Defense Inventory
Navy Needs to Improve the Management Over Government-Furnished Material Shipped to Its Repair Contractors Gao ID: GAO-04-779 July 23, 2004GAO has reported in a number of products that the lack of control over inventory shipments increases vulnerability to undetected loss or theft and substantially increases the risk that million of dollars can be spent unnecessarily. This report evaluates the Navy's and its repair contractors' adherence to Department of Defense (DOD) and Navy inventory management control procedures for government-furnished material shipped to Navy repair contractors. Government-furnished material includes assemblies, parts, and other items that are provided to contractors to support repairs, alterations, and modifications. Generally, this material is incorporated into or attached onto deliverable end items, such as aircraft, or consumed or expended in performing a contract.
The Naval Inventory Control Point and its repair contractors have not followed DOD and Navy inventory management control procedures intended to provide accountability for and visibility of shipped government-furnished material to Navy repair contractors. As a result, Navy inventory worth millions of dollars is vulnerable to fraud, waste, or abuse. First, Navy repair contractors are not acknowledging receipt of government-furnished material from the Navy's supply system. Although a DOD procedure states that contractors will notify the military services' inventory control points once material is received, Naval Inventory Control Point officials are not requiring its repair contractors to do so. Consequently, the Naval Inventory Control Point is not adhering to another DOD procedure that requires the military services to follow up with repair contractors within 45 days when the receipts for items are not confirmed. Naval Inventory Control Point officials stated that receipting for government-furnished material, which is earmarked for immediate consumption in the repair of another item, might overstate the inventory levels in their inventory management system. Without material receipt notification, the Naval Inventory Control Point cannot be assured that its repair contractors have received the material. For fiscal year 2002, the most recent and complete data available at the time of GAO's review, the Naval Inventory Control Point reported that 4,229 government-furnished material shipments (representing 4,301 items value at approximately $115 million) had been shipped to its repair contractors. GAO randomly selected and examined 308 government-furnished material shipments, representing 344 items that were shipped to the Navy's repair contractors. Based on this random sample, GAO estimated that 50 unclassified items may be unaccounted for, with a value of about $729,000 in aircraft-related government-furnished material. Additionally, the Naval Inventory Control Point does not send quarterly reports on the status of government-furnished material shipped to its repair contractors to the Defense Contract Management Agency. DOD and Navy procedures require that the Naval Inventory Control Point generate and distribute quarterly reports on government-furnished material shipped to repair contractors, including information on total shipments and their dollar value, number of shipments for which receipts are unknown, and rejected requisitions to the Defense Contract Management Agency. Although there are a number of DOD and Navy procedures that outline this reporting requirement, the Naval Inventory Control Point officials responsible for implementing this procedure were unaware of the requirement. The Naval Inventory Control Point lacks procedures to ensure that these reports are generated and distributed to the Defense Contract Management Agency. Without the reports, the Defense Contract Management Agency may be unable to independently verify that the Navy repair contractors have accounted for all government-furnished material shipped to them.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-779, Defense Inventory: Navy Needs to Improve the Management Over Government-Furnished Material Shipped to Its Repair Contractors
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
July 2004:
Defense Inventory:
Navy Needs to Improve the Management Over Government-Furnished Material
Shipped to Its Repair Contractors:
Defense Inventory:
GAO-04-779:
GAO Highlights:
Highlights of GAO-04-779, a report to the Honorable Richard J. Durbin
and the Honorable Tom Harkin, U.S. Senate; and the Honorable Peter A.
DeFazio and the Honorable Carolyn B. Maloney, House of Representatives
Why GAO Did This Study:
GAO has reported in a number of products that the lack of control over
inventory shipments increases vulnerability to undetected loss or theft
and substantially increases the risk that million of dollars can be
spent unnecessarily. This report evaluates the Navy‘s and its repair
contractors‘ adherence to Department of Defense (DOD) and Navy
inventory management control procedures for government-furnished
material shipped to Navy repair contractors. Government-furnished
material includes assemblies, parts, and other items that are provided
to contractors to support repairs, alterations, and modifications.
Generally, this material is incorporated into or attached onto
deliverable end items, such as aircraft, or consumed or expended in
performing a contract.
What GAO Found:
The Naval Inventory Control Point and its repair contractors have not
followed DOD and Navy inventory management control procedures intended
to provide accountability for and visibility of shipped
government-furnished material to Navy repair contractors. As a result,
Navy inventory worth millions of dollars is vulnerable to fraud, waste,
or abuse. First, Navy repair contractors are not acknowledging receipt
of government-furnished material from the Navy‘s supply system.
Although a DOD procedure states that contractors will notify the
military services‘ inventory control points once material is received,
Naval Inventory Control Point officials are not requiring its repair
contractors to do so. Consequently, the Naval Inventory Control Point
is not adhering to another DOD procedure that requires the military
services to follow up with repair contractors within 45 days when the
receipts for items are not confirmed. Naval Inventory Control Point
officials stated that receipting for government-furnished material,
which is earmarked for immediate consumption in the repair of another
item, might overstate the inventory levels in their inventory
management system. Without material receipt notification, the Naval
Inventory Control Point cannot be assured that its repair contractors
have received the material. For fiscal year 2002, the most recent and
complete data available at the time of GAO‘s review, the Naval
Inventory Control Point reported that 4,229 government-furnished
material shipments (representing 4,301 items value at approximately
$115 million) had been shipped to its repair contractors. GAO randomly
selected and examined 308 government-furnished material shipments,
representing 344 items that were shipped to the Navy‘s repair
contractors. Based on this random sample, GAO estimated that 50
unclassified items may be unaccounted for, with a value of about
$729,000 in aircraft-related government-furnished material.
Additionally, the Naval Inventory Control Point does not send quarterly
reports on the status of government-furnished material shipped to its
repair contractors to the Defense Contract Management Agency. DOD and
Navy procedures require that the Naval Inventory Control Point generate
and distribute quarterly reports on government-furnished material
shipped to repair contractors, including information on total shipments
and their dollar value, number of shipments for which receipts are
unknown, and rejected requisitions to the Defense Contract Management
Agency. Although there are a number of DOD and Navy procedures that
outline this reporting requirement, the Naval Inventory Control Point
officials responsible for implementing this procedure were unaware of
the requirement. The Naval Inventory Control Point lacks procedures to
ensure that these reports are generated and distributed to the Defense
Contract Management Agency. Without the reports, the Defense Contract
Management Agency may be unable to independently verify that the Navy
repair contractors have accounted for all government-furnished material
shipped to them.
What GAO Recommends:
GAO recommends that the Navy require its repair contractors to
acknowledge receipt of government-furnished material, follow up on
unconfirmed material receipts within the established 45 days, and
implement procedures to ensure that quarterly reports of
government-furnished material shipped to repair contractors are
generated and distributed to the Defense Contract Management Agency.
DOD concurred with GAO‘s recommendations and provided estimated
timelines for implementation of each of the recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-04-779.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact William M. Solis at
(202) 512-8412 or solisw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Inventory Management Control Procedures Are Not Being Followed:
Conclusion:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Table:
Table 1: Fiscal Year 2002 Government-Furnished Material Shipments by
Number and Value:
United States Government Accountability Office:
Washington, DC 20548:
July 23, 2004:
The Honorable Richard J. Durbin:
The Honorable Tom Harkin:
United States Senate:
The Honorable Peter A. DeFazio:
The Honorable Carolyn B. Maloney:
House of Representatives:
As we have reported in a number of our products, the lack of control
over inventory shipments increases vulnerability to undetected loss or
theft and substantially increases the risk that millions of dollars
will be spent unnecessarily. Since at least 1990, we have considered
Department of Defense (DOD) inventory management to be a high-risk area
because inventory management systems and procedures are ineffective. (A
list of related GAO products appears at the end of this report.)
In July 2002, we reported on the Air Force's noncompliance with
inventory management control procedures that led to inventory worth
billions of dollars being vulnerable to fraud, waste, or
abuse.[Footnote 1] In response to your request for us to review the
Navy and Army inventory management procedures for controlling inventory
shipped to repair contractors, we evaluated the Navy's and its repair
contractors' adherence to DOD and Navy inventory management control
procedures for government-furnished material[Footnote 2] shipped to
Navy repair contractors. As agreed with your offices, we plan to
initiate a review of the Army's and its repair contractors' adherence
to DOD and Army inventory management control procedures for shipped
government-furnished material, as well as items for repair that are
provided to Army repair contractors.
The Navy contracts with private companies (i.e., repair and production
contractors) to produce, maintain, and repair its equipment. In some
cases, the Navy furnishes the material necessary to perform the repairs
at the contractors' locations. Responsibility for controlling this
material is shared among the Naval Supply Command, the Naval Inventory
Control Point, the Defense Logistics Agency, repair contractors, and
the Defense Contract Management Agency. The Naval Supply Command
administers the Navy's supply system and provides inventory management
policies and procedures. The Naval Inventory Control Point procures,
manages, and supplies inventory for naval aircraft, submarines, and
ships worldwide.[Footnote 3] The Defense Contract Management Agency
assesses the accuracy of repair contractor records and accounts for all
government property furnished to a contractor.[Footnote 4]
Our objective was to determine whether the Naval Inventory Control
Point and its repair contractors adhere to DOD and Navy inventory
management control procedures governing the accountability for and
visibility of shipped government-furnished material. We did not review
the Navy inventory management control procedures for items needing
repair that are provided to Navy contractors because of a recent June
2003 DOD Office of the Inspector General report.[Footnote 5] While the
Inspector General's report indicated that the Navy had taken actions to
improve its procedures and controls to account for these items at
commercial repair facilities, it found that additional improvements
were needed to improve the monitoring and oversight of shipped
inventory.[Footnote 6]
To assess the Naval Inventory Control Point's and its repair
contractors' adherence to DOD and Navy inventory management control
procedures related to government-furnished material shipped to repair
contractors, we randomly selected and examined 308 government-furnished
material shipments. These shipments represented 344 items that were
shipped to Navy repair contractors in fiscal year 2002, the most recent
and complete data available at the time of our review. We sent surveys
to 29 Navy repair contractors requesting data on these unclassified,
classified, and sensitive shipments valued at about
$11.9 million.[Footnote 7] We received survey responses from 20 of the
29 contractors, representing 207 government-furnished material
shipments (corresponding to 243 items). Our review focused on the Naval
Inventory Control Point facility located in Philadelphia, Pennsylvania,
which manages aircraft-related inventory.[Footnote 8] We assessed the
reliability of the data used in this report and determined that the
data were sufficiently reliable for our purposes.
We conducted our review from March 2003 through April 2004 in
accordance with generally accepted government auditing standards.
More details about our scope and methodology appear in appendix I.
Results in Brief:
The Naval Inventory Control Point and its repair contractors have not
followed DOD and Navy procedures intended to provide the accountability
for and visibility of inventory shipped to Navy repair contractors.
Specifically, Navy repair contractors are not routinely acknowledging
receipt of government-furnished material received from the Navy. A DOD
procedure requires repair contractors to acknowledge receipt of
government-furnished material[Footnote 9] that has been shipped to them
from the Navy's supply system.[Footnote 10] However, Naval Inventory
Control Point officials are not requiring repair contractors to
acknowledge receipt of government-furnished material that they have
received from this system. By not requiring repair contractors to
acknowledge receipt of government-furnished material, the Naval
Inventory Control Point has also departed from the procedure to follow
up with the contractor within 45 days when the contractor fails to
confirm receipt for an item.[Footnote 11] Without material receipt
notification, the Naval Inventory Control Point cannot be assured that
its repair contractors have received the shipped material. This failure
to acknowledge receipt of material shipped to repair contractors can
potentially impair the Navy's ability to account for shipments leading
to possible fraud, waste, or abuse. For fiscal year 2002, the most
recent and complete data available at the time of our review, the Naval
Inventory Control Point reported that 4,229 government-furnished
material shipments had been shipped to its repair contractors. These
shipments had a value of approximately $115 million. We randomly
selected and examined 308 government-furnished material shipments,
valued at approximately $11.9 million, and surveyed 29 Navy repair
contractors to determine if they had recorded receipts for these
shipments in their property records. The Navy repair contractors had
documented receipts for all classified shipments. However, they were
unable to document the receipts for 4 of the unclassified shipments
(representing 4 items) in our sample. Because our sample was randomly
selected, it was estimated that 50 unclassified items may be
unaccounted for, with a value of about $729,000 in inventory of
aircraft-related government-furnished material for fiscal year
2002.[Footnote 12]
Additionally, the Naval Inventory Control Point does not send quarterly
reports on the status of shipped material to the Defense Contract
Management Agency. DOD and Navy procedures require that the Naval
Inventory Control Point generate quarterly reports on government-
furnished material shipped to repair contractors, including information
on total shipments and their dollar value, number of shipments for
which receipts are unknown, and rejected requisitions to the Defense
Contract Management Agency.[Footnote 13] However, the Naval Inventory
Control Point does not have procedures in place to ensure that these
quarterly reports are generated and distributed to the Defense Contract
Management Agency. Without these reports, the Defense Contract
Management Agency may be unable to conduct an independent verification
that the Navy repair contractors have accounted for all government-
furnished material shipped to them.
We are making three recommendations to strengthen the Navy's compliance
with existing inventory management procedures for controlling
government-furnished material shipped to its repair contractors. In
written comments on a draft of this report, DOD concurred with our
recommendations and provided estimated timelines for implementation of
each of the recommendations.
Background:
The Naval Inventory Control Point authorizes movement of its inventory
from the Defense Logistic Agency,[Footnote 14] Navy-managed shipping
and receiving activities, and Navy repair contractors. With prior
approval from Naval Inventory Control Point item managers, Navy repair
contractors can also use material located at their facilities. DOD
procedures and Federal Acquisition Regulation procedures generally
require that repair contractors establish and maintain an internal
property control system for the control, use, maintenance, repair,
protection, and preservation of government property in their
possession.[Footnote 15]
The Navy currently has 359 repair contractors using its Web-based
inventory management system, known as the DOD Commercial Asset
Visibility System. This system provides the Navy with asset reporting
coverage for more than 95 percent of its commercial repair business.
For fiscal year 2002, the most recent and complete data available at
the time of our review, the Naval Inventory Control Point reported that
4,229 government-furnished material shipments (representing 4,301
items valued at approximately $115 million) had been shipped to its
repair contractors. Table 1 shows the derivation of the sample size of
our survey, including the number and value of shipments for which we
received survey responses.
Table 1: Fiscal Year 2002 Government-Furnished Material Shipments by
Number and Value:
Categories of government-furnished material shipments: Universe of
shipments to Navy repair contractors;
Number of shipments: 4,229;
Number of items: 4,301;
Value: $115,310,392.
Categories of government-furnished material shipments: Audit sample
shipments;
* Unclassified and sensitive;
Number of shipments: 302;
Number of items: 338;
Value: $9,652,910.
Categories of government-furnished material shipments: Audit sample
shipments;
* Classified;
Number of shipments: 6;
Number of items: 6;
Value: $2,241,116.
Categories of government-furnished material shipments: Total sample
shipments;
Number of shipments: 308;
Number of items: 344;
Value: $11,894,026.
Categories of government-furnished material shipments: Total shipments
captured in survey responses[A];
Number of shipments: 207;
Number of items: 243;
Value: $9,922,155.
Source: GAO's analysis of Naval Inventory Control Point data.
[A] These shipments represent 67 percent of the total sample shipments.
All classified shipments and dollar values are included in this
category. Nine of the repair contractors in our survey did not provide
data for the remaining 101 shipments, or 33 percent of our total
sample.
[End of table]
DOD requires the Navy to use a number of procedures to monitor items
shipped to and received by repair contractors. First, the recipient of
the material is responsible for notifying the Naval Inventory Control
Point once an item has been received. If the Naval Inventory Control
Point has not been provided a receipt within 45 days of shipment, it is
required to follow up with the intended recipient.[Footnote 16] The
rationale behind these requirements is that until receipt is confirmed,
the exact status of the shipment is uncertain and therefore vulnerable
to fraud, waste, or abuse. The Naval Inventory Control Point is also
required by DOD and Navy procedures to submit quarterly reports to the
Defense Contract Management Agency identifying all government-
furnished material that has been provided to a contractor.[Footnote 17]
These reports allow the Defense Contract Management Agency to
independently verify that Navy repair contractors have accounted for
all government-furnished material shipped to them. As a result, the
Defense Contract Management Agency does not have to rely strictly on
records provided by Navy repair contractors.
