This is the accessible text file for GAO report number GAO-04-779 
entitled 'Defense Inventory: Navy Needs to Improve the Management Over 
Government-Furnished Material Shipped to Its Repair Contractors' which 
was released on August 23, 2004.

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.

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 Navys 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 Navys 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 GAOs 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 Navys 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 GAOs 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). 

GAO's Mission: 

The Government Accountability Office, the investigative arm of 
Congress, exists to support Congress in meeting its constitutional 
responsibilities and to help improve the performance and accountability 
of the federal government for the American people. GAO examines the use 
of public funds; evaluates federal programs and policies; and provides 
analyses, recommendations, and other assistance to help Congress make 
informed oversight, policy, and funding decisions. GAO's commitment to 
good government is reflected in its core values of accountability, 
integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains 
abstracts and full-text files of current reports and testimony and an 
expanding archive of older products. The Web site features a search 
engine to help you locate documents using key words and phrases. You 
can print these documents in their entirety, including charts and other 
graphics.

Each day, GAO issues a list of newly released reports, testimony, and 
correspondence. GAO posts this list, known as "Today's Reports," on its 
Web site daily. The list contains links to the full-text document 
files. To have GAO e-mail this list to you every afternoon, go to 
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order 
GAO Products" heading.

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548: 

To order by Phone: 

Voice: (202) 512-6000: 

TDD: (202) 512-2537: 

Fax: (202) 512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470: 

Public Affairs: 

Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800

U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548: