          Follow-up Procedures
                        Figure II.2: Warehoused Material Receipt Acknowledgment and             26
                          Follow-up Procedures
                        Figure II.3: Purchased Material Receipt Acknowledgment and              27
                          Follow-up Procedures




                        Page 20                                   GAO/NSIAD-99-61 Defense Inventory
Contents




Abbreviations

DAAS       Defense Automated Addressing System
DLA        Defense Logistics Agency
DOD        Department of Defense
GAO        General Accounting Office
NAVICP     Naval Inventory Control Point
NAVSUP     Naval Supply Systems Command


Page 21                                 GAO/NSIAD-99-61 Defense Inventory
Appendix I

Scope and Methodology


                 Our objectives for this report were to (1) identify the reported value and
                 types of inventory in transit within and between storage and repair
                 activities, vendors, and end users that were unaccounted for (or lost) and
                 (2) assess the Navy’s adherence to procedures for controlling such
                 in-transit inventory.

                 To assess the Navy’s procedures for controlling in-transit inventory and
                 identify the reported types and amounts of in-transit items that were not
                 accounted for, we took the following steps:

             •   We reviewed policies and procedures and obtained other relevant
                 documentation related to in-transit inventory from officials at the Defense
                 Logistics Management Standards Office, McLean, Virginia; the Defense
                 Automated Addressing System Office, Dayton, Ohio; and the Naval Supply
                 Systems Command (NAVSUP), Mechanicsburg, Pennsylvania.
             •   We obtained financial reports of in-transit losses between October 1995
                 and September 1998 at NAVSUP. Using the financial reports, we identified
                 the Naval Inventory Control Point (NAVICP) Philadelphia as the Navy’s
                 inventory control activity with the highest reported dollar value of
                 in-transit inventory losses. At NAVICP Philadelphia, we obtained
                 computerized inventory and financial records of in-transit losses between
                 October 1996 and September 1997, the most current and complete
                 in-transit information available. Using the data, we judgmentally selected
                 and reviewed 214 shipments of warehoused, purchased, and end-user
                 material, valued at $9 million, that were reported as lost or not received.
                 We did not independently verify the overall accuracy of NAVICP
                 Philadelphia’s databases from which we obtained data but used them as a
                 starting point for selecting shipments that we then tracked back to records
                 and documents on individual transactions.
             •   For each sample shipment, we reviewed available computer-generated
                 shipment and receipt data, analyzed inventory records, and held
                 discussions at the NAVICP Philadelphia, Pennsylvania; the Defense
                 Distribution Depot, Fleet and Industrial Supply Center, Norfolk Naval Air
                 Station, Norfolk, Virginia; and Oceana Naval Air Station, Virginia Beach,
                 Virginia. To learn whether issues associated with overdue shipments were
                 adequately resolved, we reviewed Department of Defense, Navy, and
                 NAVICP Philadelphia implementing guidance. Such information provided the
                 basis for conclusions regarding the controls over in-transit inventory. To
                 determine whether the Navy had emphasized in-transit inventory as part of
                 its assessment of internal controls, we reviewed assessments from NAVICP
                 Philadelphia for fiscal years 1995-97 and Navy Headquarters for fiscal
                 years 1995-97.



                 Page 22                                      GAO/NSIAD-99-61 Defense Inventory
Appendix I
Scope and Methodology




We performed our review between February 1998 and January 1999 in
accordance with generally accepted government auditing standards.




Page 23                                  GAO/NSIAD-99-61 Defense Inventory
Appendix II

Additional Details on In-Transit Receipt
Acknowledgment and Follow-Up
Procedures
               Figure II.1 shows the procedures the Navy is to follow to acknowledge
               receipts and to follow up on delinquent receipts for shipments of material
               to end users, figure II.2 shows these procedures for shipments of
               warehoused material, and figure II.3 shows the procedures for shipments
               of purchased material.




               Page 24                                      GAO/NSIAD-99-61 Defense Inventory
                                         Appendix II
                                         Additional Details on In-Transit Receipt
                                         Acknowledgment and Follow-Up
                                         Procedures




Figure II.1: End-User Material Receipt
Acknowledgment and Follow-Up
Procedures

                                                                                                         1
                                                                                            ICP
                                                                                     Directs shipment




                                                                                                         2
                                                                                     Storage Activity
                                                                      3a              Ships material
                                                         Receipt posted
                                                             file closed




                                                                                         End user




                                                                           Yes                                5 day time standard
                                                                                      Reports receipt?