In addition to these DOD and Navy procedures, the Navy, as a
representative of the federal government, is also obligated to
establish and maintain effective internal control systems. The Federal
Managers' Financial Integrity Act of 1982[Footnote 18] requires the
General Accounting Office to issue standards for internal control in
government.[Footnote 19] According to these standards, internal control
is defined as an integral component of an organization's management
that provides reasonable assurance that the following objectives are
being achieved: (1) effectiveness and efficiency of operations,
(2) reliability of financial reporting, and (3) compliance with
applicable laws and regulations. A subset of these objectives is the
safeguarding of assets. Internal control should be designed to provide
reasonable assurance regarding prevention of or prompt detection of
unauthorized acquisition, use, or disposition of an agency's assets.
Effective and efficient internal control activities help ensure that an
agency's control objectives are accomplished. The control activities
are the policies, procedures, techniques, and mechanisms that enforce
management's directives, such as the process of adhering to DOD
requirements for receipt of government-furnished material and issuance
of quarterly government-furnished material status reports.
DOD annually ships inventory valued at billions of dollars to various
locations around the world. For years, DOD has had difficulty tracking
this inventory from origin to destination. The accountability problem
with shipped inventory is part of a more global issue. Since at least
1990, we have considered DOD's inventory management to be a high-risk
area because DOD's inventory management procedures are ineffective. The
lack of adequate controls over shipped inventory and the resulting
vulnerability to undetected loss or theft have been major areas of
concern. In March 1999, we reported that significant weaknesses existed
at all levels of the Navy's shipped inventory management structure,
leading to potential theft or undetected losses of items and
demonstrating inefficient and ineffective logistics management
practices.[Footnote 20] We concluded that these weaknesses and the
problems they created were primarily a result of the Navy not following
its own procedures regarding controls over shipped inventory. In
following up with the Navy, we found that the Navy had implemented many
of our recommendations that have improved the accountability over its
shipped inventory. According to Naval Inventory Control Point
officials, at least 75 percent of their shipped inventory discrepancies
have been resolved. Also, according to a June 2003 DOD Office of the
Inspector General report, the Navy had taken actions to improve its
procedures and controls to account for items repaired at commercial
repair facilities. However, the DOD Office of the Inspector General
found that additional improvements were needed to improve the
monitoring and oversight of shipped inventory.[Footnote 21]
Inventory Management Control Procedures Are Not Being Followed:
The Naval Inventory Control Point and its repair contractors are not
following DOD inventory management control procedures governing the
accountability for and visibility of government-furnished material
shipped to its repair contractors. As a result, this inventory is
vulnerable to loss or theft. First, the Naval Inventory Control Point
is not following a DOD procedure that requires repair contractors to
acknowledge receipt of government-furnished material that has been
shipped to them from the Navy's supply system. Consequently, the Naval
Inventory Control Point is not following another DOD procedure that
requires it to follow up with its repair contractors that have not
confirmed receipt of shipped material. Additionally, the Naval
Inventory Control Point is not following DOD and Navy procedures that
require quarterly reports on the status of government-furnished
material shipped to Navy repair contractors be provided to the Defense
Contract Management Agency.
Navy Is Not Requiring Its Repair Contractors to Acknowledge Receipt of
Government-Furnished Material:
Navy repair contractors are not routinely acknowledging receipt of
government-furnished material that has been shipped to them from the
Navy's supply system. According to a DOD procedure, repair contractors
must enter shipments into their inventory records and notify the
inventory control point when material has been received. This material
receipt acknowledgment is designed to maintain accountability for all
shipped items, including government-furnished material that has been
shipped to Navy repair contractors in usable condition from the Navy's
supply system. Additionally, the Navy must adhere to internal control
standards outlined by the General Accounting Office, such as providing
assurance that assets are safeguarded against unauthorized acquisition,
use, or disposition.
Navy repair contractors are not routinely adhering to the DOD procedure
to acknowledge receipt of government-furnished material shipped to them
because Naval Inventory Control Point officials are not requiring them
to do so. By not requiring repair contractors to receipt, the Naval
Inventory Control Point does not follow up with its repair contractors
within 45 days--as required by DOD procedure--when these repair
contractors fail to confirm receipt of government-furnished material
shipped to them. Naval Inventory Control Point officials acknowledged
that they only become aware that a contractor has not received an item
if the contractor inquires about the shipment.
Naval Inventory Control Point personnel provided several reasons why
Navy repair contractors are not being required to notify the Naval
Inventory Control Point of material receipt. They indicated that the
Naval Inventory Control Point does not require its repair contractors
to acknowledge receipt of government-furnished material because such
material is provided with the expectation that it will immediately be
consumed in the repair of other items. Naval Inventory Control Point
officials also stated that submitting notification of receipt for this
material might overstate the inventory levels in the DOD Commercial
Asset Visibility System--the Navy's inventory management system--
because the system would show this material as on-hand at its repair
contractors' facilities when the material is actually earmarked for
immediate use in the repair of another item.
We have noted the Naval Inventory Control Point officials' concerns
about the potential for notification of receipt of government-furnished
material to overstate inventory levels. However, one of the Navy repair
contractors in our review currently uses the DOD Commercial Asset
Visibility System to enter receipt of government-furnished material,
without overstating the inventory levels maintained within the system.
Specifically, the Navy repair contractor is using a standard module of
the DOD Commercial Asset Visibility System to enter receipt of material
received in usable condition from the Navy's supply system. Upon
entering a receipt of material in the system, the contractor then
issues the item to itself for immediate use in the repair of another
item. This process eliminates the possibility of adverse impacts to
inventory levels. However, the Naval Inventory Control Point is not
using this module of the DOD Commercial Asset Visibility System for the
receipt of material received in usable condition. Additionally, in our
previous Air Force report on shipments to repair contractors,[Footnote
22] we found that in contrast to the Navy, the Air Force requires
repair contractors to issue a notification of receipt for material that
they have received.
For fiscal year 2002, the most recent and complete data available at
the time of our review, the Naval Inventory Control Point reported that
4,229 government-furnished material shipments (representing
4,301 items valued at approximately $115 million) had been shipped to
its repair contractors. We randomly selected and examined 308
government-furnished material shipments, representing 344 items that
were shipped to Navy repair contractors. We surveyed 29 Navy repair
contractors to determine if they had recorded receipts for these
shipments in their property records. The repair contractors had
recorded receipts for all classified shipments. However, they could not
document the receipt of 4 unclassified shipments (representing 4
items). Because our sample was randomly selected, the results can be
projected to the entire universe of government-furnished material
managed by the Naval Inventory Control Point. We estimate that 50
unclassified items may be unaccounted for, with a value of about
$729,000 in inventory of aircraft-related government-furnished
material for fiscal year 2002.[Footnote 23]
Lack of contractor notification has impeded the Naval Inventory Control
Point's visibility of government-furnished material. Without such
notification, the Naval Inventory Control Point cannot be assured that
its repair contractors have received all shipped material. Finally,
because the Naval Inventory Control Point does not have data on
unconfirmed government-furnished material shipments, it lacks the
ability to independently know when corrective actions, such as
resolving inventory discrepancies, are needed. As a result, the Navy's
inventory continues to be at risk of fraud or loss.
Navy Is Not Submitting Required Quarterly Reports:
The Naval Inventory Control Point is also not following DOD and Navy
procedures that require Naval Inventory Control Point officials to
provide the Defense Contract Management Agency with quarterly status
reports showing all shipments of government-furnished material that
have been provided to its repair contractors.[Footnote 24] According to
the procedures, these reports should include information about total
shipments and their dollar value, number of shipments for which
receipts are unknown, and rejected requisitions. The purpose of the
reports is to assist the Defense Contract Management Agency in
independently verifying contractor records of government-furnished
material.
A Navy procedure designates individuals within the inventory control
point to serve as the management control activity to, among other
things, generate and distribute the required quarterly government-
furnished material status reports.[Footnote 25] According to Naval
Inventory Control Point and Defense Contract Management Agency
officials, the inventory control point has not provided the Defense
Contract Management Agency with the required quarterly reports. The
inventory control point officials stated that they were unaware of the
requirement to provide quarterly reports to the Defense Contract
Management Agency. Although a number of standard DOD and Navy inventory
management control procedures stipulate the requirement to generate and
distribute the quarterly reports, inventory control point officials
lack recognition of this reporting requirement. The Naval Inventory
Control Point currently lacks procedures to ensure that these quarterly
reports are generated and distributed to the Defense Contract
Management Agency as required by DOD and Navy procedures.
Proper distribution of the quarterly status reports is vital to the
management of government-furnished material. A 1995 DOD Inspector
General audit report of management access to DOD's supply system
asserted that the Defense Contract Management Agency serves as the last
line of defense in protecting material resources and needs an
independent record of the government-furnished material shipped to
repair contractors. These quarterly reports serve as such a record and
prevent the Defense Contract Management Agency from having to rely
solely on the repair contractors' records of government-furnished
material.
Conclusion:
Inventory worth millions of dollars is vulnerable to fraud, waste, or
abuse because the Naval Inventory Control Point is not adhering to DOD
inventory management control procedures for government-furnished
material shipped to its repair contractors. Because the Naval Inventory
Control Point has not required its repair contractors to acknowledge
receipt of government-furnished material, it will continue to lack
assurance that its repair contractors have received shipped material.
In addition, without requiring receipts, the Naval Inventory Control
Point will be unable to follow up on unconfirmed material receipts
within the required 45 days. As a result, the Naval Inventory Control
Point will continue to lose the ability to understand inventory
management weaknesses and take necessary corrective action.
Furthermore, without the Naval Inventory Control Point implementing
procedures to ensure that quarterly reports for all shipments of
government-furnished material to its repair contractors are generated
and distributed to the Defense Contract Management Agency, the Defense
Contract Management Agency might be impaired in its ability to serve as
the last line of defense in protecting government-furnished material.
Recommendations for Executive Action:
To improve the control of government-furnished material shipped to Navy
repair contractors, we recommend that the Secretary of Defense direct
the Secretary of the Navy to instruct the Commander, Naval Inventory
Control Point, to implement the following three actions:
* Require Navy repair contractors to acknowledge receipt of material
that is received from the Navy's supply system as prescribed by DOD
procedure.
* Follow up on unconfirmed material receipts within the 45 days as
prescribed in the DOD internal control procedures to ensure that the
Naval Inventory Control Point can reconcile material shipped to and
received by its repair contractors.
* Implement procedures to ensure that quarterly reports of all
shipments of government-furnished material to Navy repair contractors
are generated and distributed to the Defense Contract Management
Agency.
Agency Comments:
In written comments on a draft of this report, DOD concurred with our
recommendations and provided estimated timelines for implementation of
each of the recommendations. DOD's written comments on this report are
reprinted in their entirety in appendix II.
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 the appropriate congressional committees; the Secretary of
Defense; the Secretary of the Navy; the Director, Office of Management
and Budget; and the Director, Defense Logistics Agency. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at http://
www.gao.gov.
Signed by:
William M. Solis:
Director:
Defense Capabilities and Management:
[End of section]
Appendix I: Scope and Methodology:
For the purposes of this review, government-furnished material is
defined as either (1) usable items (commonly referred to as "A"
condition items that the Naval Inventory Control Point directs to be
shipped from Navy wholesale warehouses to its repair contractors or
(2) items that the Navy repair contractors have repaired to usable
condition and issued to themselves to use in completing the repair of
another item. According to Naval Inventory Control Point officials,
their use of government-furnished material occurs in three different
circumstances where an item is needed to complete the repair of another
item because the item in question is (1) missing when the other item is
inducted for repair, (2) beyond repair or beyond economical repair, or
(3) needed to complete the expeditious repair of another item.