                                                                                              No


                                                                                                         3b
                                                                                            ICP               45 days from
                                                                                      Starts follow up        date of shipping




                                                                       4
                                                         Receipt posted                 End user
                                                             file closed




                                                                           Yes                                15 days from
                                                                                      Reports receipt?
                                                                                                              date of follow-up



                                                                                              No


                                                                                             File             30 days from
                                                                                    closed without receipt    date of follow-up
                                                                                         confirmation




                                         Page 25                                                     GAO/NSIAD-99-61 Defense Inventory
                                                             Appendix II
                                                             Additional Details on In-Transit Receipt
                                                             Acknowledgment and Follow-Up
                                                             Procedures




Figure II.2: Warehoused Material Receipt Acknowledgment and Follow-Up Procedures



                                                                      1                                                                  Receipt
                                                       ICP
                                                Directs shipment                                                                         posted
                                                                                                                       ICP
                                                                                                                Seeks proof of issue



                                               Issuing Activity
                                               ●Storage activity                                                  Shipping Activity
                                               ●Repair activity



                          5a
             Receipt posted
                 file closed
                                                                      2                                   No
                                                      Carrier                                                      Provides proof
                                                   Ships material                                                    of issue?



                                                                                                                             Yes
                                                                      3
                                            Receiving Activity
                                           ●Storage activity                                                            ICP
                                           ●Repair facility                                                        Seeks proof of
                                                                                                                      delivery



                                 4
                                Yes                                                                                   Carrier
                                                 Reports receipt?

                                                                                                                             Yes

                                                           No 5b
                                                                                                 Write               Carrier
                                                                                                          No
                                                       ICP            6                       off after          Provides proof of
                                                  Starts internal                          11 months                 delivery
                                                    follow-up
                         6a
            Receipt posted                                                                                                   Yes
                file closed
                                                                                                                        ICP
                               Yes                                                                              Seeks proof of receipt
                                                Identifies receipt?

                                                                                                                             Yes

                                                           No
                                                                                                                  Receiving Activity


                       Under threshold                                    Over threshold


                                                                                                           No      Provides proof
                                          6b                                                                          of receipt
                        Write-off after                                   ICP starts
                         6 months                                     external follow-up

                                                                                                                          Yes




                                                             Page 26                                               GAO/NSIAD-99-61 Defense Inventory
                                          Appendix II
                                          Additional Details on In-Transit Receipt
                                          Acknowledgment and Follow-Up
                                          Procedures




Figure II.3: Purchased Material Receipt
Acknowledgment and Follow-Up
Procedures                                                                                                1
                                                                                            ICP
                                                                                     Directs Shipment




                                                                                                  2
                                                                                 Commercial Vendor
                                                                                   Ships material
                                                                    4
                                                      Receipt posted
                                                          file closed



                                                                                     Storage Activity




                                                                        3a
                                                                        Yes
                                                                                     Reports receipt?




                                                                                               No

                                                                                                         3b
                                                                                            ICP               45 days after
                                                                                      Starts follow-up        shipment




                                                                                     Storage Activity
                                                                    4
                                                      Receipt posted
                                                          file closed




                                                                        Yes
                                                                                     Reports receipt?         No time standard




                                                                                               No


                                                                                      (No procedures)




                                          Page 27                                                    GAO/NSIAD-99-61 Defense Inventory
Appendix III

Comments From the Department of Defense




               Page 28       GAO/NSIAD-99-61 Defense Inventory
Appendix III
Comments From the Department of Defense




Page 29                                   GAO/NSIAD-99-61 Defense Inventory
Appendix III
Comments From the Department of Defense




Page 30                                   GAO/NSIAD-99-61 Defense Inventory
Appendix III
Comments From the Department of Defense




Page 31                                   GAO/NSIAD-99-61 Defense Inventory
Appendix IV

Major Contributors to This Report


                        Charles I. Patton, Jr.
National Security and   Lawson (Rick) Gist, Jr.
International Affairs   James R. Murphy
Division, Washington,
D.C.
                        Sandra F. Bell
Norfolk Field Office    Carleen C. Bennett
                        Paul A. Gvoth, Jr.
                        Joseph A. Murray
                        Jeanett H. Reid


                        Robert C. Sommer
Kansas City Field
Office




                        Page 32                   GAO/NSIAD-99-61 Defense Inventory
Related GAO Products


              Performance and Accountability Series: Major Management Challenges
              and Program Risks—Department of Defense (GAO/OCG-99-4, Jan. 1999).

              Department of Defense: Financial Audits Highlight Continuing Challenges
              to Correct Serious Financial Management Problems (GAO/T-AIMD/NSIAD-98-158,
              Apr. 16, 1998).

              Department of Defense: In-Transit Inventory (GAO/NSIAD-98-80R, Feb. 27,
              1998).

              Inventory Management: Vulnerability of Sensitive Defense Material to
              Theft (GAO/NSIAD-97-175, Sept. 19, 1997).

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

              High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997).




(709322)      Page 33                                      GAO/NSIAD-99-61 Defense Inventory
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