To assess the Naval Inventory Control Point's and its repair
contractors' adherence to procedures for controlling government-
furnished material, we took the following steps:
* To identify criteria for controlling shipped inventory, we reviewed
Department of Defense (DOD) and Navy procedures, obtained other
relevant documentation related to shipped inventory, and discussed
inventory management procedures with officials from the following
locations: Headquarters, Department of the Navy, Washington, D.C; the
Naval Inventory Control Point; Mechanicsburg, Pennsylvania; the Naval
Inventory Control Point, Philadelphia, Pennsylvania; and the Defense
Contract Management Agency, Alexandria, Virginia.
* Because of long-standing problems with the accuracy of data in DOD's
inventory management systems, we took a number of measures to assess
the reliability of the Naval Inventory Control Point's data. To assess
the data, we performed electronic testing for obvious errors in
accuracy and completeness in the data on government-furnished material
shipped to Navy repair contractors. When we found discrepancies in the
data, such as missing data elements and data entry errors, we brought
them to the Naval Inventory Control Point officials' attention and
worked closely with them to correct the discrepancies before conducting
our analysis. In addition, we statistically selected a random sample of
the Navy's data for review. This sampling methodology enabled us to
independently verify the overall accuracy of the Navy's data on
government-furnished material shipped to Navy repair contractors.
* To identify the number, value, and classification of the government-
furnished material shipments, we obtained computerized supply records
from the Navy's transaction history file of all shipments between
October 2001 and September 2002 from the Naval Inventory Control
Point's two office locations--Philadelphia and Mechanicsburg,
Pennsylvania. The records contained descriptive information about each
shipment, including document number, national stock number, quantity
shipped, classification, and source of supply. After some preliminary
data analysis, we excluded all records from the Mechanicsburg office
due to the data set mistakenly capturing nongovernment-furnished
material as government-furnished material.
* To select Navy repair contractors and items shipped to them, we used
computerized shipment data obtained from the Naval Inventory Control
Point's transaction history file, including data such as national stock
number, quantity, source of supply, and transaction dates. We randomly
selected 302 unclassified or sensitive shipments (representing 338
items) and selected the total population of 6 classified shipments
(representing 6 items) that were issued to Navy repair contractors in
fiscal year 2002 as government-furnished material. We randomly selected
and sent surveys to 29 Navy repair contractors (associated with 83
unique repair contracts) for our review. We received survey responses
from 20 of the 29 Navy repair contractors, representing 207 government-
furnished material shipments (corresponding to 243 items). Four of
these Navy repair contractors received the 6 shipments of classified
shipments. Because the number of Navy repair contractors and
government-furnished material shipments were randomly selected, the
results of our analysis can be projected to all Navy repair contractors
and shipments.
* To determine how Navy repair contractors are granted access to
government-furnished material (i.e., federal supply class or stock
number), we conducted a modified statistical sample of the various
contractual agreements between the Navy and its repair contractors. We
initially planned to manually review a subset of 40 contracts
associated with our sample shipments to determine how the government-
furnished material was identified in the contract. However, we revised
our approach when we discovered that the Navy's inventory management
system had the functionality to match each of our items by stock number
to the associated Navy repair contracts and contractors that are
repairing the items. As a result, we reviewed all of the contracts
associated with our sample shipments. We found each of our sample
shipments was listed by national item identification number in the
contractual repair agreement and based on certain circumstances (such
as items are missing on induction, broken beyond economical repair, or
are needed for the expeditious repair of another higher assembly item),
these items were furnished to the contractor as government-furnished
material.
* To determine whether Navy repair contractors had received and
accounted for our selected shipments, we surveyed each randomly
selected contractor to assess whether government-furnished material
shipments delineated in the Naval Inventory Supply Control Point's
supply records had been received and entered into the contractor's
property control records.
* To determine what happened to sample shipments that had reportedly
not been received by the Navy repair contractors, we provided a listing
to the Naval Inventory Control Point in Philadelphia for further
review. To learn whether issues associated with unaccounted for
shipments were adequately resolved, we reviewed Department of Defense,
Navy, and Naval Inventory Control Point implementing guidance. Such
information provided the basis for conclusions regarding the adherence
to procedures for controlling shipped inventory.
The Navy repair contractors that responded to our survey were BAE
Flight Systems, Nashua, New Hampshire; Boeing, Jacksonville, Florida;
Lockheed Martin, Marietta, Georgia; Lockheed Martin, Oswego, New York;
Lockheed Martin, Syracuse, New York; Northrop Grumman, Bethpage, New
York; Northrop Grumman, Woodland Hills, California (two locations);
Systems and Electronics, Inc., Sanford, Florida; Raytheon,
Indianapolis, Indiana; Raytheon, Goleta, California; Raytheon,
McKinney, Texas; Raytheon Technical Services Corp., Indianapolis,
Indiana; General Dynamics, Bloomington, Minnesota; Global Technical
Systems, Virginia Beach, Virginia; Sikorsky Aircraft, Shelton,
Connecticut; Rockwell Collins, Cedar Rapids, Iowa; Beaver Aerospace,
Livonia, Michigan; L3 Communications, Alpharetta, Georgia; and Parker
Hannifin, Irvine, California.
Our work was performed from March 2003 through April 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Defense:
DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS:
3500 DEFENSE PENTAGON:
WASHINGTON, DC 20301-3500:
JUN 29 2004:
Mr. William Solis:
Director, Defense Capabilities and Management:
U.S. General Accounting Office:
Washington, D.C. 20548:
Dear Mr. Solis:
This is the Department of Defense (DoD) response to the GAO draft
report GAO-04-779, "DEFENSE INVENTORY: Navy Needs to Improve the
Management Over Government-Furnished Material Shipped to Its Repair
Contractors, dated May 26, 2004 (GAO Code 350337).
The Department concurs with all three recommendations in the draft
report. Enclosed are detailed comments to the recommendations. The
Department appreciates the opportunity to comment on the draft report.
Sincerely,
Signed by:
Bradley Berkson:
Acting:
Enclosure: As stated:
GAO CODE 350337/GAO-04-779:
"DEFENSE INVENTORY: NAVY NEEDS TO IMPROVE THE MANAGEMENT OVER
GOVERNMENT-FURNISHED MATERIAL SHIPPED TO ITS CONTRACTORS":
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Secretary of the Navy to instruct the Commander, Naval
Inventory Control Point (NICP) to require Navy repair contractors to
acknowledge receipt of material that is received from the Navy supply
system as prescribed by DoD procedure. (Page 14/Draft Report):
DoD RESPONSE: Concur. The majority of Navy repair contracts already
mandate receipt-reporting requirements for material shipped to
commercial contractors. The primary application used to acknowledge
receipt is DoD's web-based Commercial Asset Visibility (CAV) system.
This system will require modifications to enable NAVICP to effectively
receipt for Government-Furnished Material (GFM) material. NAVICP will
submit a program change request to Navy Supply Information Systems
Activity (NAVSISA) to develop the required modifications to accommodate
implementing the recommendation. Currently, receipt-reporting for GFM
is not mandated in Navy repair contracts. For the last ten years,
NAVICP has "expensed" GFM as a cost of repair, and receipt
acknowledgement from contractors was not obtained. Following program
changes, NAVICP will therefore also modify its contractual vehicles to
include requirements for acknowledging receipt of GFM material.
Estimated timeline for contracts modification is six months after
program changes are completed.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the Secretary of the Navy to instruct the Commander, Naval
Inventory Control Point to follow-up on unconfirmed material receipts
within the 45 days as prescribed in the DoD internal control procedures
to ensure that the Naval Inventory Control Point can reconcile material
shipped to and received by its repair contractors. (Page 14/Draft
Report):
DoD RESPONSE: Concur. The Navy's Stock-In-Transit (SIT) application,
PM76, currently has the functionality required to generate follow-ups
for GFM material shipped to commercial contractors. However, in order
to successfully perform the reconciliation needed to generate a follow-
up, the CAV program changes highlighted above will need to be made to
capture all GFM material receipts. NAVICP will submit program change
requests to NAVSISA for the development of modifications needed to
fully implement GAO recommendation number two. With program changes in
place, NAVICP will have the required tools to reconcile material
shipped and received by repair contractors. The Navy will continue to
"expense" GFM material until all required program changes have been
completed. Estimated timeline for implementation is one year after
program changes are completed.
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
direct the Secretary of the Navy to instruct the Commander, Naval
Inventory Control Point to implement procedures to ensure that
quarterly reports of all shipments of government-furnished material to
Navy repair contractors are generated and distributed to the Defense
Contract Management Agency Officials. (Page 14/Draft Report):
DoD RESPONSE: Concur. Current IT systems do not have the functionality
to provide quarterly data report required by SECNAV instruction
4440.32A. Therefore, Naval Inventory Control Point will request
appropriate programming changes to NAVSISA to develop automated
interfaces and functionality needed to extract GFM shipment
information. Once these automated tools and interfaces are in place,
NAVICP will provide quarterly reports to DCMA for all shipments of GFM
material. Estimated timeline for implementation is one year after
program changes are completed.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
William M. Solis, (202) 512-8412:
Acknowledgments:
In addition to the contact listed above, Lawson Gist, Jr., Jacqueline
S. McColl, Corrie J. Dodd, Anthony C. Fernandez, Arthur L. James, Jr.,
Stanley J. Kostyla, David A. Mayfield, and Robert K. Wild made key
contributions to this report.
[End of section]
Related GAO Products:
Defense Inventory: Air Force Needs to Improve Control of Shipments to
Repair Contractors. GAO-02-617. Washington, D.C.: July 1, 2002.
Performance and Accountability Series: Major Management Challenges and
Program Risks--Department of Defense. GAO-01-244. Washington, D.C.:
January 1, 2001.
High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 1,
2001.
Defense Inventory: Plan to Improve Management of Shipped Inventory
Should Be Strengthened. GAO/NSIAD-00-39. Washington, D.C.: February 22,
2000.
Department of the Navy: Breakdown of In-Transit Inventory Process
Leaves It Vulnerable to Fraud. GAO/OSI/NSIAD-00-61. Washington, D.C.:
February 2, 2000.
Defense Inventory: Property Being Shipped to Disposal Is Not Properly
Controlled. GAO/NSIAD-99-84. Washington, D.C.: July 1, 1999.
DOD Financial Management: More Reliable Information Key to Assuring
Accountability and Managing Defense Operations More Efficiently. GAO/T-
AIMD/NSIAD-99-145. Washington, D.C.: April 14, 1999.
Defense Inventory: DOD Could Improve Total Asset Visibility Initiative
With Results Act Framework. GAO/NSIAD-99-40. Washington, D.C.: April
12, 1999.
Defense Inventory: Navy Procedures for Controlling In-Transit Items Are
Not Being Followed. GAO/NSIAD-99-61. Washington, D.C.: March 31, 1999.
Performance and Accountability Series: Major Management Challenges and
Program Risks--Department of Defense. GAO/OCG-99-4. Washington, D.C.:
January 1, 1999.
High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January 1,
1999.
Department of Defense: Financial Audits Highlight Continuing Challenges
to Correct Serious Financial Management Problems. GAO/T-AIMD/NSIAD-98-
158. Washington, D.C.: April 16, 1998.
Department of Defense: In-Transit Inventory. GAO/NSIAD-98-80R.
Washington, D.C.: February 27, 1998.
Inventory Management: Vulnerability of Sensitive Defense Material to
Theft. GAO/NSIAD-97-175. Washington, D.C.: September 19, 1997.
Defense Inventory Management: Problems, Progress, and Additional
Actions Needed. GAO/T-NSIAD-97-109. Washington, D.C.: March 20, 1997.
High-Risk Series: Defense Inventory Management. GAO/HR-97-5.
Washington, D.C.: February 1, 1997.
High-Risk Series: Defense Financial Management. GAO/HR-97-3.
Washington, D.C.: February 1, 1997.
FOOTNOTES
[1] U.S. General Accounting Office, Defense Inventory: Air Force Needs
to Improve Control of Shipments to Repair Contractors, GAO-02-617
(Washington, D.C.: July 1, 2002).
[2] Government-furnished material is material in the possession of, or
acquired by, the government and later delivered or otherwise made
available to a contractor. It includes assemblies, components, parts,
raw and process material, and small tools and supplies that contractors
use in support of repairs, alterations, and modifications. Generally,
this material is incorporated into or attached onto deliverable end
items, such as aircraft, or consumed or expended in performing a
contract. Additional details regarding how the Navy further defines
government-furnished material are included in appendix I.
[3] The Naval Inventory Control Point serves as the Management Control
Activity for the Navy Supply Command. The Management Control Activity
is a Navy activity or DOD activity delegated by the Navy that is
responsible for validating all requisitions for government-furnished
material shipped to contractors. The Management Control Activity is
also responsible for submitting government-furnished material status
reports to the Defense Contract Management Agency.
[4] The Defense Contract Management Agency property administrators are
charged with carrying out this responsibility.
[5] Department of Defense Office of the Inspector General, Logistics:
Followup Audit of Depot-Level Repairable Assets at Selected Army and
Navy Organizations, D-2003-098 (Arlington, Virginia: June 5, 2003).
[6] Until the inventory reaches its intended destination, the Naval
Inventory Control Point refers to it as in-transit, which is also
referred to as shipped inventory.
[7] Classified items are those that require the highest degree of
protection in the interest of national security. Sensitive items--those
that are 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.
[8] Hereafter referred to as Naval Inventory Control Point.
[9] DOD 4000.25-2-M, Military Standard Transaction Reporting and
Accounting Procedures (MILSTRAP), September 2001 (as amended by changes
1&2), paragraph C6.6.
[10] For purposes of this report, the Navy's supply system refers to
inventory stored at and shipped from Navy warehouses, contractor
facilities, and manufacturer facilities.
[11] DOD 4000.25-2-M, Military Standard Transaction Reporting and
Accounting Procedures (MILSTRAP), September 2001 (as amended by changes
1&2), paragraph C6.7.
[12] This is the mean value based on our analysis. We are 95 percent
confident that between 4 and 98 items are unaccounted for with a value
of between $58,300 and $1,428,350.
[13] DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May
23, 2003, paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the
Performance of Contract Property Administration, December 1991,
paragraph C5.2.6; and SECNAVINSTR 4440.32A, Control of Contractor
Access to DoD Material Inventories and Determinations for the Supply of
Government Furnished Material, September 27, 1991, paragraph 6d(5)(b).
[14] The Defense Logistics Agency--which operates and manages 23
storage depots--receives, stores, and issues inventory and maintains
inventory records.
[15] DOD 4161.2-M, DoD Manual for the Performance of Contract Property
Administration, December 1991, paragraph C3.4; Federal Acquisition
Regulation (FAR), Subpart 45.502.
[16] DOD 4000.25-2-M, Military Standard Transaction Reporting and
Accounting Procedures (MILSTRAP), September 2001 (as amended by changes
1&2), paragraphs C6.6 and C6.7.
[17] DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May
23, 2003, paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the
Performance of Contract Property Administration, December 1991,
paragraph C5.2.6; and SECNAVINSTR 4440.32A, Control of Contractor
Access to DoD Material Inventories and Determinations for the Supply of
Government Furnished Material, September 27, 1991, paragraph 6d(5)(b).
[18] 31 U.S.C. 3512(b).
[19] U.S. General Accounting Office, Internal Control: Standard for
Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: Nov. 1999).
[20] U.S. General Accounting Office, Defense Inventory: Navy's
Procedures for Controlling In-Transit Items Are Not Being Followed,
GAO/NSIAD-99-61 (Washington, D.C.: Mar. 31,1999).
[21] Department of Defense Office of the Inspector General, Logistics:
Followup Audit of Depot-Level Repairable Assets at Selected Army and
Navy Organizations, D-2003-098 (Arlington, Virginia: June 5, 2003).
[22] See GAO-02-617.
[23] This is the mean value based on our analysis. We are 95 percent
confident that between 4 and 98 items are unaccounted for with a value
of between $58,300 and $1,428,350.
[24] DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May
23, 2003, paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the
Performance of Contract Property Administration, December 1991,
paragraph C5.2.6; and SECNAVINSTR 4440.32A, Control of Contractor
Access to DoD Material Inventories and Determinations for the Supply of
Government Furnished Material, September 27,1991, paragraph 6d(5)(b).
[25] SECNAVINSTR 4440.32A, Control of Contractor Access to DoD Material
Inventories and Determinations for the Supply of Government Furnished
Material, September 27,1991, paragraphs 4c and 6d(2)(d).
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